Subsea sector to thrive on 7% growth if oil prices stay above US$60 per barrel
Annual growth in the subsea market is forecast to reach 7% over the next five years, but declining oil prices could threaten the sector’s long-term positive outlook, according to a leading independent energy research firm.
“We expect the subsea market to thrive during the coming years, but market growth will be at risk if the oil price falls to US$50 per barrel,” says Rystad Energy analyst Henning Bjørvik. At the end of August, Brent crude was trading in the range of US$58 per barrel, while West Texas Intermediate (WTI) oil was trading about US$55 per barrel.
Oil prices in the range of US$60 to US$70 per barrel will underpin 7% annual growth in the subsea sector until 2025, says Rystad Energy. Even if oil falls to US$50 per barrel, growth in the subsea sector would be 5% annually until 2022. While that is good news for subsea vessel owners such as Subsea 7, DOF Subsea, and Oceaneering, Rystad Energy warns the growth rate will drop to zero after 2022 if oil falls in price.
Mr Bjørvik says the subsea market will have “one of the highest growth rates within oilfield services,” but that it is more “vulnerable to an oil price drop than the oilfield services market in general.” As much as 20% of subsea equipment and SURF spending would be at risk, especially for greenfield projects.
Rystad Energy says 16 projects with subsea expenditure confirmed between 2019 and 2025 are at risk, 14 of which are subsea tie-back projects on the Norwegian Continental Shelf (NCS).
Reducing subsea costs
One of the saving graces is that international oil companies (IOCs) have made great strides in reducing development costs since the downturn in the market five years ago. “It is worth mentioning that operators have had a remarkable ability to cut costs during downturns, much helped by the oilfield service industry,” says Mr Bjørvik. “Should a lower price environment again become reality, we can be assured that the industry has a proven track record of survival and ingenuity.”
Perhaps one of the most dramatic examples of this is Equinor’s Johan Castberg project, a large subsea field some 100 km north of the Snøvhit field in the Barents Sea. In 2013, the breakeven price of the project was above US$80. Through close co-operation with suppliers and the group-wide effort Statoil Technical Efficiency Programme (STEP), the breakeven price is now US$35 per barrel. The development costs of the project have been pared down from a projected Nrk100Bn (US$11Bn) to Nrk50Bn (US$5.5Bn).
One supplier co-operating with Equinor on the Johan Castberg project is Aker Solutions ASA. Publicly traded on the Oslo stock exchange, Aker Solutions provides products and services across the lifecycle of the oilfield, from exploration to decommissioning. Aker Solutions says it has been able to reduce cost-per-well on the NCS by 40% through the use of standardised equipment and processes, configurable system engineering and taking a serial line production approach.
Innovative technologies such as delivering the world’s first subsea compression system to Equinor for its Åsgard field have also been key. The all-electric subsea gas compression system is designed to enhance production recovery from the field by some 306M barrels of oil equivalents (boes).
Using its all-electric gas compressor technology, developed in co-operation with ABB and MAN Energy Solutions, Aker Solutions says it was able to generate Nkr5Bn (US$550M) in additional revenue in the first year for Equinor at Åsgard.
Compressors are typically installed on platforms above sea level, but at Åsgard the compressors were placed on the seabed near the wellheads to improve recovery rates and reduce capital and operating costs. Subsea compression also leaves a smaller environmental footprint and is safer to operate than a platform.
Building on its experience, Aker Solutions unveiled ‘Intelligent Subsea,’ which will combine digital design tools with ultra-long tiebacks, all-electric technology and subsea gas compression. Aker Solutions will use digital front-end engineering design to speed and optimise subsea field layout and its digital twin platform to provide valuable insight over the life of the field.
Green light for Johan Sverdrup
Set for the start of production in November following approval by the Norwegian Maritime Directorate, the Johan Sverdrup was also a beneficiary of reduced capex costs, with the first phase resulting in Nrk40Bn (US$4.3Bn) in savings, from an estimated Nrk123Bn (US$13.5Bn) to Nrk83Bn (US$9.1Bn).
The first phase of construction has a field centre with four installations connected by bridges. The four installations are a living quarters platform with auxiliary systems, a process platform, a drilling platform and a riser platform.
Pipelines for transporting oil and gas, the power from shore unit and three subsea templates for water injection are linked to the riser platform.
In the first phase of construction, Subsea 7 was responsible for delivery and installation of several subsea components and tie-in of pipelines at the field.
The second phase of construction involves an expansion of the field centre with a new process platform, five subsea templates connected to the field centre and development of the outer areas of the reservoir.
For the second phase of construction, Subsea 7 received a contract in June for the delivery and installation of around 100 km of infield pipelines and 25 spools, installation of umbilicals and marine operations associated with the subsea scope. The contract was one of several won in Q2 2019 by Subsea 7 totalling US$395M, contributing to an order backlog of US$4.6Bn. During Q2, Subsea 7 had 31 of its 34 vessels active, with two vessels stacked and one newbuild, Seven Vega, being outfitted for delivery in 2020.
Activity in the subsea sector is clearly moving in a positive direction. Subsea 7 chief executive Jean Cahuzac says: “The pace of awards is expected to increase over the next 12 months as clients progress their investment decisions on the first phase of greenfield projects to be sanctioned since the downturn. The increase in market activity and subsequent tightening in key vessel availability in the medium term is supporting improved pricing compared to the prior year.”
Among Subsea 7’s five SURF awards this year is a contract supporting Total E&P do Brasil’s Lapa North East field in the deepwater pre-salt Santos Basin. Subsea 7 will provide transport, installation and pre-commissioning of 35 km of flexible pipelines and 20 km of umbilical, connecting five wells to the FPSO Cidade de Caraguatatuba. Subsea 7 has a long-term contract with state-run oil company Petrobras for four pipelay service vessels.
In a move to take advantage of the improving subsea sector and growing global demand for LNG, TechnipFMC announced that it would split into two companies, RemainCo, focusing on the subsea services sector, and SpinCo, a midstream- and downstream-focused engineering, procurement and construction company. SpinCo is expected to compete against the likes of McDermott for EPIC work in the buoyant LNG market, where Rystad Energy forecasts a massive wave of planned onshore LNG developments will unlock US$80Bn in contracts by 2021.