Demand for maritime service companies has increased recently, this feature explores why and the measures taken to meet this rising demand.
The open sea has been the wonderment of man since we first managed to navigate its expanse. It has struck fear in the hearts of those who have gotten lost within it and joy in the hearts of those who journeyed to new and uncharted territories with it. Today, while many of its secrets have been revealed to us, the open sea still presents untapped opportunities and apprehension. Historically, one of the first utilizations of the sea besides pure adventure and exploration has been trade. Trade by sea is currently one of the most important methods of export, especially in the oil and gas sector.
In Egypt, maritime export is of extreme importance, but so is maritime procurement of energy sources. With technological advancements, deep sea drilling has begotten mass production of oil and natural gas. Companies who so choose to tap the sea cannot do it on their own. While maritime service companies do not specialize in exporting energy commodities, they do specialize in providing support for oil and gas operators.
These companies’ in essence support offshore oil rigs and provides them with all their needs during operations. Some of the tasks these companies undertake include installation and maintenance of platforms, topside hook-ups, transportation of structures, subsea facilities, pipe laying, oil pollution detection and prevention, and towing support. The equipments or rather vessels of these companies vary from Platform Supply Vessels (PSV’s) Anchor Handling, Tugs and Supply Vessels (AHTS), Survey Ships and crane/Flat top barges, Construction Support Vessels, Standby Rescue Vessels to oil recovery vessels.
Essentially, these companies provide services to offshore operators. These services range from the minor, for example transportation of a rig crew, to the major, for example fire fighting capabilities in case of an accident. These companies also offer other employments that include salvage, ship lifting, clearing, and surveys. The first three services consist of preparing a certain site for operation, whether through removal of simple obstacles from ports or the removal of explosives. The last service consists of inspecting a drilling location through technological equipment such as geoseismic or geotechnical devices.
The rise of subsea exploration and production has created a dire need of maritime service companies. The Egyptian Ministry of Transport’s Maritime Transport sector has put a strategic goal of involving the public sector in 10% of overall activities which includes maritime services, under which falls, towage, pilotage, and maritime services related to petroleum and gas platform and drillers. Thus far, the sector holds only 5% of activities.
A Widening Gap
Since the public sector’s share in maritime services is palpably small, the burden falls on private sector companies. More recently, the rise in petroleum prices has caused a rise in demand for the commodity, mainly coming from industries and not per capita oil usage. This demand has created opportunities for investors and in effect has caused exploration to flourish in the country.
Maritime service companies are used both in the production phase as well as in the exploration phase of oil and gas. With the rise of exploration appears a rise of demand for service companies. This rise of demand has produced a gap in the services sector.
This gap is caused in part by a general demand for service vessels, but also in part due to technological advancements in exploration methods. With the rising sophistication of exploration methods comes the need for vessels with as much sophistication. A quick solution to this problem would be building new vessels that are technologically superior, or re-building old vessels to new standards in the market. However, legal inspection procedures render rebuilding vessels as troublesome as building new vessels, which take approximately two years to build.
In terms of building new vessels another obstacle stands in the way: the cost of raw materials. In Egypt steel is an expensive matter and the bureaucracy related to the building process helps little in the building process as well. Most companies opt for building their vessels abroad in China or India, where steel has been efficiently accumulated and human labor is quite cheap.
Thus, there is a blatant gap in the maritime services sector in Egypt. This gap cannot be solved instantaneously by inserting new vessels into the sector because such an endeavor is simply easier said than done.
The Market as it Stands
Currently, there are close to 15 companies in the maritime services sector in Egypt. Some of the larger companies include Maridive, Tidewater, PMS (associated with Petrojet), Ocean Marine Services, Misr Gulf, Rashied, Maersk, and Timsah. In essence this means that there are 15 companies servicing the needs of close to 70 operators.
Of course not every operator is conducting their work in the sea. Currently, there are 24 offshore rigs operating in the Gulf of Suez and the Mediterranean Sea. This means that if the service companies were equally distributed among the 24 rigs, each service company would need to supply close to two vessels to accommodate for each rig. The problem however, is that each rig needs at least two service vessels and in times of towing no less than three (at least in the rig’s final location). Some companies do not even have three vessels and each operator needs a specific vessel and not a standard vessel, hence the initial uniform distribution is flawed.
The most demanded vessels in the market are Anchor Handling Tug Supply vessels, vessels with Dynamic Positioning systems, and fire fighting vessels. The demand for these vessels has caused some companies to begin building newer vessels abroad, as previously mentioned, in China and India.
The pricing strategy in the country is yet another problem that faces the maritime service sector. The prices of vessels in Egypt are close to 20% lower than prices in neighboring countries. However, the interesting aspect to the pricing strategy in Egypt is that there a monopolizing force does not exist, as in other sectors that determine the price in the market. So what makes Egyptian pricing lower than neighboring countries? In short, the international market sets an initial benchmark whereupon domestic supply and demand contort it.
To some, the stable nature of contracts in Egypt and assured payments conversely compensate for the lower pricing. Vessel owners are assured work for at least two years, this can also be disadvantageous when an owner is tied down to a contract while market prices are rising, but not as disadvantageous as being unemployed. However, many find that Egypt’s contracts are by no means long. Two years is the maximum term of a contract in Egypt and service companies enjoy the assurance of longer contracts.
Other factors undoubtedly play a role in pricing including the age of the vessel. Unlike rigs, where age and a history of production is a sign of success, vessels are demanded based on novelty; meaning, the newer the vessel, the higher the price. In fact, in Egypt, vessels built before 1982 are not recommended or preferred.
The Tendering Process
With marine service companies as with all issues regarding oil and gas in Egypt, service is allotted using a tendering process. This process which eventually leads to the contract places much of the responsibility on the vessel owner, which causes some distress to companies.
One of the many argumentative points in service contracts is that the operator has the right to terminate the contract at any time just as long as a 30 day written notice is given. Another problem in the contract is that the operator can make the service company wait until they are ready for their services meanwhile the service company cannot take on any other tasks because they are contracted with the operator. The service company however is monetarily penalized if the vessel is not delivered on time to the operator. In essence, each day the vessel is not working is money lost for the company.
There are beneficial aspects to the contract as well. An example of this is the clause that vessel owners are urged to hire Egyptian personnel if they are available in the local market. While not all that helpful or harmful to service companies, this is indubitably good news for the Egyptian work force.
Another advantageous feature of the contract is the article for safety precautions, which set stern guidelines to sea safety. Service companies have to abide by the British Institute of petroleum’s “Code of Safe Practice for Drilling, Production and Pipeline Operations in Marine Areas.” They also have to be in accordance with international marine practice for safe operation and must comply with the environment protection Law No. 4 for the year 1994.
The Future of the Market
The recent rise in exploration efforts will certainly increase the number of vessels in Egypt. This is welcomed news not just for the local market but also for the international market, where Egypt will hopefully one day be a main player.
While vessel building is usually pursued aboard currently, at one point it will be more advantageous to build at home, where the abundant human labor capacity will be efficiently utilized. Maybe in the future more companies will opt for building in Egypt when bureaucracy is streamlined and materials and equipment are more accessible and less costly.
The technological advancements in the field of exploration have already compelled companies to build new state of the art vessels; this essentially means that when Egypt has these vessels their chances of international competition are greater. It also means that new territories can be explored and new sources of oil and gas discovered.
Also, the rise in the number of vessels rises investment opportunities; exploration companies will come and explore not only based on the existence of natural resources but also on the existence of appropriate equipment to help in their endeavors.
And while there are indeed concerns regarding the tendering process and the contracts, these issues will eventually balance in the end; the facilitation of legal procedures is a natural progression that comes after weighing opportunities to sacrifices and the sacrifices on the part of the government or on the part of the operator is in reality not as bad as it seems when it is compared to the endless possibilities that come from expanding any market in the economy.
An interview with Captain Tarek Shawkat, Maridive & Oil Services Marketing Manager
Your company was created to meet the need of marine services in Egypt, has the need been met?
Yes, since its establishment in 1978, Maridive has been accomplishing great steps and now it enjoys the largest market share in Egypt, compared to the number of units providing the Anchor Handling Towing Supply Service for offshore rigs in the Mediterranean Sea and Red Sea areas.
Moreover, there are two “new-building programs” for advanced units in order to meet the needs of both Egyptian and international markets by supplying technologically advanced units.
The first “new-building program”: Maridive has signed an agreement with an Indian shipyard to build five Anchor Handling Towing Supply –Dynamic Positioning system class 2- Fire Fighting class1, units with a capacity of 6310 BHP; two out of which are currently operating in Saudi Arabia for “Aramco”.
Also, in the same program the Indian shipyard will build a Diving Support Vessel Dynamic Positioning System class 2- Helideck – FiFi 1, unit for maintenance and a Construction. In addition to, Accommodation, Pipe laying, Construction Barge (90meter), which is due to launch during the few coming months.
The second “new-building program” is with China where five vessels will be built; four units of Anchor Handling Towing Supply FiFi1 vessels with the capacity of 5150 BHP, and another unit of Diving Support / Utility vessel, which will be launched this year.
What are the main problems experienced in the marine services sector in Egypt?
We do not have problems with customers; we enjoy very good relations with all clients. I do not prefer calling it problems, but rather minor obstacles. And, they can only be determined in the case of having the Egyptian market unable to cope with the increase of international vessel daily rate prices at sometimes.
How? Generally speaking, we market a product (marine unit) provided with a service. Sometimes we face increased demand for such services, especially with the increase of oil price. And hence, comes the hurdle as it takes the Egyptian market some time to respond to this demand increase, especially that cost of maintenance and equipments rise as well. Personally I believe that each customer has the full right to decrease the expenses of his company and raise his profit and that in this case we have to have a middle ground to deal with customers.
In order for the maritime sector to thrive what can be done on the part of the government and what can be done on the part of corporations?
From the government’s side, to give out support setting the priority to Egyptian companies over the foreign ones which is a normal trend everywhere. From our side, it is our duty to satisfy the needs and requirements of our customers and provide advanced units conforming to the latest technology.
What are some of the hazardous conditions met by maritime service companies?
Every maritime unit is prone to hazards, however, our units are uniquely characterized by their capabilities of fire and pollution fighting and salvage rescue for other units. Besides, the safety rules applied by our company and the audit carried out routinely, place us in top ranks internationally. Moreover, all our units are certified by International Safety Management (ISM) from Germanischer Lloyd, ISO 9002 and International Marine Contractors (IMCA).
What were some of the problems met in trying to strengthen your position in the domestic and global markets?
I do not call it problems but as a matter of fact, advanced unit investments for deep water drilling are very costly due to the high prices of steel and equipments. This led to an increase in the cost of units reaching more than $25 million, which requires long term contracts, not less than 10 years with customers. Unfortunately, this is not easy to get here in Egypt.
In all the areas you’ve serviced from Mexico to the Caspian Sea, which would you say was the least troublesome and why?
Places do not differ despite the differences in the area of operation. We sign contracts with large firms, mostly international and multi-national. Setting deadlines and time delays are what we face most in our work.
Maritime Service Companies in Egypt and their Respective Market Share