Bergen, Norway 11 – 13 June, 2019

Higher oil prices, but a changing cycle

A higher oil price but shorter cycle projects will dominate the offshore market in coming years, the Underwater Technology Conference’s (UTC) Day Zero Subsea Market Insight event heard this afternoon (June 12).

The event focused on market dynamics, not least the oil price and the dynamic political environment, with an OPEC meeting due next week to consider an increase in output, Iran and Trump among the variables, but also how the offshore market competes with shale.

On a positive note for the subsea focused audience at VSF Verftet, in Bergen, oil prices are expected to increase and the offshore sector has been seen to adjust to the new shorter cycles.

Nadia Martin Wiggen, Partner – Oil and Gas Research, at Pareto, told the event that Pareto expects the oil price to be in the US$80 through next year. “I think the oil price development looks positive,” she said, “the low US$80s looks comfortable, driven by demand, even if there is a supply increase, because you have demand.”

Erik Holm Reiso, Partner and Shale Expert at Rystad Energy, focused on the impact shale is having on on the industry, especially around changing the supply/demand cycle. “Since 2016, two things have happened (in shale),” he told the UTC Subsea Market Insight event. “There has been an impressive reduction in break-even levels, not just cost but also volume per well, due to completion intensity. Two, especially in the Permian, there’s increasing supply potential, even when wells are closer together they are delivering as much.”

As a result, shale is creating a shorter cycle length. Instead of a seven-year cycle it’s a two-year cycle, he said, and this is driving a need for new thinking in the investment cycle in the offshore business.

The good news is that this is already happening, said Reiso, citing Eni’s Zohr development, offshore Egypt, and ExxonMobil’s fast-track phased plans for Liza, offshore Guyana.

Robert Pulleyn, an analyst with Morgan Stanley, said: “Since the downturn started, the cycle has contracted. Shale is a big part of that. But it’s also being seen in deep water and shallow water (projects). We are seeing projects becoming smaller and faster. The supply chain has reacted. A $100 million tieback can be done within 12 months, the same as an 8-12 Well pad in the Permian. The tieback will bring you 10 year’s plateau production, the pad will not. This approach is working.”

Indeed, subsea tiebacks on the Norwegian Continental Shelf (NCS) offer a very positive picture, said Reiso. “The NCS tieback agenda is a very competitive game. It’s cheap as a development solution, compared to platforms, and has shorter lead time.”

Cost and project size reduction has led an increase in final investment decisions, from a low in 2015, to <16 in 2016, and up to 29 in 2017, with 60% of those in 2017 being smaller projects with fewer than four wells, said Pulleyn. “We expect this to continue,” he said. In contrast, large 30-40-year projects will not be sanctioned lightly, he says, especially with peak demand predicted in coming decades.

But it’s not just about cost and scale. There will be enabling technologies, including multiphase boosting, Subsea compression, compact manifolds, surf bundles, etc., all helping the shorter cycle, said Pulleyn.

Focusing on the supply chain, Reiso highlighted the trend for vertical integration in the market, with the four top subsea umbilical, risers and flowlines (SURF) players “getting into bed” with the top subsea production system (SPS) players. This has meant they’ve been able to offer one-stop-shop capability, and with that efficiency, but this could introduce challenges for smaller players trying to get technology into the market, warned Reiso. For Pulleyn, this trend is also a concern. These new models offer efficiency, “but I worry as the market develops that will result in a tighter market than we think,” he said.

According to a survey by DNV GL, there is more confidence in the market with increases expected in capex spending, head counts and opex spending, Kjell Eriksson, VP and Regional Manager Oil & Gas, Region Norway, DNV GL, told the UTC Market Insight event. However, he says that, while skills were seen as a barrier to growth in 2014, they were not even one of the top three barriers cited in the latest survey. He and others are concerned by this.

Cost efficiency, however, remains high on the agenda. Perhaps surprisingly, the respondents, when asked how they would continue saving costs, didn’t cite digital technologies, while those in the midstream and downstream sectors had digitisation at the top of their lists. But, when asked what they would be investing in, digital cane top, with, in Norway, investment in subsea second.

“We see we are at a digital tipping point,” said Eriksson. “Is it hype or a real business understanding remains to be seen. We saw that 54% (of respondents) said they intended to increase investment in digitisation and 70% said you have to embrace change. This is coming.”

There are barriers, however, and these were seen as old-fashioned organisations and lack of skills, while access to required data wasn’t seen as a barrier. “Is it really the number of people that can code stopping us or is it difficulty finding good business cases and sharing data?” asked Eriksson.

Thomas Sunde, VP Technology at Subsea and programme chairman deputy chairman, opened the event. He said: “The subsea industry as always been in constant evolution. I see its strengths as being collaborative, knowledgeable, experts in innovation and in technology, and through this we have an opportunity to unlock the full potential of this industry creating a safe, sustainable and profitable industry.” Co-moderators Kristin Berg (DNV GL) and Wendy Lam (BHGE) presided over the Market Insight event.

The UTC Bergen conference will open tomorrow, Wednesday, 13 June, at Bergen’s Grieghallen. UTC 2018 the 24th UTC, with 700 professionals and 40 exhibitors expected to attend at Bergen’s Grieghallen from 12-14 June 2018.