Oversupply and high levels of competition in the pipelay segment are weighing down a potential recovery, writes Audrey Leon
The pipelay market is still reeling from the downturn (pun intended) and while there is a flicker of activity, many vessels remain laid up despite a rising oil price.
It is a troubling scenario and “very challenging” in the words of subsea contractor McDermott International’s global vice president for marine asset operations Alan Marriott. Still, all hope is not lost and Mr Marriott is pinning his hopes on the long-term view, which he feels is somewhat brighter.
“The general feeling is that as the oil price goes up people are starting to perhaps spend a little bit more,” said Mr Marriott. “But that typically takes 18-24 months before it percolates to the contractor side of things, when we see an improvement in asset utilisation,” he added.
Compounding the problem, the current pipelay market is very geographically split. “There are big differences between the Gulf of Mexico, which is very quiet, and the Middle East [which] is relatively active again,” said Mr Marriott. “That is tied into a lot of the facilities work going on there. In Asia, there is some work ongoing, but there is limited near-term visibility. There is work out there [but they are either very big or very small projects.
“I don’t think anybody is as busy as they want to be,” added Mr. Marriott.
Oversupply and demand
Wood Mackenzie research analyst Iona Preston said that one of the key issues affecting the pipelay segment is oversupply. Wood Mackenzie is tracking over 200 operational lay vessels in the global market.
Subsea 7 leads the segment with 19 lay vessels, followed by TechnipFMC with 13 and Sapura Energy with 11, while Saipem and McDermott are tied with seven apiece.
“We expect the number of vessels to reduce to 180 over the next five years,” said Ms Preston, noting “There will be a few newbuilds added, but it would not be sufficient to offset fleet reduction as the older, uncompetitive vessels fall out of the market.”
She added “We do not expect to see a material increase in activity. [Wood Mackenzie] expects this year to be similar to 2017, and as a result we expect to see more consolidations or diversifications.”
And while Ms Preston does see a glimmer of hope ahead, she is not getting too optimistic: “Hopefully with the oil price climbing, we may see some more work out there. There is potential for the market to improve, but it will certainly be a very slow process.”
Slow indeed, but not static; despite its moves to recycle or sell, Subsea 7 is expected to add one more vessel to its lay vessel fleet in the first half of 2020. The firm announced an order for a new integrated, high spec reel-lay vessel to be designed and built by Royal IHC in late 2017. The vessel will be able to install complex rigid flowlines, including pipe-in-pipe and electrical trace heating systems. Royal IHC said it will have a twin tensioner pipelay ramp that tilts to allow pipeline installation from shallow waters to depths of up to 3,000 m.
As of its Q1 2018 earnings report, Subsea 7 lists a vessel utilisation of 52%. The company recycled the Seven Condor, a deepwater flexible pipelayer built in 1982, according to its earnings report and Sapura Energy took ownership of the Sapura 3000 in Q4 2017 when the Subsea 7-Sapura Energy joint venture, SapuraAcergy dissolved that same quarter. The Sapura 3000 is a self-propelled, DP heavy lift/pipelay combination vessel.
McDermott is also considering bringing in new assets. “We are continuing to evaluate what the needs of the marketplace will be,” said Mr. Marriott. “We have assets that are getting older and will eventually need to be replaced. A downcycle market provides opportunities, and we continue to look for opportunities, whether that is long-term charters of assets that are available [or] newbuild assets because shipyard capacity is definitely there, at the moment, to do that. And, it is competitively priced.”
Recently, McDermott International sought to further expand its areas of expertise via a US$6Bn merger with onshore engineering firm CB&I. The move will allow McDermott to expand into areas such as onshore refining, petrochemical, liquefied natural gas and natural gas-fired power plants. Last year, when the merger was announced, McDermott said the combined companies would create a fully vertically integrated onshore-offshore firm with a broad engineering, procurement, construction and installation service offering.
In April 2018, prior to the merger’s close, fellow subsea contractor Subsea 7 made a hostile bid for McDermott. Subsea 7 offered US$2Bn to McDermott in the hope that a consolidation would make the combined company a market leader within the pipeline segment, ahead of TechnipFMC and Saipem. At the time, Subsea 7 CEO Jean Cahuzac said, “a combination with McDermott is supported by compelling industrial logic.”
But the bid was not meant to be. “Subsea 7 caught a lot of people off guard,” said Ms. Preston. “We will likely see them try to pursue new opportunities. They are looking to grow, focusing on differentiating themselves from other companies.”
Subsea 7 aims to diversify its offerings, adding more offshore renewables capabilities following its US$164M acquisition of Siem Offshore Contractors, also in April 2018.
In late April this year, Heerema Marine Contractors announced it would cease its offshore pipelay activities, focusing instead on heavy lift, decommissioning and renewables work.
At the time, Heerema attributed the departure to the pipelay market’s highly competitive nature and its current overcapacity.
“Dictated by the difficult market conditions we have to change into a different kind of organisation,” said chairman and interim chief executive Pieter Heerema. “We have to continue our process of transforming into a marine contractor which is leaner, more efficient and capable of benefiting from the opportunities the offshore market still represents.”
Taking advantage of any opportunities that do arise is imperative in the current market and McDermott is in the final stages of its Ichthys (Inpex) project workscope. The firm was contracted to provide engineering, procurement, construction and installation at the subsea gas field offshore Northern Browse Basin, Western Australia, with first gas expected by Q2 this year.
Operator Inpex announced in January 2017 that subsea infrastructure and equipment had been installed at the field. McDermott used the Lay Vessel 108 (a DP2 vessel with a flexible and umbilical lay system) and Derrick Lay Vessel 2000 (a DP3-compliant combination heavy lift and pipelay vessel with 2,000 tonne crane and S-Lay capabilities) to carry out installation of 139 km of flowlines, 49 km of umbilicals and flying leads, 2,460 tonne of production and MEG spools.
“From our perspective, Ichthys is a world class project, well-executed, and with an excellent relationship with the customer (Inpex),” said Mr. Marriott. “We worked with Inpex to handle some of the challenges of those projects. We had good utilisation of assets and good utilisation of our office in Asia. We had a lot of good collaboration with our offices in general. For me, Ichthys is a benchmark project, if we execute all of our projects on that level, it would be a great achievement for the company.”
Mr. Marriott added that the project was successful because McDermott often collaborated with the customer and gave them transparency during the project, where the workscope also included steelwork fabricated at McDermott’s fabrication yard on Batam Island in Indonesia.
During the installation process, McDermott had to maintain open communication with the operator and Australian regulator the National Offshore Petroleum Safety and Environmental Management Authority because there were simultaneous operations ongoing.
“Typically, they would have at least two drilling rigs on location; at another point they brought in the two floating facilities, so we had to work around that as well,” said Mr. Marriott.
“A lot of it is about visibility of what they are doing and what we are doing and working together to make sure we do not have those two assets at the same place and time.” He added: “But, again, that is about discussion and whether we move the scope later and agree to come back and do it in a month's time. That is what that dialogue is about, collaboration.”