Despite a continuously challenging market environment, things are finally starting to look up for OSV businesses. Underpinned by the rising price of oil over the past two years, the offshore industry is preparing to move into recovery mode following years of dire returns. Indeed, offshore oil and gas majors are set to invest US$208Bn on offshore drilling and oilfield services this year, according to Offshore Support Journal – a huge sigh of relief in an industry where 1 in 5 vessels are currently thought to be in layup.
While the long-term outlook of the industry looks increasingly positive, any near-term gains will be tempered by the continued glut of vessels, caused by over-ordering during the boom in oil prices and speculative building activity in shipyards across Asia, due to supportive bank credit. To add to this, charter rates across most asset classes and regions are still running at or close to operating cost levels. In the past, the revenue of a vessel might have been four or five times its opex, but now operating margins are much tighter. Assets worth billions are now worth a fifth of what they were, but owners are still servicing debts based on what they paid originally.
In order to secure future profitability and build resilience in an increasingly volatile market, OSV operators will need to be more ambitious about their cost-cutting plans. In an Altman Z-score analysis of OSV companies last year, 34 out of 38 were found to have scores of less than 1.8, indicating a high likelihood of bankruptcy. This means that companies hoping for a dramatic rebound in vessel demand are at serious risk, as there is no guarantee that their existing finances will sustain them through the current environment.
So, what should a shipowner’s top priorities be in returning to profitability? Along with restructuring debt, it’s essential that we examine how to re-enter vessels from layup as quickly and efficiently as possible. Out of the current fleet, some vessels in cold layup may never come back to life, some newly received assets are ready to start work, and a ‘grey area’ of assets will need the right set of circumstances to come back online. Within this area are vessels between 5-10 years old, with a large deck – particularly subsea construction vessels, IRM (inspection, repair and maintenance), and survey vessels. Their price to reactivate will partially depend on how well they were preserved, and on how economically they can be brought back into service.
The cost of reactivation, and the time it takes to reactivate, can both be improved through strategic procurement. This process involves critical element analysis to ensure that spares, equipment and components can be bought as economically as possible. For example, if a company is adding a PSV in three locations, it would have to buy six thrusters, as each would require a spare. Looking at this through the lens of strategic procurement, the equation changes. By conducting critical element analysis, we can see that a thruster might fail once in two years, and calculate that, with the right infrastructure in place, it would be cheaper to buy one set of spares and transport it around the world, rather than buying two additional thrusters to have one in each location, which would cost millions of dollars extra. At the same time, relationships with shipyards and global suppliers plays an important part.
Strategic procurement, while simple enough in theory, is a resource-intensive procedure, and relies on quantities of scale and logistics networks that may be out of reach for many offshore vessel owners and operators. For this reason, ship managers are well placed to add value through strategic procurement solutions, which could otherwise take years to develop in-house.
V.Group’s scale is a unique advantage in the oil and gas sector. V.Group’s global reach not only enables strategic procurement on a global scale, but allows for economies of scale and greater bargaining power with shipyards and other suppliers. In addition, V.Group has first-class, availability of credit – something that may not be the case for companies in the offshore sector. This further enables fast, strategic, and flexible purchasing.
In the long term, strategic procurement solutions will be necessary to keep opex rates low. However, it will also be essential to ensure that talent levels can be brought back to the same levels as they were pre-downturn.
Ship management companies can help to fill this skills gap. V.Group’s offshore team, for example, comprises many professionals with experience in the oil and gas industries, as well as the deep maritime expertise from the wider cargo and passenger shipping sectors. In addition, V.Group’s crew draws on the most experienced seafarers from around the world, with a network of over 40,000 seafarers. V.Group invests in training centres of excellence around the globe, meaning that the offshore industry can select the most experienced and highly-qualified seafarers in the world, and gain access to flexible man power solutions and consistent and reliable services.
As new crew enters the field to meet demand, or returns to service, it is essential that safety standards are rigidly maintained. One potential hurdle for ship management companies entering the offshore space, however, is the stringent nature of safety standards, which in many cases outstrip those in other commercial shipping sectors. In many cases, the onus is then on the customer to provide an additional team to oversee the operation of the vessel and ensure compliance with various safety regulations, resulting in additional resource and unforeseen costs.
V.Group has created its own safety management system, which it has been audited and vetted with oil companies. The system follows IMCA standards, verified by FPAL, Achilles, to finally be verified by clients. By working closely with clients, and also by hiring people with the experience of working at the highest levels of health and safety, it is possible for third-party managers to supply crew that can handle the majority of offshore operations
With a cautious recovery now underway and utilisation on the upturn, it seems that the worst is now over for the offshore sector. However, the OSV market will continue to suffer from low day rates for the near term, which means that turning increased demand into profitability is by no means simple, or guaranteed. It is therefore essential for ship managers to play a consultative role and add value through shared expertise and strategic procurement.
Maciek Bejm, Business Development Director - Offshore, V.Group