COLUMN | Why is the North Sea offshore market so weak and what does it mean? [Offshore Accounts]

For the last thirty years, if you wanted to find the highest day rates for anchor handlers (AHTS) or platform supply vessels (PSVs) in the world, you looked at the North Sea spot market in the summer.

It was accepted that the market was seasonal with miserable winters with low utilisation and rates, but then in the summer, the rates would regularly “pop” with pricing surging to high levels when vessels were scarce.

Charterers in Aberdeen and Stavanger have long experienced shocks from “dynamic pricing” from shipowners, which makes the Oasis ticket pricing debacle in the UK look like a walk in the park.

Anchor handlers still earning superstar money

For anchor handlers, this has largely remained the case. Broking house Seabrokers reported in its excellent monthly newsletter Seabreeze that anchor handlers both above 22,000 bhp (16,000 kW) and below 22,000 bhp achieved day rates of over US$160,000 per vessel when availability ran out in August. This meant that on August 19, Equinor had to pay those steep rates for the anchor handlers Loke Viking, Magne Viking, and Normand Sigma as the last and only ships on the quay in Norway for the rig move of the jackup Askeladden.

Believe me, chartering managers live for signing spot contracts at those super premium prices. Even last week, rates were healthy with Loke Viking being fixed for the pound equivalent of US$62,000 to Ineos for the rig move of the Noble Resolve, whilst Tidewater fixed Pacific Dispatch at around US$40,000 for FPSO heading control.

There is still nice money being made in the North Sea for anchor handlers, even if it is erratic and unpredictable, being dependent on clusters of rig moves or bad weather selling out the market.

Seabrokers found average rates in year-to-date end-August for AHTS were up around 20 per cent for both larger vessels over 22,000 bhp and also for smaller vessels under 22,000 bhp compared to 2023 average spot market rates for the same eight months a year ago.

So far, so normal. This is what you would expect to see in a rising market with constrained capacity.

Platform supply vessels sent straight to streaming

But for PSVs, the summer of 2024 has been nothing short of disappointing. If anchor handlers are the Deadpool & Wolverine of 2024, North Sea PSVs have been like Disney’s The Acolyte: the investor audience has hated it, the rates have sucked, and the reviews are dreadful.

We spotted the trend last year (about PSVs, not Disney) and we commented last September:

“This summer [2023], PSV rates in the North Sea have lagged rates internationally, even though the costs of operating in the Norwegian sector have soared. Recent spot fixtures have been solid, around the US$20,000 mark, much better than the shocking US$4,810 rate at which we reported Vroon as fixing one of its PX121s in February. Even so, year to date cumulative spot rates for large PSVs have only been US$15,000 per day, half the international rate. Term rates have improved, but a gap is opening up with international rates at US$30,000 for the same boat working elsewhere.”

This summer, the divergence is even more stark.

Here comes the US$40,000 fixture

Day rates for large PSVs working in international markets have continued to soar. Analyst Jesper Skjong of Norwegian shipbroker Fearnleys, one of the perennial contenders for the title of “smartest person in offshore,” has data that shows that PSVs with over 900 square metres of clear deck space now command rates of around US$36,000 per day in both West Africa and the Mediterranean for term contracts. Tidewater has been boasting that it has fixed some large PSVs in Namibia for shorter term drilling campaigns work at over US$40,000 per day, net of all taxes.

What do we see on the North Sea spot market? Year to date, average spot rates for both medium size PSVs and large PSVs with decks of over 900 square metres have risen by about eight per cent (better than nothing, I suppose). The pound has strengthened since last year so that the large PSVs have now achieved average rates of US$16,900 per day in 2023 to the end of August, but on much lower utilisation than vessels on international term charters.

The gap is widening.

Bargain basement rates for high-spec ships

Recent spot fixtures on both sides of the North Sea for PSVs have been more reminiscent of the dark days of mid-winter than September, historically a buoyant month. Three weeks ago, Atlantica Server, Atlantica Trader, and Seacor Yangtze all fixed for less than US$10,000 per day out of Aberdeen on spot fixtures.

What was especially concerning for Seacor is that Seacor Yangtze is a 2018-built UT771 CDL design, battery hybrid vessel, one of the youngest and most technically advanced PSVs in the world, with 875 square metres of clear deck. Seacor had believed that the vessel could command a premium in the North Sea, where environmentally sensitive and emissions conscious charterers would pay higher rates than in less sophisticated parts of the world with less stringent regulations.

Wrong!

Instead, North Sea charterers were quite content to award it the same rock-bottom day rate as the aged Atlantica Server (former Energy Scout), a 2005-built diesel mechanical UT755 design PSV with only 670 square metres of clear deck.

Aberdeen lags Abidjan, Bergen lags Batam!

As a result of this spot market weakness, term fixtures in the North Sea are also lagging those internationally. Hilariously, Fearnleys data suggests that not only do term charter rates for PSVs in the North Sea lag those in Brazil, West Africa and the Mediterranean, typically the strongest markets, but they also now lag those in South East Asia, historically the weakest market for PSVs.

Large PSVs in South East Asia have now punched through US$30,000 per day and mid-sized units of 700 to 900 square metres have achieved around US$20,000 per day, ten per cent higher than term rates in the North Sea.

What is driving the weakness?

The principal problem afflicting the North Sea has been the departure of high specification, harsh environment rigs for more lucrative contracts elsewhere in the world – for example, Transocean Equinox went to Australia and Transocean Barents to the Mediterranean, whilst Odfjell Drilling mobilised Ocean Bollsta and Ocean Mira to Namibia, and Hercules to Namibia now to Canada.

Other North Sea rigs, mainly older semi-subs, have simply been scrapped. Dolphin Drilling announced it was scrapping Bideford Dolphin in March this year and then added Dolphin Leader (the recently acquired Transocean Leader) to the scrapping list in June. Diamond Offshore scrapped Ocean Valiant over the summer, too. Now Stena Drilling has announced that it will be scrapping the laid up semi-sub Stena Spey.

The pool of rigs working in the North Sea is contracting both in relative terms compared to other regions and in absolute terms compared to 10 years ago. The UK semi-sub rig count has declined by more than 50 per cent since 2016, as per Dolphin’s very informative investor presentation last month. Fewer rigs, fewer PSVs needed.

Stop oil by taxing UK oil producers and cancelling investment

Underpinning this has been the hostile approach of the UK government to oil and gas investment as successive governments have sought to increase taxes on the sector, often at short notice and arbitrarily.

The latest kick in the teeth for the industry came when the new Labour Government confirmed that it would increase the Energy Profits Levy (the so-called “windfall tax”) by another three percentage points, to a total of 78 per cent, whilst removing what it described as “unjustifiably generous investment allowances” for oil and gas production companies.

The result was predictable. Dolphin Drilling’s presentation showed that that the Letter of Intent it had received for a potential 500-day drilling campaign in the UK sector for its semi sub Borgland Dolphin had lapsed, as its customer had not approved the field development. The rig will now come available after a short programme with Enquest in 2025.

And drilling drives the incremental demand that makes the spot market for PSVs. So, who is hit by Britain’s negative policies that have caused this PSV slow-down?

Loser number one: Tidewater

One of the surprising losers from this North Sea weakness is Tidewater. Tidewater has done an incredible job of raising charter rates and boosting its stock price. One of the main drivers of its growth was the acquisition of 37 PSVs from Solstad Offshore for what turned out to be a price of US$594.2 million, as per the company’s most recent filing, a deal that closed in early July 2023.

The deal made Tidewater the single largest operator of PSVs in the North Sea, with 52 vessels working in Northern Europe, 26 of them from the Solstad fleet it acquired (see the presentation announcing the deal here).

The Solstad deal was premised on the fact that heavily-indebted Solstad had locked many of its ships into long-term charter parties at low, low rates. Tidewater would buy the PSVs and the company noted that the vessels "have significant cash flow generation upside as over half of existing contracts rollover by year-end 2024 onto market day rates."

Middle East remains a dog, North Sea second worst

Unfortunately, the upside from the newly acquired Solstad PSV fleet has perhaps been disappointing due to North Sea weakness. There has been upside, but less than hoped.

We have highlighted several times that the Middle East is a black hole for the company. So, it was again when Tidewater reported its second quarter results for the April 1 to June 30 period. Once again, the company’s 43 vessels in the Middle East lost money at the vessel operating profit level.

What was surprising was that the Europe and Mediterranean region (dominated by Tidewater’s North Sea PSV fleet) was the second worst performing region. It made money, US$15 million on a vessel operating profit basis over the 91 days, but less money than anywhere else, except the blighted Gulf.

The 50 Tidewater ships in Europe and the Mediterranean generated less profit than the 22 vessels in Asia-Pacific, and the 35 in the Americas, and they generated less than half the profit of the 66 Tidewater vessels working in West Africa.

The result has been rather predictable. Tidewater mobilised the PX105 design PSV Swift Tide (1,000 square metres clear deck, 4,700 DWT) to West Africa, and Seacor sent Seacor Yangtze’s sister UT771 CDL diesel-electric hybrid Seacor Ohio to Africa as well. No point in sticking around making a pittance in Aberdeen, when the big money is elsewhere.

If the North Sea remains in the doldrums, we can expect to see further repositioning out of the market, certainly by Tidewater.

Losers 2: Norwegian speculators

Seacor and Tidewater both have well-established global marketing networks, strong international client relationships, and the ability to operate ships anywhere else in the world.

The other big losers from the North Sea’s PSV problems are a group who lack all those things: the Norwegian speculators. Oh no!

They have no commercial reach, no client relationships of their own, and they are dependent on third-party ship managers that usually possess no commercial capabilities. After all, who has ever heard of Colombia, V-Ships, Anglo-Eastern, or OSM-Thome chartering a vessel for their clients? Correct me if I am wrong.

As a result, these Norwegian financial players are stuck in the North Sea where brokers control the market, and the clients view the vessels as commodities.

Consortiums of investors lured by the promise of the summer “pop” by the same financial institutions who sold them the ships and packaged the debt now look very exposed, especially as more of them continue to pour tonnage of dubious age and quality into the North Sea market.

Harald comes in with Monsoon as Tidewater leaves

In 2023, speculator Harald Moraeus-Hanssen, the former boss of Fearnley Securities, acquired the 2003 built UT745 PSV Normand Flipper from Solstad through his company Uthalden Maritime, and his partners at Vestland Offshore, and renamed it HM Flipper, as we highlighted.

Now he has acquired the former Bourbon Monsoon, a 2007-built PX105 design PSV – the same design of vessel as Swift Tide. which Tidewater has pulled from the North Sea! Having bought the ship for US$20 million from Bourbon, which apparently plans to invest the proceeds in reactivating laid-up small anchor handlers, Mr Moraeus-Hanssen renamed it HM Monsoon, and now the PSV is commanding a spot market rate of less than half what Bourbon had fixed the ship on term charter, most recently in Guyana.

GMS Legend also en route, to become FS Aries

On September 26, another aged PSV with a colourful history is due to arrive in the North Sea from the Middle East via South Africa. Seabrokers announced that the UAE-based owners Genesis Marine Services had sold the 2008-built PSV GMS Legend to a new entity “listed as NFH FBM 240402, under the control of Nytt Foretak.”

The brokers said that the management was awarded to the Fletcher Group of Aberdeen, which recently lost the management of the PSVs acquired by Capital Offshore of Greece to Aurora Offshore. At least two of the former owners of the vessel, Emas Offshore, who owned it as Lewek Aries and Aries Offshore, when it was Aries Warrior, met with untimely financial issues and are no more. Let’s hope Nytt Foretak bucks that trend.

GMS Legend/FS Aries is an old school VS 470 MkII design, with a deck area of 700 square metres and a DP2 system.

Conclusion: Aberdeen waning

The return of these vintage vessels to the North Sea suggests that rather than being at the cutting edge of technology, as it has been for 50 years, the body of water off the UK is now a place where speculators bring old vessels one last time to try to wring out the final profits before the ships are scrapped or sold to India or Egypt.

The market could recover if the UK government adopted a more investor-friendly approach to try to wind down its North Sea assets with a final development wave. Unfortunately, windfall taxes and investment uncertainty look set to keep the UK sector at a reduced level of activity in the short term at least.

We can expect more international operators to take rigs and boats away, leaving the speculators and the brokers to try to profit from the volatility. Reports of the demise of the North Sea have been wrong before, but without new investment, the UK sector looks vulnerable.

Background reading

We have covered the Dark Fleet of sanction-busting oil tankers over the last three weeks in a series of articles highlighting the corruption, the secrecy, and the shameful disregard for safety that characterises this fleet of ageing and often dangerous vessels. Do read Part 1, Part 2 and Part 3.

We highlighted the need for stricter port state control on flags like Gabon, Cameroon and Sao Tome, which have suffered repeated safety lapses including collisions and seafarer fatalities. We suggested that coastal states might want to be more aggressive at pursuing negligent flag for damages caused by the Dark Fleet at the International Tribunal for the Law of the Sea.

We also noted that many private companies are profiting from the registry of ships to these lax open registries as governments delegated the management of their registries to private organisations like Intershipping Services, a private company run from the UAE by Hysham Akram Shaikh, an Indian national with seemingly no shipping background and no connection to Gabon.

We suggested that the government of New Zealand might want to look into the involvement of its nationals in the management and ownership of Maritime Cook Islands, which runs the Cook Islands registry. We also recommended that the US Treasury Department's Office of Foreign Assets Control (OFAC) might want to cast its eye over the American connections of the company that runs the Palau International Ship Registry, where Russian interests have re-flagged many vessels suspected of smuggling oil and latterly even gas from Russia to avoid sanctions and conceal the ownership of the vessels.

We also proposed that the governments of Gabon and the other open registries might audit the accounts of the private companies of their ship managers and publish how much is paid to the sovereign government and how much to the managers of the registry like Intershipping Services in Ajman. In the case of Gabon, one reader wrote to suggest that the government take might be only 25 per cent of what the registry charges.

Of course, without public disclosure and audited accounts from the ship registry managers, we can never verify this claim. So, Mr Shaikh, it might be better to publish your audited accounts now, or to accept that when the government in Libreville finds out, it might be none too pleased to see the split in revenues!

We concluded by highlighting that flags and insurers who accept the self-certification of ship owners as to their compliance with OFAC and other western sanctions, and the price cap on Russian oil shipments, might still be fined by the US regulators and found liable. This could be the case if they did not do enough due diligence or had good reason to believe the statements their customers made were not true. Here, the US$3 million settlement made by Swedbank Latvia in 2023 over a single transfer of US dollars on behalf of a Crimean-linked customer might focus the minds of men like Mr Shaikh.

We will be returning to this topic soon, so if you have any Dark Fleet information or revelations, or ideas on how to make the seas safer, feel free to email us at editor@bairdmaritime.com.