In July 2014 Brent crude cost around US$110 per barrel, a price around which it had fluctuated for about four years. Brent crude is currently hovering around the low US$30s per barrel. Naturally the fortunes of the offshore support sector are closely tied to the price of oil, and the collapse of the oil price has had a significant impact on the industry.

The prospects for the offshore services industry generally remain bleak, as the oil price is unlikely to move upwards any time soon, and talk of any recovery and when that might happen is speculation. This has resulted in direct cuts in exploration and production (E&P) spend by a number of national and international oil companies and as a result, the fortunes of operators in the offshore services sector have been dramatically affected. The message from offshore operators around the world is consistent, namely pressure on rates leading to decreasing revenues and increased competition on new tenders, which are already few and far between.

On the demand side, global E&P spend is estimated to decrease again by up to 20% in 2016, according to www.reuters.com1. The Middle East presents a different picture, where continued spending of local national oil companies such as Saudi Aramco and Abu Dhabi National Oil Co have bolstered the local market. An increase in E&P spending of 5% is expected in the region as these companies commit to ambitious five-year capital expenditure plans to raise production capacity, suggesting the Middle East may fare better than other global offshore centres.

On the supply side, over-supply and reduced demand has led to lower rates globally. We have seen evidence that oil companies are demanding a reduction on rates on existing charters and on options. Rates in the North Sea are at, or below, operating costs. In most cases rates in Southeast Asia, Brazil, the Gulf of Mexico and West Africa have fallen to levels last seen in the aftermath of the global financial crisis, and in many cases are now lower than they were in that period seven years ago.

Notwithstanding the local increased spend in E&P in the Middle East, most of the operators do not work exclusively on contracts with a local content. Accordingly, operators in the Middle East are very likely to be affected in the same way. We anticipate that the downturn in the offshore vessel market is likely to lead to a number of workouts and restructurings in 2016 as income falls and debt levels increase. These days, Middle East operators may be in varying stages of distress, ranging from a negative cashflow situation through to an actual default, with a formal debt restructuring processes taking place.

For example, Polarcus, a Middle Eastern operator owning a fleet of seismic exploration vessels have, according to Lloyd’s List, said in January 2016 that they are halting interest and amortisation payments while they seek debt restructuring with their creditors. Lloyd’s List also reports that Rawabi Vallianz Offshore, incorporated in Saudi Arabia, is looking to refinance the bulk of its bank loans currently secured by its fleet of 20 vessels.

A number of operators in the Middle East have now published their financial results covering the first nine months with almost all reporting challenging economic conditions and pressure on rates. One client, Topaz Energy and Marine have, according to their website, recently redeployed four AHTs from Africa, where demand is weak, to the Middle East region to operate on a spot basis. In this respect, flexibility to move equipment and absorbing mobilisation costs are key.

One highlight to report in this depressed market is a US$115 million new order in November 2015 by Topaz for two subsea construction vessels to be built by Vard. Deliveries are expected in the third and fourth quarters of 2017. The DP2 units will carry two remotely operated vehicles, according to a Topaz press release, underlining confidence in the long-term strength in the subsea sector. In addition, there are cost savings by committing to build in this market.

In other activity, the Offshore Support Journal Magazine reports that Abu Dhabi-based Gulf Marine Services, has ordered a construction vessel at a Chinese yard, Jiangsu Hongqiang. No price or other details have emerged except that delivery is planned for September 2017.

These are welcome orders, but it is too early to predict any sustained order revival and how much subsidy or other financial inducement may have been provided by the yards or the Export Credit Agreements (ECAs).

In summary, operators in the Middle East and globally need to adjust to the new benchmark of low oil prices and take active steps to reduce overhead costs to align with market realities and maximise fleet utilisation. We do not expect the market to improve materially during 2016 and all signs point to a continued challenging market backdrop. But even as the industry adapts to a lower oil price environment, operators will need to revise their operating and financial models to ensure they are delivering value and results in a challenging market.