Offshore outlook

Whilst things seem more uncertain in the current banking climate, the panel and assembled delegates from the Middle East’s leading oil and gas shipping companies seemed of the opinion that mutually beneficial deals will continue to be done and that an increase in credit costs for shipping companies might just prevent the industry from overheating.

Tanker talk

Galbraith’s research puts the global double-hull fleet of oil tankers currently stands at a record 300 million dead weight tonnes (dwt) in operation. Added to that is a further 82 million dwt of single hull capacity gradually being phased out to comply with the International Maritime Organisation’s 2010 deadline. At current day rates for tankers that 82 million dwt is well worth replacing.

However, worldwide orders for double hull tankers have had all the yards capable of building them at capacity for the past two years, encouraged by access to very cheap capital from a banking sector riding high on a decade’s sustained growth.

“As the market stands we’re going to see a massive 60 % of the entire bulk fleet, worldwide, come on stream in the next three years,” said Jonathon Hill, managing director of Tufton Oceanic (Middle East).

“If this is the case, and all of this tonnage is delivered according to the current schedule, then there will inevitably be a greater degree of instability in the tanker market than we have now. Coping with that instability is the job of marine financiers,” he added.

However, panelist Lars Modin, managing director of International Tanker Management highlighted the fact that while financing vessels may be the business of those present, from his position the industry faced, first and foremost, an altogether non-financial challenge.

“The biggest concern for tanker owners and the operators now will definitely be finding competent crew for the ‘difficult ships’.”

Very large crude carriers (VLCC) and Liquefied Natural Gas (LNG) vessels may be joining the global fleet at a rate of knots, but the personnel capable of guiding them safely across the world’s oceans are leaving the industry at the same pace. With the industry facing a shortfall of 30 000 first officers over the next ten years, this, he said, was the more pressing issue.

“My major concern is with the crewing shortfall, operating costs will continue to rise, and it’s unclear if these are always being factored into the deals to purchase vessels,” said Modin.

Dr Philip Rogers, head of research at Galbraith’s said that the market trend showed more tanker demand growth navigating crude from producers in the Middle East, Africa, and the Former Soviet Union countries to European and American customers had been consistent and saw no reason for that to change.

“I don’t agree with the predictions of bad times ahead,” said Ahmed Al-Falahi, CEO of Dubai-based product carrier Gulf Energy Maritime (GEM).

“I foresee for the petrochemical product carrying sector a very healthy 2008, and a sustained two to three years beyond that,” he added.
 

Credit crunch

Things were a little more conclusive from the bankers, who sang in unison that the way the sector approached the financing of tankers and offshore vessels was already changing, and that collaboration and tighter relationship building would colour the successful deals in the difficult years ahead.

“We will undoubtedly see an increase in credit costs for ship financing because banks’ access to capital has become more volatile and expensive,” observed David Bonicel, Regional Head, Shipping & Land Transportation Finance, Middle East & India, Natixis.

“However, the appetite for shipping risk for banks remains strong, the assets are attractive, much more so than housing and unsecured finance,” he added.

Simon Deefholts, director, shipping, HSBC Bank, noted that a reduction in access to cheap finance would play into the hands of some tanker fleet owners. “The withdrawal of liquidity will strengthen the hand of the stronger, bigger players in the industry, some smaller owners may find that they’ve stretched themselves too thin and will be vulnerable to buyout activity.”

Jon Sinders, managing director at Clarksons Inc. echoed the sentiment. “The drying up of capital will have a positive impact on the tanker business. There has been in some regards too much cheap capital for too long, which isn’t necessarily good for the industry.”

Sinders also noted that Sharia’a compliant fund opportunities remained plentiful and unscathed by the sub-prime credit crisis which battered many Western banks.

Indeed, the contraction of much traditional ship financing presents itself as a huge opportunity to the Sovereign Wealth Funds currently so strong in the Middle East.

Offshore outlook

The offshore service sector is a hugely fragmented sector, and as such isn’t attracting the same cast aspersions as more visible, easily defined sectors.

Rig supply, installation and transport are all witnessing unprecedented demand for new builds, as are survey vessels, subsea, seismic and cabling vessels as well.

Indeed, the oil and gas offshore business appears to be having no trouble at all when it comes to attracting finance, in what is clearly a bull market.

Geir Sjurseth, managing director and global head of offshore support at DVB Bank was positively upbeat about the outlook for the offshore sector.

“Bourbon Offshore is taking delivery of one newbuild vessel every 12 days for the next three years,” said Sjurseth. The oilfield services company says it has a current fleet of 230 owned vessels, including 170 new generation modern offshore vessels, and a massive 188 currently under construction. Clearly, business is booming.

“Offshore companies in this region have traditionally been serviced by Middle Eastern banks,” said Sjurseth.

“But the need to replenish fleets is at an all time high, local companies need to look outside the region to banks worldwide, good projects will always be financed,” he added.

With continued strong markets, and a record oil price hit again in March there seems to be no danger of the exploration and production activity dropping off. The forum’s consensus was that for E&P vessels, in almost every category, remain attractive investments for banks, and profitable assets for owners.

Related Links: Banking on oil, Oil challenges, risks and opportunities