By Fazel A. Fazelbhoy, Chief Executive Officer, Synergy Offshore FZ LLE
The regional Middle East market has been suffering, along with the rest of the Global Offshore Support Vessel (OSV) market for the past 4-5 years or so. However, it has fared far better than the global average. Initially, after the market collapse in 2014-2015 OPEC and the regional National Oil Companies (NOC’s) decided to maintain a “preservation of market share” strategy, which kept the Middle East busy while the rest of the International Oil Companies (IOC’s) dropped their E&P spend and cut back on exploration and drilling activity. This meant that the amount of Middle East oil produced remained at pre-crash levels.
However, this buoyant market, began to attract attention from other areas where oil exploration and production had tapered off in response to the falling oil prices. Hence, we had a tsunami of South East Asian vessels flooding into the Middle East Market. The regional market has a capacity to absorb about 300-350 vessels. Unfortunately, the incoming tonnage took the market supply to about the 450 vessel mark. Which meant that between 20% - 25% of vessels looking for work in this area were the newly arrived vessels from SE Asia and surplus to the regional requirements. The result of this saw a rapid drop in utilization which went down to below 50%.
The OPEC strategy of continued production resulted in a global oil glut whereby oil prices went crashing to below the $30 per barrel mark. OPEC then responded by introducing the OPEC Plus group (that included Russia) and started the oil cuts by restricting production. With this drop in oil revenue for the regional NOC’s, they were forced to follow the IOC’s lead in re-negotiating existing contracts and forcing 20%-30% cuts in day rates for the OSV market.
OSV owners had to face the double whammy of both an oversupply of vessels (and the concomitant drop in utilization) and now a reduction in day rates. This has put the ME market into a sustained crisis not seen for more than the past 20 years.
It appears that the market is now approaching an inflection point!
While there is a remaining pressure on day rates, they seem to have stabilized with some contracts being signed for up to 5 years (the longer the duration of a contract usually implies that the charterers expect the day rates to increase, hence they want to lock in at current prices). With over 60 vessels stacked regionally, the utilization rates have crept up to about 60-65% levels. This is for overall fleet utilization and includes vessels that are in hot/cold standby condition and stacked vessels.
With the UAE committing $26 B per year for the next 5 years and Saudi Arabia expecting to spend $55b per year across the whole oil and gas value chain, exploration and field development remains a priority of the NOC’s. Therefore, 2019 should see a gradual uptick in utilization rates, but as there is such a huge amount of oversupply of OSV’s in the market, I do not see a significant increase in day rates until late 2020.
So while the region is still only treading water, at least we have a positive direction!