Life is good in the subsea industry and there’s every prospect of this continuing for years to come. And in their most recent report, analysts at Douglas-Westwood see the overall market value growing from $18.2billion last year to almost $23billion in 2017.
About two-thirds of this rising market is expected to be driven by Asia, Africa and the Americas. Curiously, while the trend remains up for the UK sector, D-W currently forecasts a slight decline in the Norwegian sector based on current knowledge.
“Holistically, its exceptionally buoyant and the outlook is healthy across all regions,” D-W’s chief executive Andrew Reid told Energy.
“Many offshore contractors and original equipment manufacturers have built huge backlogs and so, on the face of it, everything seems rosy.
“However, the big challenge is that projects have become increasingly large and there is tightness in the supply chain, such as for umbilicals, subsea trees and other equipment.”
Reid said too that the industry was suffering from a huge “inexperienced talent” problem among operators and within the supply chain, especially project management and among subsea contractors who are crying out for thousands more skilled people in the North Sea let alone anywhere else.
“Combine such factors and what we’re continuing to see is complex projects running late and over budget. There’s a high potential for that to continue.”
Reid warned that the supposed time of plenty had a dark side as many companies were making little or no money, which is ironic.
“If you look at the big offshore construction guys, many of the engineering houses, they have a really hot market yet they’re making no money. It’s nuts.
“We also have the operators for whom commodity prices are stagnating if not experiencing downward pressure. They’re not managing their costs properly either as inflation creeps into the system. Their margins are declining too.
“So something has to give… and change.
“We expect a lot of projects will get delayed and more so in 2014 as projects are too costly, too complex and there’s too much inflation in the market.”
Reid warned of the seemingly intractable lack of capacity.
“Operators will be forced to pull large-scale or high-risk projects to balance the market; also to ensure that they get their returns, in my view.”
He said that Asia-Pac and Brazil are under particular pressure, in the latter’s case compounded by local content issues; this had hit European contractors particularly hard.
“As we’ve seen with Brazil, Subsea 7 has taken some serious haircuts on a number of projects that they have there. Everyone is struggling with the cost of operations out there.
“Contracts are too tight and, from a contractor perspective, not in their favour. So, if anything goes wrong they get into trouble quickly.”
Reid thinks that many contractors were lured by the spectacular Brazil deepwater story, seeking a piece of the action, only to get burnt.
So is there any sign of Petrobras easing some of the pressure? Not that Reid sees, warning that huge appreciation of Brazil’s currency against the Greenback means that the real cost of doing business in this huge country has increased massively.
Reid: “This is a dollar-denominated industry. People have been caught out. And, in spite of all the efforts made by Petrobras, Brazil is struggling to grow production. I see it being an environment where people will get fed-up; and I hear a lot of noise from guys in the marketplace who are admitting that they’re getting to the end of their tether.
“We’re seeing signs that Brazil is no longer regarded as the be-all and end-all and that companies are taking a more rational view. I think we’ll see more of that.”
Turning to Asia-Pac, Reid said the dynamic was very different, pointing out that European subsea contractors were experiencing growing competition from a cadre of local players, coupled with the various national oil companies favouring their local supply chains.
Reid agreed that, as Asia-Pac subsea contractors mature and grow confident, they will expand geographically.
“Chinese firms especially are considering how they can enter other markets like the North Sea, Gulf of Mexico, West Africa and so on. I can see continued acquisition. It would make sense from their perspective to acquire Western brand names and businesses.”
However, the US market would be a tough nut for the likes of the Chinese to crack, given that it has been hard enough for European contractors, in part because of the infamous Jones Act of 1920 which was designed to and still protects local sea trade.
Reid is optimistic about the US market, especially deepwater. And, as the effects of the Macondo disaster wane, he sees the rig count and exploration and development momentum rebuilding.
“Activity levels are rising and we’ll probably be in a position later this year, otherwise next, of seeing the highest-ever activity levels there as opportunity-constrained IOCs invest heavily.
“If you look at the rig commitments and projected projects and expenditure among the IOCs, you will see a big increase in the dollars that they will be spending, at least in deepwater of which the US GoM is one of the key markets.”
Turning to the still small US domestic deepwater contracting community, Reid admitted that the Jones Act is in their favour. However, with one or two exceptions like Helix, domestic players have a long way to go before they catch up on the European brigade with its sophisticated tonnage.
“We’ve seen a lot of North American orientated offshore construction companies do not particularly well; hideously in fact,” said Reid.
“Delta Subsea is an example of a start-up service-related business; there’s Helix adding more tonnage and capability to its fleet and there are other names that could quickly invest in subsea and make quick, material gains.”
As already referred, Africa is a hugely important and growing market for the subsea contracting community, particularly offshore Angola and the Gulf of Guinea, but with East Africa (Mozambique) coming into play.
The highest investment levels and number of installations of subsea trees in Africa are expected to occur in 2017 driven by large developments such as the Kaombo and Cabaca fields in Angola, and the Bonga Southwest and Nsiko projects in Nigeria. This assumes no project slippage.
Back in home waters . . . North West Europe . . . Reid reckons the province remains hugely important despite advancing maturity, especially the UK sector where output is plummeting and exploration is one step short of a near dead-stop.
He reeled out the usual reasons as for why . . . ample infrastructure that needs a lot of maintaining and fixing, a geo-political environment that helps operators secure reasonable risk-adjusted returns, and a respectable though moribund oil price.
“The North Sea remains an investment friendly environment.”
However, there is a big and growing but.
“Reality is that when activity drops, neither the UK or to a lesser extent the Norwegian environment will be enough to support a large subsea contracting presence and the companies will be forced elsewhere to build their revenues and opportunities.”
Reid remains sceptical about decommissioning with the exception of routine well plugging and abandonment, which he regards as an almost annuity business for those who play in that space.
“I think it is so hard to build a business around decommissioning, though plugging and abandonment of wells is an exception. But, above the well, it’s far harder for anyone to make money.
“For the subsea community it remains mostly a case of wait and see.”
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