Capital investment is returning to the offshore oil and gas sector, with energy companies recommencing deferred projects and forecast to spend US$44Bn in 2021
Offshore hydrocarbon markets were severely impacted by the global coronavirus pandemic, resulting slump in oil prices and falling demand.
Energy companies slashed billions of dollars from their capital investments as demand fell by almost 9M barrels per day (b/d), supply dropped by 6.6M b/d and oil prices dived to just above US$20/barrel.
There has been some recovery in demand and oil prices were over US$65/barrel in March 2021, but Covid-19 has long-term implications for the offshore sector, said Westwood Global Energy Group head of offshore Thom Payne.
He said 2020’s slump in demand, “an unprecedented supply glut” and 20-year low oil prices resulted in significant cuts in energy company spending.
“2020 was one of the worst years for offshore spending,” he said at Riviera Maritime Media’s Annual Offshore Support Journal virtual conference and exhibition, supported by platinum sponsor Caterpillar.
“Offshore companies of all sizes reacted quickly by slashing capital expenditure by more than 30% and deferring US$41Bn of planned 2020 engineering, procurement and construction (EPC) contracts.”
Just US$12.3Bn of EPC contracts were awarded in 2020, and 75% of these focused on five projects, compared with around US$40Bn in 2019. Some of these deferred contracts should be awarded this year as energy companies begin investing in development projects again.
“In 2021, we will see a significant uptick in activity,” Mr Payne said, as he forecast exploration and production spending to be around US$44Bn this year.
“Some deferred projects from 2020 had gone through significant pre-FID [final investment decision] commitment,” he said. These include projects requiring long-term investments in floating production systems and platforms.
Mr Payne highlighted how the majority of 2021 capital investment and large EPC contracts will be focused on major offshore gas projects in Australia and deepwater oil developments offshore South America.
Around US$4.8Bn of contracts could be awarded in Australian offshore gas projects for filling LNG trains and meeting sales commitments.
In Brazil, Petrobras could shell out US$6.5Bn in EPC contracts for its pre-salt deepwater oil projects and revitalisation of ageing oil fields. This will have a knock-on impact on offshore rig and vessel markets.
“Sentiment is expected to turn more positive in 2021 [than 2020] with rig markets expected to stabilise,” said Mr Payne. Up to 40 offshore drilling rigs could be reactivated from layup in 2021.
“The offshore support vessel (OSV) segment was significantly impacted in 2020. There are now signs of market recovery,” said Mr Payne.
VesselsValue head of offshore Robert Day reiterated the state of market slump OSV owners faced in 2020.
He explained how these market conditions resulted in financial pressure on owners, falling OSV values and vessel disposals. OSV owners in the US and Norway were faced with “bankruptcy, restructuring, refinancing and reorganisation” over the past year, said Mr Day.
These include Boa Offshore, DOF, Eidesvik, Havila, Olympic Subsea, Siem Offshore and Solstad in Norway; Hornbeck Offshore and Hermitage Offshore in the US.
The 2020 downturn also affected vessel utilisation with up to 44% of OSVs in the US Gulf laid up due to oversupply.
Owners with assets in southeast Asia also face low OSV utilisation with 39% in layup. Northern Europe has the lowest number of vessels in layup with just 17% of the fleet inactive for at least eight weeks. Layup in west Africa is 26% and in the Middle East it is 24%.
Mr Day looked at value of vessels in two sectors of the industry.
“Offshore construction vessels were the worst for losses in value,” said Mr Day. “Liftboats are also under significant value pressure. It is a good time for purchases,” he said, adding many of the available assets could be transitioned into the growing offshore wind sector.
Riviera’s Offshore Support Journal Subsea Conference offers a platform for offshore professionals to discuss and debate growth, operations and opportunities. Industry leaders will share their experiences, review the latest industry trends and ensure attendees come away armed for future success and growth. Register here.