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The West African market for offshore supply vessels (OSVs) is a
large region encompassing 10 countries with active offshore
exploration and development; Nigeria and Angola make up more than
half of the entire regions offshore oil and gas activity. The
region currently has 33 mobile drilling rigs under contract
(drillships, semisubmersibles and jackups) supported by over 200
offshore supply vessels. The region also has 65 floating production
systems in operation which also require regular support, and
another six floating production facilities are scheduled to
complete construction and be installed from now out to August 2022.
Perenco's La Noumbi FPSO is expected to begin mobilization and
installation within the next few months offshore Congo on the Yombo
field. Offshore oil and gas development is one of the main drivers
of long-term vessel demand; in West Africa the spilt is roughly
50/50 shallow and deepwater drilling.
In the same boat
Like most of the world West Africa has been suffering through a
deep recession in offshore exploration and development since the
fourth quarter of 2014. OSV demand in West Africa had been slowly
climbing upward since hitting the bottom of the slide in January
2017, but over the last three months demand has again fallen back.
The reason is simple, the surge of drilling campaigns that started
in early 2019 have been finishing up and the rigs and supply
vessels have been rolling off contract and looking for the next
job, increasing local availability. The underlying reason is that
since 2014 oil companies have become much more selective in where
they will deploy their fresh exploration and production dollars.
Offshore drilling campaigns have become much shorter and less
likely to have immediate follow on work as was a more common
occurrence before the offshore recession.
Before 2014, the market for drilling rigs was much tighter and
oil companies had to contract mobile drilling rig on longer terms
in order to secure the rig they wanted. This meant that there was a
relatively steady demand for support vessels with much less
downtime. But the global offshore service industry overbuilt in the
years from 2010 to 2014, and most did not anticipate the historic
downturn in offshore demand. Today OSVs and rigs are cold stacked
across the world, and there is a surfeit of available equipment and
tonnage. Dayrates have improved from the lows of 2017 and 2018, but
not sufficiently to pay down the debt associated with the newest
vessels.
Oversupply puts a ceiling on some market
categories
The massive oversupply of tonnage is holding down dayrates and
keeping them closer to operating costs. At their worst in 2017,
vessel companies were offering vessels for charter at or below
their operating costs. More recently, occasional shortages in
immediately available vessels has helped drive spot rates up in
some markets, which can also result in a modest rise in long term
dayrates. Many thought rates and utilization would be steadily
improving into 2019, but even though offshore activity has improved
from the levels seen at the bottom of the slump it has been
insufficient to take up the slack created by the vessel building
surge seen during the boom years. Most of the recovery models have
been based on old assumptions that offshore demand would rebound at
certain prices points, like USD 65/barrel oil; however, the success
of tight shale has siphoned off new spending which would have gone
into offshore exploration and production. Only the most
cost-efficient oil and gas projects are getting to their final
investment decision (FID); many large offshore projects are on the
cusp of being sanctioned.
OSV Supply/Demand: A negative feedback loop
The OSV industry is in a difficult position, as companies
struggle to get back to profitable margins. The economics of the
OSV industry are such that increases in dayrates bring more vessels
out of layup. So that immediate tightness in OSV demand, increases
rates and consequently draws vessels out of cold stack. It's true
that immediate availability in some regions has improved dayrates,
but there is a ceiling on the rates which relates to the cold
stacked fleet. For the right price, any OSV can been
reactivated.
Since January 2018, 14 vessels have been reactivated from
cold-stack throughout West Africa, seven in 2018 and another seven
have been reactivated so far this year. Most immediately began term
charters upon leaving the shipyard. The reactivation list below
gives a good indication of where OSV companies have been willing to
spend money, in order to get a term charter in West Africa.
West African OSV reactivations since January
2018
Figure 1: West African OSV reactivations since January 2018.
Source: IHS Markit MarineBase
West African cold stack reports
The laid-up fleet in West Africa is not just a bunch of rusting
hulls from the 1980 and 90s, one third of the stacked boats are
between five and ten years old and will represent a significant
capital expenditure by their owners. There is older tonnage in this
stacked fleet as well though, with 102 of the cold stacked vessels
over 20 years old. One Hundred of the 170 vessels cold stacked
across West Africa can be found in Nigeria. Three other ports, have
a mass of laid up OSVs: 18 Cote d'Ivoire, 15 Ghana and 13 in
Cameroon.
Perenco's installation of an FPSO offshore Congo will commence
by the end of this year. At the start and end of 2020 two Floating
Storage Regasification Unit (FSRU) are scheduled to be delivered
and installed in Ghana and Cote d'Ivoire. In January 2020, Quantum
Power's Tema FSRU is due to finish construction at CSSC Jiangnan
Shipyard in Shanghai, China. Installation of the Tema FSRU is
expected to proceed in the first or second quarter of 2020. The
Saipem Ivory Coast FSRU is expected to complete construction at the
end of 2020, with installation offshore Cote d'Ivoire in early
2021. The next three floating production facilities aren't due
until 2022; Etine FLNG is slated for Cameroon, while GoFLNG Gimi
and Tortue FPSO will be headed to Mauritania. Four more FPSO deals
are tendering, but final investment decisions are still
pending.
West African Market Outlook
By the end of 2019, more drilling projects are ending than are
starting. The rest of the year is likely to see more vessels and
rigs roll off contract. Nigeria had continued to see strong OSV
demand thru the first half of the year, while other large markets
like Angola were already trending down. Further declines in
activity are likely across West Africa as three drillship and three
more jackups are likely be come off charter by year's end. On the
upside, Sirius is scheduled to begin a long-term drilling program
with Shelf Drilling jackup Adriatic in Nigeria on the Orono-Orono-2
field. Sirius has exercised options for an additional appraisal
well, with work lasting until April 2020. In Gabon Petronas
Carigali will commence a four-month drilling campaign with
drillship West Polaris in September 2019. Drillship West Gemini is
scheduled to begin a nine-well program with an undisclosed operator
in Angola in mid-October 2019; the program includes three two-well
options.
The next year schedule also looks light for the region, with
only semisubmersible Deepsea Stavanger starting a new drilling
project in South Africa. Total has contracted the semi in South
Africa starting March 2020 for one to two wells on the Luiperd-1
prospect. All of which points to a challenging scenario for OSV
demand in the coming year for the region. West African OSV dayrates
are expected to remain highly competitive, even US vessel owners
have been bidding on the region's long term tenders.
