Wed 11 Jan 2017 by Philip Woodcock
Chartering vessels at historically low rates has helped reduce costs in the offshore wind industry, but the
market needs to remain sustainable
2016 was a year of sustained low rates for support vessels in the offshore oil and gas sector. It was also a year that saw
rates for vessels for offshore wind decline as a result
by Philip Woodcock*
Such has been the extreme nature of the downturn in the market for offshore support vessels in the oil and gas sector that
‘consumers,’ whether they are crew transfer vessels (CTVs) or service operation vessels (SOVs) or large subsea
construction vessels are in a position of being able to dictate terms. As asset values fall there are also opportunities for
investors to build fleets at heavily discounted rates, if they have the cash and the courage to go against market sentiment.
With the signing of the new windfarm concessions in The Netherlands and Denmark, there will be increased downward
pressure on the supply chain as developers try and make money on these optimistically low strike prices.
Although direct parallels cannot be drawn between every part of the offshore oil and gas industry and the challenges
faced by the offshore wind support vessel market, similarities exist. A reduced number of projects in 2016, which were
delivered more efficiently than ever before, absorbed fewer CTVs, which mirrors the reduction in work in the oil and gas
industry brought about by the drastic reduction in spending on exploration and production.
Taking costs out of the supply chain is allowing previously non-viable oil and gas projects to become competitive. The
dramatic reduction in the wages for dynamic positioning operators coupled with walk-to-work technology moving from
being a niche sector to a commodity has moved the SOV concept from a luxury to simply being another tool in the
offshore toolbox. Vessel oversupply brought about by easy access to credit is the most obvious common denominator
between the industries, banks and the shipyards having lowered the barrier to entry for vessel ownership to a level that
has proved to be unsustainable.
In 2016, charter rates for CTVs experienced downward pressure similar to that witnessed in the platform supply vessel
market in oil and gas. Those who could get work took what was available at whatever terms the client offered. Operators
who averaged utilisation of in excess of 60 per cent in 2016 will count themselves fortunate, especially if some of that
work was committed at 2015 rates. One operator recently commented that they experienced a 32 per cent rate reduction
year-on-year for the same vessel doing the same job on the same windfarm as 2015. As fixed costs could not be limited in
the same fashion the vessel worked for little more than OPEX, with no accrual for depreciation or future maintenance.
Anecdotal evidence suggests that vessels are being fixed for 2017 on 24-hour projects at returns of less than £500 per
million invested, which is half of what is considered a sustainable business case, especially if this is for short-term work
and not 365 days commitment.
For the charterer this situation allows the short term advantages of flexibility in vessel selection, minimum commitment
lengths and low charter rates. This windfall, coupled with continued low fuel costs has greatly reduced expenditure on the
marine vessel spreads. For vessel operators to try and remain in business they will have to find ways of reducing their fixed costs which will include reducing crew wages, hiring foreign, low wage crews, reducing or postponing vessel
maintenance and eliminating investment in training and safety management systems. While these efforts may slow the
burn of cash, they will have a long-term negative impact on safety and efficiency offshore.
Windfarm operators need a sustainable supply chain to get the operational quality and reliability they need and to have
contractors who will not fail financially mid-contract. To achieve a safe and sustainable supply chain, developers and
contractors must resist the urge to squeeze CTV operators for every last penny and allow enough life to flow, either by
offering sustainable day rates for short term work or returning to the era of long term contracts, which provide operators
with certainty on capital costs. In today’s market, the latter option will give charterers a double windfall of long-term
costs fixed at today’s low rates and a supplier who will be in business for the long run, providing service at a quality level
needed for safe and efficient offshore operations.
*Philip Woodcock is general manager at Workships Contractors BV
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