Awards for engineering, procurement and construction projects will be 71% higher between 2022 and 2026 than the previous five-year forecast period, says Westwood Global Energy
While initial estimates for a “bumper year” appear to have been too rosy, Westwood Global Energy is projecting spending for offshore oil and gas (O&G) engineering, procurement and construction (EPC) will be robust for H1 2022 and the next five years.
The UK energy analysts forecast EPC contracts valued at US$26Bn will be awarded for H1 2022 – a three-fold increase compared to H1 2021. This first-half spending will be driven by 123 subsea tree unit awards, eight floating production systems (FPS) – four newbuilds, two conversions, two upgrades/redeployments – 52 fixed platforms (topsides), over 1,600 km of subsea umbilicals, risers and flowlines (SURF) and 1,660 km of line pipe. Major projects sanctioned in H1 2022 include ExxonMobil’s Yellowtail development (Guyana), LLOG’s Leon Castile fields (USA), Shell’s Crux (Australia), Equinor’s Haltenbanken East (Norway), ADNOC’s Umm Shaif – Long Term Development Phase I, and Saudi Aramco’s Zuluf Incremental project.
In H2 2022, Westwood Global Energy sees contract awards for Shell’s Gato do Mato (Brazil), Aker BP’s NOA Fulla and Wisting project offshore Norway, QatarEnergy’s North Field Compression phase one project, as well as Woodside Energy’s Trion (Mexico). However, Westwood notes, FID on Trion could be delayed beyond 2022 by Woodside Energy as its digests its newly gained BHP O&G assets from its recently completed merger.
Overall for 2022, Westwood Global Energy is forecasting US$68Bn in spending, about 18% lower than its original projections in January 2022. “Emboldened by the Brent oil price averaging US$70/bbl in 2021 and US$107/bbl in H1 2022, there were high expectations for an influx of offshore EPC awards,” it noted.
Presenting at the Annual Offshore Support Journal Conference in London in June, Rystad Energy senior partner and deputy chief executive Lars Eirik Nicolaisen pointed out increased oil prices have led to a resurgence in offshore exploration and development projects, while Russia’s invasion of Ukraine and the resulting geopolitical reaction is driving demand for renewable energy.
“There is an energy crunch and a scramble for oil and gas,” said Mr Nicolaisen. “There is also a renewed focus on renewables in the energy transition.”
Europe is attempting to minimise Russian oil and gas exports by searching for LNG, piped gas and oil from other producers in the Middle East, Americas and Asia.
At the conference, Westwood Global Energy Group head of offshore energy services and director Thom Payne noted current project EPC spending for 2022 was well up from the US$14Bn in 2020 and US$41Bn in 2021.
Increasing energy company investment is driving mobile drilling rig utilisation and pushing charter rates higher, with semi-submersible drilling rigs being fixed for more than US$350,000/day, versus below US$200,000/day in 2020.
This increases demand for OSVs, reactivates laid-up vessels and raises dayrates, noted Mr Payne. He pointed to a quicker-than-expected resumption of offshore E&P activity, which has led to a rapid reactivation of idled tonnage, with the <15-year-old laid up fleet now at 2015 levels, pushing effective utilisation to 75%.
Strong spending to 2026
Additional good news for OSV owners is that the upturn in offshore EPC activity is expected to be sustained for the next five years, as the oil and gas sector tries to make up for lost time during Covid, which caused energy demand destruction, an oil price crash and reined in spending.
“The offshore O&G sector is primed for a flurry of investment to make up for limited spending over the last few years,” said Westwood Global Energy. “The EIA predicts the Brent oil price to average US$104/bbl and US$94/bbl in 2022 and 2023, respectively, setting the tone for an upcycle.”
Based on data from Westwood’s SubseaLogix and PlatformLogix market analytic tools, the energy analyst is forecasting a sustained upcycle over the 2022-26, “in the absence of any significant shocks in O&G demand, with offshore EPC spend expected to total US$276Bn, a 71% increase compared to the preceding five-year period.”
It expects expenditure over the five-year period to be dominated by Asia, the Middle East and Latin America, but West Africa could attract investment to develop untapped gas reserves, “as Europe urgently seeks alternative gas supplies to replace Russian feedstock,” noted the analysts.
“There is a renewed focus on renewables in the energy transition”
Inflation slows development
However, despite an increase in early-stage engagement of the supply chain by E&Ps and a steady growth in the number of pre-sanction projects, the optimism for a bumper year has been somewhat tempered, pointed out Westwood Global Energy in its analysis.
Inflation, supply chain issues and limited resources appear to be the culprits, as highlighted by presenters at the Annual Offshore Support Journal Conference.
“From my memory, the last time we had decent business was 2014,” said Seacor Marine chief executive and president John Gellert during his keynote address at the conference. “Seven, eight years is a long time; we’ve been managing contraction, managing costs and really trying to do the most with the least amount of cost and resources, and we are now entering a period where things are really growing,” he said.
Following the prolonged contraction in offshore oil and gas, Mr Gellert said there was a limited asset base of people and vessels and limited available capital to reactivate vessels from layup.
“The pandemic is largely behind us and there has been a change in client requirements,” said Mr Gellert. “Demand is rising and prices are rebounding, but opex costs are higher and there are shortages in the labour market.”
“EPC contracts valued at US$26Bn will be awarded for H1 2022”
Seacor is addressing these challenges by keeping full utilisation of its fleet and raising seafarer’s wages to retain them, owing to the difficulties involved in finding qualified people and the time it takes to train and certify them.
Added Mr Gellert: “The overall challenge is how we manage growth using current assets.”
In its analysis of the market, Westwood Global Energy also fingered inflation for slowing development, saying: “This decline is due to delays in project sanctioning, as some operators remodel project economics due to supply chain inflationary pressures that could range between 10% to 15% for subsea equipment and production platforms.
“It’s been challenging for the supply chain to scale up quickly after being forced to downsize during the pandemic. This has led to limited participants in some EPC tenders, causing operators to continually extend bid deadline dates or retender for projects to increase competition, forcing a delay on the project-sanctioning timeline,” said the UK energy analyst.
Some major projects that have had FID and EPC awards delayed from H1 2022 include Equinor’s Rosebank development (UK), TotalEnergies’ Cameia-Golfinho project (Angola), and the Preowei field (Nigeria), PetroVietnam’s Block B project (Vietnam), as well as Petronas’ Bestari (Malaysia). While these delayed projects are expected to be sanctioned over the next 18 months, projects such as Shell’s Linnorm (Norway) and Aker Energy’s Pecan (Ghana) have been shelved indefinitely. Shell is exploring alternative development concepts for its Linnorm field, while Aker Energy is seeking potential farm-in partners for Lukoil’s stake in the Pecan field, due to uncertainties surrounding the complexity of possible future Western sanctions against the Russian-based operator.
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