As the offshore market entered 2020, many within the industry had an optimistic outlook for the future and the consensus was ‘the worst is behind us’.
However, nobody could have foreseen the events that would unfold in Q1 2020 and the impact that would be felt throughout every corner of the global economy.
The coronavirus or Covid-19 swept through the world from the epicenter of Wuhan, first impacting surrounding Asian and Middle Eastern countries, quickly followed by Europe and the US.
The global economy was sent into a tailspin and as a result, the demand for oil plummeted. To add another twist, Saudi Arabia and Russia entered an aggressive oil price war and the price of the commodity fell sharply. In January 2020 Brent Crude was $63/bl and by 1st April it was c. $25/bl.
This article will discuss the regional impact of both COVID-19 and oil price decrease on key operating regions.
Asia hasn’t had an easy ride in the last 5 years, especially Singapore. The last thing Singaporean offshore players wanted or needed was a dramatic fall in oil prices.
The region was hit quickly by the oil price war and large companies such as Keppel, Sembcorp, Nam Chong and Mermaid, Marco Polo all saw their share price drop dramatically in a matter of days. Not good for a region still hurting from its past mistakes.
As discussed in last month’s article several early S.E. Asian adopters turned their attention to the growing windfarm industry in the region. This employment will be a welcomed relief now oil and gas contracts are under pressure. However, the vessels that have had contracts canceled, or are struggling to find new employment must go somewhere and renewables work will be on their radar.
Europe
European owners, especially the Norwegians, are feeling the effects of the current market. Even before the events unfolded over the last 2 months, they were under huge amounts of pressure and many in the industry questioned, one, how they had survived this long and two, not if, but when they would have to seek restructuring plans.
The recent oil price crash has made the decision for them and most have been forced to find a solution. For example, Solstad Offshore the largest Norwegian offshore player was earlier this month taken over by Banks and bondholders as a $946m debt deal was agreed. Solstad will also be trimming its fleet to 90 vessels by disposing of 37 ships either in the second hand or demolition market. Other players in the region also forced into action include Havilla, DOF, Siem Offshore, Vroon etc. Solstad’s total fleet value 16/04/2020 is USD 1.304B (excluding the companies' two pipelay vessels).
US
The US oil and gas majors have reacted quickly and aggressively to the economic situation, ExxonMobil, Chevron, HESS, ConocoPhillips, Philips 66 have all cut 2020 CAPEX to adjust to this new price environment. These cuts will have huge implications for vessel owners in the region, the US Gulf already suffers from an oversupply of tonnage and investment cuts will certainly tip the supply and demand scales further out of favor.
Hornbeck Offshore this month announced they are entering chapter 11 restructuring. Unlike many other publicly US-listed OSV owners Hornbeck had not gone down the Chapter 11 route and instead sought other alternatives with their lenders. However, continued challenging market conditions over the last year combined with Covid-19 and the drop in oil price proved too potent a combination.
Conclusion
The current global economic situation is showing no signs of improving and how far into the future the repercussions will be felt is still very much unknown. What we do know is that the offshore industry is retracting, and 2020 is going to be a very large stress test for the industry and its players. Just as we thought we had seen the last of the mergers, bankruptcies, forced sales, delistings and chapter 11’s it looks as though more pain is on the horizon.