To me, when there is overwhelming positive agreement on something, then it’s time to take a step back and consider if that sentiment is deserving. For today’s OSV industry, it certainly seems time to evaluate if the current positivity around the industry is warranted—something we haven’t see since 2007 and 2008. In that timeframe, the upticks were being driven in part by the peak oil theory, pushing oil prices near $150 / barrel. However, as we all know, the global economy soon fell into a deep recession and the oil and OSV industries had a harsh reality check.
Similarly, in 2011 through 2014, the OSV industry was once again topping the general oil field service universe. Dozens of vessels were contracted to be built for the US market as the demand reached its highest levels with 47 deepwater rigs operating in the US GOM. While the sentiment was very positive, virtually no one raised any concerns about the sustainability of the demand. By the beginning of 2015, it was clear that offshore drilling was dramatically slowing as oil prices fell due to the explosion of onshore shale drilling.
Today, the overwhelming optimism about the OSV industry is a function of the short supply of vessels, even with the relatively low level of rig activity. Though there are only 22 deepwater rigs currently active, deepwater OSV supplies are very limited resulting in very favorable market conditions and pricing. The logical correction this market imbalance would be construction of new vessels but the cost to build new today is more than twice what it was in 2014. Charter rates would need to nearly double from current levels to support new builds and no charter is willing to commit to such high rates to support new construction.
There is consensus among industry analysts that there will be a long-term up cycle for at least a few more years. As I mentioned, this consensus makes me slightly nervous but fortunate to have the strong long-term contracts in place across the JOO fleet. We will continue to take advantage of the improved market but also prepare for the eventual downturn—whenever that may come.