Our subsea sector is in rude health. This was plain to anyone who spent time at Subsea Expo in Aberdeen last week. The challenge ahead is whether or not the many smaller companies working in the field can seize the day and turn themselves into businesses of scale.
The subsea market is fragmented but it is fast growing with lots of young, innovative companies with interesting technologies and ideas. With the right management, finance and strategy these businesses have the potential to secure a place on the world stage and create value for themselves, their employees and the wider economy.
Rewards available to the service industry are greater than ever. The world is increasingly reliant upon unconventional oil to satisfy demand. All the easy to find, big fields were discovered decades ago and the industry is now driven to explore the harsh and remote environments. The job of finding new fields and bringing them into production, as well as extracting as much oil as possible from existing fields, rests squarely on the service industry’s shoulders. The biggest sources of new production are fracking and offshore reserves – service intensive activities which call for enormous investment in technology, equipment and expertise. This is a big part of why oilfield spending is rising annually by 10% or so.
However, no matter how good things are today, it is impossible to set the right strategy or to make coherent investment decisions without taking into account what is going on in the industry as a whole and avoid the all too common trap of living in the moment.
The events of preceding decades illustrate the unpredictability of our industry. From the mid-1980s through to the early 2000s we saw oil prices in the $11-30 per barrel band and extreme price volatility, which topped 250% on occasions: the equivalent of waking up tomorrow to find crude has dropped to $35. The period was also characterised by consistent growth in production from the major oil companies and lack of investment in the service sector.
Then followed the peak oil years of 2002 to 2008 when the majors discovered that growing their production was not so easy, oil demand in the developing economies began to take off and the US Energy Information Administration warned that demand would outstrip crude oil production. Conventional crude production peaked in 2006 and the oil price hit an all time high of $142 in 2008. Were it not for the advent of shale oil in the United States, we could very easily have been faced with crude prices three times higher than they are today.
Since 2008, we have worked in an environment of range-bound crude prices ($80-112) and volatility of no more than 40%. A floor of $80 has been established because the economics of shale oil do not work below that price, rigs would be laid down and production cut. On the upside, the price is kept in check by concerns of oversupply and the watchful eye of OPEC.
But what’s around the corner? Some of the factors playing into our current economic environment may constitute clouds on the horizon. We cannot, for example, dismiss the possibility of further speed bumps in the broader economy or the resurgence of production from Iran and Iraq together with new US production resulting in oversupply, driving down price and activity.
Range bound oil prices only stimulate activity whilst the cost base is static but service costs have been leaping upwards so the confluence of more difficult offshore projects, higher costs and range bound oil prices are beginning to give the E&P community pause for thought when it comes to pushing the button on new subsea projects. This is particularly relevant for a mature region like the North Sea. Within this context, the economics and risks of shale are favourable relative to offshore investment so resources may increasingly be diverted there.
The industry also has a track record of responding to a shortage of capacity by flooding the market and spoiling the economics. It happened with seismic, it happens regularly with vessels, and now it has happened with fracking in the US. There is no reason to think that it will not happen in subsea at some point.
And what about the potential impacts of renewables, technology and politics?
The point is that although the sun is shining on us at the moment, history teaches us that this is an industry where it is virtually impossible to predict the future. We know things are good but we should not be complacent.
So, my message to the subsea community is for it to take control of its destiny. The UK has 40 years of experience in offshore development and production and is held in the highest regard globally. The opportunity in front of the sector is massive but is not going to be around forever. Now is the time to think strategically and achieve growth. There are increasing numbers of investors seeking opportunities in energy and the tools and expertise are available in the corporate finance community to help move fledgling subsea businesses into higher leagues. Think about tomorrow and where your business could be.
As a final thought on the theme of tomorrow’s world, during Subsea Expo I was asked about my view on Scottish independence. The question was prompted by Bob Dudley’s comments earlier that week. I am not particularly interested in politics because, more often than not, things seem to be said or done to court popularity and win votes rather than to achieve what is in the best interests of the country and its people.
In this vein, the current debate often seems to lack depth. I am not an expert in constitutional or international law but I do know a bit about the energy industry. The repeated claim that an independent Scotland would be a wealthy country because of North Sea oil and renewables is something I take exception to.
One of Matt Simmons’ strong suits was his intellectual curiosity. He was not a man to take accepted wisdom at face value and he liked to look at the detail. Thorough analysis is a fundamental of our business. To this end, we are carrying out research which will provide factual context for the independence debate on oil and gas and energy policy. I am sure that all parties will appreciate our diligence in this area and I hope that it will help people to make informed choices, based upon facts rather than rhetoric.
Colin Welsh is chief executive with Simmons & Company International Ltd.
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