The petroleum industry is living through a politically-driven crisis, but the North Sea was in trouble before the latest price collapse and badly needed urgent fixing. That urgency has become acute, as Subsea UK’s CEO Neil Gordon told Jeremy Cresswell
“The problem that the UK had was realised before we had this oil price crash,” Gordon said.
“Our costs were spiralling out of control; the writing was on the wall, but we didn’t do much about it as an industry. The drop amplified and compounded those problems.”
The North Sea had become over-heated UKCS; steaming even. Not only that, the UK industry especially was back to the gold-plating, especially in subsea.
Simply being fit for purpose was not good enough. Look at the generation of construction ships that has been delivered over the past 10 years; as if money was no object.
“Yes, but don’t forget that vessels have become more specialised,” Gordon reminded. “For example, look at the big pipe-lay vessels for deep- and ultra-deepwater. Vessels had to get bigger in order to handle larger projects. Deepwater was the big prize.
“If you look at the new projects and listen to the analysts talking about future big spends, they of course said deepwater was where it was going to happen.”
In a nutshell, subsea had become largely capex focused with opex arguably taking a back seat except, perhaps in the North Sea itself, according to Gordon.
“When we look at the UK, IRM (inspection, repair, maintenance) is a very important part of what we have because we have ageing infrastructure that’s still producing and could carry on doing so for a lot longer if properly maintained,” he said.
“But typically around the world, operators have been focusing on the big new prizes and these are costly to develop. If you focus too much on the big new prizes and forget to fix the hole in the bucket, then you will have problems as older infrastructure deteriorates.
“That is where the UK has a lot of experience and knowledge . . . how to squeeze more out of this basin.
“We’ve been good at that and key has been the subsea tie-back which has been mastered in the UK and should become the global norm.”
One of the highly visible worries for subsea is ships tied up, out of work. In some cases these huge toolboxes appear not to have anywhere to go. In some cases they appear too big and too specialised to take on the IRM market. They need big projects to make the returns that big companies need, but few are being sanctioned nowadays.
Gordon: “A lot of these projects cannot be sanctioned when you have a price that is still falling. Oil companies need to know what they’re dealing with in terms of oil price direction; but no one knows where that’s going to end up.
“I fear that 2016 is going to be a really mean year for many projects and a lot of vessels.”
Gordon agreed that as and when the presumed recovery starts, even assuming a rapid shift in prices, it will take years for momentum to rebuild.
Say it shot to $50-60-70, the industry still faces the issue of oil companies with damaged balance sheets; in some cases perhaps badly in debt; out of favour with stock market analysts. The first thing they’re going to do is try to sustain production with what they’ve got while they work out how to restore their financial position. As for re-hiring some of those very many thousands of people fired, that might come later.
That suggests a minimum of three years, four years, five years and more before big projects start to pick up again. After all, it took years to get the North Sea going again after the ’86 and late ’90s crashes?
Gordon: “Yes; but there are projects where a lot of preparation has been done and so they may not take that long to get moving quite quickly.
“I agree there will be a gap; there’s no doubt that the future’s going to be tough, no matter which way we look at it. There will a surplus of vessels this year at least.
“But are we in the UK looking at this realistically and acknowledging that we may have to live in a sub-$60 world? The price may rise above that at some point, but we have to keep our costs right down.
“If one looks at other parts of the world where subsea is happening, the industry is flat, even places that are still developing. However, in areas like Southeast Asia, they’re still talking about moving into deeper water.”
Gordon is clear, this downturn is very different to prior collapses. Deeper, more fundamental solutions are required. He talked of a three-stage process.
“When we’ve had low oil prices in the past and we’ve gone through initiatives like CRINE to get things sorted out again, the first thing that was done is that the industry cut costs.
“The result of that is we end up with organisations losing people and the supply chain gets squeezed.
“It’s happening this time too and it’s getting very painful for our members, especially small companies lower down the supply chain.
“As seen in the past, the first stage is cost-cutting; so that means reducing head-counts and squeezing margins.
“The second stage is how we begin to look at efficiencies . . . the various initiatives under way.
“And stage three is behavioural change . . . getting companies and their people to adopt and change the way they do their business. That means having the right kind of conversations that look at how we can do things differently.
“And don’t forget, it is not in the interest of the client to squeeze its suppliers out of business. Creating relationships where efficiency can thrive is fundamental.
“We’ve never had stage three before. We’ve been through stages one and two (in the ’86 and late ’90s crunches) and started to put things in place for stage three, but Opec acted, the oil price shot back up and then we went back to the way we were.
“We’re now going to have to go through the pain of stage three; that’s what transformation means. This industry has to transform; that’s everyone from the top to the bottom.”
Does this therefore mean the industry has to simplify itself?
And is subsea capable of achieving this, given the fleet of vessels and subsea vehicles and other technologies that have emerged over the past decade?
Might this kit and the tool-bags that carry them be over-specified for a new lean, mean world?
Gordon: “Yes, the industry does have to simplify itself.
“As for the ships, I can’t say whether they’re over-specified. However, the reality is that there is only a handful of really big vessels. They’re of course geared to deep-/ultra-deepwater.
“Unfortunately, given where the oil price now is and taking into account the strategy of defending market share that Saudi Arabia is applying, deepwater is badly hit and headed for stagnation.”
That spells big trouble. Therefore, does Neil Gordon expect any big subsea busts, bearing in mind that we’ve already seen Ceona collapse and signs of others in difficulties?
“I can’t say that I can see any, but there are talks at all levels regarding that possibility. You can’t predict that sort of thing at this stage.
“However, as deepwater projects become less attractive for investment, the opportunity to focus on ‘squeezing’ more out of existing fields and assets creates opportunity for the subsea supply chain.
“If operators could double production from existing assets and infrastructure at the same or similar to existing costs, it would halve their cost of production.
“I want to emphasise that the UK subsea sector is in fact well placed to be part of the solution to improve asset integrity and develop low-cost subsea developments and bring similar type of innovation that saw the subsea tie back revolutionise the UKCS in the 1990s. Overall, however, if I had a crystal ball to see how far out recovery might be, it would be fantastic.
“Ask me a year ago and I would probably have a different answer to your question than now.
“A year ago, a lot of people were saying the collapse would be over in a year; but they’ve been proven wrong, things are getting worse, not better.”
So there’s the risk that offshore could be compromised for a long time ahead, isn’t there?
“I think the future will be more conservative,” Gordon replied. “The landscape has changed and will keep on changing.
“It’s made more complicated because Opec no longer controls things and US production has increased so much that it is now exporting, plus there are Russia and Iran.
“The result is a very volatile market and that’s the way it’s going to be. I know you’ve heard it before, but we’ve got to treat this crisis as an opportunity.”
The petroleum industry is living through a politically-driven crisis, but the North Sea was in trouble before the latest price collapse and badly needed urgent fixing. That urgency has become acute, as Subsea UK’s CEO Neil Gordon told Jeremy Cresswell.
“The problem that the UK had was realised before we had this oil price crash,” Gordon said.
“Our costs were spiralling out of control; the writing was on the wall, but we didn’t do much about it as an industry. The drop amplified and compounded those problems.
The North Sea had become over-heated UKCS; steaming even. Not only that, the UK industry especially was back to the gold-plating, especially in subsea.
Simply being fit for purpose was not good enough. Look at the generation of construction ships that has been delivered over the past 10 years; as if money was no object.
“Yes, but don’t forget that vessels have become more specialised,” Gordon reminded. “For example, look at the big pipe-lay vessels for deep- and ultra-deepwater.
“Vessels had to get bigger in order to handle larger projects. Deepwater was the big prize.
“If you look at the new projects and listen to the analysts talking about future big spends, they of course said deepwater was where it was going to happen.”
So subsea had become largely capex focused with opex arguably taking a back seat except, perhaps in the North Sea itself.
“When we look at the UK, IRM (inspection, repair, maintenance) is a very important part of what we have because we have ageing infrastructure that’s still producing and could carry on doing so for a lot longer if properly maintained,” said Gordon.
“But typically around the world, operators have been focusing on the big new prizes and these are costly to bring onstream. If you focus too much on the big new prizes and forget to fix the hole in the bucket, then you have problems as older infrastructure deteriorates.
“That is where the UK has a lot of experience and knowledge . . . how to squeeze more out of this basin.
“We’ve been good at that and a key element has been the subsea tie-back which has been mastered in the UK and should become the norm around the world.”
One of the highly visible worries for subsea is ships tied up, out of work. In some cases these huge toolboxes appear not to have anywhere to go. In some cases they appear too big and too specialised to take on the IRM market. They need big projects to make the returns that big companies need, but few are being sanctioned nowadays.
Gordon: “A lot of these projects cannot be sanctioned when you have a price that is still falling. Oil companies need to know what they’re dealing with in terms of oil price direction; but no one knows where that’s going to end up.
“I fear that 2016 is going to be a really mean year for many projects and a lot of vessels.”
Gordon agreed that as and when the presumed recovery starts, even assuming a rapid shift in prices, it will take years for momentum to rebuild.
Say it shot to $50-60-70, the industry still faces the issue of oil companies with damaged balance sheets; in some cases perhaps badly in debt; out of favour with stock market analysts.
The first thing they’re going to do is try to sustain production with what they’ve got while they work out how to restore their financial position. As for re-hiring some of those many thousands of people fired, that might come later.
That suggests a minimum of three years, four years, five years and more before big projects start to pick up again. After all, it took many years to get the North Sea going again after the ’86 and late ‘90s crashes?
Gordon: “Yes; but there are projects where a lot of preparation has been done and so they may not take that long to get moving quite quickly.
“I agree there will be a gap; there’s no doubt that the future’s going to be tough, no matter which way we look at it. There will a surplus of vessels this year at least.
“But are we in the UK looking at this realistically and acknowledging that we may have to live in a sub-$60 world. The price may rise above that at some point, but we have to keep our costs right down.”
“If one looks at other parts of the world where subsea is happening, the industry is flat, even places that are still developing. However, in areas like Southeast Asia, they’re still talking about moving into deeper water.”
Gordon is clear, this downturn is very different to prior collapses. Deeper, more fundamental solutions are required. He talked of a three-stage process.
“When we’ve had low oil prices in the past and we’ve gone through initiatives like CRINE to get things sorted out again, the first thing that was done is that the industry cut costs.
“The result of that is we end up with organisations losing people and the supply chain gets squeezed.
“It’s happening this time too, but it’s getting very painful for our members, especially small companies lower down the supply chain.
“As seen in the past, the first stage is cost-cutting; so that means reducing headcount and squeezing margins.
“The second stage is how we begin to look at efficiencies . . . the various initiatives under way.
“And stage three is behavioural change . . . getting companies and their people to adopt and change the way they do their business. That means having the right kind of conversations that look at how we can do things differently. And don’t forget, it is not in the interest of the client to squeeze its suppliers out of business, so creating relationships where efficiency can thrive is fundamental.
“We’ve never had stage three before. We’ve been through stages one and two before (in the ’86 and late ‘90s crunches) and started to put things in place for stage three, but Opec acted, the oil price shot back up and then we went back to the way we were.
“We’re now going to have to go through the pain of stage three; that’s what transformation means. This industry has to transform; that’s everyone from the top to the bottom.”
Does this mean the industry has to simplify itself?
And is subsea capable of achieving this, given the fleet of vessels and subsea vehicles and other technologies that have emerged over the past decade?
Might this kit and the tool-bags that carry them be over-specified for a new lean, mean world?
Gordon: “Yes, the industry does have to simplify itself.
“As for the ships, I can’t say whether they’re over-specified. However, the reality is that there is only a handful of really big vessels. They’re of course geared to deep-/ultra-deepwater.
“Unfortunately, given where the oil price now is and taking into account the strategy of defending market share that Saudi Arabia is applying, deepwater is badly hit and headed for stagnation.
That spells big trouble. Therefore, does Neil Gordon expect any big subsea busts, bearing in mind that we’ve already seen Ceona collapse and signs of others in difficulties.
“I can’t say that I can see any, but there are talks at all levels regarding that possibility. You can’t predict that sort of thing at this stage.
“However, as deepwater projects become less attractive for investment, the opportunity to focus on “squeezing” more out of existing fields and assets creates opportunity for the subsea supply chain.
“If operators could double production from existing assets and infrastructure at the same or similar to existing costs, it would halve their cost of production.
“I want to emphasise that the UK subsea sector is in fact well placed to be part of the solution to improve subsea asset integrity and develop low-cost subsea developments and bring similar type of innovation that saw the subsea tie back revolutionise the UKCS in the 1990s.
“Overall, however, if I had a crystal ball to see how far out recovery might be, it would be fantastic. Ask me a year ago and I would probably have a different answer to your question than now.”
A year ago, a lot of people were saying the collapse would be over in a year; but they’ve been proven wrong and things are getting worse, not better. There’s the risk that offshore could be compromised for a long time ahead, isn’t there?
“I think the future will be more conservative,” Gordon replied. “The landscape has changed and will keep on changing.
“It’s made more complicated because Opec no longer controls things as US production has increased so much that it is now exporting, plus there are Russia and Iran.
“The result is a very volatile market and that’s the way it’s going to be. I know you’ve heard it before, but we’ve got to treat this crisis as an opportunity.”
If you focus too much on the big new prizes and forget to fix the hole in the bucket, then you have problems as older infrastructure deteriorates
However, the reality is that there is only a handful of really big vessels. They’re of course geared to deep-/ultra-deepwater
Recommended for you
