The six-month period October, 2009, through March, 2010, is likely to be tough on the UK Continental Shelf for subsea contractors and suppliers.
Alastair Birnie, CEO of industry body Subsea UK, told Energy that many companies were worried that their North Sea backlog would have dried up by then, with little indication of where the new order book would come from.
They also remained distrustful of the banks and were keen to minimise involvement with them.
While, at about $70 per barrel, oil is once again riding at healthy levels much like 2007, the rollercoaster ride up to $147 reached in July, 2008, and plunge to the $30s early this year before recovering, coupled with the credit crunch, has made even well heeled operators cut work programmes to the bone offshore Britain.
Birnie notes in Subsea UK’s latest Business Confidence report that, while some FEED (front end engineering and design) studies and pre-tender preparation work is continuing, most projects are suspended or have been slowed down.
UK contract awards are scarce, though a number of large development-related deals have been awarded throughout the difficult period in theatres such as West Africa, where exploration, appraisal and development activity remains healthy.
One part of the North Sea subsea business that is in reasonable shape, according to Birnie, is bread-and-butter IRM (inspection, repair and maintenance).
“Although not a panacea, demand in this area has held up better than expected,” he said.
“A common comment, however, particularly in the operations side of the business, is lack of visibility of upcoming work. This has been coupled with a significant increase in bid preparation work that is coming through, but these are, in the main, for smaller jobs on a spot basis.
“Current visibility is in the order of a few weeks rather than quarters, and in many cases, an inquiry is issued only a matter of days before work is due to commence.
“We are also hearing of inquiries circulating a number of times before the work is secured, indicating an increased tendency for clients to shop around to find the best deal. This is to be expected and is a sign that the free market is working, although it does, of course, impose an additional, significant cost and resource burden on the contractors.”
Birnie said that a further indication of the slowing of business was the improving availability of equipment.
“Where previously there would have been a lead time of several months for equipment such as, for example, survey sensors, we are now seeing equipment being available ex stock, and a more opportunistic market evolving where buyers are anticipating availability of equipment, delaying their purchasing patterns.
“There are two aspects to this – the order backlog is visibly drying up but, against that, the ability to respond quickly to inquiries is helping these businesses secure sales in the short term – providing, of course, the suppliers are able to finance the stock holding.”
Turning his attention to vessels that support North Sea subsea work, Birnie told Energy that the hiring pattern for ships had changed over the past few months, with the spot market coming to the fore.
Subsea UK boss Alistair Biirnie said: “A number of major clients are opting for spot work rather than placing work via framework agreements. These clients are taking vessels on spot hire, preferring to pay a slightly higher day rate, but under revised conditions, changing the risk onus on weather waiting time and so on, so imposing more commercial risk on the supplier side.”
Overall, Birnie warns that reductions in activity will persist, backlog build will lessen and price pressure and cost-reduction initiatives will persist within the 21 companies covered by the Subsea UK survey.
“The impact will be felt across the Subsea UK membership through the supply chain as cost-reduction initiatives are maintained,” said Birnie.
Banks are singled out for criticism; they are simply not trusted, though it is evident from some of the companies surveyed that there is “some money flowing”.
“There are many frustrations around this area and it would appear that trust has eroded, with suppliers preferring not to allow their businesses to become more dependent on the banks in the event that they are ‘caught short’ later, as would appear to have happened over the last six months to a number of borrowers,” said Birnie.
But he pointed out: “It has not all been bad news, however, as some of the specialist niche companies have performed better than they had anticipated, and in some cases, we are even hearing of some of these having a better year in 2009 than was the case in 2008.”
Also, the market capitalisation for the 21 businesses measured for the Subsea UK review has, since the low of mid-March, grown by 51%, from $144billion to $217billion, indicating a confidence that these stocks are “fundamentally sound”.
Furthermore, the outlook for 2010 is generally more positive. Recovery in spending is expected and, coupled with more favourable commodity-prices expectations, exploration and production companies are likely to adjust budgets upwards during the first half of the year.
But Subsea UK’s latest survey warns: “It is unlikely that the industry will see an immediate return to the activity levels witnessed during 2007 and the first half of 2008 and pressure will remain as the industry absorbs new assets and manufacturing capacity increases.
“This will likely see pricing growth muted when recovery materialises although, longer term, the fundamentals within the subsea industry, as part of the drive towards increased deepwater production, will eventually see this trend reversed.”