Light at the end of the pipeline

Is the subsea market poised for a comeback? Jon Fredrik Müller, of Rystad Energy, sets out the detail.

An oil and gas Xmas tree. Photo from GE Oil & Gas.

The subsea market has taken hit after hit over the last years with declining revenues and margins. However, at the same time, the industry has adjusted capacity and is now positioned to start taking advantages of increased activity. First on the tendering side, but then on the revenue and margin side as well. In this article we look at the status of the industry and the likely way ahead.

OPEC back in the game

At the end of November 2016, OPEC announced it would cut production to a level of 32.5 MMb/d. In addition to OPEC, Russia declared that it is willing to cut 300,000 b/d and, according to OPEC, other non-OPEC countries will commit to similar cuts as Russia. However, since the announcement, the oil price has gained close to US$10/bbl and is trading at around $55/bbl at time of writing.

A higher oil price is certainly positive for subsea developments and higher project sanctioning activity. Costs have come down across the entire industry and although several fields are “in the money” at oil prices of $40-50/bbl, these price levels do trigger fewer offshore developments than seen during the 2011-2013 hay days. Looking towards 2020, Rystad Energy sees an increasingly tighter market balance for oil, which implies increasing oil prices. By 2020, Rystad Energy forecasts oil prices to be in the $80-90/bbl range, increasing the need for offshore and subsea developments.

Subsea expenditure – bottoming out in 2017

The bottom of the subsea market is likely still ahead, given the fact that subsea expenditure is relatively late in the cycle. Subsea expenditure (capex and opex) fell from $48 billion in 2014 to $43 billion in 2015 (Figure 1), a negative growth of 10%. In 2016, the market is forecast to contract by another 16% to $36 billion. The market is believed to bottom out in 2017 at $31 billion (-14%), before it returns on a growth path from 2018. By 2020, the subsea market is estimated to reach $39 billion, and it is forecast to continue to grow into the first half of the 2020’s, surpassing the last high from 2014.

The market development is similar when looking at the number of installed subsea Xmas trees. The number of subsea Xmas trees awarded in 2016 will likely come in closer to 1/10 of the ~550 tree awards of 2013. However, installation activities are smoothened out compared to the awards as there are usually several years from award to installation. Rystad Energy follows installation activity field-by-field. Figure 2 shows the number of subsea Xmas trees installed per year since 2010, with forecast towards 2020. In terms of number of installed trees, the bottom is forecast to be 2017 at approximately 160 trees installed globally. However, Rystad Energy believes that the tree awards have hit the bottom this year and that tendering activity will start to pick up next year.

In terms of major subsea markets, it is still the Atlantic basin that will see most of the activity going forward. However, there are also potential deepwater projects in Asia that may drive demand towards the end of the period. Although activity is forecast to improve over the next year, it will likely be into the 2020’s before installation activity is back at the high levels witnessed in 2013.

Figure 1 from Rystad Energy DCube; Figure 2 from Rystad Energy Oilfield Service Solutions & Analysis

Subsea integration may change field layouts

In terms of subsea structures, the overall market development is quite similar to the subsea Xmas trees. There was a market peak in 2013 and the bottom of this cycle, in terms of installed components, is believed to be in 2017 (Figure 3). However, the different segments fluctuate slightly differently than subsea Xmas trees due to different drivers. For example, protective structures are driven by activity areas/water depths with fisheries, while deepwater developments normally do not include such structures. When it comes to riser bases, you will see much more use in shallow to midwater regions and fewer units in deepwater markets where dynamic loads and riser configurations result in less usage.

Source: Rystad Energy Oilfield Service Solutions & Analysis

Figure 3 is based on several years of field–by-field data gathering collected in Rystad Energy. The forecast period is based on communicated plans and subsea developments continuing to utilize similar development solutions that have been seen historically, where plans have not been communicated. It will be interesting to follow the development in subsea infrastructure over the next years to see whether integration in the subsea value chain will result in changes. Mergers like Technip/FMC Technologies and Schlumberger/OneSubsea, and different cooperation agreements between actors involved in subsea production systems (SPS) and subsea installation (SURF), might result in improvements of field design and layout. With potential for single contracts covering the total subsea scope, it would be natural to think that one can improve on interfaces and redundancies in system and work processes. Take pipeline end terminations (PLET) as an example. The structure is an interface between typical SPS and SURF scope as it functions as a “parking lot” for the end of the pipeline while it awaits final hook-up to the SPS. With a single contractor responsible for both SPS and SURF, it should be possible to plan the installation activities in such a way that you could reduce the need for PLETs. Some may argue that the PLET also performs other functions like capturing horizontal movement in the pipe, but Rystad Energy believe that that could be solved by other measures like laying the pipe in S patterns and/or using flex tails.

Going in to 2017, the subsea industry is in many ways at the bottom. 2017 might be harder still for many companies, however, there should be increased tendering activity as the year progresses, giving more transparency on increased revenues for 2018. The market balance for oil, the likely strengthening of the oil price and a large backlog of discoveries that could be developed should, set the scene for 2018 being the start of the next subsea growth cycle.

Jon Fredrik Müller is a partner in Rystad Energy, based in Oslo. His main area of expertise lies in the oil field service segments and particularly within offshore related segments. He holds an M.Sc. in industrial economics from NTNU, Norway, with specialization in mechanical engineering and finance, including a graduate exchange program at University of Calgary.