Recycling has been widely described as “the 4th Pillar of the Shipping Industry”, behind the Newbuilding, Chartering, and S&P sectors. The majority of shipping professionals have indeed heard or were involved at some point in time with an Asset that had to be recycled, was about to be recycled, or simply liquidate an Asset in a constantly active market and always guarantees the minimum residual value of their Vessel. The tricky part is though, that despite the fact that everyone has heard of the recycling of normal Bulkers/ tankers/ containers when it comes to offshore Assets (mainly jackups, floaters - rigs in general, offshore support Vessels), the understanding of the offshore recycling Industry is not to the same extent as on the normal commercial Vessels.

The reason behind the fundamental lack of experience in this offshore vessel and offshore recycling sector can be justified. 

Such Units are not considered as part of the normal shipping industry but mainly constitute part of the Oil & Gas – Energy sector, as they have been used on exploration, drilling, and support, not in the actual transportation of the commodities. The offshore recycling industry is considered separate from the regular ship recycling industry.

Owners of these Assets have not been considering the residual value of their Units since the spread between the  NB prices, and the recycling rates is the biggest that anyone can find across the shipping sector. Just for comparison purposes, while the price of a VLCC tanker in the NB market would be in the 70-80mil range, her residual value would fluctuate in the 16-20mil, indicating approximately a 25% return when selling for recycling. On the other hand, when an NB price of a Jackup Rig would say in the $250mil, her recycling value will marginally come to $3mil (on average), which indicates a 1-1.5% return on the investment. Commercially rig Owners were never dependent on the offshore recycling market for cashing out on their Units.

Regarding the charter Hire for the Offshore Units, one can observe that “when it rains, it pours”. Retaking the JUR as an example, the Units, depending on the region and specs, when on charter - can easily earn anywhere from $50,000- 150,000 per day, exceeding the typical historical average earnings of commercial Vessels. In times of turmoil in the Oil Industry, when oil prices fell to the $25-30/bbl, the decision was clear for Owners to lay up their Units and wait for the next upside- instead of immediately sending them for scrap or offshore recycling – who would normally get rid of a cash cow, mainly if she can be laid up cheaply and have proper maintenance at logical rates to avoid huge reactivation bills?

On the 2 points above, we have taken only the example of the JURs. When looking into floaters, such as semi-submersible rigs, or even drillships, the NB prices as well as the daily earnings, are even more significant.

Furthermore, let’s not forget the Ownership of these Units. Mainly rig Owners tend to be either state-owned companies or stocklisted companies – either way, firms that can have easy access to substantial financing lines to perform their operations and stockholders that need to be involved in the process. Owners described above have always been conscious and hesitant to sell their Units for offshore recycling, especially in the subcontinent, in view of the lack of a necessary framework & regulations governing the recycling activity. Owners had to wait for the IMO guidelines of the Hong Kong Convention to be exercised and implemented, with India leading the charge and Bangladesh slowly following, for considering the offshore recycling of their Assets as a viable solution.

Additionally, we cannot avoid the issue of the logistical nightmare of transporting the Assets for offshore recycling. For example, the majority of Drilling Rigs, since operating in major oil fields all around the globe, are often located in the middle of the oil fields, or in layby berths/ anchorages in jurisdictions and locations far away from the actual recycling destinations. Taking into account the weather restrictions on transporting the Units (US hurricane season, COGH winter season, monsoon season in the subcontinent), the principal dimensions (leg protrusion on JUR/ thrusters in Semi-sub Rigs, increased beam, heavy drafts, reduced stability), the means of transportation (wet or dry tow) it is evident that transporting these Units was never a ‘‘stroll in the park” and not compared to normal towing of a ship-shaped Unit. Transport for offshore recycling certainly requires tremendous logistical preparation and increased cost for bringing such Units to the subcontinent destinations. Adding to the above, the low LDT of such Units (f.e. JUR has on average 6,000-10,000 LDT) can make the exercise futile, and the transportation cost may overcome the residual value of the Asset.

Finally, the values of the Drilling rigs in terms of offshore recycling are heavily dependent on the extra equipment that remains onboard at the time of the recycling, which is included in the recycling sale. While price fluctuations in normal Vessels could be in the $10-20/lt for 2 similar size Vessels, 2 rigs are most probably never the same, and one can observe $40-50/lt differences in the offshore recycling rates for 2 similar rigs. The main reason behind this is the extra equipment, especially on the drilling side. Riser pipes, BOP, cementing Units, mud pumps, raw water towers, and thrusters are equipment that can considerably increase the value of the Asset if left onboard. Rig majors though, due to the value of these items being great, tend to remove the equipment for further use in other Assets (or due to these being 3rd party hired items), literally stripping them and leaving only the basic shell to be recycled, which of course will not be demanding any premium over a normal, more accessible to cut, Bulk Carrier. Discounting the already reduced recycling price of a Rig was not leading Owners to seriously consider the demo market.

BUT THE TIDE IS TURNING ON OFFSHORE SHIP RECYCLING.

Over the past 6-7 years, we have observed that oil prices have not been anywhere near the excess $100/bbl levels, which would make the exploration and drilling highly lucrative for Owners. The two significant downturns of the Oil price, in 2015-2016 and just recently during COVID-19, have normalized the prices in a prolonged period of lean cows. Rig Owners have been forced to look more actively into the offshore recycling market, especially for their unemployed laid-up Assets.

Locally, the tolls for improving the offshore recycling industry are well known and adhered to. The Hong Kong Convention has strong roots in India, with more than 80 yards being certified by IACS classes as compliant to the relevant guidelines, for which the yards are vetted regularly for certification renewal. This is a token to an evolving industry that had come a long way since 2014 when only 4 yards had taken the initiative to invest in such a direction. With only a handful of yards not being certified yet, but working towards this direction, India has emerged as the primary location for offshore recycling (and preferred), with many Owners opting also for a 3rd Party monitoring reporting service during the recycling process. Following India, Bangladesh already has its first HKC-approved yard, with several more yards working towards the certification. For those who have experienced the early stages of HKC implementation in the subcontinent, our hope is that we will see Bangladesh rapidly increasing in the number of HKC yards within 2021-2022 and Pakistan join overall, providing more solutions to Offshore Rig Owners for offshore recycling.

In closing this explanatory article, I need to mention that what many believe to be a super cycle for commodities has affected the residual values. We are currently experiencing the most robust recycling market of the past 5-6 years, with prices well above $500/lt for normal commercial Vessels and the mid-high $400s for Offshore Assets- Rigs. In such an environment, the ideal conditions are there for Rig Owners to get the best residual value in many years for their Assets through offshore recycling.

It should be pointed out that at the time of this article being written, there are more than 20 Offshore Rigs in the offshore recycling market, either being marketed or already sold to Cash Buyers, which is a historical high for the Offshore Recycling Industry and a sign of things to come.

Everyone is looking forward to an era where offshore recycling will no longer be a “terra incognita” but rather a “Terra Nova”.