BY James McLean, ABN subsea features writer & director of subsea consultancy firm Zenocean
Forecasting at any time can be challenging and can often be a case of art, rather than science, however, given the challenges the entire world is experiencing at the moment, the best forecast this year might just might need to be a work of fiction.
To make the task even more difficult, the UK economy is allegedly on the brink of a double-dip recession after shrinking as result of an increase in Covid-19 cases. It could be however, that at least part of the answer may reside within a completely different sector.
With Brexit being finalised, the UK Government is now looking to the future. Chancellor Rishi Sunak, has a blueprint for the future of the UK’s financial sector. In an attempt to inject some new life into the financial industry, his strategy applies a focus towards green investments and technology to set the scene for the UK to become the world leader in carbon capture and storage and offshore wind.
Essentially, he wants finance to be a critical enabler in the country’s effort to meet its net zero-carbon target by 2050.
Bank savings are at very high levels, but interest rates are low and doing nothing for savers – the Government has to get those savings to work and it’s been suggested that pension firms and fund managers now hope for a surge in investment and a resultant boom this year.
One very large opportunity will of course be climate change. It is hoped that public and private money will be directed towards carbon capture and maybe even North-sea decommissioning projects.
If Sunak is successful with his strategy and the finance sector becomes the enabler, then that sets the scene for an established, albeit currently damaged, subsea supply-chain, to play its part in being the deliverer of the technology and service support to turn the whole thing into reality.
As part of their strategy, the UK Oil and Gas Authority (OGA) have been driving the concept of area/hub developments within the offshore field development sector, therefore if that same model were employed, it could create myriad opportunities for big and small players in the subsea sector, whether it’s design, installation and or through-life facilities management.
With oil and gas developments, the economic argument for a hub and satellite system as a model, is that money spent on a main field can be discounted when evaluating an investment decision for a future satellite system that can be tied back to a host platform. The investment is treated as a sunk cost and so does not necessarily impact the decision to develop a satellite.
As 2019 was drawing to a close, there were certain signs of an uptick in industry activity which suggested the long tail of the down turn was finally disappearing, however, as 2020 appeared, we saw a very different reality. A spectacular oil price collapse, as much as >$30 negative, followed almost immediately by Covid-19 changed the scene completely.
In terms of decommissioning it was originally thought that 2020 would herald a quickening pace of projects, where in fact, a substantial percentage of planned work was deferred or cancelled.
However, it is thought in some camps that from later on this year, we could see some healthy activity, especially as the industry learns to cope with the existential threat of Covid.
A key factor though in decommissioning is the fact that there is a trend towards integrated projects where solutions come from a single provider. That could be good news for some, and not so good news for smaller players.
As just one example – Allseas construction vessel the Pioneering Spirit will use single-lift methodology to remove Spirit Energy’s DP3 and DP4 platforms in the Irish Sea during 2021. It’s also not a given that all removed infrastructure will end up in UK yards.
In terms of field development. There has been a significant amount of bidding work through 2020 with respect to field techno-economic screening and this is a good early-stage indicator of projects to come – when is the question?
Another good indicator of activity is subsea tree orders and in 2020 there had been a >30% year-on-year reduction in orders at around 150 units, whereas for 2021 there is potential for an increase of orders of maybe as much as 50% on that number, some of which will be destined for projects in the North Sea such as Equinor’s $1.9 bn plus Breidablikk and Captain EOR, and also overseas – Woodside in Australia, ENI Angola, plus – Equinor Bacalhau Brazil and Exxon, Guyana.
One ray of hope could come from the Forties Pipeline system three-week shutdown. It was scheduled for 2020, but postponed into 2021 due to Covid. The system, which includes an interlinked section called the Graben Area Export Line handles around a third of UK oil output. As a whole, including Graben, the system serves 90 fields in the UK and some in Norway.
It’s often the case that operators will take advantage of a shutdown to undertake a variety of works/maintenance etc, therefore, this could throw up the opportunity for the subsea sector to secure much-needed work.
As a result of recent Saudi production cuts, we now see Brent prices at just above $55 per barrel – its nearly a year since we saw that price.
Further positive impact could come as a result of an incoming US president who pledges trillions of dollars in a new stimulus package and signs of economic recovery in China may well see confidence recover, thus fuelling hungry subsea players. The market is still fragile, but volatility and fragility in any kind of system, whether natural or man-made can create opportunities.
Some observers reckon US production will be going down under the incoming presidential administration. Some onshore players are already looking to divest themselves of their holdings, such as in Colorado, because the state Oil and Gas Commission is doing everything possible to limit production. If US overall production goes down by say 500,000 to 1,000,000 bbls per day, as some believe, then world prices should improve.
The price of oil is the most important value on international commodity markets and emerging markets such as China, India and Latin America hugely influence the price of oil, needing it to fuel growth. As a result, oil price has a strong influence on international economic development. Replenishment of reserves is always an ongoing issue and it is the case that most of the worlds known untapped oil exists offshore in deep and ultra-deepwater. Good news of course for the subsea sector.
Whilst opportunities continue to exist within an albeit fairly mature North Sea, increasingly, unless they are already there, companies will need to look towards overseas locations for growth.
Scottish Enterprise and trade bodies such as Subsea UK do a fantastic job in helping companies to serve not only their home market, but to network and also export services around the world.
If companies have the financial strength and wherewithal to weather the current storms, then they will come out the other end all the stronger. The bottom line is that it will be difficult to forecast with any certainty this year, but it is the case that difficulty wakes up genius.