Covid-19 driven demand destruction, depressed oil prices and a building oversupply are driving oil companies to aggressively cut capex on exploration and production, with analysts estimating budgets will be slashed by more than 60%
“Operators are aggressively cutting offshore-related opex and capex,” said Clarksons Research managing director Stephen Gordon. “From initially expecting US$116Bn of offshore project sanctioning in 2020, our latest scenario now envisages just US$44Bn of FIDs, 25% below the previous low of the last downturn recorded in 2016.”
Amid the uncertainty in the oil market, UK-based maritime consultancy Clarksons has begun publishing regular Covid-19: Offshore market impact assessment reports. Commenting on the latest briefing, Mr Gordon highlighted the head-spinning events roiling the energy markets. “Since our last offshore impact assessment, unprecedented developments in the energy markets have continued: a rapidly developing surplus; a 20M bpd drop in oil demand expected over Q2; OPEC supply cuts / G20 policies; implied 1.4Bn bbl stock build in Q2; generational lows in oil prices; storage needs onshore and afloat.”
Norwegian energy analysts Rystad Energy said it expected cuts to leave about US$60Bn on spending in 2020 for greenfield projects. Its pre-coronavirus estimates placed the total value of such tenders in 2020 at as much as US$132.8Bn.
“Contractors are bracing for cut-throat competition as new orders, especially fabrication jobs, will be few and far between. Around US$60Bn in engineering, procurement, construction and installation (EPCI) awards originally scheduled to be awarded this year – including US$25Bn in equipment and US$30Bn in other fabrication jobs – have been postponed,” said Rystad Energy.
In the rig sector, Mr Gordon noted that Clarksons has seen “contract cancellation, curtailment or rate adjustments involving over 55 rigs and expects utilisation and day rates to trend downwards sharply while demolition and stacking increases.”
Citing the ‘price war’ between Saudi-led OPEC and Russia and the Covid-19 pandemic, Houston-based driller contractor Diamond Offshore filed for bankruptcy last month.
Mr Gordon said offshore support vessels are starting to see contract adjustments and cancellations and recorded a seven-point percentage drop in North Sea PSV utilisation during April.
Meanwhile, Rystad Energy said with most new projects involving floating production, storage and offloading vessels (FPSOs) now facing delays, awards for associated subsea facilities and services are witnessing another slump after having shown healthy activity in 2019. Also facing a bleak outlook is the seismic market, after E&P companies slashed exploration budgets over the past couple few months, leading to a considerable number of contract cancellations in recent weeks.
By sharp contrast, US$170Bn worth of tenders was doled out in 2019. Tendering activity is expected to show only marginal recovery in 2021, reaching about US$74Bn, according to Rystad Energy research.
“Many contracts that have already been awarded are at risk of being terminated, with operators initially reaching out to contractors to reduce prices,” said Rystad Energy oilfield services analyst Chinmayi Teggi. “Given the massive efficiency efforts during the 2015 and 2016 downturn, which have already improved cost margins, we believe there is little possibility that contractors will be able to accommodate significant price reductions in the near term,” added Ms Teggi.
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