Morton’s Fork, Nor Offshore, and the North Sea DSV market

John Morton was my kind of optimist (and economist actually): as the Archbishop of Canterbury (1486-1500) he devised the logic for imposing forced loans on people that those who were rich could obviously afford to pay, and those whom lived frugally obviously had savings buried away somewhere (and could therefore afford to pay). This somewhat quaint logic is the origin of Morton’s Fork, a bifurcation that leads to no good options.

An article in the FT today on the increasing free cash flow of North Sea oil producers highlights the Morton’s Fork for the Nor bond holders. In November last year, after raising money again they had the decision to make of continuing the spectacularly unsuccessful strategy of sitting in Blyth, with no diving contractor,. waiting for work when all the dive contractors had excess DSV capacity, or changing. Admittedly the decision was a Morton’s Fork, work anywherre is hard and there is excess capacity everywhere. But serious work in the North Sea, given the industry structure and regulations, was never possible. Suddenly the USD 15m liquidity issue, having been depleted roughly a third, without a day of work and absolutely none in the schedule, just on OPEX, doesn’t seem like such a big number (and there appear to be valid questions about the technical condition of the Atlantis where the crane for example has been downrated to 50t).

However, the bond holders decided they would wait for the mountain to come to them. After a recent fiasco where the Contracts Department/ Nor were awarded a five day job, and then couldn’t close it commerically, the mountain is looking strangely distant, and the FT article shows why:

Alongside cuts to operating expenses, North Sea operators reduced project investments during the downturn — last year only two relatively modest field development plans were approved, involving BP and Apache. Up to six new projects could get final approval from operators this year, and a further eight in 2018, said Oil & Gas UK, but it warned in a report published on Tuesday that these are “not certain to be delivered and may be subject to delay or cancellation”.

As I have stated before until the construction work returns the maintenance market will not save these vessels. It’s worth pointing out that Clair Ridge, the BP project above, used no DSV days, nor will any West of Shetland (except for potentially some minor riser hook-up work).

Subsea 7 recently reactivated the DSV Seven Pelican, currently off to do 200 days for Apache, and the Seven Osprey, which is having a new thruster installed in Gdansk and then heading East. Subsea 7 and Technip are recommitting to diving because the work is there and they can. With huge engineering and tendering teams they can move old assets back into the market to take advantage of what little work there is. I have been told, but I have no idea of the veracity, that market rates are GBP 65-75k, strip out GBP 50k for divers/project crew and no one is making much money here, but neither are they losing it tied up. But the North Sea DSV fleet will not face a demand driven recovery until the tie-backs/tie-in market, which soak up huge amounts of DSV days return.

Any serious hope the bondholders had that a mild uptick in maintenance work would lead to a charter in the North Sea must now have vanished to all but the most die-hard optimists. Setting up a tin-shed operation in the most regulated market in the work (bar Norway) was simply a bad idea, even had the market returned, but looks even worse in a poor market. The Nor vessels will move before the mountain one would assume.

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