Challenges aplenty, but subsea set fair

‘An exciting future for the subsea business' was predicted by Ross Kinnear, head of subsea operations in BP's North Sea SPU, when he addressed Subsea UK's annual flagship conference in Aberdeen last month. David Morgan reviews some of the Subsea 2011 highlights.

The elephant in the room, inevitably, was Macondo. BP head of subsea operations Ross Kinnear wasted little time in acknowledging as much when he ventured: ‘Clearly safe drilling in deepwater is fundamental to any future subsea development.'

But there had already been ‘a large number of learnings' from the Deepwater Horizon disaster, he added, and BP was ‘actively engaging with governments, regulators and the industry in key offshore deepwater basins to share our knowledge and foster the dialogue on how we may improve deepwater drilling safety, containment and response capabilities'.

Highlighting his company's responses to date, Kinnear pointed out that its new safety and operational risk organisation, reporting directly to CEO Bob Dudley, had unprecedented authority to intervene as appropriate in operations (OE October 2010). And its new global wells organisation, working independently of individual business units, aimed to ensure the best practices are brought to every well, every project, in a consistent way.

‘Prevention and drilling safety is clearly the most important area,' said Kinnear. ‘We are focussing on improving standards in a number of important well operations practices, including BOP standards and cementing practices.'

Corporate safety practices were being reviewed at all levels to ensure they were aligned with BP's corporate safety goals and compliance requirements. And Osprag's new well containment cap for contingency service in support of UKCS drilling (OE January), the development of which BP is project managing following JP Kenny's preliminary design work, is expected to be completed late summer 2011.

Many technical challenges lie ahead for the offshore industry, Kinnear said. He was in no doubt, however, that ‘subsea developments will continue to become a bigger and more important part of BP's offshore production business in the North Sea and globally'.

Around 50% of the company's North Sea production already comes from subsea facilities – indeed, BP lays claim to the largest subsea portfolio in the UK sector, currently representing half of its subsea well stock, with around 178 subsea pipelines, 170 subsea wells and 5000km of pipelines and umbilicals – and that percentage is growing, he said.

Continued growth
A major spur to the continued growth of the company's North Sea subsea infrastructure will come soon with the commissioning of Skarv, BP's first FPSObased development offshore Norway. The FPSO, currently in transit from Korea, is due online later this year and the project's subsea inventory, in 370m of water, includes five templates and 16 horizontal wells (base case).

Back on the UKCS, subsea production drilling is due this year and next on the Devenick field, a two-well HP/HT subsea tieback to East Brae, with first gas scheduled in 2Q 2012. And first production from Kinnoull, an additional subsea tieback to the Andrew platform, is also expected early next year. With its three subsea trees and a bundle system with production, gas lift and methanol all within a carrier pipe, this development involves quite a bit of brownfield topsides work on Andrew as well as the subsea activity.

Further out, on a 2013-15 horizon, is the Quad 204 project which will effectively see the redevelopment of BP's Schiehallion field west of Shetland. As well as a new FPSO – the existing vessel is expected to come off station in 2014 and be replaced the following year – the project will involve up to 25 new wells along with a subsea systems changeout, new control systems, flowlines, risers and manifolds.

Beyond these specific developments, Kinnear said he expected BP to add, typically, another five subsea tiebacks a year to its North Sea portfolio. ‘So it's going to be a very busy time for us, and by 2015 subsea will make up an even bigger proportion of BP's production in the North Sea,' he added.

Global picture
Subsea developments further afield include the PSVM project, BP's first in Angola block 31, which is due onstream later this year. As with the company's first operated development in Angola – Greater Plutonio in block 18 (OE November 2007) – PSVM is an FPSO-based development serving multiple fields. It involves up to 40 wells and 15 manifolds in 2000m of water.

BP has some subsea operations in the east Nile Delta area offshore Egypt at the moment, but going forward ‘the big thing' on the horizon for the company is the West Nile development which will initially develop and exploit a series of gas condensate fields within the Northern Alexandria concession, with subsea wells and associated gathering systems flowing directly to an onshore processing terminal. Currently at the detailed design stage, and targeting first gas in 2015, it will involve up to 24 wells with 14 manifolds.

Unusually for a subsea development, Shah Deniz 2 in the Caspian offshore Azerbaijan will actually be served by two fixed platforms, reservoir conditions having dictated a ‘no drilling' zone in the centre of this big HP/HT gas field. The timeframe for this project is circa 2017 and it will involve up to 26, 15K wells drilled subsea and tied back to the platforms.

In the US Gulf of Mexico, BP operates eight major deepwater facilities, representing 30% of the region's deepwater production, and has an interest in a further 22 producing fields. The events of the past year have clearly impacted activity levels, but Kinnear said the company was currently progressing six major projects there.

Elsewhere, and further into the future, BP is looking to build on it global subsea portfolio by specifically targeting new deepwater acreage in Brazil, Libya, Australia, China and Russia.

‘But all are pretty much in the early exploration phase and 5-10 years out in terms of potential activity,' Kinnear noted.

Shell subsea
Kinnear's confidence in the continued strong growth of the subsea sector chimed with the conference presentation by Shell UK's head of subsea, Frank Bee, who declared that there were an ‘an awful lot of developments close to home' lining up over the next few years.

Upcoming Shell projects in the North Sea cited by Bee include Fram offshore Norway, for which concept selection is anticipated mid-March, and in the UK a decision on the Penguins redevelopment options is also imminent. For the southern North Sea, fabrication of the first of the new riser access towers is getting under way at the Mercon yard in the Netherlands under the so-called Sweep project. The plan is for Shell UK and NAM to use these monopole structures in combination with subsea trees and existing production platforms to develop multiple small gas accumulations in the UK and Dutch sectors.

Further afield, high-profile Shell projects with a substantial subsea component include the Perdido DVA separation and boosting system in the deepwater Gulf of Mexico and the floating LNG facility earmarked for the Prelude and Concerto gas discoveries in Australia's Browse Basin, described by Bee as the company's ‘biggest development at the moment'.

But one of the subsea industry's biggest challenges remains people, Bee declared. ‘There are never enough of the right people,' he said, adding: ‘Will we ever be fully resourced?'

Show me the money!
Colin Welsh, chief executive of Simmons & Company International in Aberdeen, offered would-be subsea entrepreneurs some tips on how to make money in the current and immediate future business climate.

‘Stay in the game, sit tight, and remember this is an industry that goes up and down with amazing regularity,' he urged the many small and medium sized entities that populate Subsea UK's membership. ‘Make sure you've got enough capital to tough out 2011. Remember that every extra pound of EBITDA that you can generate might be worth six or seven pounds on a future sale. Find clever ways to gain exposure to key markets such as Brazil, Australia, West Africa and of course the UK which given another year will be a very strong market. Build scale – big businesses sell for much bigger multiples than small ones do, so think about bolt-on acquisitions or mergers. And lastly, technology is a great thing to have in your portfolio – we throw out the rulebook when it comes to valuing businesses that have got the technology or capability to deliver truly competitive advantage.'

With the IEA predicting that 75% of the existing oil production base will need to be replaced over the next 25 years, and Infield estimating that global capex on oil & gas infrastructure – mostly offshore – will amount to a staggering $469 billion over the next five years alone – Welsh was in no doubt about the size of the prize ahead. ‘This is very big news for the oil service industry because the only way to arrest the production declines is to spend more money on drilling thousands of new wells and deploying a variety of technologies to reduce cost and improve recovery rates. The vast majority of this new production will have to come from offshore fields,' he said.

‘Stock markets can see the current surge in activity, and that's what's behind the current stellar run that the oil service public stocks have had in the last six months, with the US large caps such as Schlumberger, Weatherford, and Halliburton and in the UK the likes of Amec, Wood Group, Hunting and Petrofac all making very impressive returns.'

Market analysts were now forecasting that Schlumberger; with its monster market cap of $120 billion, will increase its revenue by 75% over the next three years and its EBITDA by 83% – ‘quite incredible growth', Welsh noted.

So what's in it for the subsea sector? ‘Forgive the pun, but a rising tide lifts all the ships,' said Welsh. ‘I think from a trading perspective 2011 could well be quite a difficult year particularly for small and medium sized companies in the subsea sector, because we're still suffering a little bit from the lag from some large projects being stalled as a consequence of the financial crisis. But if they can tough it out, the future looks good. I think 2011 will go down as a great year for order taking, and 2012 onwards will be when volumes and margins actually take off.

‘There is certainly no shortage of investment at the moment looking for a home in the subsea segment, with trade players and private equity firms jockeying for a piece of the action,' he added. ‘Inevitably prices – both of the commodity and the services – are going to get a lot higher. You've got to go back to the basics of supply and demand. And with projects now queuing up to be executed, I think things are going to be even tighter than they were in 2008. Certainly look out for crude prices over $100 a barrel and service cost inflation similar to what we saw then.'

Except this time it may not be the oil companies calling the shots where the cost of things is concerned, argued Welsh. ‘The boot's going to be on the other foot I suspect. The oil companies have to keep spending, have to keep investing in new fields simply to maintain their production, so I don't think they have too much choice in the matter.'

Business boost
The UK subsea industry would appear to have heeded Colin Welsh's advice some time ago if the latest business stats unveiled by Subsea UK at the conference are anything to go by. Summarising the findings of its 2010 Business Activity Review – based on a survey of 761 companies throughout the supply chain – chief executive Alistair Birnie said the UK's subsea industry is now worth £5.9 billion.

This figure represents almost a third of the estimated £18.9m billion global subsea market, and the latest predictions suggest it may grow to over £7.5 billion by 2013.

According to Birnie, the UK subsea sector now supports around 50,000 jobs, with 40,000 of those directly employed in subsea-related activity. Manufacturing companies employ 40% of the total subsea workforce, with another 40% employed in offshore services and 10% in multidisciplinary firms and 10% in consulting and support services.

‘It is highly impressive that despite the economic downturn, subsea businesses in the UK have grown by almost 40% between 2006-09 and the sector is now larger than ever, commanding a third of the global market,' said Birnie. Much of the growth had been driven by exports, he added, with an impressive £3.3 billion (or 56%) of total revenues generated by the sector directly attributed to export sales. The main export markets currently are Europe (especially Norway), Africa (especially West Africa), North America and Asia. Future export growth is anticipated to come primarily from South America and Africa. ‘If the forecast of around 8% year on year growth is achieved, the sector will reach over £7.5 billion in revenues with the potential to create an additional 10,000 jobs.' OE