Editorial comment
Falling oil prices and overcapacity concerns were enough to cause a substantial decline in the oil and gas turbomachinery market in 2014 and 2015.
The unfavourable market conditions have only been exacerbated by geopolitical issues such as the Iran Nuclear Deal, conflict in the Russian and Caspian region and, most recently, the British exit from the European Union (EU). As a result, contractors in the oil and gas industry continue to cut costs and reduce capacity, workforce size and further capital commitments. These decisions have had a significant effect on the turbomachinery suppliers into midstream applications, especially for pump and compressor manufacturers, which are currently struggling to win new bids and maintain profitability.
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Going forward, pumps and compressors sold into pipeline applications are forecast to grow at modest CAGRs of 0.2% and 1.3%, respectively, in terms of unit shipments from 2014 - 2019.
While low oil prices are a severely prohibitive factor in upstream oil and gas developments, they are expected to have less of an impact on onshore pipeline builds in 2016. In fact, rising demand for natural gas has made it less likely for gas expansion projects to be delayed any further. Political tensions and regulatory initiatives are the biggest threat to onshore pipeline projects, as was seen by the suspension of talks for the Turkish Stream pipeline and the US State Department denying a construction permit for the Keystone XL pipeline.
Despite such threats, IHS Markit forecasts that pump and compressor station construction will maintain stable growth through 2019. However, pump and compressor sales into pipeline applications are projected to decline in 2017 and 2018 due to the current slowdown in contractor spending. The full effect on the market will be delayed somewhat as a result of long lead times for pumps and compressors.
While the offshore market only accounts for roughly 10% of sales of pump and compressor equipment, it is much more exposed to the downturn resulting from lower oil prices. As fleet utilisation rates are expected to plunge from 2015 - 2020, IHS Markit predicts a decline in offshore pipeline pump and compressor sales will follow.
IHS Markit has received feedback from key industry suppliers that investor confidence has dropped substantially since the unexpected exit of the UK from the EU (Brexit). While stabilisation of the oil and gas market seemed possible in the first half of 2016, Brexit, along with other geopolitical crises around the world, have only served to make the turbomachinery markets’ rebound more uncertain and unpredictable. Still, major gas transmission projects are planned in China, Southeast Asia, Russia, the US and Mexico. The message received from pump and compressor suppliers was one of caution, but also reassurance because of the continued increase of supply. Despite an expected slowdown in 2017 and 2018, natural gas demand is increasing and will need to be transported to meet this demand. Furthermore, the slowdown of the upstream oil and gas market will only have a minor negative impact on turbomachinery sales into midstream applications, especially due to the increased activity in LNG facility construction.
Siemens and GE remain the two leading suppliers of pipeline compressors globally. The pump market is more fragmented and is largely led by Flowserve, Sulzer, KSB and ITT, as well as some regional players. These markets have consolidated quite substantially during the past five years, and the threat of substitution is quite low. The leading companies have developed a niche, which makes entry barriers high for newcomers to the pipeline market for these products.
Manufacturers of pumps and compressors still have competitive struggles, however, because a depressed commodity market has led to substantial decreases in average selling prices (ASPs). This has been partially offset because of an increasing demand for custom designed (and more expensive) equipment. Still, adverse exchange rates for many leading suppliers due to the strengthening of the US dollar and a weak market caused ASPs for pumps and compressors to decline by an average of nearly 9% globally in 2015. Suppliers of pump and compressor drivers (low voltage and medium voltage motors, engines, and gas and steam turbines) also reported substantial declines in ASPs, with some major customers requesting discounts ranging from 20 - 30% in 2015.
