The commoditisation of subsea services in Asia

There is a general consensus among industry players attending the inaugural Asia Offshore Support Journal Subsea conference in Singapore that cost cutting is here to stay, even if the crude oil price creeps back up to US$70-US$80 per barrel

Speakers from the world’s two leading subsea players, Subsea 7 and Saipem, opened the conference by reminding the audience that capital expenditure reductions were already on the cards even before the oil price began its startling tumble from above US$100 to below US$60.

In early 2014 Shell had already chopped its capital spending for 2014. This was followed by a cost cutting announcement from Statoil just before mid-year.

The oil price had recovered some ground to trade above US$60, but the damage done to the bottom lines of industry players saw further budget reductions unveiled by national oil companies, including Petronas, PTTEP and China National Offshore Oil Corporation (CNOOC). The latest oil inventory figures from the US caused the oil price to reverse those modest gains and slump once again to below US$50/bbl.

Nomura Holdings’ regional head of oil and gas research, Gordon Kwan singled out CNOOC as having “the least room to reduce cost as it expands into deeper and farther waters”. Nomura estimates CNOOC’s all-in per barrel cost stands at US$50, compared with US$66.10 for PetroChina and US$66.90 for Sinopec. Nomura is positive however, that the oil price will rebound to US$75 to US$80 in the next 12 months.

Even so, speakers from Subsea 7 and Saipem said that the subsea industry should prepare to write off 2015 given both tendering activity and contract awards are down.

Subsea 7’s senior vice president, Dick Martin warned against the long gestation of the contracting cycle, which could translate to years before tenders complete their full cycles.

A positive side effect of the downturn in capital expenditure is a projected ramp-up of in-field maintenance demand as oil companies seek to mitigate against any decline in production from holding back new field development investments, Bourbon Subsea Services Asia general manager, Jean-Charles Audouin said.

Yet, even within a prospectively more buoyant inspection, maintenance and repair sector, there is a potential backlash from the commoditisation of subsea services in the face of oversupply across the various assets servicing the segment. Saipem Asia’s managing director, Max Bellotti commented that this had graduated from a threat to a reality.

Citing data from Infield Systems, DVB Bank Singapore senior vice president for offshore finance, Jan Solemsile, said that about 30 construction support vessels are on the orderbook.

M3 Marine chief executive officer, Mike Meade said that another 10 diving support vessels are being built, two of which are about to be cancelled.

In the current industry downturn, Mr Solesmile warned that banks will demand charter contracts, typically just under or above four years, before extending financing.

Subsea 7’s Mr Martin urged the industry to take the opportunity to reduce cost amid a changing supply chain landscape to create more sustainable business models. “We tend to over procedurise,” Mr Martin said, adding that this has been exacerbated especially after the Macondo tragedy in the US Gulf of Mexico. He suggested standardisation as the way going forward, although he acknowledged the challenge posed by local content policies of governments in the Asia Pacific region.

Saipem’s Mr Bellotti said that in Southeast Asia, the problem is compounded by the different characteristics of local content policies across nations. He believes that the industry could also gain efficiencies by cutting layers of third parties created during times of fatter margins.

Cost cutting and streamlining would be necessary for the long-term health of an industry, which, as one speaker said, tends to be first to feel the pain from a downturn in upstream activity, yet the last to taste the sweetness of any uptick.

In a poll held at the conference, most delegates expressed confidence that there could be a market recovery before 2017.