INTERVIEW: Vivek Seth, CEO, Halul Offshore
The price per barrel of Brent crude globally had plunged 56% from its peak, at the time of writing, throwing the oil and gas industry into a state of uncertainty, while the offshore services sector is taking delivery of newbuilds ordered two to three years ago when the oil price was going up and business was booming.
Speaking to Maritime & Ports Middle East on the sidelines of the 3rd Offshore Support Forum in Abu Dhabi, Vivek Seth, CEO of Halul Offshore Services Company, a subsidiary of Milaha, and one of the largest companies of its kind in the region, said operators in the offshore sector were currently going through three phases as a response to dramatic changes in the industry (denial confusion and finally acceptance). “Everyone seems to be in a state of flux at the moment, no one is quite sure what is happening or how low the oil price is going to go,” says Seth.
“Right now the offshore marine services sector seems to have come out of a denial phase, and is entering the second phase, which is confusion,” he adds. “But the fact of the matter is that the oil price has plunged, and now we have to find a way to operate in this new paradigm, because no one knows when the oil price is going to rebound and everyone is hoping for some stable price to define the way ahead.”
The rout of the oil price is the greatest challenge facing the marine offshore sector at present and has led to significant cut back in investment by oil and gas firms. In the week ending March 6th alone, during which Maritime & Ports Middle East met with Vivek Seth and during which this article was written, 75 oil rigs were taken offline, according to data from Oil Price.com. So there is falling demand for offshore services at the same time that offshore services companies are launching vessels aplenty to meet what was supposed to be growing demand.
“This goes back to when oil was at its peak and many in the shipping industry thought that being related to the oil and gas industry was great because the rest of the shipping industry was suffering from falling freight rates, the tanker industry and bulk carriers were seeing some oversupply and yet offshore support was doing well,” Seth explains. “Another issue was that most of these new ships were being built in China, because Chinese shipyards were offering very good financing options.”
According to Seth, with just US $1-million down payment, you could be a ship owner if you ordered a US $20-million anchor handler from China due to very attractive terms from the yards, thus prompting some offshore companies to over extend themselves, even with the oil price at the high levels seen late last year.
Like a set of large swells that combine at sea to create a rogue wave then, the offshore sector is experiencing three key factors that are putting “marginal players” in a difficult position, according to Seth. “If you’re a marginal player, you’re going to have serious, serious problems this year,” he told Maritime & Ports Middle East.
For its part, Halul Offshore Services has resigned itself to riding out the storm.
“We’ve had a great run these last few years with a really high oil price, but as recently as December, 1998 the price of oil had dropped as low as US $11 per barrel,” Seth points out. “Today it’s still five times that amount, but the industry allowed itself to get used to a price in excess of US $100 per barrel, which was a new benchmark, but now the benchmark is shifting.”
Seth describes it as a paradigm shift, “once people accept that this is the new oil price and it isn’t going to rebound suddenly in a few months, then once more, the industry will settle down to growth.” In the Middle East marine offshore support sector, a particular challenge for the sector is the fragmented nature of the market, with over 75 ship owners operating a fleet that is relatively aged compared to other major oil drilling regions such as the Gulf of Mexico and North Sea.
“More than 30% of offshore vessels in the Middle East are at least 25-year-old,” says Seth. “For a lot of this older tonnage, the owners need to think about how much of a market there is for these older ships now that there is a fall in demand for services and excess supply of vessels.” Seth says that what the Middle East marine offshore sector may experience in the coming years is consolidation, with newer, more modern vessels being delivered and older tonnage being decommissioned. As an example, he points out that more than 100 platform supply vessels (PSVs) in the 2000-3999 dwt range are being delivered globally this year alone, which will increase supply more than 20%.
“These new ships aren’t cheap though, so companies need to adjust their expectations and be realistic about the services they can offer and the rate they are willing to accept,” Seth adds. “These new sophisticated vessels are a huge investment, with high operating costs.”
Seth says that to counter act this many offshore services companies, Halul included, are specialising to an ever-greater extent in particular micro-niches within what is already a fairly niche sector of the maritime industry. Seth says that Halul will continue to consolidate its activities in diving operations, PSVs and anchor handlers. “We ordered 14 new vessels two years ago for these purposes, with six being delivered this year and two more in 2016.”
Asked whether Halul Offshore Services would be able to survive independently of Milaha Group, Seth said that despite their commitment to expanding the fleet, the company would remain profitable with its current contracts. “We are one of the largest offshore support service companies in the Middle East, we have more than 1,000 employees and the vast majority, more than 900 are offshore, so finding a home for these new ships will be a challenge, but a manageable one,” says Seth. “We didn’t anticipate that the market would turn the way it has, so the question now is when and how to make the future growth happen when the market is very volatile given the uncertainty of the oil price.”
Seth sounds a calming tone amid much confusion then. As the ancient Greek fabulist Aesop observed: “The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over.” The great oil rigs sprinkled across the Arabian Gulf and the offshore vessels that bustle fussily to and from shore with supplies, or hold station near them like anxious sentinels, ready to provide protection or assistance, are, however, different from a little reed in that they are part of the most important industry in the world, after agriculture.