The offshore industry could be in store for a cautious recovery in the second half of 2020, writes Westwood Global Energy head of offshore Thom Payne
It goes without saying that the first half of 2020 has not gone according to plan. In Q4 2019, the offshore industry was looking back at a year of progress and improvement. Activity and backlogs had grown steadily across the majority of supply chains and even pricing, largely flat since 2016, had shown some signs of upward momentum. Emboldened by an apparently stable US$60/bbl oil price and significantly improved E&P cashflows since 2016 (largely due to suppressed pricing levels), the industry was looking forward to a potential bumper year for offshore investment in 2020. Based on anticipated awards, Westwood had projected US$67Bn of offshore engineering, procurement and construction (EPC) contract value for the year, an increase of over 50% relative to 2019.
Coronavirus begins to spread
However, in the background the novel coronavirus had already begun to spread, with the World Health Organisation (WHO) reporting 44 confirmed cases in Wuhan, China by 3 January 2020. The rapid rise of the pandemic is well documented, with 1M global cases reported by the end of March. The lockdowns that had come into effect across the world in Q1, coupled with the breakdown of OPEC+ cut negotiations, led to 22 million barrels per day (mmbpd) of excess oil production in April, pushing the Brent spot price under US$10/bbl and causing the WTI futures contract for May to briefly turn negative. E&Ps were quick to react to the unprecedented oil price crash, cutting 2020 capex guidance by an average of 30% over the course of March to May, while US shale producers made cuts averaging 44% and offshore-centric Supermajors reduced their expected capital investments for 2020 by 25%.
The knock-on effect to the global offshore supply chain has been significant, both in terms of immediate impact and potential future legacy. The count of contracted mobile offshore drilling units (MODUs) fell by 50 rigs over the course of the first half of the year, with around 65 contract terminations resulting in an estimated US$1.5Bn of lost backlog for already beleaguered rig managers. Hard fought pricing gains achieved over the course of 2019 are now being reversed, with recent drillship fixtures in the Gulf of Mexico falling back below the US$200k/day mark. Fewer opportunities and even weaker rates have had the potentially welcome side effect of accelerating scrapping, with 16 floaters retired over H1 2020 compared to just 15 for the entirety of 2019 – 10 jackups have also been moved out of the fleet.
“E&Ps were quick to react to the unprecedented oil price crash, cutting 2020 capex guidance by an average of 30%”
Offshore EPC awards cut
Offshore EPC activity has also been laid low, with our initial expectation of US$67Bn of awards for 2020 now revised down to US$19.5Bn (a 70% reduction) of which roughly a third has already been awarded, including two FPSOs for Woodside’s Sangomar and Petrobras’ Marlim Revitalisation projects. The list of announced high profile project deferments includes Aramco’s Zuluf, Equinor’s Bay du Nord, Woodside’s Scarborough, Siccar Point’s Cambo and Shell’s Whale and Gato do Mato developments, which alone accounted for around US$12Bn of EPC value.
Improvement in second half
Looking to the second half of this year and beyond, things already seem to be improving as cautious demand recovery and over 100% compliance with the 9.7 mmbpd of OPEC+ cuts led to an undersupplied oil market in June. Assuming uninterrupted demand recovery (a relatively big assumption) and continued full compliance with production cuts, the second half of the year could see an average undersupply of 5.2 mmbpd, which will be critical in eroding the estimated 1.2Bn barrels of excess crude produced during the first six months of the year and allow oil prices to stabilise this year before potentially recovering in 2021 – Westwood’s base case assumption for Brent oil prices is US$50/bbl in 2021 and US$60/bbl by 2022. Assuming a more stable environment, offshore rig activity is now expected to remain steady for the balance of the year and a number of significant EPC awards are still expected, including FPSO systems for Equinor’s Bacalhau & Petrobras’ Mero-3 developments and subsea production systems (SPS) for Equinor’s Breidablikk (a letter of intent was signed with Aker Solutions in June).
Longer term, offshore EPC activity is expected to bounce back to average US$44Bn a year over 2021-24 as deferred projects are re-examined under potentially more favourable conditions. Overall, a total of 960 subsea trees, 58 floating production systems, 429 fixed platforms, 14,800 km of pipelines and 12,000 km of SURF lines are expected to be awarded over the next five years under our base case outlook.
Offshore wind resilient
One market that does not appear to have been hampered by the recent downturn is the offshore wind sector. Despite some recent high profile delays for government approval (Orsted’s industry leading 2.4-GW Hornsea 3 development is now expected to get the green light in Q4 2020), the growing market has gone from strength to strength, with over 3 GW of capacity being brought online and 3.5 GW of projects passing FID in Q2 2020. With over 12,500 turbines to be installed over the 2020-2025 period, the sheer scale and increasing complexity of this industry continues to attract the attention of offshore contractors seeking some reprieve from the helter-skelter of the oil and gas sector.