Special-survey bell tolls for North Sea anchor-handlers

AHTS owners have a ‘mountain to climb’ to address the supply imbalance but a lack of dry docking may make a big impact

Anchor handling tug supply vessels in the North Sea will not be able to depend on a demand increase for a recovery from the worst downturn of the past 30 years, according to London-based Maritime Strategies International (MSI).

However, a significant number of special surveys coming due for AHTS vessels in the North Sea are likely to make poor economic sense, which MSI senior analyst James Frew says may help address the severe oversupply of ships in the medium term.

“Is the North Sea AHTS market going to be able to recover just on the back of demand growth alone? No, or not under any sort of realistic oil-price scenario,” Frew told TradeWinds this week.

To spark enough vessel demand in the North Sea to soak up the idle fleet, another 15 to 20 drilling rigs need to go to back to work, which would be a spike by as much as 36% on the 32 jack-ups and 23 floaters active this week.

Frew says such an increase of working rigs for the North Sea “would probably need an oil price north of $80 per barrel”.

“If historical AHTS-to-rig ratios hold, then we would need some pretty heroic assumptions about the strength of the North Sea drilling campaigns over 2018 and 2019,” he said.

Oil prices are indeed on the rise, with North Sea Brent reaching $63.97 per barrel and West Texas Intermediate at $57.23 per barrel by midweek. Various analysts are linking part of the rise to the recent political purge in Saudi Arabia, along with strong oil demand, lower growth in output and declining oil inventories.

Despite the welcome increase, Brent still has a steep 33%-plus climb ahead before hitting Frew’s threshold. But it would also have to remain at the level for a sustained period to create the demand to start absorbing the idle AHTS vessels.

“The market needs a supply-side change and how is that change going to happen? The AHTS vessels in lay-up will become increasingly uncompetitive,” he said.

The main key for whether the stacked AHTS units remain in the vessel pool is whether the bare economics add up for taking them through special survey, so Frew walked TradeWinds through the survey equation in general terms.

For large AHTS vessels, Frew pegs operating expenses (opex) at somewhere around £8,000 ($10,510) per day in the UK sector, which is typically less expensive than the Norwegian segment.

North Sea AHTS rates in July and August this year increased to “actually decent levels”, Frew says, pointing out that the market was seeing some spot charters at £20,000 ($26,280) per day.

“I don’t think anyone was cracking open the champagne but, actually, if you look at AHTS spot rates in August, it really wasn’t too rough,” he said.

“The interesting thing is that during the summer, rates went up for spot fixtures but didn’t move for term fixtures and that was because of the idle fleet.”

Of course, there are other crucial items above the opex level, such as interest payments and return on capital, but for the sake of argument, being above opex in July and August was roughly £12,000 per day in the black for shipowners.

Recently, North Sea spot fixtures for AHTS vessels have fallen back to £4,500 to £5,000 (($5,900 to $6,570) per day, or £3,500 per day in the red. And this is without even counting the red ink from low utilisation.

The analyst says these AHTS day rates are likely to remain in an “ice bath” as the North Sea goes into its winter season.

Averaged out, the fall in rates to about £4,500 per day quickly wipes out the £12,000 per day on the plus side, although, again, this also does not take into account low utilisation that would limit the initial gain.

However, it is important to compare that brief period of “decent rates” with the cost of a special survey. Frew says this expense is likely to start at $500,000 and increase depending on the specific vessel and the level of regular attention it has received while in lay-up.

If a given ship had been at 60% utilisation in July and August, which was about average, the above-opex part of the rates for that period would still be more than $100,000 short of paying the cheapest special survey.

The analyst says that, among AHTS vessels in the North Sea, about 18 are on term charters and 35 are on the spot market for a total of 53 vessels, compared with about 45 ships in lay-up.

Of those 45 laid-up units, 15 have already fallen out of class certification because of the lack of special survey.

About 30 of the 45 could be brought back into the market now, potentially without huge spending. However, out of the total number, 11 AHTS vessels will need surveys in 2018 and another 12 will be due in 2019.

This means, in the medium term, 38 ships out of the roughly 45 now have potential for not being taken through their surveys.

“If none of those go through dry dock, then suddenly you are looking at a long-term laid-up fleet that is a lot less significant in determining rates because there are not that many that can be quickly reactivated,” Frew said.

“We believe that a lot of owners will just not put many vessels into dry dock for surveys, and it is that contraction in the supply side that will drive the market recovery. It will be this rather than the ‘demand fairy’ coming out of the woodwork and giving the market an extra 20 rigs working.”

Frew says a rise in decommissioning activities, which is outside the AHTS vessels’ core rig move market, has helped the situation. However, there is unlikely to be enough decommissioning of offshore facilities “to create enough demand over the coming two years to lift AHTS vessels out of the swamp”.

"The only real solution for AHTS owners in the North Sea is a steady attrition of the idle fleet as owners take tough decisions about whether to keep stacked ships in class as special surveys roll around," he said.