Global 2020 EPC awards reduced by 61% year-on-year, but 2021 should see a quick rebound in final investment decisions (FIDs) led by national oil companies investing in the Middle East, writes Westwood Global Energy head of offshore Thom Payne
Entering July, Westwood was quietly optimistic that the worst in the offshore oil and gas market was in the rear view mirror and better times were ahead. This was reinforced by positive signs: Brent spot prices averaged US$44/bbl over July/August as surplus inventories began draining with financial institutions such as Goldman Sachs suggesting US$50/bbl was possible by year-end.
But by September sentiment was souring. The re-emergence of the pandemic and regional lockdowns across the OECD saw US refinery runs fall by 2M barrels per day (b/d) in the first week of the month and elsewhere, data from China confirmed opportunistic crude imports had fallen by 11% over August. This was enough to send Brent below US$40/bbl for the first time since early June. Some correction in US crude demand and strong OPEC+ compliance rallied prices back to the US$40-45/bbl band for much of October but with a deterioration of expectations for the demand recovery, an increasingly uncertain outlook will be determined by supply-side factors.
Downside risk is largely tied to an uptick in North America drilling and completion activity and more acutely the (perhaps untimely) resumption of Libyan output. The latter has already seen estimates of 500,000 b/d as operations recommence at major oilfields such as Sharara and Abu Attifel – more than enough to justify Brent futures retreating to US$37/bbl on 29 October.
However, bulls may point to another Gulf of Mexico storm (Zeta) temporarily wiping out over two thirds of production capacity and more significantly the potential for OPEC+ compensation cuts that would see previous quota laggards potentially remove a further 1.2M b/d to 2.4M b/d of supply for the balance of the year.
Westwood Global Energy expects oil prices to just about hold the US$40 to US$45/bbl band for the balance of the year. Unfortunately, things do not look to be improving anytime soon with a potential chokepoint on the horizon in Q1 2021 as seasonally soft oil demand collides with the planned tapering of OPEC+ cuts to 5.8M b/d (although OPEC+ leaders Saudi Arabia and Russia already seem to be warming to the idea of extending the current quotas).
It should come of little surprise that offshore investment has been sporadic. Westwood Global Energy currently expects just US$17Bn of offshore EPC awards in 2020 – a 61% reduction versus 2019 with around US$60Bn of deferred or shelved contract value. Of this, around US$11Bn was awarded over the first three quarters of the year including sizeable awards for Petrobras’ Mero-3 FPSO unit and a subsea solution at Equinor’s Breidablikk offshore Norway. US$6Bn of contracts are still expected in Q4 2020 and the quarter saw early momentum with the FID of ExxonMobil’s long-awaited Payara development offshore Guyana which was swiftly followed by a flurry of EPC award confirmations. Other notable FIDs still expected in 2020 include Equinor’s Bacalau in Brazil and Energean’s Karish North Offshore Israel.
2021 rebound in FIDs
Looking forward into 2021 and on the surface, Westwood Global Energy expects a quick rebound in activity with 72 FIDs and US$45Bn of EPC awards – comparable to 2019 levels. However, on closer inspection it should be noted that the majority of this spend will be associated with national oil companies such as Aramco and Qatar Petroleum in the Middle East, who will be committing to the mega Zuluf and the North Field Expansion developments respectively.
IOCs will account for just 16% of 2021 EPC award value with only Shell and Woodside in the top 10 spenders globally – a list that also included Total, BP and ExxonMobil in 2019. The global rig market has also seen a very turbulent time with an estimated US$2Bn of backlog lost since the onset of the pandemic. Global counts for both jack-ups and floaters fell by 38 and 31 units respectively between March and August but now seem to be showing some signs of stabilising.
Laid-up OSV fleet increases 10%
Deferred investment and suspended drilling campaigns have, of course, taken a significant toll on the offshore support market. Westwood Global Energy estimates that over the course of Q3 2020, the global laid-up fleet increased by almost 10%, halting the positive fleet rationalisation of the previous six quarters. Around two thirds of the laid-up fleet is now aged over 15 years with the majority accounted for by 8,000 to 12,000-hp anchor handling tug supply vessels and 2,000 to 4,000-dwt platform supply vessels.
In addition to demand destruction, slow scrapping has also contributed to the swelling of the laid-up fleet. Over 2017 to 2018, an average of 40 vessels per quarter were scrapped versus just 16 in for the Q1 2019 to Q1 2020 period. With the announcement of recent high-profile restructurings in Europe there is potential for these numbers to improve in the near term.
When assessing the net effect of these above factors on the outlook for the OSV sector, the bad news is that Westwood Global Energy’s five-year outlook for global supply/demand is weaker now than at any point of the past three years. Current total utilisation (including lay-ups) is estimated at 50% with a low case (zero scrapping) rising to just 59% by 2024. Removal of the entirety of the >15 year old laid-up fleet would see utilisation increase to 75%, suggesting there is a lot of work to do to rebalance the market.
However, one bull narrative emerging from the analysis is the anticipated ageing of the premium (<15 year old) fleet which is expected to contract by 27% between now and 2024. This shift and the potential scarcity of premium tonnage will certainly be a key area to watch, in particular the attitudes and procurement priorities of E&Ps who have put increasingly stringent age requirements in place over the past few years as they enjoyed unprecedented buying power over the offshore supply chain.
Mr Payne is one of the many high-powered presenters at Offshore Support Journal Middle East Virtual Conference, 9-10 November. Find out more details, visit us online.