Total offshore vessel deliveries more than tripled between 2004 and 2009, driven by rising oil prices and fleet replacement. As a consequence, offshore became a key market segment for the shipbuilding industry with a high contribution to the turnover of the global shipbuilding sector.
The recent expansion of the offshore market was, however, not sufficient to reduce excess capacity in the shipbuilding industry. Indeed, according to Clarkson, the market for offshore support vessels is itself suffering from overcapacity due to the recent increase in the construction of small vessels in Asia and very large vessels for the North Sea and Brazilian markets.
However, over the medium-term, according to Douglas-Westwood, demand for all offshore vessel types is expected to increase by 3.7% per year on average over the next ten years driven by the developments of deep offshore fields. This might have a positive impact on reducing excess capacity through facilitating reorientation of shipbuilding companies.
Challenges and risks
Despite similarities regarding inputs used, the reorientation of shipyards into the offshore sector involves various and elevated risks. These are notably linked to complicated construction processes, strict regulations, high levels of investment needed and the absence of a level playing field in the market. The shift towards offshore industry represents a big challenge for employees that can be tackled through education, training and research.
After the sharp decrease of oil prices in the second half of 2014, oil companies announced reductions of their oil exploration investments. Offshore vessel deliveries are expected to decrease by at least 10% in 2015, and further decreases are expected in 2016 and 2017.
Upstream costs, capital and operating cost have been increasing steadily in recent years and put many projects at risk as they are vulnerable to an oil price drop below USD 80 per barrel. According to DouglasWestwood, cost escalation in offshore oil and gas exploration and production activities is expected to be the biggest challenge for the offshore industry.
Other offshore sectors
Offshore renewables are promising markets, notably offshore wind installations that are expected to increase from 2 Gigawatt (GW) in 2014 to 12 GW in 2020. However, these markets, as well as that for floating plants (e.g. desalination) remain small as compared to offshore oil and gas, and also involve big challenges including logistics, large investment requirements and construction risks. Several types of policies have a significant impact on the shipbuilding sector in the context of its offshore activity, in particular local content requirements which are applied in various regions, increasing costs and uncertainty of offshore projects.
Financing
The outstanding exposure to the offshore segment increased from 32% in January 2012 to 42% in January 2014 of total ship financing. Tightening capital requirements for banks are expected to lead to further increases of financing by Export Credit Agencies as finance is a key competitiveness factor for the shipbuilding companies constructing offshore vessels. Against this backdrop, the increasing role of export credit agencies in offshore ship financing could be considered as an important policy issue for discussion