With some of the highest levels of activity expected in seven years, the subsea sector has ‘turned the corner’, but an oversupply of vessels and tight cost controls are hampering utilisation and day rates
Speaking at the Offshore Support Journal Subsea Conference in London in February, Strategic Offshore Research director Ian McIntosh said an oversupply and under-utilisation of vessels had left rates flat in the subsea sector. “Where are we now?” Mr Mcintosh asked conference delegates. “We are in some pain.”
While Mr McIntosh admitted that the market had “turned the corner,” the recovery process is expected to be lengthy. He said intense competition and oversupply in the sector had left some vessels being employed in work at less than break-even rates.
“With all this oversupply, you’ve had to have lots of high-spec subsea support vessels in other parts of the market – so sometimes, you have had boats making less in service than they would while laid up,” he said.
He added: “Pricing in the subsea market is all about utilisation. It has started a very modest recovery, but rates are going to take a lot more time to move again, to get the momentum back.”
During his presentation at the conference, Westwood Global Energy Group senior analyst offshore Mark Adeosun told delegates that despite an increase in subsea order intakes, cost margins were still relatively suppressed.
However, Mr Adeosun pointed out that over the next four years, offshore exploration and production spending would be at its best levels since 2013, with spending on greenfield developments for deepwater projects totaling US$246Bn during the period from 2020 to 2023.
In 2020, Westwood Global Energy Group expects US$63Bn of contract awards for new offshore oil and gas production infrastructure (subsea production systems, SURF, pipelines, fixed platforms and floating production systems) – a 49% increase over 2019 and the highest in seven years.
Spend on floating production systems (FPS) is projected to reach US$20Bn in 2020, up from US$13.5Bn last year, according to Mr Adeosun. Latin America will dominate activity, with major awards such as Mero 3 (Q2), Itapu (Q4) and Sergipe (Q4) underpinning US$7Bn of spend. Africa will also feature, with Woodside’s focus FPSO already awarded to MODEC in January and BP’s PAJ and Shell’s much anticipated Bonga SW projects currently expected to be awarded late in 2020. Other major awards anticipated are Western Gas’ Equus (Australia) and LLOG’s Shenandoah (USA).
Delays in projects causes slippage in subtree installations
As the result of the delay in some major projects, subsea tree contract awards slipped in 2019 to 212, about 19% lower than the 263 tree orders awarded in 2018. One of those was Sangomar field development, Senegal’s first offshore oil development, which was awarded to the Subsea Integration Alliance of Subsea 7 and Schlumberger in January. Overall, Mr Adeosun says that “2020 looks like a bumper year” with 321 projected tree awards and US$10Bn of subsea equipment order value for contractors.
A jump in subsea activity is music to the ears of integrated subsea solutions provider Subsea 7, which reported a loss of US$82.4M in its 2019 annual results reflecting “lower levels of activity and low pricing on projects awarded in the downturn.” The blow to shareholders was softened somewhat by Subsea 7’s US$250M repurchase of 21M shares during 2019.
Overall, revenue for 2019 was US$3.66Bn as compared with US$4.07Bn the previous year, with SURF and conventional revenue being relatively flat year-on-year (y-o-y), US$3.17Bn to US$3.16Bn. Vessel utilisation did climb slightly y-o-y, 72% from 70%.
In March, two major contracts were won by Subsea 7, under which it will deploy its reel-lay and heavy-lift construction vessels for subsea projects in Australia and the US Gulf of Mexico.
Under a contract valued in the range of US$300M to US$500M awarded by operator ConocoPhillips Australia Barossa Pty Ltd, Subsea 7 will deliver the SURF scope for the Barossa Project. The Barossa field is located 300 km offshore Darwin in the Northern Territory of Australia.
Subsea 7’s scope of work includes project management, engineering, procurement, fabrication, transportation, installation and pre-commissioning of 36 km of flowlines and associated client-supplied risers, umbilicals and subsea structures in water depths between 230 and 270 m. The offshore work scope is scheduled to occur in 2022 and 2023, using Subsea 7’s reel-lay and heavy construction vessels. The project is currently awaiting FID.
In the US Gulf of Mexico, Subsea 7 announced the award of a contract valued between US$150M and US$300M from Murphy Exploration and Production Company - USA for “one of the largest subsea developments in the Gulf of Mexico”, according to Subsea 7 US vice president Craig Broussard. The work involves subsea installation services related to the Samurai, Khaleesi, and Mormont developments tying back to the King’s Quay semi-submersible. The King’s Quay host facility is approximately 282 km south of New Orleans in the Green Canyon area of the Gulf of Mexico.
Subsea 7’s contract covers the tie back of seven subsea wells to the King’s Quay host facility. The project scope includes engineering, procurement, construction, installation and commissioning of all subsea equipment including PLETs, PLEMs, umbilicals and distribution hardware, production and export flowlines and jumpers, as well as the wet tow in the Gulf of Mexico to the fields and mooring system installation of the semi-submersible FPS.
Offshore operations will begin in 2021.
|Deepwater expenditure, by sector, 2020-2023|
|Source: Westwood Global Energy|
TechnipFMC sees big order growth
One of the largest players in the subsea market, NYSE-listed TechnipFMC experienced over 50% order growth in subsea projects in Q4 2019. In discussing the company’s results, TechnipFMC chairman and chief executive Doug Pferdehirt expects the momentum to continue in 2020, buoyed by activity for small- to mid-sized brownfield subsea projects and a continued healthy outlook for greenfield projects. “Strength in project activity, as well as our expectation for double-digit revenue growth in subsea services, provides the framework for 2020 subsea orders to approach the level achieved in 2019,” he said. TechnipFMC’s consolidated backlog for subsea services is US$8.48Bn from 2020 and beyond.
TechnipFMC is moving ahead with its split into two pure-play companies, TechnipFMC and Technip Energies in H1 2020. After the separation, TechnipFMC will be a fully integrated subsea technology and services provider headquartered in Houston and listed on the NYSE and Euronext Paris exchanges. Technip Energies, headquartered in Paris and listed on the Euronext Paris exchange, will focus on engineering and construction, with a focus on LNG projects, biofuels and alternative energy.