Demolition cash-buyer Global Marketing Systems (GMS) is taking a fairly unusual approach to convince reluctant offshore companies to recycle assets — because it is seeking scrapping promises from several competitors simultaneously.
This latest demolition effort is focused on the US Gulf of Mexico (GoM), where one rig owner was reluctant to scrap any units without first being sure that competitors would also follow suit.
GMS chief executive Anil Sharma says the idea is to get letters of intent (LOIs) for scrapping from several companies in the region.
Client's idea
Speaking at Marine Money’s annual Ship & Offshore Finance Forum in Oslo this week, Sharma gave credit for the idea to a potential client, an unnamed GoM owner of jack-ups.
“I had one driller in Houston tell me, ‘If I sell two of my units and my competitor does not, I don’t like that’,” Sharma told the forum, while pointing out the need to thin the fleet.
Sharma says he received a list of rigs and a list of US competitors who potentially would need to sign LOIs for a deal to proceed.
“I always ask the seller what they think I should be doing because they are the experts in their field,” Sharma told TradeWinds on the side lines of the forum.
“My job is to find solutions, do all the logistics, create a deal and there are always options out there. Let’s see how this works. If it does, it will be brilliant.”
GMS, which has been involved in the demolition of merchant shipping for about the past 25 years, has been making recent efforts to push further into the offshore sector, especially given the constant industry calls for the need to scrap rigs and offshore support vessels (OSVs).
Sharma says he has team focused on the offshore sector, with an equal emphasis on rigs and ships, and that they have picked up some deals in the past few days.
For OSVs, the case for removal is strong because of the huge overhang of supply, even counting around 1,500 ships in layup, but the incentives are low for owners to recycle OSVs.
The issues are well known in the sector. Layup costs are low. Some loan to value (LTV) ratios are “just terrible”, says Sharma, meaning OSVs with large book values face receiving “almost nothing” from a demolition sale because of low steel content.
Global scrap candidate pool
The OSVs ripe for scrapping are also located all over the world and some in difficult areas with local restrictions, making for challenging logistics.
Depending on the ship’s location, just the fuel bill for getting to breaker’s yard could be considerably higher than the cash from scrap scale.
TradeWinds asked Sharma to estimate a ballpark expected demolition sale today for a generic 3,000-dwt platform supply vessel (PSVs), which he put at roughly $250,000.
“For a capesize bulker today, if you had bought one secondhand last year, you could make more money today just selling it for scrap now,” Sharma told TradeWinds.
“This is just not the case for the offshore sector, which is an equipment-based and not steel-based market.”
While having low steel content, OSVs are packed with equipment but there is no real functioning market to reap much gain the secondhand sales of this gear, says Sharma.
Offshore scrapping rises
For offshore sector including rigs and ships, Sharma points to recycling volumes of 2.9 million dwt in 2016, which is a 38% rise from 2.1 million dwt in 2015. This compares with 28 million dwt of scrapping in the dry cargo sector in 2016, a 3% fall from 29 million dwt in 2015.
For the potential rig deal with LOIs in the US GoM, Sharma says that from his perspective, as long as a deal is done, the number of participating companies is not factor but the number of assets is.
“As long as we three units and above, we can do it, in terms of it being cost effective,” he said.
For OSVs, Sharma says it will be necessary to come up with creative ways to increase a scrap sale’s viability. For example, one method could be to use one OSV to tow another, in the case of two ships being sent for scrapping at once, he says.
