As offshore market activity recovers and continues to increase through the next decade, as we expect it to, oilfield service (OFS) capacity is expected to tighten.
As offshore market activity recovers and continues to increase through the next decade, as NorthStone Advisors expect it to, oilfield service (OFS) capacity is expected to tighten. In NorthStone Advisors’ view, this will create a period of increased scarcity and cost inflation, presenting significant cost and schedule risk to decommissioning programs.
Many eyes are on the UK, which continues to progress a series of meaningful abandonment campaigns.
Over the next two years, trade body Oil & Gas UK forecasts some 589 wells to be plugged and abandoned (P&A) and around 90 topsides and jackets and 57 km of pipelines to be removed.
The Oil & Gas Authority (OGA), a UK government department tasked with reducing decommissioning expenditure in the territory, is proud of its achievements to date.
Since 2017, it has helped steward the industry to reduce the UK Continental Shelf liability by 23% to £46 billion. This has been achieved through improved planning and understanding of project liabilities, in addition to reduced project costs through commercial arrangements; namely, driving lower service costs from a beleaguered supply chain struggling with overcapacity.
Yet, as we unwind from an extremely challenging couple of years in the upstream market, offshore markets are expected to recover strongly. According to several data sources, global offshore expenditure across upstream and renewables is expected to increase by 76% to US$523 billion by 2030. Upstream offshore markets will still account for more than 75% of activity, ultimately recovering to 2014 peak offshore spending levels. Tailwinds are provided from the offshore wind sector, which will increase by 186% over the period.
Decommissioning expenditure will rise too. According to research firm IHS Markit, global decommissioning expenditure is expected to grow by 10% each year, reaching $12 billion by 2030, with $100 billion of cumulative spending over the decade. Regionally, the largest market is Europe, with its mature and complex infrastructure, which accounts for a third of spending, the Americas 30% and Asia Pacific 23%.
As demand increases through the decade, the key questions centre around supply. Are there enough drilling rigs, well service equipment, construction support vessels, port handling facilities and personnel to support decommissioning requirements? Perhaps. But it’s going to get tight. And tight markets mean low availability and higher, potentially much higher, prices.
The most material decommissioning cost center is well P&A, which accounts for around 50% of all offshore decommissioning liability. This is delivered by the offshore drilling rig fleet for subsea well access, in addition to the well service providers to support a range of services, including casing removal, logging, and the preparation and setting of plugs and caps.
Rig markets were hit especially hard during the recent downturns, reducing dayrates by 50% or more to operating cost or below levels.
Consequently, several firms went bankrupt, mergers were consummated, and many rigs were retired or idled to improve the supply balance and profitability. According to Esgian, a data provider, global rig utilization increased by 5% to 70% in 2021, backlog increased 33% year over year, while semisubmersible dayrates increased by around 8%.
Markets are getting better, but the economics of the rig sector remains depressed, for now.
The other key providers in the P&A process are the well service firms. In response to the recent downturns and pressures from shareholders, the major global players Schlumberger, Halliburton, and Baker Hughes have altered their commercial approach, promising to increase financial returns from their activities and only progressing the strongest margin opportunities.
With the global market heating up for service provision, post a period of major asset retiral and employee reductions to try and balance overcapacity, declining, lower margin markets don’t fit their model. Resources will and are moving to the most attractive markets, which will create shortages of core well service equipment and personnel where the economics don’t fit.
There are several regional providers of well services to fill the gaps, although they too have their challenges. Capital is scarce and expensive for OFS players looking to invest in new equipment or capacity. Contract security, returns to cover the cost of capital, and robust margins are a necessity for any new investment. In other words, to secure new kit, prices need to go up.
Another key enabler for decommissioning is the offshore construction firms that provide dismantling, lifting, and removal of the offshore infrastructure. Like all firms exposed to the upstream market, the providers of these services were hit hard during the downturn, seeing rates and activity plummet as new field development approvals declined.
Unlike the drilling providers, these firms managed to redeploy assets to the growing offshore wind market, supporting the infrastructure buildout, which has taken hold in the North Sea and is expected to continue through the coming decade. As traditional upstream markets improve, coupled with the increasing activity in the offshore wind sector, availability will continue to tighten.
The impact of offshore wind on decommissioning-related capacity cannot be underestimated. In addition to providing competition for construction assets, they are also competing for available port space and laydown facilities. Right now, there is a valuation premium for service businesses leveraged to the sector, especially in today’s push towards sustainable energies. Are firms going to push away renewable work in favor of decommissioning? They might, but it will be for a premium.
Such unfolding market dynamics present a major issue for exploration and production (E&P) firms managing a decommissioning portfolio, often with moving cessation dates, alternative abandonment strategies, limited experience, engineering uncertainties, and cost pressures. Working collaboratively and with clarity with key suppliers is a challenge.
Those E&P firms that are proactive and work with their supply chain providers can mitigate their risks considerably. There is still potential for advances in new downhole and other technologies while embracing supply chain practices to allow for flexible scheduling, equitable returns, and balanced risk will secure capacity and engagement.