The offshore and specialised ships markets
 in 2003

Offshore support vessels 
Coast-guard, salvage, ice-breakers
North Sea 
U.S. Gulf 
Brazil 
West Africa
Seismic market 
S.U.R.F (subsea umbilicals risers and flowlines)
Drilling market
Production market (surface systems)
Prospects 

This past year we have seen a slowdown in the offshore industry. Once more, high gas and oil prices did not provide the incentive needed to boost exploration and production efforts due to consumption rates not living up to analysts� predictions and actually dropping from previous years. We expect to see this market downturn to continue, coupled with an oversupply of vessels through late 2004.  

With the globalisation of the offshore markets becoming more prevalent as  is the case with West Africa and Mexico, operators are now becoming more inclined to build high-tech vessels at ever lower prices. As efficiency and lower cost demand increases, operators are taking a harder look at renewing their fleets in low-wage shipbuilding countries like China and maybe soon India, to make economic sense of the low charter rates prevailing. Many key players do not see an end to these decreased rates and are strategizing to build no more or even less than the operators demand to fulfil their support requirements and still produce revenue on new capital expenditures. 

Facing the globalisation of the offshore markets and the faster pace of tonnage shifting to markets in pursuit of sustainable day-rates, operators and contractors need also to change their market stance by increasing their presence worldwide. A key condition to either access or develop market share in the prevailing West African and Brazilian offshore operations is the obligation to incorporate more and more local content.  

This is much in line with what has been successfully done in Brazil over the years. The West-African way has been to enforce joint ventures with international companies, although recently Angolan rules were amended so as to allow foreign operators or contractors to bid directly for jobs. The Mexican national oil giant Pemex deals exclusively with Mexican companies, leaving it up to them to find partners internationally. The vessel age-span for by Pemex is narrowing sharply and 2003 saw their first newbuilding-for-term-charter enquiry.
 

The Anchor Handling Tug/Supply (AHTS) and the Platform Supply Vessel (PSV) fleet utilisation along with rates continued to drop in the main markets throughout the year with the exception of West Coast Africa. Lower drilling activities combined with lower rates and continued deliveries of uncommitted newbuildings have both contributed to this imbalance. 

Operators like Groupe Bourbon, Sealion or Vroon are now engaged in large and challenging new construction programmes in China. Vessels being built there are no longer dedicated to one single market but have been designed with versatility enabling them to get employment worldwide moving from North Sea to West Coast Africa, from US Gulf to Middle East Gulf, all the more that companies like Pemex (Mexico) require for all newly contracted vessels to have keel lay dates of 1997 or newer. This requirement is already in place phasing out all older tonnage as new units take their place. 
 

It was a good time for owners having AHTS with ice-breaking capabilities available in the Baltic early 2003. They were able to play a long and cold season assisting vessels which were frozen in for weeks on end. Damaged vessels were taken out of Russian waters on a LOF-basis and others on healthy rates. Following the environmental disasters of 'Erika' and 'Prestige' as well as the consequences of a strong winter and difficult ice conditions, it is with interest that we note the increasing coast-guard contingency in vulnerable areas.  

• Les Abeilles International was awarded the long-term French Navy contract upon which they ordered two tailor-made UT 515 Deep Sea Salvage Tugs - 200 t bollard pull - to be built at Myklebust Mek in Norway for deliveries first half of 2005.
• Rem�y Shipping AS did the same for the Norwegian Coast Guard with one UT 512 Deep Salvage Tug - 110 t bollard pull - to be built at S�viknes Shipyard for delivery early 2005.
• Far Eastern Shipping Company ordered 1+1 Icebreaking AHTS with stand-by and supply class at Kv�rner Masa Yards for delivery in May 2005. These are to be chartered by ExxonMobil, operator of the Sakhalin-1 project.
• CJSC Sevmorneftegaz ordered 1 + 1 icebreakers of the MOSS 828 MISV design at Havyard Leirvik AS. The contract value is in the region NOK 430m and the vessel is to be delivered in September 2005. 
• Smit continued growing in size with the acquisition of the remaining 50.1 % share in URS, Unie van Redding- en Sleepdienst N.V., the leading offshore and towage operator in Belgium. This share was then sold again to Fairplay of Germany.
• UK Maritime & Coastguard Agency took over the long term chartered 180 t bollard pull 'Anglian Sovereign' from Klyne Tugs, she is the second salvage tug of her class to join the Agency after the 'Anglian Princess'.
• CCG, Canadian Coast Guards, will have to either refit their existing 'Louis St Laurent' (built in 1969) or to order a new vessel.
   

The offshore oil and gas industry in Norway and in the UK struggles with low activity levels leading to substantial lay-offs of workforce in all sectors. The scenario is certainly not improved by Norway's minority coalition government struggling to find common ground on the reopening of petroleum exploration and production areas off the Lofoten islands. However, a go-ahead was given on the development of the Norsk Hydro-operated Ormen Lange field and all the major sub-contracts for this $ 10 bn project will be awarded within 2004. 

Statoil and Norsk Hydro were the big winners in Norway's latest licensing round, where 13 companies received offers for 19 production licences and 39 blocks in the North and Norwegian Seas. All of the new licences are located close to existing production infrastructure and are likely to lead to more subsea developments and exploration drilling. We hope that the Ministry of Petroleum and Energy will push the licence winners to fast-forward the work programmes for these new blocks in order to increase the overall activity in the region.  

In the support market, the spot market never gained the expected summer momentum this year, but peaked at poor levels in April with large AHTS obtaining up to $ 26,000 per day, whereas the larger PSVs were averaging $ 14,000. But the low drilling activities, combined with a constant feed of uncommitted PSV/AHTS newbuildings and a steady supply of sublet tonnage, have seen a market paying in general below the $ 9,000 per day for AHTS. 

The North Sea offshore shipyards and subcontractors, all being at the end of the chain, suffered from the lack of orders. The remains of the old orderbook emptied into an already flooded market and the overall lay-off of the labour force accelerated.  

Groupe Bourbon's share acquisition in Havila ASA was completed with a full take-over of the company in 2003 renaming it Bourbon Offshore Norway. The take-over included the PSVs and the large AHTS under construction in Norway, now most likely bound for West-Africa in a move where Groupe Bourbon draws on its increasing market presence and long experience. Towards the end of the year, BON placed a repeat order of the UT 745E multi-purpose PSVs already under construction at Aker Langsten. Prior to Groupe Bourbon's final share acquisition in Havila ASA, Havila Shipping bought out Havila ASA stand-by fleet and now consists of 10 vessels, many of which are very modern. 

District Offshore entered into an agreement with Boa Offshore to establish a 50/50 joint venture called DOF BOA AS. This new company bought the modern AHTS 'Boa Giant' and the 'Boa Hercules'. 

DOF was also busy buying the 'Northern Admiral', a large MPP AHTS built in 1999, being on a term contract to Norsk Hydro.  

'Viking Energy' and 'Stril Pioner' were delivered this year from Kleven Shipyard to Eidesvik AS and Simon M�kster Shipping respectively. These large PSVs are equipped with an innovative dual-fuel solution that burns mainly LNG for power generation
 

Charter rates this year have hit all-time lows with lower than normal fleet utilisation as a result of the exodus of over 22 drilling rigs to Mexican and West African waters. Operators have laid up old tonnage en mass awaiting a resurgence of drilling activities which are not expected to gain momentum until late 2004. These high levels of availability have spawned aggressive pricing by owners leaving most operators wondering when the bottom will be hit. With the rig count stagnant and only a few new field development projects in the works, OSV owners and service contractors appear to be headed for a rough winter. 

US based operators have continued to strategically consolidate their fleets:  

• the newly incorporated Rigdon Marine (Groupe Bourbon), will take delivery of its first vessel from Bender shipbuilding February 2004 with all following 9 vessels to be delivered within mid 2005,

• Tidewater has acquired Ensco Marine boosting its fleet by  27 Gulf of Mexico vessels. They have also initiated newbuilding contracts totalling over $ 100 m for  6  AHTS, 2 FSVs, and 2 PSVs,

• Hornbeck Offshore has acquired Candy Fleet adding an additional 5 PSVs to  its fleet,

• Otto Candies LLC has taken delivery of 2 units from De Hoop Shipyard in Holland and also 2 PSVs from Houma Fabricators in Louisiana. Otto Candies also placed an additional order for a PSV at Houma Fabricators. All vessels are expected to work for Pemex in Mexico.

Efforts continue by US operators to lobby US Congress to pass a bill blocking foreign investment by non-US operators in US Jones Act fleets. This revised bill would also disqualify US companies from fleeing to offshore countries in order to avoid US taxes from participating in US Jones Act qualified contracts for coastal trade.
 

The Brazilian oil company Petrobras announced this year its aggressive renewal plan of offshore supply boats serving their upstream strategy. Petrobras disclosed the chartering plans of 18 newbuildings and 21 upgraded vessels for periods of 8 and 4 year terms respectively. The newbuildings are estimated to generate revenues of $290 m to the Brazilian shipbuilding industry and an associated cost of $50 m to the refurbished vessels. 

On the horizon, Brazil has projected adding shipbuilding capacity worth a total of $ 500 m collectively in Bahia, Parana and Espirito Santo states. The country of Brazil is a flurry of hot alternative shipbuilding hubs of investments, projected new shipyards, the promising leasing of an existing government yard and the possibility of reopening 3 local yards being among the shipyard news. The local corporation Camargo Correa projects a spending of US$ 50 million in a yard located in Espirito Santo state while the Brazilian government has suggested two international shipyards, already operating in their markets, with a $ 250 m investment.  

An interesting occurrence in that respect was that NorSkan Offshore Limitada, the 50/50 j/v between DOF and Solstad, bought Trico Offshore Limitada which sole asset was a UT 722 L under construction at the Eisa shipyard in Rio against a long term contract to Petrobras.
 

Benefiting from a steady demand from the production market, mainly in Nigeria, Angola and Equatorial Guinea, the offshore utilisation rate remained on the high side in 2003, though absorbing new tonnage, and rates remained healthy. In the best case, the spot and term rates should remain at the same average levels in 2004. 

From these above briefly described facts, one can easily deduct that the fleet of offshore vessels dedicated to production will expand further, which is why two main shipowning joint ventures Sonatide and Sonasurf have been created to cover the needs of OSV in Angola, with a third one Angobulk having been set up in 2003. These three joint ventures employ about 60 vessels offshore Angola. 

OSV owners think that more and larger PSVs will be in need off the west coast of Africa as well as dedicated offshore vessels to carry out subsea works with ROVs, this means bigger units with large accommodation and DP2.
 

Few opportunities arose in this market as the volume demand for 2D and 3D data also suffered from the general stagnation of the demand from the exploration sector. However the four remaining major operators have maintained their effort in R&D, and the solid streamers technology becomes a key asset to guarantee one�s position.
 

Even though in general the employment rates of key subsea construction vessels were on the high side, all contractors have suffered from the increasing imbalance between risk and reward which is evidenced by the poor financial health of several major contractors. Oil companies commercial policy has been slowly but surely leading the latter into the red area by off-loading always more and more risks and liability onto their sub-contractors.  

The industry anticipates a real slow down in 2004, which should significantly affect the utilisation rate of the major construction and pipe-lay units. As of today one can hardly expect an up-turn before 2005, which shall be automatically due to a wave of projects reaching the stage of construction completion and installation. 

West Africa and the Gulf of Mexico have again been among the best opportunities. 

Hyundai is poised to expand its construction and pipe-laying capacities in the Far Eastern market, but the lack of valuable assets should lead HHI to build some of these in their own facilities.  

Along with their new business model, Stolt Offshore is committed to sell some of  its older or non-core assets. This has proven to be somewhat difficult due to the adverse market conditions. On the other hand the same contractor is about to refurbish its LB200 lay-barge due to the installation of the 540 km of 44-inch diameter gas pipeline linking Ormen field to the Norwegian shore. 

In consequence there were no real changes in the fleet with the exception of the conversion of the Solstad 2001 built cableship, �Normand Cutter�. She is being converted into a construction and pipe-lay vessel on a long term charter to Saipem�s subsidiary Sonsub.  

The ROV service market to the production and drilling industry has considerably consolidated since Oceaneering acquired the ROV business from Subsea 7, as well as the Stolt Offshore ROV business, thus becoming an uncontested world leader. 

The fibre optical market remains very low although maintenance keeps a certain level of activity. The major operators envisage a slow up-turn by 2005 once again linked to the increase demand derived from the �internet network and its associated technologies�.
 

This sector has experienced a year of "consolidation", that is to say that the 6 major drilling contractors have worked to maintain fleet utilisation rates. They have continued to cut costs and to rebuild their cash position, not only to survive another year of stagnation in 2004, but also to be prepared for the next wave of investments. Generally the market remains oversupplied with rigs in all water depth segments and all geographical areas, thus contractors hesitate to plan large, speculative and costly movements of rigs. 

In the rig construction and upgrade side, the world leader,  Keppel, has completed the acquisition of Verolme of the Netherlands. Furthermore, the company is about to open a new facility in Kazakhstan - Aktau - to cope with the Kashagan development in the North Caspian Sea. After the construction of a "mode V" jack-up rig for Transocean Sedco, one has to underline the record breaking achievement of the semi-submersible 'Maersk Explorer' built and delivered in Baku by the same rig builder. The yard is now involved in the construction of a production jack-up rig for BP.
 

By the end of 2003, Exxon and Sonangol announced that 16 deepwater oil discoveries (1,000/1,500 meters water depth) were made on block 15. This represents a potential to recover more than 4 billion oil-equivalent barrels, whilst Total and Sonangol have made 15 important deepwater oil discoveries on block 17. The West African offshore market was still buoyant in 2003. The immediate future for 2004 is slightly less promising as one foresees that oil companies will consolidate their production through their existing investments in deep offshore. Furthermore, majors will do their best to connect the production coming from additional wells to existing FPSO such as Rosa & Lirio fields developed by Total in Angola. All blocks should ensure a high level of activity in Angola. 

In Brazil, Petrobras issued a tender for the construction of two giant production semi-submersibles, 'P51' and 'P52', linked to a national demand for economical returns in terms of construction and operation. In 2004, Fels Setal should be awarded the first contract despite the uncertainties due to the tax regime applicable to this project.  

This year has seen the physical completion of major FPSO projects such as the 'Bonga', giant 2 million bbl, in Nigeria as well as the award by Total to a consortium headed by Technip of a contract for the construction of the 'Dalia' FPSO, a 2 million bbl. This unit will complement the giant 'Girassol' FPSO on the Total Angolan block 17.  

The BP Angola 'Plutonio', another 2 million bbl giant FPSO, should be built by HHI, whilst one expects finally Chevron Texaco Nigeria to issue its tender for the construction of the 'Agbami' 2 million bbl FPSO. 

The strong demand for general shipbuilding, combined with the slow down of the offshore demand for the construction of large surface systems, has led the HHI offshore division to steer slightly off its course by taking an order for the construction of a batch of ten Aframax ashore. 

Sakhalin-1 and 2 will continue to provide a lot of work to contractors all through the year 2004
 

E&P spending should steadily increase in 2004 with no real impact in the offshore service markets before the end of the year 2004. Although the medium term prospects are not so brilliant, the outlook for a full recovery certainly lies in the sharp increase of the Chinese and generally Far Eastern demand for energy. CNOOC has been busy, taking significant shares in oil and gas fields located far from its local acreage of the Bohai Sea. For the first time ever the market recovery might come from the Far East.