The oil price collapse is dominating the current news cycle, with Brent dropping below $28 a barrel for the first time in over 12 years.
This continuous dramatic fall spanning 18 months has raised concerns over the future development of many offshore oil & gas fields.
Deepwater fields in particular will continue to see deferrals as operators slash budgets further, while also trying to safeguard return on their investments in these capital-intensive projects.
Douglas-Westwood (DW) expects subsea hardware Capex to decrease by 14% compared to the preceding five-year period, totalling $102billion between 2016 and 2020.
Capex growth is expected to be limited in the short-term, with activity driven by large African and Latin American projects that were sanctioned before the oil price downturn.
However, an expected sluggish oil price recovery in the mid-term will see Capex increase slightly by the end of the decade.
Subsea tree installations reached unprecedented levels between 2013 and 2014. Nevertheless, this will come to an end with reduced offshore installation activities expected over the forecast period.
The subsea tree installation forecast between 2016 and 2020 will be 10% lower than the preceding five years.
Trunklines represents the highest spend among the three categories, accounting for 41% of the total global subsea hardware Capex, while SURF (subsea umbilicals, risers and flowlines) and subsea production will account for 32% and 27% respectively over the forecast period.
Subsea production hardware will attract $28bn of expenditure over 2016-2020, driven by a number of large projects in deepwater such as the 65-tree Kaombo project that was sanctioned in early 2014.
Projects that were committed to prior to the downturn are, for the most part, still going ahead, demonstrating why the drop in Capex is not commensurate to the drop in oil price for offshore developments.
The SURF market will total $33bn. This will be boosted by revisions to development plans, with a number of projects being developed as tiebacks to existing infrastructure rather than being developed with standalone facilities.
Although this increases the volume of required SURF infrastructure, it is often a cheaper solution, and in a time when companies are under pressure to cut costs, this will be an attractive option.
Examples of such projects include Chevron’s Bucksin and Moccasin in the US Gulf of Mexico and Wintershall’s Maria project in Norway.
Other factors such as increased installation water depth drive higher Capex for particular pieces of hardware.
For example, in Latin America and African deepwater developments we have seen a number of large subsea/FPSO projects, which drives demand for complex and larger riser bundles.
Trunkline Capex is forecast at $41bn and will be driven by a number of significant projects. Spend will experience an upward swing post-2017 due to the potential installation of the East Natuna pipeline, Nord Stream Phase II and the SAGE pipeline by the end of the forecast period.
Regional Overview
Africa will become the world’s most significant region for subsea field development, accounting for 30% of global subsea tree installations over the period of 2016 to 2020. The region will also represent 15% of global subsea hardware Capex over the next five years.
The start of offshore activities in East Africa towards the latter years of the forecast period and the fast track development plans for the Zohr gas field offshore Egypt will contribute to the bright spot within the region.
Subsea hardware Capex over the 2016-2020 period in Asia-Pacific is set to reach almost $24bn, a 26% decrease from the preceding five years.
Chevron’s IDD (Indonesia Deepwater Development), a major deepwater development in the region comprising a series of gas discoveries, has been further delayed as Chevron tries to revise its budget.
In Australia, the current low oil prices will impact the number of LNG projects that get sanctioned in the coming years as the country prepares to enter a new production phase with massive projects such as Gorgon and Ichthys.
As for Brazil, Petrobras’ latest business plan has been heavily pruned because of the large amount of debt that this parastatal carries and the risk posed by the oil price crash.
Consequently, the number of subsea trees expected to be installed by Petrobras in Brazil over the forecast period will decrease by 13% when compared to the number of subsea tree installations over the preceding five years.
The US Gulf of Mexico will see a decline of 45% in the total number of subsea trees to be installed when compared to the preceding five years. Operators will continue to delay or cancel projects, as seen recently when Chevron cancelled its planned development for the Bucksin and Moccasin ultra-deepwater resource.
However, the prospect of BP developing Mad Dog Phase II has gained momentum in recent weeks, with FID expected before the end of 2016.
Furthermore, Shell’s Appomattox development, currently under construction, is expected to be operational by the end of the decade contributing to the number of subsea trees to be installed over the forecast period.
Turning to Western Europe, subsea hardware capex is expected to decline by 34% between 2016 and 2020 compared to the preceding five years.
Subsea spend will be driven by a few large and several medium to small offshore development projects.
Among the large ongoing field developments are Statoil’s Aasta Hansteen and the Johan Sverdrup projects in Norway, while in the UK, BP’s Quad 204 redevelopment and EnQuest’s Kraken development will represent significant proportion of activities in the region in the medium term.
Conclusions
Overall, the market for subsea hardware will be constrained as the low oil price hits numerous projects on a global basis.
While this will be negative for both operators and subsea manufacturers over the next few years, the impact of delayed projects is likely to last long into the forecast period even as oil prices start a slow recovery.
Oil companies tend to take a long-term view of the market and while there will be delays, some projects are expected to be sanctioned once the oil price stabilises and equipment costs lessen.
To date, subsea hardware manufacturers have been somewhat insulated from the downturn due to record levels of backlog established over the period 2011-2014.
However, with orders now trickling in at very low levels, backlogs are falling rapidly and we expect intense competition in the market in the years to come. 2016 will undoubtedly be a very difficult year for the industry compared to the previous year and many of the firms that were buoyed by backlog in 2015 will now have to face the realities of the current market and position themselves accordingly.
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