Private equity and offshore: Bibby/York Offshore, DOF Subsea, and Ocean Installer and “stuck in the middle”..

Realism provides only amoral observation, while Absurdism rejects even the possibility of debate.

FRANCES BABBAGE, Augusto Boal

 

The firm stuck in the middle is almost guaranteed low profitability. It either loses the high-volume customers who demand low prices or must bid away its profits to get this business away from low-cost firms. Yet it also loses high-margin businesses — the cream — to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm stuck in the middle also probably suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation system.”

Porter, Competitive Strategy, p. 41-42

 

“Alice laughed: “There’s no use trying,” she said; “one can’t believe impossible things.” “I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Bibby/York Offshore, DOF Subsea, and Ocean Installer are all tied into the same economic dynamic in the offshore market: the improvement in the market is coming in IRM spend (marginally), large-deepwater projects, and  step-outs associated with existing deepwater infrastructure, not the markets that made these firms viable economic entities (although the DOF Subsea question is just as much about leverage and overcommitting to assets). These companies highlight that although offshore spending may increase in 2018 over 2017, though DNB notes risk to the downside, a recovery will not benefit everyone equally: asset choice and strategy that recognise different market segments are important to identify.

I have read the Bibby Offshore “Cleansing Document” that was sent out as part of the takeover/recapitalisation notice. A cleansing document is required when investors, who are classed as “outsiders”, gain confidential information as part of deal and therefore become “insiders”, who learn confidential information, and must make all the investors aware of what they know. It’s an extraordinary presentation, a business plan so outrageous that it can’t be taken seriously. The document obviously has its origins in the EY attempted distress M&A transaction, that couldn’t be funded, and when you read this you can see why. Worringly the new investors must accept something similar or they are involved in a gigantic scheme to knowingly lose money.

The most obvious affront to intelligence is the 2017 growth rate for revenue pegged at 52%!!! Seriously, in this market someone is telling you they are going to grow at 52% and they actually have enough chutzpah to put it to paper… words don’t often fail me. Not only that they then double down and state it will rise 50% again the year after. I can tell you there is a 0 (zero)% chance of that happening. There is more chance of drydocking the Sapphire on the moon to save money. It’s not just the fact that IMR spend, the core Bibby/York offering, is set to grow at 3.3%, or the fact that total market spend is due to grow at 6.7%, that is just a common sense point: if the market grows at 6.7% and you are growing at 53% then 46% of your growth is coming from winning market share. Does anyone really think Bibby’s competitors are just going to wake up one day and allow them to be the only company in the entire industry that can grow that fast and let them take all that market share? Really?

Fictional Revenue and EBITDA Forecast

Lewis Carrol

Source: Lewis Carroll

To be clear the previous best year of growth was 2013-2014 when Bibby chartered in tonnage, in the greatest North Sea DSV boom ever, and it grew a measly 46%… seriously you can’t make this up.

North Sea Outlook

The fact is this forecast shows the core Bibby/York IRM market declining after 2019 and all the growth is coming in windfarm work. A portion of the windfarm work is likely to be bundled with installation workscopes, and that leaves Subsea 7 and Boskalis well positioned with their topflight installation capacity. And I have said many times the lack of oil and gas construction work (the light grey bar EPCI) will leave a surplus of DSVs as there are no multi-month construction projects to soak up capacity. There is an even more absurd graph later on designed to show a market shortfall in a few years that ignores latent capacity in meeting supply challenges.

Bibby/York will turnover £85m if they are lucky for 2017. In this market, if they have an amazing year next year they will turnover £95-100m, and if they have a bad year they will come in at £70-75m. And the risk is on the downside here because the first six months of 2017 included ROVs in Asia that were sold, most of which were working. But in offshore contracting in general some jobs will go your way and some won’t, so everyone in the industry budgets a modest increase and some get lucky. But what definitely won’t happen is putting 15 Red on at the casino and winning 30 times in a row, and talk of £130m in revenue is more unrealistic mathematically than that.

Even more the Sapphire now looks to be going into layup! So not only is turnover going up 53% but DSV capacity is going back 33%. It’s a miracle I tell you! That’s not profitability that is top-line!

The US office is of course a giant millstone and is put in the presentation as a “Diversification” play rather than as a cost centre – and certainly no spefic financiakl data on the office is offered. The US must be costing Bibby/York c.USD 250k per month in cash terms and now has no boat to bid. That puts them Bibby against DOF Subsea and OI for any significant project except they don’t have a boat? Zero chance. Literally less than zero. Only someone who really didn’t understand, or didn’t want to, the reality of the current market would sanction such move. Operating margins of similar competitors, following exactly that strategy are less than 10%, which means you will be losing cash forever. Nuts. Not needed and not wanted in an oversupplied market, it is simply a matter of time before that office is closed.

But I don’t want to get into it in a micro level because it degrades the wider point: in this market businesses don’t grow organically at 53%. It is a preposterous statement and needs to be treated as such on that basis only.

Not only that, Bibby claim they will make an EBITDA of ~£12m on the 2 x DSVs in the North Sea, and a staggering c.£11m using vessels of opportunity. So not only are they betting they will take enormous amounts of market share off their competitors they are also planning to do it at margins way above anyone else in the industry. And this from a management team, with exactly the same asset base, who presided over a revenue decline of 56% in 2016 and is on target for a 45% decline in 2017. The first few people who got this presentation must have phoned up and asked if the printer had had a typesetting error, not believing that intelligent people would send them this.

The only certainty of this plan is that it will fail. Statements around its release confirm the company ~50 days of work for 2018 yet they are planning 78% utilisation (up from 53% in 2017), yet if the first quarter work isn’t booked in now it won’t happen in a meaningful sense.  And once you are chasing you tail to that extent a dreadful dynamic sets it because you have committed to the cost and the revenue miss means you know early in the year you are facing a massive cash flow deficit. The fixed cost base is so high in the operation that a miss on the revenue side produces catastrophic financial results; just like a budget airline, the inventory is effectively disposable (i.e. after a possible days sale has passed) yet the cost base is committed. This of course explains how the model was created I suspect: a revenue number that magically covered the costs was devised, how real management believed that number to be at the time will be crucial by March (only 12 weeks away) when the plan is revealed as a fantasy. I’m not saying it’s deliberate, humans are strange, it took Hiroo Onoda until 1974 to surrender, so if you want to you can believe a lot of things, and unless you believe the revenue number then the whole economic model falls apart.

York clearly got into this late in 2016 and early 2017 not believing the scale of the decrease going on in the business in revenue terms, and without clearly understanding how the competitive space was directly supported by the construction market. Instead of pulling out they have doubled down and appear set to pump more in working capital into the business than the assets are worth (one of which is going into lay-up for goodness sake). York appear to have confused a liquidity problem with a solvency one.

The funds this come from are large but this is till going to be a painful episode for York while doing nothing to solve the long-term solvency issues at Bibby who now only have a 6 month liquidity runway based on current expenditure. At an Enterprise Value of £115m it values a business with one DSV on lay-up and a cost centre with no work, and an operation with a 1999 DSV and one chartered asset, losing substantial amounts of money and with historic liabilities, way above a the operation Boskalis are building with 2 x 2011 DSVs at a blended capital cost of ~USD 80m. Good luck with that.

I still wouldn’t rule out a Swiber scenario here where as York get close to the drawdown/ scheme of arrangement date they get lawyers to examine MAC clauses (e.g. Boskalis buying the Nor vessels), or simply not pay and worry about getting sued by the administrator. They must know now this is a terrible financial idea.

DOF Subsea on the other hand have the opposite issue: First Reserve looked to reduce their position earlier in the year via an IPO and couldn’t. Now DOF are slowly diluting First Reserve out in  the latest capital raise… there is no more money coming from First Reserve for DOF Subsea. I get the fact that some technical reasons are in  play here: it is difficult for late-life private equity funds to buy inter-related holdings, but they always seem to manage it on the up but never on the down.

DOF Subsea might be big but the problem is clear:

DOF Subsea Debt repayent profile Q3 2017

 

DOF Subsea EBITA Q3 2017

DOF Subsea isn’t generating enough cash to pay the scheduled debt repayments. And in these circumstances it is no surprise that the private equity fund is reluctant to put more equity in. DOF Subsea could sell its crown-jewels, the flexlay assets, to Technip but that would involve a price at nothing like book value; or maybe DOF/Mogsters’ bail them out but that will further dilute First Reserve. Either way First Reserve, some of the smartest energy PE money in history on a performance basis, have decided if you can’t get someone else to buy your equity then dilution is a better option.

Ocean Installer is a riddle wrapped in a mystery. OI has some chartered tonnage and some smart people. But it is subscale in nearly everything and I doubt it was even cash flow positive in the boom years as they were “investing” so much in growing capacity. The company had takeover talks with McDermott, that failed on price, and seems to exist solely because Statoil is worried about having an installation duopoly in Norway. It can’t continue like this forever. Rumours abound that Hi Tec have now installed staff in the Aberdeen office and are seriously looking at how to cut the burn rate.

There is nothing in OI that you couldn’t recreate for less in todays market, and that unfortunately means the equity is worth zero. Hi Tec, whose standard business model of taking Norwegian companies and opening a foriegn office, expanding both the quantum and size of the acquisition multiple (admittedly a fantastic idea in the boom), will not work here. Now it’s hunker down and build a substantial business of scale or exit. All the larger players have to do is sit this out, no one needs to pay an acquisition premium, buying work at a marginal loss, which will eventually reduce industry capacity, is a far more rational option.

Not all of these companies can survive as they are simply too similar and chasing the same projects that are also now being chased by the larger SURF contractors. Clearly DOF Subsea is in the best position as OI and Bibby/York have a very high cost of capital and owners with unrealistic value assumptions.

All these firms suffer from two problems:

  1. In strategic terms they are “stuck in the middle”. In 1980 Michael Porter wrote his famous text (“Competitive Strategy“) positing that a company chooses to be either low cost or value added; firms that didn’t  were “stuck in the middle” and destined to low profitability forever. In subsea the deepwater contractors are the value-add and the contractors without a vessel, or the regional companies with local tonnage,  are the low cost. Bibby/York, DOF Subsea, OI are stuck in the middle – not deepwater/rigid reel to add value and with too high a cost base to compete with the regional low cost operators – given their funding requirements this will not carry on indefinitelyPorter stuck in the middle
  2. The projects that made these companies profitable (if OI ever was) have suffered the largest fall in demand of all the market segments. Small scale field development, with flexibles as the core component, just aren’t big enough to move the needle for the the larger companies and the smaller E&P companies can’t raise the cash. All the FID stats show these developments to be almost non-existent. These were projects commissioned at the margin to satisfy high oil prices and therefore are the first to fall off as the price drops. That is why these companies have suffered disproportionately in the downturn: they have lost market size and market share (Bibby Offshore revenue has dropped by 77% since 2014 where as Subsea has (only!) dropped 45%

The subsea/SURF market is an industry that private equity/ alternative asset managers struggle with: a market with genuine advantages to industrial players with economies of scale, scope and knowledge. In an age of seemingly endless debt and leverage these equity providers are not used to coming across industries where their organisational advantages of capital and speed cannot work. But for the next few years, as the industry requires less capital not more, the smart money here will be on the industrial companies. It wasn’t the distressed debt investors in Nor Offshore who made money on the liquidity bond (issued this time last year), it was Boskalis when the reckoning came for more liquidity. That is a parable of this market.

 

Productivity in the long run…

I go on about it a lot but productivity is the core of economic growth and undertsanding its importance is crucial to having a reasonable chance of understanding how an industry may evolve. Brad De Long makes this clear when discussing the iPhone X;

Consider the 256 GB memory iPhone X: Implemented in vacuum tubes in 1957, the transistors in an iPhoneX alone would have:

  • cost 150 trillion of today’s dollars: one and a half times today’s global annual product

  • taken up a hundred-story square building 300 meters high, and 3 kilometers long and wide

  • drawn 150 terawatts of power—30 times the world’s current generating capacity

Renewable also energy seems to be in a marked phase of marked productivity improvement:

better_energy_01.jpg

I am not predicting the end of oil already: it is simply too efficient on an output basis. but in the long run everything is a productivity game, the supply curve in oil is just a very long run curve that requires technology to fundamentally change it. And for offshore it isn’t doing that much at the moment. The risk here is that large E&P companies reduce their focus on CapEx for offshore, which becomes self-fulfilling because it prompts infrastructure investments that make renewables even more efficient. Most commentators believe this productivity surge has a long way to go with maybe a 20-30% further cost reduction by 2030.

And big institutions have the investment narrative that says this is hot with Blackrock Infratsructure (who admittedly have their own agenda to raise money) backing a shift in energy sources:

During a recent interview, Jim Barry, a managing director of BlackRock and global head of the investment firm’s Infrastructure and Investment Group, recently declared that “coal is dead.” While he acknowledged that coal will still be part of many countries’ energy portfolios, Barry said any investor who is seeking returns from coal beyond 10 years from now is “gambling very significantly.”…

And largely due to the cheap cost of renewables, Barry and BlackRock are sanguine about these technologies’ future. Barry was also optimistic during the interview on the outlook for electric cars, due to their improved range and the declining cost of battery storage. While talk of “peak oil” has been underway for years, Barry views the oil markets through a different lens, insisting that “peak demand,” not just supply, is a dynamic that investors should not ignore. As consumers embrace electric vehicles, the demand for oil will continue to decline – with the end result a cloudy future for conventional energy companies with large oil reserves on their books.

Don’t for a second underestimate the fact that senior managers at large E&P companies see investors like this as their boss and seek to deliver messages that please them.

I think some of the big mergers will help integrated solutions deliver productivity to make oil more competitive. But production productivity, and not just demand, will be crucial for the future of offshore production. The core of productivity improvements is generally mass production of all components in the supply chain by a small number of vast tier one suppliers and a network of subcontractors (who make minimal margins), and this is almost antithetical to the entire make-up of offshore. Change is coming.

Boskalis holds all the cards, the importance of windfarms, and restructuring transactions…

I don’t need a watch, the time is now or never.

Lil Wayne

A couple of people have sent me emails asking some questions relating to my Bibby/ Boskalis post and it is easier to answer them once. Obviously this isn’t investment advice (and no one reading this is likely to own the minimum of GB 100k anyway) and is a general indication of events not specific advice. Deals never go the way anyone plans.

Firstly, under UK law a company is insolvent if the assets do not cover the debts or if it cannot pay its debts as they fall due. Should either of these circumstances occur the shareholders have lost control of the company and it is in effect run for the benefit of the creditors and at that point the debtholders can decide whether to call in administrators. Trading while insolvent is a very serious offence for the Directors as it increases creditor losses knowingly.

In Bibby Offshore’s case the only assets of note are the cash, DSVs, and ROVs which combined would come nowhere close to the value of the debts, and in fact Bibby is one of the few companies in the entire offshore industry not to have taken an impairment charge recently on vessel values, so everyone knows the GBP 100m book value is simply not real and the delta is a number like £50m not £2m. The next trading results will make it clear that without an immediate liquidity injection the company is unlikely to make the December interest payment and therefore the Directors now have a very limited window in which to gain funding (this is where is gets complex because a “highly confident” letter from a reputable financial institution may be enough to cover them for a bit but within a strict legal corridor). Given Bibby Offshore is operating at a loss in every geographic region, and has minimal backlog, and seems unable to meaningfully reduce its cost base, it is very unlikely to get this as any investor has to deal with the bondholders who realise they are going to take a substantial write-off here and have to work out how to minimise this loss. To all intents-and-purposes Bibby Offshore Holdings Ltd is controlled by the bondholders not the shareholders now, and it is their interests that are paramount. This can be seen from the BOHL balance sheet in March and the cash balance will be down at least around another £7-10m at best since then (excluding interest costs that have been paid).

BOHL Balance Sheet

BOHL Balance Sheet 20 June 2017

The only refinancing deal Bibby (BLG and BOHL) had been working on was a complex capital injection which required the bondholders to take a loss and work with new capital providers (such as M2 backer Alchemy) who would inject the funds for working capital and agree to pay the bondholders back less than the £175m but more than they would receive in a liquidation scenario. There is simply no realistic way the company could trade out of present situation even if the market recovered. The only conditonal funding from BLG was to back-up the revolver facility that essentially meant they got their money back before bondholders. I imagine this move went down badly with the bondholders.

The other things that seems to have been forgotten here is that the cash being burned is the creditors cash. If the bondholders can turn this spigot off then that money is available for distribution to them, so an option where they stop the cash burn at £15m in the bank is potentially an 8% increase in their recovery, which is meaningful when the only other option is watching it being burned on by a company with poor cost control who are seeking a free option on timing for their shareholder. The bondholders and their bankers will be remarkably unemotional when the first chance comes protect value. It is clear that the BOHL Directors  (and frankly at least one banker involved in the bond issue) failed to understand the seriousness of the 2016 financial result and the Non-Exec Directors at BOHL have performed particularly poorly. Making an interest payment in June, and then running into a liquidity issue now is not a market driven event. The backstop offered by BLG is insignificant in relation to the cash burn rate and reflects the lack of realism about the precarious nature of their situation.

Boskalis have therefore now made a price and pitched it to the “owners” of the company: the bondholders. The offer which I understand is for the bondholders to sell them certain assets of the company,  in-effect the North Sea Bibby Offshore, and leave the legal structure and debts with bondholders. These will be liquidated and generate a minimal recovery but that company will recieve the consideration for the assets it has sold and therefore the bondholders would be paid out of these funds. The price is c. £52m I have been led to believe which equates to the bondholders getting around 30% of the face value (par) of the bond. That means that any competing offer to control the company needs to give the bondholders the certainty of £52m (or whatever the final price agreed on is). Boskalis has wisely laid a marker in the ground, and with nearly €1bn cash on their balance sheet on the last reported financials, there is no doubt they can complete the transaction so the bondholders can bank this number.

It’s pony up with your money time if you are in the race to own these assets (the company will not be sold as the company has a legal obligation to pay the bondholders £175m which only liquidation or a restructuring agreement can extinguish). That sum of money, and the required OpEx for the company to trade through its losses for the next 12 months (say £20m), is so far beyond the capacity of Bibby Line Group to come up with up it might as well be a trillion, barring Sir Michael winning Euromillions twice in one week (and it needs to be next week).

So the only other question the bondholder advisers will be trying to answer now is can they can get a better offer… and who that might come from? I think the only credible bidder would be DeepOcean, as like Boskalis they have North Sea windfarm backlog and a customer base and chartered vessels they could hand back, to de-risk the asset OpEx. But DeepOcean are not as attractive for the bondholders as they are owned by a consortium of PE investors, and raising that sort of capital adds an execution risk to the deal,  one the bankers advising the bondholders will be acutely aware of. The worst case scenario for the bondholders is to lose a deal for accepting a higher price only to find the other side cannot deliver.

I don’t see McDermott (or someone like them) entering the race. Although they are the largest diving contractor in the world now, the North Sea is expensive, and as Bibby have shown perhaps not even profitable for a third player. McDermott want to get the 105 working in the North Sea, but having Boskalis or DeepOcean owning the Bibby DSVs gets them covered on that front without being exposed to the OpEx risk which they have no work in the region to cover so would be starting from scratch. DOF won’t want assets that old and would only be buying backlog of which there isn’t much.

Without any material backlog I don’t see any private equity bidder coming in period. It leaves them 100% exposed to execution risk and market recovery and the very real possibility of losing everything, and to be clear they would have to offer the bondholders something at least as good as £50m cash. Also for the bondholders advisers’ PE companies require due diligence and conditonal closing clauses that they simply don’t want to take execution risk on.

Such competing theories may also be irrelevant: last week (as I noted here) a large buyer of the Bibby bonds sent the price up. If that buyer was Boskalis, and I suspect it is, they may now own enough bonds to dominate (or at least block) the restructuring talks anyway and any competing proposals would be a waste of time. In that case all that is going on here is the protocols required to close this as a deal. In such a scenario Boskalis have probably also reached out to Barclays, who as owner of the revolver just want their money back quickly and will work on any constructive financed proposal to get out rather than risk having to recover their funds from a liquidator. The inability of BLG/BOHL and Barclays to agree a deal that was outlined in the 2016 YE results shows you exactly where Barclays are with this and they are an important stakeholder. It would also highlight this was essentially a hostile offer because the Bibby Town Hall recently, where Sir Michael reassured the staff about their solution, would not have taken place (or would have had a different tone).

So this could happen very quickly because the bondholders now have the certainty of a number and a credible counterparty, and the only internal/competing proposal is not “fully financed” in investment venacular i.e. the BLG shareholders don’t have an investor or an agreement in principal with the bondholders to renounce a proportion of their debts. My broad understanding, and only lawyers can answer these questions definitively, is that the bondholders and Barclays are within their rights now to call in the administrators, or will definitively be able to when results are due in the next few days. The vessels must have been revalued now so there is no place to hide and brokers giving valuations will be aware of their position so will be extremely realistic. The bondholder advisers then will simply seek irrevocable undertakings from the majority of bondholders to back the Boskalis deal, this would save the execution risk of a bondholder vote and this may have already been done, then agree a final deal with Boskalis. The they will call in the administrators with the deal being done at the same time. In legal terms it would all happen in a couple of hours as the major agreements will have been prengotiated and documented and the firm may have a small period in administration while the execution period vests (e.g. formal bondholder vote and Boskalis will seek to novate contracts for work).

This isn’t meant to be a definitive guide as to what will happen but it is a likely scenario and the final version will not be too different. There are numerous specific legal hurdles that must be covered and all insolvencies are different (I am also not a restructuring expert but I have been involved in some so this is broad rather than specific guidance), but I don’t believe the path will be materially different from the one I have outlined unless Boskalis pull out (and they have no reason to here because they are in control of this process).

Boskalis and DeepOcean show how much the market has changed since the oil and gas work dropped and how building up from a low cost windfarm environment has allowed them to take advantage of these opportunities. Both firms have the backlog and work that will allow them to trade the DSVs as peak SAT assets in the North Sea summer, doing diving work and minor project work only and the core maintenance work that Bibby used to do almost exclusively.

Windfarm work in the UK is getting deeper, some of the newer installations are at a depth of 60m which is pure SAT diving work, and work that was is on the margin of SAT or air diving can be carried out by  the Sapphire and Polaris economically given the purchase price. Without that base of windfarm work to spread the OpEx over it is very hard to see how a third major 2 vessel SAT diving player could survive in the UK North Sea because it is clear the Technip and Subsea 7 will protect market share aggressively in a quiet period for oil and gas. DOF Subsea could be expected to bid more aggressively but there is no certainty here as a few staff moves lately make it clear they are backing away a bit.

That will leave Technip and Subsea 7 to the major construction projects and who will hopefully be able to introduce some pricing sanity. Boskalis will do the lower end IRM work that Bibby used to specialise in, keep the cost base at an appropriate level, and yet still support companies like McDermott who need DSV support for SURF work but don’t have commit to running a DSV fleet.. This is a microcosm for how the whole offshore contractting industry will adapt to lower for maybe forever.

As I have said before in The New Offshore all that matters is: liquidity (a derivative of backog), strategy, and execution.

Dong to build an offshore wind project without a subsidy…

Among all the doom and gloom of a quiet offshore summer this struck me as good news:

On Thursday, the Danish company Dong Energy, the largest offshore wind developer, won the right to build two large wind projects in the German North Sea with no government subsidies — a highly symbolic first for the industry.

There are some unique circumstances as this article in the FT makes clear: obviously not having to pay substantial interconnection to the grid, and being close to existing infrastructure makes a difference. Also, the reduction in offshore installation costs will be flowing through into the tender spreadsheets of the contractors for the long-term. It does feel like a milestone, and from a contracting perspective in the North Sea and eon since we picked over the wreckage of Subocean.

But it is also a sign of change at the margin with increased productivity in offshore wind, economies of scale and scope, knowledge development, and all the other factors that contribute to a drop down the long run cost curve.

Day rates in offshore remain at nearing OPEX in the North Sea, given the surplus of oil and gas vessels and the more benign environments of the locations. Clearly, offshore wind will not displace oil and gas, it’s nowhere near as efficient on a calorie output/cost basis, but it is moving down the cost curve quicker than many thought possible. Vessel owners will be hoping day rates move in the opposite direction, but as long as offshore wind sticks to the civil contracting formula and vessel operators need utilisation, I fear that a faint hope.

 

A miracle at sea apparently… or an oversupplied vessel market?

Offshore windfarm costs.png

A really good article from Bloomberg on the unit cost reductions occurring in the offshore windfarm space:

Across Europe, the price of building an offshore wind farm has fallen 46 percent in the last five years — 22 percent last year alone. Erecting turbines in the seabed now costs an average $126 for each megawatt-hour of capacity, according to Bloomberg New Energy Finance. That’s below the $155 a megawatt-hour price for new nuclear developments in Europe and closing in on the $88 price tag on new coal plants, the London-based researcher estimates.

Clearly, as the cost reductions started five years ago, some of this is all about economies of scale and the experience curve. But I am willing to wager a good chunk of the 22% reduction last year came from cheaper vessels for installation as the oil and gas vessels hunt for work.

In the UK the newer locations are in deeper water that theoretically should have increased installation costs but the major programmes are going ahead just as the vessel market hits its lowest point. Diving at 60m is SAT diving not air (Greater Gabbard I think?). A breakdown of the source of cost savings would be very interesting. But as I always say regarding shale versus offshore: be wary of betting against industries that can standardise and turn the output into a manufacturing process, as in the modern age this should lead to dramatic cost reductions (as we have seen with shale).

Oil and gas contractors hate offshore wind because the use civil contracting documentation, and as there is no first oil pressure rates are lower. But offshore wind could be an important source of vessel demand moving forward with productivity gains like this.