The North Sea PSV market – booming worldwide, yet underdelivering locally

The world of offshore supply changed dramatically in the spring of last year due to the apparent sudden realization that OSV tonnage is required to keep offshore oil and gas production running.

The offshore supply market can be complex for outsiders and often entails quite technically complex vessels with high working capabilities, combined with advanced contract structures.

Yet the PSV segment might be the most “vanilla” offshore segment due to their similar capabilities, work scopes, and contracts globally.

The global PSV market experienced a similar story as most other OSV segments with low utilization and rates from the market deterioration starting in 2015 towards 2017, then a minor improvement in 2018 and 2019, followed by a complete crash in 2020. This changed rapidly in early 2022 and the global market is now heading towards full utilization for high-specification units, driving dayrates to levels not seen in a decade.

The North Sea fleet is arguably home to the most advanced tonnage, given the innovative drive from designers, equipment manufacturers, shipyards, vessel owners, and most notably, the strict requirements from Tier 1 charterers. Increased deck space, underdeck capacities, and power were key developments from the 1980s to the early 2010s, which were replaced by environmental efficiency and the ability to service more complex projects. Being home to the only efficient spot market globally is also contributing to its unique nature.

The North Sea fleet has experienced a steady decline in the number of vessels in recent years, primarily driven by scrapping of old tonnage, conversions towards renewables or aquaculture, and vessels sold to - or migration to other regions. The average fleet age is now just shy of 13 years and there are currently no vessels under construction targeting the high requirements of the North Sea operators.

The peak of the market deterioration in 2017 saw more than 120 PSVs laid up in cold stack, a number which has since gradually declined, and presently we do not count any units left in layup. Combining this with the lack of North Sea-compliant newbuilds, the entire excess capacity is gone. The total fleet is now under 180 units, compared to more than 250 units between 2016 and 2018, equaling a dramatic decrease in available vessels.

After a strong PSV summer in the North Sea last year, there was unison optimism towards a fantastic PSV market this year. The consensus among owners and industry players was grounded in the declining fleet and increasing activity levels, combined with the lack of potential fleet growth.

Last year, the UK side of the North Sea achieved average spot rates exceeding GBP 20,000, and the Norwegian side saw roughly NOK 213,000 during the high-activity summer months of May, June, and August. Keep in mind that these rates are not adjusted for utilization, and the daily OPEX in Norway is currently just shy of NOK 100,000, compared to roughly GBP 6,000 in the UK, depending on operation mode.

This year saw the Norwegian market sold out from late April to late September, leading to achieved spot rates averaging more than NOK 315,000 during the summer months. The UK market, on the other hand, saw average dayrates decline to just below GBP 17,000 per day in the same period, which was a big and rather unfortunate surprise to most owners. The UK market was hit hard by a special windfall tax driving the total tax liability for major oil and gas producers to 75%, likely offsetting some investments this year, leading to less offshore activity.

In light of the promising market forecasts for this region before the start of the year, owners in the UK market reactivated the remainder of the then-laid-up fleet to meet expected demand. This led to a rather minor, albeit significant enough, increase in vessel availability in the spot market compared to last summer, which, in light of the above, was sufficient to soften rates, illustrating the market sensitivity.

When analyzing the dramatic improvement in the North Sea market balance in the last 18 months, it becomes clear that it is, in fact, not the number of working units that is driving the strong utilization development. The summer months of 2023, perhaps surprisingly, saw fever units working spot and term combined than 2018. Rather, we observe that the number of vessels in the fleet is at a decade-low.

Given the high technical state of the North Sea fleet, it might be a paradox that all comparable regions are now accelerating at rates far higher than the North Sea. Large PSV tonnage is now fixed for term contracts at close to USD 40,000 in South America, more than USD 30,000 in West Africa, more than USD 35,000 in the Mediterranean, and the Southeast Asian market has seen dayrates surpass USD 30,000 recently. All the while, the North Sea term market is averaging below USD 25,000.

Granted, the North Sea owners have also seen the benefits of these developments by being able to both sell tonnage at decent prices, as well as fix their ships outside of their local market this year. Yet it illustrates how far behind the region lags comparable regions. As a result, we have seen roughly 15 units leaving the North Sea region for long- or short-term work this year, primarily driven by higher dayrates achieved abroad.

Given recent market predictions suggesting that the number of contracted rigs in the North Sea will remain fairly stable next year, we find it likely that the vessel migration patterns will continue at the current pace. Short-term, we see no immediate nor compelling reasons for vessel owners to return to the North Sea given the higher earnings potential elsewhere.

The big question will then be what we can expect when all sanctioned offshore investments from majors such as Aker BP and Equinor are transformed into offshore activity from 2025 onwards. More than NOK 200 billion in offshore oil and gas development plans were submitted last year for Norwegian projects. Meanwhile, the UK saw Equinor reach the final investment decision on its major Rosebank development recently, illustrating the company’s belief in the UK sector. Similarly, in late July, the UK government announced that hundreds of new oil and gas licenses will be granted, with the first to be awarded this autumn.

Energy security has moved towards the top of Europe’s priority list and both the UK and Norway will play an important role in reducing dependence on unstable energy producers. To achieve this, both nations have accepted that significant greenfield investments will be required in the coming years, which in turn is likely to increase PSV demand substantially.

At the same time, the PSV fleet is aging without any potential renewal until 2026. We believe this will lead to a rush to source high-quality tonnage in the coming years, as the writing on the wall is suggesting that rates will have to increase to compete with comparable regions.

It might not happen this year, as the North Sea spot market normally softens sustainably towards the low activity winter months and owners accept lower term rates, yet the current trajectory can lead to a squeeze for charterers and a perfect storm for vessel owners in the medium term.