Broker expects tough times in subsea market

Speaking at the 2015 OSJ Annual Conference, Awards & exhibition in London in February, Petter Dyring, head of subsea at RS Platou’s Oslo office, described some of the key trends in the subsea sector, and looked in detail at expenditure and vessel demand, charter trends, and challenges and opportunities in the sector.

As Mr Dyring noted, the industry has gone from “oil drought to flood” in around six years and, at the current time, the oil majors are experiencing a “cash squeeze.” Added to this, the steep fall in the oil price in the last 12 months means that there has been a significant drop in spending on exploration and production (E&P).

As he noted, field development projects have been hampered by delays even before the oil price dropped and sanctioning of new projects is now being delayed.

“Shale oil has become a problem for offshore oil – and could create a new ceiling for the oil price,” he told delegates.

As of the end of 2014, the subsea sector order backlog was high, but the new industry-wide focus on cost reduction will not only have an effect on E&P – it will also have an effect on the subsea market, he believes.

“In the current market, engineering, procurement, construction (EPC) majors are likely to move down the food chain and add some pressure to smaller players,” he explained, and some deepwater developments are in danger due to break-even costs for the fields in question. “Frontier areas are more likely to be postponed/ cancelled,” said Mr Dyring, highlighting the fact that Arctic developments – especially those in northern Russia – have been delayed and that sanctions on Russia had contributed to these decisions. “Financial challenges may also dampen predicted growth of the Brazilian market,” he said.

To try to understand what the effects of the current downturn might be, Mr Dyring looked at how previous downturns played out. “Following the financial crisis that started in 2008, it took a few quarters before the backlog really started declining,” he explained. “The second and third quarters of 2008 still saw decent order intake on the back of investment decisions already made by the oil companies pre-crisis. In these cases, contracts had for all practical purposes been awarded already, just not yet announced,” he explained. “The backlog then declined strongly on the back the of a weak order intake. Revenues and fleet utilization also came down, but margins were at an all-time high due to legacy backlog at solid prices being executed and constituting a large part of the revenue mix.”

“Following a long period of exceptionally strong backlog growth, the industry backlog (based on work awarded to the major subsea installation and construction contractors) seems to flatten out,” he explained. “Order intake for the majors has stalled further lately, and we expect the combined industry backlog to start declining,” he told delegates at the conference. However, as he noted, the significant backlog for the installation and construction majors provides a decent outlook for offshore construction activity in 2015/16, as companies work their way through the backlog. “This significant backlog should also support fleet utilization and could contribute to slightly less pressure on the inspection, maintenance and repair (IMR) market,” Mr Dyring explained, “so there should be less need for the majors to chase IMR and subsea tieback fill-in work.”

Turning to the various regions in which subsea activity is taking place, Mr Dyring noted that the Gulf of Mexico market was characterised by lower offshore activity and a reduced amount of subsea, umbilicals, risers and flowlines (surf) and engineering, production, installation and commissioning (EPIC) work. A number of projects are in their early phases. This means that there is likely to be increased near-term competition. “Mexico is opening up, but the deepwater ramp-up is likely to take some time,” Mr Dyring explained.

In Brazil Petrobras is progressing, but decision-making is slow. “Longer term visibility has improved on the back of the Libra project,” he explained, “but Petrobras has secured significant pipelay support vessels (PLSVs) on long term charters. Also, we continue to question the profit potential for some of these services – many players have had their fingers burned in Brazil,” he said.

In the North Sea the Norwegian continental shelf has been heavily influenced by Statoil’s strong focus on capital discipline. “Rig, engineering and construction and IMR activity will continue to drop off in the near term,” he said, and some contractors are cutting staff and foresee vessel over-capacity in the near term. It is also possible that existing charters will be allowed to expire, rather than being extended.

On the UK continental shelf, there is still what Mr Dyring described as “decent tendering activity,” but spending is expected to drop also in the coming years. SURF order intake has dropped strongly across North Sea and overall the market is much more competitive – major contractors are moving down the food chain to secure fill-in work, and multiple newcomers are also aggressively targeting project work to secure utilization. The upshot of all of this is that there will be vessel over-capacity in the near- to medium-term.

Africa has seen a pause in large EPIC awards following the contract rush in 2012/13. There will be fewer large scale awards in the next 6-12 months. “The West Nile Delta deepwater project looks likely to be the exception,” Mr Dyring told delegates. “Conventional activity is still fairly stable but large West African awards are not likely to resurface in the short term.”

The Asia Pacific presents what Mr Dyring described as “a very mixed scene,” part of which remains very competitive with many low-cost players, resulting in challenging pricing conditions. There is, however, a growing Asian deepwater subsea and floater market in countries such as Indonesia and Malaysia and the South China Sea. Australia is a challenging market, he said, with high operating costs, strong unions, many environmental requirements and low-cost Asian players entering into certain segments.

Unfortunately, this downturn in the market comes at a time when there has also been substantial newbuilding activity, which was initiated across all subsea segments, from 2006/2007 onwards, following the strong oil price and extensive contracting of mobile offshore drilling units (MOUDs) for ultra-deepwater projects.

Many of these vessels were delivered 2009-2011, following the financial crisis. Fortunately, the subsea market remained strong enough to absorb all of these newbuilds. The number of deliveries fell strongly in 2012/13 because relatively few newbuilds were ordered during and immediately after the financial crisis, however ordering activity picked up again strongly in 2012-13, resulting in a large number of vessels delivered, or due to be delivered in the period 2014-16. Unsurprisingly, ordering activity has abated lately.

Turning to charter trends, Mr Dyring said that one noticeable trend had been the growing number of so-called ‘frame agreements,’ or strategic partnerships for which the rationale was “we win, you win.” There have also been more vessel sublets from the major subsea contractors. Some vessels will undoubtedly be returned from long term charters or, if the contract allows, term rates will be renegotiated. An oil price-based rate structure and risk sharing are likely to become increasingly prominent ways of doing business. Fleet allocation will probably involve more transits in future, Mr Dyring noted, and vessel operators will be more open for work in new regions. There is also likely to be minimal activity during winter in the North Sea, and owners will be targeting the renewables sector in future as they seek to maximise vessel utilisation.

“Innovation will be needed,” said Mr Dyring, “especially if it can reduce costs. Lower technical requirements are likely on the condition that they do not jeopardize safety. Cost reduction could also reduce the need for equipment and personnel, leading to reduced demand for key items of equipment such as remotely operated vehicles, and the introduction of new shift arrangements for personnel.

Overall, said Mr Dyring the subsea sector could well see “a few years of reduced vessel demand’” and the “subsea factory” effect is likely to be delayed. “There will be more seasonal variation in the market than we have been used to and winter lay-ups may be one result of this.

“The dampening effect of current market conditions on newbuild ordering will help the over-supply situation,” Mr Dyring suggested, and there may be opportunities for owners to pick-up vessels on the secondhand market. Scrapping, consolidation and vessel sharing could increase, and IMR will become more important than ever.