Shares of some offshore services companies have jumped 30%. The first billion-dollar oil project in a year and a half was approved for the US Gulf. And an offer of exploration blocks offshore Mexico generated excitement you normally only see in a boom. It is less than two months since OPEC agreed at the end of November to bring in production cuts, but it has already shaken the offshore services industry out of its doldrums.
“There's definitely life in the offshore market,” says Brian Fariello, Wärtsilä’s Business Sales Manager for the Americas. “We are seeing general reasons to be optimistic about the market for several different vessel types. It's not going to be ideal, but I think next year will be better.”
Wärtsilä is in discussions with a couple of US drilling companies over upcoming tenders for new rigs, which would mark some of the first new orders in more than a year. According to data from IHS Fairplay, not one new drilling rig was ordered in the first seven months of 2016, and only seven in 2015. This compares to the more than a hundred rigs ordered in 2013, before oil prices started to fall.
James West, Managing Director for Oil Services, Equipment and Drilling at Evercore, a boutique investment banking firm, argued in a recent report that he expected spending on offshore projects to bottom out in the middle of 2017, after which it would follow the recovery already seen in onshore projects.
“Onshore is alive and well and poised for recovery,” he said. “North America will rebound first and the strongest. Offshore markets will likely be the last to recover.”
Even in the most challenging conditions, however, Wärtsilä has been involved in some large projects. In December last year, it won a contract to provide innovative, detachable thrusters to Heerema’s Sleipnir crane vessel.
According to Arthur Boogaard, Wärtsilä Marine Solution’s General Manager of Business Sales, specialised vessels such as Sleipnir are less exposed to fluctuations in the oil price than other offshore vessels.
“The oil and gas crisis has not so much affected the specialised vessel segment,” he says. “It is healthy, stable, and slowly growing.”
The Helix Q5000 well intervention vessel, which came into service in May 2015, quickly secured a string of profitable contracts despite a challenging market, which saw the oil company BP delay the job with which Helix had expected to launch the new vessel.
Helix saw its share price rise more than 70% between September and the start of December, with its shares leaping 30% in a matter of days following the OPEC agreement.
The Helix Q5000 is used to plug and abandon wells that are no longer producing so it has benefitted from the “idle iron” rule brought in by the US Bureau of Safety and Environmental Enforcement in 2010. This puts a five-year limit on how long a well can be left not producing before it must be sealed and decommissioned.
The rule was intended to ensure the removal of the 110 platforms irredeemably damaged when Hurricanes Katrina and Rita swept through the Gulf in 2005, but Helix now expects a wave of new business capping wells at depleted oilfields made uneconomic by lower oil prices.
Heerema hopes that Sleipnir will also benefit from the still-strong decommissioning market, as well as winning jobs from outside the oil and gas industry.
Meeting the needs of the specialist vessel segment often requires suppliers such as Wärtsilä to develop tailored solutions.
Wärtsilä won the Sleipnir deal because its research and development team was able and willing to meet Heerema’s request to develop retractable thrusters, which can be dismounted underwater – an industry first. It won the Q5000 deal because it gave Helix almost unlimited access to its hydrodynamics experts in The Netherlands, convincing them that its downward thrusters were the most efficient solution.
Fariello said that the full lifecycle support and excellent hydrodynamic performance, with tilted gearboxes that reduce interaction losses, also helped win the Helix deal.
Wärtsilä also has been involved in one of the few ongoing projects to build new deepwater semi-submersible rigs: the construction of two rigs of the Frigstad D90 design, by China International Maritime Containers Group and the Norwegian offshore company Frigstad.
In a sign of just how tentative the recovery for the offshore is, however, Frigstad in December exited the project, selling out to its Chinese partner.
Helix has also delayed delivery of its new Helix Q7000 well intervention rig from June 2017 until the end of 2018, showing that even specialist service companies are being cautious.
Fariello hopes that the OPEC agreement, together with the election of the pro-energy Donald Trump, could push Helix to bring delivery forward into this year.
He also expects the new safety regulations imposed in the US Gulf, following the 2010 Deepwater Horizon disaster, to force some offshore companies to invest in new equipment.
But many offshore companies are not in a financial position to invest, while others built too much capacity in the boom.
According to Haynes and Boone, a Houston law firm, no fewer than 109 North American oil services companies had filed for Chapter 11 bankruptcy between the start of 2015 and October 2016. There also has been a string of bankruptcies among Norwegian and UK oil services firms.
Fariello believes it will take until well into 2017 and even 2018 for those companies who do have the resources to have enough faith in the oil price recovery to start sanctioning large investments. For those with “a hangover from their construction programme during the go-go times,” the delay could be longer.
“The offshore guys really want USD 60 to USD 65 consistently and not just as a one-time blip,” he says. “Things are now so new and so fresh that we've still got some time to see how it will really go.”
But at least the offshore services industry is at last seeing some following wind, even if it is still not yet plain sailing.
