The mood in Singapore last week while attending Sea Asia was, for the most part, quite subdued as everyone was looking at each other wondering what the future was going to bring.
As huge reductions in capital expenditures by the oil majors struck the drilling sector last year, the trickle-down effect has left carnage in its wake as modern offshore support vessels sit idle at piers around the world, roughly 100 jack-up rigs are stacked in Asia, tens of thousands are out of work and numerous shipyards desperately seek to sell or sign charters for vessels that had been built on spec when oil was at its peak.
OEM suppliers to the industry are feeling it as well as loyalty, in some cases, has been trumped by those desperate enough to sell at or near cost.
In the past year, the offshore industry has shifted from a period of unprecedented optimism to one of utter despair.
The situation will get even worse, commented Steffen Pedersen, Partner at Wikborg Rein in a presentation last week, “Financing has gone completely silent as banks are very cautious.”
Steffen Pedersen notes that the banks, which supply the lifeblood to the capital-intensive offshore oil and gas industry, are in a very cautious wait-and-see approach and that the traditional methods of financing will likely get somewhat backfilled by the private equity sector – both only for the right companies, according to Viggo Pedersen, Director Offshore & Marine at Clifford Capital.
Viggo notes the capital markets still have huge resources, but the cost of borrowing has risen significantly and investors are putting an additional premium on the offshore market.
Serious legal drama will expand toward the end of 2015, says Steffen Pedersen, as defaults on loans grow in number and companies are forced, for one reason or another, to renegotiate contracts.
This situation is already being seen by drilling contractors as ultra-deepwater rigs that had long-term contracts signed in the first half of 2014 are having new contracts drawn up at a much lower rate, regardless of the penalties that energy companies must absorb in the process.
These new contracts will now be scrutinized by legal teams down to each and every word, says Steffen Pedersen, and the legal back-and-forth that will ensue will not end this year, or next, but likely continue for many years to come.
Is there a light at the end of the tunnel?
Viggo Pedersen notes that Morgan Stanley has recently called the bottom of the oil services stocks and that investors are now net long oil. Ambitious scrapping of old assets in the offshore marine and drilling sector will also speed up the recovery of the sector.
Old assets don’t necessarily mean bad assets though as those rigs are already paid for in many cases. Some drilling contractors are at this very moment, investing millions of dollars into refurbishing oil rigs that may not earn a huge day rate, but enough to make a profit for their respective companies.
Although some shipyards are hurting, others, like Sembawang in Singapore, are extraordinarily busy as many owners are taking advantage of this period to conduct maintenance and upgrade projects of their fleet.
As a country that is highly dependent on the import of energy products, low oil prices have been beneficial to India and, in stark contrast to other regions, exploration and production projects have not slowed down off the country’s shores.
In Brunei, a huge amount of offshore work continues at the massive Champion field and the world’s first FLNG facility is set to be installed by the end of this year offshore Malaysia by Petronas.
“What’s beyond the horizon is anyone’s guess however,” commented Vivek Seth, Chief Executive at Halul Offshore, Qatar. “It’s natural to be nervous.”