Elephants in the water? The offshore supply chain adapts to the new normal

The days of offshore monoliths could well be over. For much of the last thirty years the industry sought to push developments further offshore and into deeper, harsher waters. The resulting cost overruns and delays look ill-at-odds with a macro backdrop that favours short-cycle developments and faster payback.

Now, after a downturn sufficient in length so as to sharpen corporate mind-sets and enact real structural change, the next generation of offshore projects will look very different.

We see a far greater weighting towards phased tieback work at the expense of greenfield development. Where once a field would be developed in a single phase, prioritising peak production rates at the expense of stronger through cycle returns, we now see a greater number of smaller scale projects better suited to a cash constrained, returns focussed industry.

The implications for contractors could be stark. Will there be sufficient activity so as to feed supply chains built deliver monolithic structures? Or after four painful years, does the industry require further restructuring to adjust to the new norm?

The new normal

In the traditional offshore hubs – the North Sea, US Gulf of Mexico and even the likes of Brazil and West Africa – smaller, phased developments are increasingly prioritised over large scale greenfield development. We see this as a structural shift away from over engineered, gold plated projects which have proven so troublesome for the industry.

Megaprojects – Gorgon, Kashagan, Goliat – have all been plagued by delays and cost overruns. In contrast, and as an example of what can now be achieved, RDS bought the 40 000 bpd Kaikias field on-stream a year early and some 30% below initial budgets by using a simplified field architecture supplied by TechnipFMC. Kaikias, and similar successes at the likes of Fenja in the North Sea are paving the way for increased uptake of the new commercial model of delivering fit for purpose solutions.

Over the next 18 months we see a host of candidates for integrated awards. The wave of tiebacks off Angola, South Maclure, Harrier and Columbus off the UK and the likes of Tigris, Constellation and Mormot in the US Gulf of Mexico are just a few of those captured within MSI’s newly developed Oil and Gas Project Tracker.

Our review of upcoming prospects suggests that subsea tree orders could well increase by around 25% in 2018 to around 280, with another 10% growth in 2019 driving the market to ~300 trees, but some perspective is required.

The market may well have recovered off 2016’s lows, but the industry retains capacity to deliver ~550 (down from closer to 700 last cycle). A new normal of 200 - 300 orders per annum implies that further restructuring may be required.

The integrated subsea model is one example of changing field development concepts, but is by no means the only shift in commercial development models. In Brazil, where greenfield investment is returning after years of dwindling activity, oil companies will rely on existing, proven technology and the modular development of offshore reserves, while ExxonMobil will use modular technology in the form of SBM’s Fast4Ward FPSO design for Liza Phase 2 off Guyana.

With a greater proportion of fields developed using proven solutions and appetite for frontier exploration conspicuous by its absence, we see an increasingly bullish outlook for those contractors able to deliver a fit-for-purpose development concept aligned to an installation solution that is not over specified for the work, at the expense of those geared up to deliver mega structures such as the Kaombo and Egina greenfield developments. More pain on the horizon?

The absence of over-engineered monolithic structures could well see a diminishing market for the existing supply chain. Although redeployment opportunities exist in the form of decommissioning and renewables markets we see insufficient demand so as to absorb the excess capacity in the supply chain.

As end markets shift toward fit for purpose solutions we see more pain on the horizon for offshore contractors. While overall activity levels will be buoyed by the growth of tiebacks, volumes are unlikely to recapture those of the last cycle.

For the fields that are developed we see infrastructure such as TechnipFMC’s compact manifold, with a physical footprint less than half that of conventional alternatives, and thermoplastic composite pipes, able to be deployed from relatively basic tonnage, gaining market share from conventional solutions. The result is an industry where maximum heavy lift capability and top tension capacity becomes secondary to availability and economic realities.

For the projects that are set to characterise the next cycle, gold plated assets, able to lift well in excess of 3,000mT, and hold pipes at tension greater than 500mT look increasingly redundant. Offsetting the dwindling high-end of the market, we believe that a sweet spot will emerge for a supply chain and construction fleet fit to deliver the newly scaled back projects. Light construction vessels could well displace higher end tonnage by performing much of the work at a fraction of the cost.

For an industry that has been built on pushing boundaries towards deeper, harsher and complex solutions the idea of scaling back to a fit for purpose solution might seem like heresy. But if the lessons of the last cycle are to be learnt, the industry can no longer sustain profligacy. Oil companies will prioritise smaller, faster payback projects. The supply chain will likewise adapt. The offshore elephants are in danger, and the supply chain will have to adjust to the new normal.

Read the article online at: https://www.oilfieldtechnology.com/offshore-and-subsea/10102018/elephants-in-the-water-the-offshore-supply-chain-adapts-to-the-new-normal/