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February 5, 2015


Over the past 5 or so years, as the global shipbuilding industry has slowed, and in some cases ground to a halt, many shipyards have been diversifying into the offshore oil & gas sector. I talked about this a bit in a post last year. Nowhere is this truer than with the shipbuilding giants in Korea and China. However it is also evident in other markets. The majority of the recent large shipyards built in Brazil have been built to service both shipbuilding and large scale offshore projects. And in the US, Huntington Ingalls Industries is transitioning the Avondale yard to focus on oil and gas markets.

When the price of a barrel of oil was hovering firmly above the $100 mark, the offshore industry may have looked like the last life raft on a sinking ship to many shipyards. With oil now below $50 a barrel, have these yards jumped in only to find that the life raft is smaller than they thought or is too crowded? Many analysts forecast that while a sub $50/bbl. price may be unsustainable, the days of $100+ are behind us. At this point we’re just waiting to see how cautious operators are around moving ahead with new projects and how long they hold on to them if and if/when the price stabilizes.

A recently released report from DNV GL indicates that confidence in the oil & gas industry has dropped to 28% from a 2014 high of 88% (and 89% in 2013). The report analyzed what respondents considered the most significant barriers to growth. For 2015 low oil prices, the weak global economy and low gas prices top the list. None of these 3 factors had been listed anywhere in the top 3 in the 4 prior years. While it is not the only causal factor, the report concludes that this lack of confidence will contribute to a significant reduction in capital expenditure (CAPEX) and a significant impact on future oil projects.

To add insult to injury, the lower price of oil is having an impact on even those segments of the shipbuilding industry that were still thriving. Workboat, particularly OSV, new construction is booming and was looking like it would continue to do so even a few months ago. However we’re already seeing signs of a lack of confidence in customers who service that segment. Of course workboat builders are not typically major players in large offshore EPC projects. Nonetheless it is worth considering that the downstream impact on OSV construction will likely be mirrored in the already depressed and saturated tanker new construction market. Many of the shipyards in that segment are those that were betting on success in the offshore oil & gas sector.

My personal crystal ball doesn’t let me see any further into the future of the shipbuilding industry than anyone else’s. Which segment of the industry will be viable in 5 years? What will the future hold for the price of oil? While I have my own personal favorites (offshore wind energy, for one) I don’t think anyone can predict where we will be in 3, 5 and certainly not 10 years.

As the world becomes more chaotic, and the pace of change on a global scale increases, the businesses that build themselves to be agile and responsive to change will be the ones that succeed. In my opinion too many shipyards are focused solely on what they do. With so much of a shipyard’s day-to-day operations being centered on project and construction milestones and payments that is perhaps unavoidable. I for one, believe that the most successful shipyards of tomorrow won’t be those that bet on the right industry segment (that changes too quickly and this will only get worse). The most successful shipyards will be those that also focus on how they do what they do.

I personally look at this as an opportunity. As a trusted advisor to these industries, it is our business to assist in 2 out of the three primary pillars of how a shipyard does what it does: process and tools (the third is people, if you’re keeping score). In a future blog post I will talk more about how some of the shipyards we work with are rallying against the status quo, and how some aren’t.

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