What becomes of the uncharted?

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The oil price has crept up slightly and OSVs are starting to be placed in charters that are measured in years rather than months. But for the most part these contracts are going to newbuilds, which leaves quite a number of older craft at anchor. What options does an owner have to bring these boats in from the pasture put them to work?

I've previously written about using OSVs for offshore patrol and even for seabed mining so this month I've gone a step further. After some careful thought I've come up with some completely impractical uses for a variety of offshore support vessels that an owner or charterer might leap at only if the price is right.

Some of the offshore construction vessels have found work in the decommissioning of old rigs but there simply isn't enough work to keep them all occupied. Even if we include some of the offshore wind projects, which by and large prefer dedicated vessels rather than oilfield refugees, we still have too many floating around bone idle.

One possible use is in the South China Sea, constructing islands like those that China has produced but for the other claimants who can't afford something of quite the same scale. For this scenario I'm obviously not talking about building runways for large cargo aircraft or a wharf that can resupply an aircraft carrier and support fleet.

I'm thinking a small concrete "island" only a few metres across so that a nation can claim that they qualify for the territorial status using China's legal interpretation of man-made islands as a precedent. This lump of concrete needs to sit only a few metres above the high-tide mark and can then be supported by an array of steel structures around it that can be a helipad, a small wharf (possibly floating) and some form of barracks.

Caption: Subi Reef, Spratly Islands, South China Sea, in May 2015

The Philippines currently uses a grounded landing craft to support their territorial claim to one reef so a structure as proposed here is likely to be more popular with those stationed aboard. In an extreme case the construction vessel could be repurposed as the island and base itself which would allow a desperate owner to remove an asset from their balance sheet.

Perhaps a large-deck platform supply vessel or even an anchor handler could find work in the fishing industry as a mothership providing fuel and reefer containers to fleet of smaller dedicated fishing boats. Depending on the type of catch a “cheap and nasty" process plant could be installed on the open deck of a PSV to produce fish meal from the bycatch or the offcuts from other processed fish. Alternatively the process plant could do the entire processing on behalf of the other vessels from fresh catch to frozen fillets.

A further step into the fishing realm could see an anchor handler operating as longliner. Can you imagine how many hooks could be strung off an AHTS winch? Has anybody ever studied the feasibility of a 50- or even 100-kilometre longline? Although some sectors of the public might not like the idea perhaps this could be the first step into what I have now decided should be referred to as “mega fishing" – factory fishing simply doesn't convey the same sense of scale.

On the other side of the fishing industry are the eco-“warriors" a la Sea Shepherd. They already operate a fast crew supply vessel for long range patrols in the Southern Ocean but perhaps an operator might be willing to offer a FCSV of their own to these types.

Given that Sea Shepherd vessels have a history of obtaining mysterious bumps and scratches and even losing an entire bow section in the case of one boat, an owner might want to check up on their insurance policy before handing over the keys. Does third party liability extend to pirate boarding actions?

And for the truly out there and extremely hypothetical re-use of a diesel electric OSV is to put one to use as a floating, power-neutral Bitcoin miner. Anchored in a location with decent current or tidal flows, the electric propulsion could operate in reverse and generate electricity. Even in moderate tides or currents of two to three knots a few hundred kilowatts or even over a megawatt should be achievable which could go to operating a large bank of containerised computer systems that are designed to crunch the numbers that make the magical Bitcoins.

Perhaps a few months ago this idea wouldn't have seemed so outlandish (I lie, yes it would have seemed outlandish even then) and the idea of putting one of the many out of work OSVs into this type of job could have at least potentially paid some bills to keep a care-and-maintenance crew aboard. The computers would have the benefit of water cooling which should require less energy than using traditional fans or air-conditioning.

If the boat is anchored in a tidal zone with intermittent power, the operator could either go for a large bank of batteries to store a bridging charge or alternatively, could simply power down the computers as the power supply drops and then bring them back online as power increases with the changing tide.

Have you got any ideas to help the out of work OSV fleet?

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LNG ship orders pour in

33 new LNG ships have been ordered so far this year, compared to 19 in the whole of 2017 and just six in 2016. Owners have been tempted by higher spot/short-term charter rates, still-low newbuilding prices and rapidly growing LNG trade.

New LNG supply is being absorbed far more easily than many expected by booming demand in Asia. A new wave of FIDs on new supply projects is expected to create even more demand for shipping. But owners need to be careful they don't over order.

There is still a huge number of ships ordered in the 2011-2014 LNG newbuilding boom to be delivered to the fleet and there is a long history of new ships arriving before new supply.

New LNG supply is creating new trade routes

LNG shipping is benefiting from an unprecedented wave of new LNG supply projects coming on stream in a relatively short period. Between 2015 and 2020 LNG production is forecast to increase by over 150 mmtpa; in comparison, supply rose by just 20 mmtpa in the five year prior to 2016.

For LNG shipping this supply boom is particularly beneficial, as much of it is coming from the US Gulf which is a long way from the largest LNG markets in Northeast Asia. To move one mmtpa of LNG from the US Gulf to Japan requires 1.9 ships, compared to 0.7 to move the same amount of LNG from an Australian project.

Record demand from China

The huge increase in LNG supply has so far been comfortably absorbed by rapid growth in demand. China has been at the forefront of demand growth with imports in the first half of 2018 up 50 per cent, following 46 per cent growth in 2017.

Chinese LNG demand is also taking a more pronounced seasonal shape as new terminals have opened up in the north of the country requiring more LNG in the winter months.

FIDs imminent on next wave of LNG supply

The apparent ease by which the current wave of new LNG supply is being absorbed by markets has turned attention to who will develop the next wave of LNG supply. Wood Mackenzie currently forecast that 114 mmtpa of new LNG capacity will take FID between 2018 and 2021.

These pre-FID projects will not provide any new LNG to the market until at least 2023 and most of it is unlikely to be available to ship before 2025. Between the current wave of new LNG supply and the anticipated pre-FID wave there will be a period of low LNG supply growth. Ships being ordered now will deliver just in time for the start of the period of low supply growth.

Still low yard prices

In real terms newbuilding prices for LNG ships have never been lower. Elsewhere in the shipping industry newbuilding prices have begun to creep up and prices for LNG ships will eventually follow the trend. The newbuilding prices look even more attractive when you consider how much more you get for your money with the latest ship designs. The temptation for owners is to order sooner rather than later whilst the newbuilding price remains low.

New ships versus old

Vessel design and technology advances have seen the typical new order LNG ship become larger and more efficient, making ships ordered even three or four years ago outdated. Ship orders now are typically sized at 170-180,000m³, compared to 155,000m³, dues to design advances and to maximise carrying capacity through the newly expanded Panama Canal.

In addition, the introduction of gas-injection slow-speed engines has offered fuel savings of over 20 tonnes per day even against modern DFDE/TFDE engines and 75 tonnes per day against older steam ships.

Huge orderbook to be delivered

So far this year 36 new vessels have been added to the fleet and three have been scrapped. A further 22 are scheduled for delivery before the end of the year – if these vessels are delivered on time and no further vessels are removed from the fleet, capacity will grow by 13.0 per cent in 2018 (up from 6.8 per cent in 2017). The 37 vessels currently scheduled for delivery in 2019 will grow the fleet another 7.6 per cent.

LNG trade is growing strongly but our forecast of an 8.2 per cent expansion in 2018 lags behind fleet capacity growth. More long-haul imports from the USA to Asia should see tonne-mile demand grow at a faster rate, leaving a delicate balance between supply and demand for LNG ships. But forecast trade growth of 13.7 per cent in 2019 should tip the balance in favour of ship owners.

US LNG exports are creating more seasonality in shipping

Swings in where US exports go are creating more volatility in spot/short-term LNG charter rates. Peak demand periods in Asia see more US exports attracted to long-haul destinations, taking ships out of the Atlantic basin. This drives up charter rates globally, but drives up rates even higher in the Atlantic basin.

In June charter rates in the Atlantic basin peaked at around US$90,000/day, whilst rates in the Pacific Basin at the same time were closer to US$70,000/day.

Industry outlook – too little too late or too much too soon?

LNG is one of the fastest growing sectors in shipping and design advances have made new ships more attractive compared to much of the existing LNG fleet. The market clearly wants more of these new ships and it could be said orders have been too little too late.

But looking at the wider picture there is a lot of new capacity still to be delivered from the current orderbook. There is under-used and laid-up older shipping capacity that could be more fully employed. The next pre-FID wave of LNG supply won't come on stream until mid next decade. If ordering activity continues at recent levels there is a high danger that it will be too much too soon!

By Andrew Buckland, Wood Mackenzie

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