COLUMN | The cash comes back to offshore: the North Sea lives again, Canada gets drilling, rigs are revived [Offshore Accounts]

Photo: Viking Supply Ships
Photo: Viking Supply Ships

After last week's review of the Tullow/Capricorn merger, and the news that Shell and its partners are proceeding with the Crux project to provide new offshore gas for export from the Prelude Floating Liquefied Natural Gas (FLNG) facility off Western Australia, we look at some offshore trends with staying power, namely: the revival of the North Sea and Canada, and the rush to reactivate both rigs and boats as available capacity shrinks.

The next big thing

At some point before the end of 2023, both the container industry boom and the unexpected but sustained dry bulk carrier boom will come to a grinding halt. Already 35 per cent of the world container fleet is on order, an ominous sign if ever there was one, accompanied by the usual top of the market madness. CMA CGM has now joined Maersk and MSC in a frenzy for buying cargo aeroplanes. The French liner company took delivery of its first two Boeing 777s last week, and intends to own and operate a fleet of a dozen widebody freighter jets (here).


Also, like Maersk, CMA CGM has now ordered six 15,000TEU methanol-powered container vessels to demonstrate its green credentials. Investors do behave like lemmings.

The last three months have turned the world on its head. Oil remains above US$120 per barrel at the time of writing, and a mysterious fire at the Freeport LNG plant in the Gulf of Mexico is once again squeezing gas exports from the United States. When container rates finally fall and Capesize rates regress to mean, offshore will be left as the only show in town. It will attract even more investment in the coming months after years of depression and disappointment.

But where and how?

The North Sea spot market is red hot

"The investors don't care if there's a tree growing through the back deck and the ship has been in lay-up for six years, they just want to buy platform supply vessels (PSVs)," a Norwegian investment banker told me last week. But then with PSV rates five or six times higher than they were a year ago in the North Sea, hitting ten-year highs according to shipbroker Fearnley, and anchor handling rates ten times higher there, that is no surprise.

Earlier in the year (here), we commented that Viking Supply Ships might be very lucky to have to cancel its Russian charter for four of its ice class AHTS, observing that, "as day rates for anchor handlers have spiked at over US$100,000 per day in the North Sea spot market, staying at home in Aberdeen and not going to Russia this summer may prove more lucrative for the Swedish vessel owner."

Loke Viking achieves record rates

And so, it has come to pass. Last week, Bluewater shelled out £175,000 (US$215,000) per day for the charter of Viking's AHTS Loke Viking as part of a trio of fixtures for the towage and installation of its FPSO Haewene Brim. Tidewater fixed its AHTS Pacific Discovery on the same charter, putting the company on course for a six-month payback on the 235-tonne bollard pull vessel, which was purchased just last March as part of the Swire Pacific Offshore takeover.

Yes, you read that right – a six-month payback on a ship.

Tidewater shares are up 50 per cent since the Russia-Ukraine War began in February. Viking reported a first quarter loss a few weeks ago (here), but its share price has more than doubled since the invasion of Ukraine. However, it remains 97 per cent below the heady heights achieved in 2007.

Supply constraints

North Sea offshore supply vessel (OSV) capacity is now seriously constrained. Westshore's listing shows just ten anchor handlers in lay-up in Northern Europe (six of them owned by Maersk Supply Services), and four PSVs. Indeed, six vessels came out of lay-up in May alone, including Pacific Discovery and her sister vessel, Pacific Dispatch. Remarkably, the 2013-built PSV Island Duchess came out of lay-up in January following a sale to Russian interests, after over 2,400 days cold-stacked, according to Westshore, and is now trading in Russia as Sayan Knyaz.

Island Duchess <em>(Photo: Vard)</em>
Island Duchess (Photo: Vard)

Previously, the bank of laid-up tonnage provided a safety valve when demand picked up. Now, few such additional supply of stacked tonnage remains on hand. Chinese shipyards are also nearly out of stranded resale candidates. Brazil, another market for high-horsepower anchor handlers and high-capacity PSVs, is ramping up its own drilling activities – which we will cover later in the year.

There have been no new orders for rigs or vessels in the offshore sector for seven years – yes, newbuildings have been delivered, but these were all ordered prior to the collapse in the oil price in late 2014. When you see a vessel claiming to be built in 2021 or 2022, ask the owner when the main engines were actually shipped from the factory – all that has happened is that yards slowed down work and kept nearly finished vessels in suspended animation, rather than deliver them into a depressed market with no buyers.

And when industry utilisation rises over 90 per cent, rates rise exponentially.

Jackdaw approval, Cambo back on the cards

What's different this time around is that as well as an oil industry boom with prices above US$100 per barrels, there's also huge demand for walk-to-work vessels for commissioning and maintenance in the wind turbine sector.

This suggests that, without a plunge in oil prices, demand in the North Sea will remain very strong for the next couple of years, especially as high prices are stimulating additional new oil and gas projects in the region.

UK authorities approved Shell's Jackdaw field development the central North Sea two weeks ago, after originally rejecting the oil major's plan to produce the high-pressure, high-temperature gas field on environmental grounds. The field will now be developed as planned to tie back to Shell's Shearwater platform. The new field will supply 6.5 per cent of Britain's gas output, and first production is scheduled in the second half of 2025.

Cambo oil field, in which Shell is also a partner, was originally rejected as a stranded asset in 2021, after high-profile demonstrations by activists against the development, but this field is now being revisited for development. Additionally, BP is progressing with the development of the Murlach oil field, with a target for first oil production in 2025, and Harbour Energy has filed its environmental statement with the UK authorities for the development of the Talbot oil field, which it hopes will be developed via a multi-well subsea tie-back to the Judy platform in the Central North Sea.

The North Sea is reviving, and owners with spot market exposure are going to have a glorious summer.

Newfoundland and Labrador rising

The need for new sources of oil and gas in stable democratic countries, backed by the economics of high prices also means that there's strong interest in what has traditionally been an industry backwater: offshore Canada.

For years, the province of Newfoundland and Labrador has struggled with declining production from the four existing offshore facilities at Hebron, Terra Nova, Hibernia, and White Rose, and an empty pipeline of new projects.

However, suddenly now the Atlantic coast of Canada is back on the radar for oil majors.

Equinor's Bay du Nord

Already, Equinor is now drilling two wells with the Seadrill semi-sub West Hercules to target additional reserves that can be tied back to the company's planned Bay du Nord FPSO. The Bay du Nord project consists of several oil discoveries that Equinor has made in the Flemish Pass basin in the Atlantic some 500 kilometres northeast of St. John's in Newfoundland and Labrador. The first discovery was made by Equinor in 2013, followed by additional discoveries in 2015, 2016, and 2020. First oil is planned for 2028, and the FPSO is slated to have a production capacity of 200,000 barrels per day.

West Hercules <em>(Photo: SFL Corporation)</em>
West Hercules (Photo: SFL Corporation)

The Bay du Nord discovery is at a water depth of approximately 1,170 metres, whilst the new discoveries are at circa 650 metres of water depth. The harsh environment requires high-horsepower anchor handlers to support the rig, and this has further drained tonnage from the North Sea spot market as Atlantic Towing has sent its AHTS Atlantic Merlin and Atlantic Kingfisher for the drilling campaign.

And there's more from ExxonMobil and BP

Additionally, ExxonMobil and its partner Qatar Energy have also announced that they will drill in the Flemish Pass basin and have committed to spending US$400 million on exploration activities. BP is proposing to conduct an exploration drilling program on the Ephesus prospect, which lies in about 1,250 metres of water in EL 1145, one of BP's four exploration licences in the West and East Orphan Basins.

BP's acreage is north of Flemish Pass, located between 343 and 496 kilometres offshore from Newfoundland and Labrador. BP says exploration drilling could commence as early as 2023, pending regulatory approvals from the Canadian government.

New money for old facilities

At the same time as these exploration and development programmes, existing operators are pouring new funds in to extend the life of their current infrastructure. Husky Energy has been sold to Cenovus, the oil-sands focused company that emerged in 2009 from the breakup of Encana.

Cenovus has now decided that it will reactivate Husky's West White Rose project, which was paused in March 2020 when oil prices crashed at the onset of the Covid lockdowns. West White Rose will be a fixed wellhead platform tied to the existing SeaRose FPSO. Cenovus expects that the project will add fourteen years of production to the existing White Rose facilities. There may even be a North White Rose project to tie in production from another satellite field.

US$100 oil is also stimulating ExxonMobil to extend the life of the Hibernia field with upgrades to the platform, whilst the Terra Nova FPSO will be overhauled.

The strength of new investment in Canada shows that high oil prices are stimulating interest in new sources of frontier oil in developed countries and in ensuring that current production is extended for as long as possible. The same is true in the Gulf of Mexico and in other markets. This is indicative of a broad-based recovery.

Saipem continues the rig revival, as bottlenecks build

As boats have finally left Chinese yards and have left lay-up in Northern Europe, so too have rigs, as we featured in our recent coverage of Saudi Aramco's massive expansion of drilling operations in the Kingdom (here).

Saipem has managed to stabilise its financial situation by announcing the sale of its fleet of 83 land drilling rigs (here) to KCA-Deutag, and quickly doubled down to increase its exposure to offshore drilling. Saipem has signed a contract with Ocean Challenger, the asset management company of Chinese yard CIMC Raffles, to bareboat charter the jackup rig formerly known as Gulf Driller VII. Saipem will rename the unit Perro Negro 11 and mobilise the rig to the Middle East by August for modifications, and then commence a drilling contract for Saudi Aramco by the end of the year.

This bareboat comes on top of the various charters of Keppel's abandoned jackups, which we covered here. Last year, Saipem announced that it was chartering the abandoned seventh generation drillship Samsung Santorini under a contract for ENI in the Gulf of Mexico, and vessel tracking software shows the newly renamed Santorini is now drilling on location in American waters.

One problem is quickly emerging from all the rig reactivations – shipyard capacity is extremely constrained after years of limited work on rigs, and spares for reactivation are now long lead time, as demand to reactivate rigs meets supply chain crunches. With drillships and semi-subs costing between US$35 million and US$100 million to reactivate from cold-stack, rig owners face significant outlays to bring units back to service, which is likely to ensure that day rates continue to rise, as owners seek to recover the reactivation costs from the oil company charterers.

Supply constraints and yard constraints are likely to see delays with reactivations and budget overruns as the industry moves from famine to feast in record time.

As demand surges, we should expect bumps in the road as the industry struggles to cope with the higher levels of activity. You can't mint qualified ship's officers in a few months, nor build new vessels, nor overcome the bottlenecks in the global logistics networks, where 70 per cent of container vessels currently arrive behind schedule.

Low oil prices and the industry depression created stress. Expect the latest industry boom to create new stresses, and a surge in cost inflation.

Background Reading

Youtube video of lemmings here reminds us how many investors are like these cute but stupid rodents.

Westshore's North Sea spot report and lay-up listing is here.

Full details of Equinor's Canadian Bay du Nord project is here.

History of Cenovus is here.

Environmental concerns about Canada's push to drill are set out in The Narwal here.

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