Unexpected turn: Saudi plot twist on rig-OSV ratio

In an unexpected turn, Saudi Aramco has scaled back its earlier decision to ramp up oil production targets. As a result, a series of working rigs in Saudi were temporarily suspended starting last month. About two dozen jackups received suspension notices with the first batch demobilized in early April. Given the release of the rigs, the high demand for offshore support vessels (OSVs) in the region is expected to see some disruption this year.

Saudi Arabia, the biggest global jackup market, is also the primary destination for OSVs in the region. Aramco operates around 90 jackups in Saudi waters and more than 150 OSVs directly fixed to the company on term charters. This rig-vessel ratio equates to around two vessels per rig in the country. Growth prospects for vessel demand in Saudi have been remarkably robust with record vessel demand, with utilization levels above 90% in the last two years.
However, due to the surprise turnaround from oil expansion, a considerable correction is likely with lower expectations starting in the second quarter of 2024. If this scenario develops, our assumptions indicate that roughly a quarter or around 40 of the total OSVs fixed to Aramco could be off-hired from their existing charters by the end of the year. A major share of probable candidates for suspensions would be anchor handling towing supply vessels (AHTS), in which 40% of the Middle East AHTS fleet is working in Saudi. Only 28% of the region's platform supply vessel (PSV) fleet is deployed in the Kingdom.

Since the rig suspension notices were exercised last month, more than a dozen vessels were redelivered by Aramco. According to MarineBase, a total of 15 OSVs (excluding several utility vessels) were demobilized from their field deployments in Saudi, marking the first batch of vessels off-hired from service since April. As of publication time, the redelivered fleet included 12 AHTS and three PSVs after a series of 10 jackups were towed out from the Safaniyah and Zuluf fields to serve their suspension notices. The vessels were owned and operated mostly by Saudi players Rawabi Vallianz Offshore Services, Hadi Al-Hammam, and POSH Saudi. It also included a few working vessels of United Arab Emirates-based P&O Maritime Logistics in the country. According to MarineBase, around 90 vessels are scheduled to conclude their firm charter period with Aramco until the end of the year. These vessels have yet to exercise their options for an additional year, marking them prospective candidates to be released from their active charters.

Despite the redeliveries, some opportunities remain. Rig suspensions offer flexibility to OSVs, which can be repositioned to other profitable regions like India, Southeast Asia, and West Africa where demand for competitive tonnage is increasing, particularly for large AHTS. Also, while Aramco may be shifting away from oil, the company is strategically focusing on natural gas expansions. The company plans to raise its gas production to more than 60% by 2030. This suggests that promptly available rigs and vessels would remain in the market and readily fill the demand for the future potential of offshore gas field expansion in the Kingdom. The gas market's shifting dynamic also points beyond Saudi waters, specifically towards Qatar and Abu Dhabi, where significant gas developments are underway. This could drive demand for medium DP-2 PSVs capable of handling large cargo volumes of mono-ethylene glycol (MEG), essential in gas drilling as hydrate inhibitors. Moreover, these redeliveries will also free up tonnage for a tight EPCI (engineering, procurement, construction & installation) market, potentially the small to medium AHTS.

It remains to be seen how this scenario will develop, particularly for day rates. Given the potential challenges in the global vessel supply chain, the overall trajectory is expected to continue upward movement, albeit at a slower pace. Yet the regional OSV market has proven to be as cautious, resilient, and prudent as it has always been. Despite any near-term disruption, the Middle East macro narrative remains robust with bullish sentiments tempered by a decade of turbulence and a brighter global outlook.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.