Strange days for the US OSV fleet

I was speaking with a long-time veteran of the offshore supply vessel (OSV) industry, who was similarly looking at the US OSV fleet data by age, and he said, "The fleet is disappearing." Our other S&P Global Commodity Insights MarineBase Research Analysts have been talking about the same thing, the lack of new build orders and an aging fleet. The result of shrinking supply has been rising day rates for the last two years, and those day rates can continue to rise! Demand for high deadweight tonnage has not abated and greater demand for more high-specification PSVs is expected over the next few years. It looks like a rosy time for the OSV companies, who have been reactivating many vessels, as they reap profitable day rates, nonetheless the cold-stack fleet has thinned out over the last three years. Starting new OSV construction in the middle of the supercycle can be risky as the next downturn is just around the corner. Vessel owners do not want to be left holding a pile of debt, just as the day rates start to crater.

We have quite a lot of visibility on the numerous drilling projects and floating production storage offloading (FPSO) vessel deployments in the US Gulf and Latin America over the next five years. The offshore drilling schedule looks to be very busy in the short and mid-term. Offshore oil service markets are booming all over the Americas, demand for OSVs is very high and the available supply of vessels is limited. Day rates for large PSVs are at their highest in history.

Back in 2014, brand new, state-of-the-art PSVs were fixing long-term contracts in the low $40,000s; and companies were ordering large batches of 4,000-6,000 deadweight tonnage (dwt) PSVs. Today US day rates for PSV 5,000 dwt are fixing in the range of $40,000-45,000. You would think there would be many stories about new build orders and clean propulsion systems, but the focus has been on existing tonnage. Today's OSV market is a very different story. Few newbuilds on the horizon, and those are mostly legacy orders from before 2014. Our Marine Analysts have been asking OSV owners in Mexico, Brazil and the US Gulf of Mexico, but the refrain has been the same, no newbuilds. Besides the attrition of older tonnage, we have also seen OSVs leave the oil and gas market to work in a wide variety of opportunities. Offshore Wind, Space Exploration and the US Navy are actively competing for the same pool of vessel and skilled mariners. The Latin American markets can attract vessels from the global fleet, but the Jones Act forces US operators to use US-built vessels. The US vessel market is under great constraint and pressure to grow. The cost of operating vessels has been steadily rising since 2021; and the cost to replace the fleet has also risen sharply. Vessel owners that have inquired about ordering new PSVs have been met with shockingly high stick prices in excess of $80 million. Shipbuilding and ship repair costs are also high because of supply chain issue. State of the art PSVs require a lot of computing equipment which has also increased in cost. Operators have little recourse but to pay higher rates for smaller vessels. It is the smaller PSVs (2,000-3,500 dwt) that are most likely to become available in US Gulf in the near future. Furthermore, the US Gulf is also supplying vessels to growing Latin American markets like Guyana, Mexico and Brazil.

When I first started following the OSV market in the US Gulf in 2008, the operators preferred newer vessels supporting their exploration and production operations. Operators wanted vessels less than 5-10 years in service. From 2008 to 2014 one of the big differences in day rates was whether a PSV had dynamic positioning one, two or none. The refrain I heard from OSV owners was all the vessels that can work are working. In the next generation of PSVs, I expect cleaner carbon emission will be desired by the operators. The truth is that while operators try to get the newest and best vessels for their offshore operation, they usually make do with the equipment that is available. During the OSV build cycle of 2008-15 most of the current fleet was delivered, and it is starting to age out. We only had about 10 new PSV delivered from US shipyards over the last five years. Even though some anticipate the oil and gas industry winding down sometime in the future; the need for OSVs is expected to grow, and some of the current fleet will have to be replaced with new vessel construction. The last OSV downturn (2015-21) scarred enough OSV investors and professionals that folks are leery of making $80 million investments when the next bust in oilfield services could be two or three years away. The OSV company representative I mentioned at the beginning also said that he believed the OSV industry will have to start building new vessels within the next three years. He also added that the first 100 PSVs in the water would likely fare well in the market. Technological obsolescence will become a greater competitive factor, which can also exclude older vessels from the best jobs. These are strange days for the OSV industry, but there are many opportunities for the bold.

This comprehensive article contains vital analysis from our regional experts, and is a must read for anyone involved in the OSV sector. If you want to read the full report, please visit Petrodata™ MarineBase.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.