Oil company cuts could be going too far, leading to another period of high cost inflation as the oil price returns and capacity is found to be lacking, a Norwegian industry analyst has warned.
Speaking ahead of the Subsea Valley conference, in Oslo, Rystad Energy analysts outlined their view of the market, which sees the oil price starting to increase by the end of this year. While there may be a delay to the impact being felt in the offshore industry, due to the time it will take for contracts to filter through, it will mean work starts to increase again into 2017 and further into 2018, said the firm.
Yet, warned Jarand Rystad, despite all the work to cut costs and improve efficiency, cost inflation could return because so much capacity is being cut from the sector, which could lead to expertise and equipment shortages.
“It is extremely dangerous, what we see now is the oil companies adjusting their capacity to a quarter of what it needs to be on a sustainable basis or there is risk of huge cost inflation,” he said.
Driving the cuts in capacity is the reduction in spending seen by the majors. Rystad’s Audun Martinsen said spending had been cut 25% in 2015 and was already at 21% this year. He said cuts in the service sector amounted to “shaving off 10 Schlumbergers from the industry.” But, Rystad the oil price will start to increase into 2017, and that while the offshore exploration and production industry will continue to contract going in to 2017, it will be on the up again going into 2018, with a bank of deferred projects – currently totaling some US$200 billion in oil services contracts - that could hit to market, leading to “quite immense growth,” at 12% a year, after that. Of that deferred work, $30 billion was subsea projects, he said, with 2018 being the year that would be the turning point for the subsea industry.
The predictions and warnings will offer little succour to the industry as it still leaves at least 18 months of survival mode for many. Yesterday, OE revealed FMC Technologies is to cut 700 staff in Norway. Earlier this week, Preben Strøm, managing director of Subsea Valley, said: “Things are worse than this time last year. We know we [the Oslo area] are about a year behind what’s happening on the west coast [Stavanger, Bergen]. We think unemployment will increase.”
However, the current climate – and uncertainty – isn’t holding back some of the work in research and development. DNV GL, for example, is working on a string of projects relating to the subsea industry, including subsea pumping, subsea processing qualification standardization, and subsea documentation standardization.
Earlier this week, Anders Husby, head of department, well, subsea and risers, at DNV GL, said: “These are challenging times, but it is not all dark in the subsea industry. Our industry is a good place to be, the challenge is we do not know when it is going to come back [sic].”
He highlighted a Norwegian Petroleum Directorate Resource Report from 2014, which points out that subsea tie-backs represent the most relevant solution for the 68 of the 88 discoveries on the Norwegian Continental Shelf at the time, totaling some 500 MMcu m boe, or an average 7.5 million cu m boe per project.” Where Husby sees the limitation to some of these projects getting off the ground, however, is in terms of new technology. “To be able to realize many of these projects, new technology needs to be developed, and the complexity, size and economy in these projects will be a barrier to technology development.”
According to DNV GL’s latest Industry Outlook Survey, subsea technology is believed to be that which will have the greatest impact in 2016 (39%). It also highlights other trends, including some 45% saying they will increase co-operation with other industry players. Also, 30% say they will have greater involvement in JIPs, and 22% said they would be involved in specific joint ventures with external players. “This is a time when reducing research and development spending,” says Husby. Yet, 18% don’t have a strategy in place to maintain technology innovation, he says.
Uncertainty continues, but industry participants remain confident in the long-term future. To read more about Subsea Valley, keep following OE.
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