The future looks bright for the offshore engineering and construction segment.
That's the message I got from Daniel Valot, CEO of Technip, at an E&C forum in Houston recently. In both his remarks to the forum and his conversation with me afterward, Valot was upbeat about the prospects for the offshore marine construction market.
"The driving force is not so much the current price of oil and gas, as the long-term price that the oil companies have in mind," Valot said. "They don't make decisions based on today's oil prices. All of them have their long-term price scenario. What is important is what the price of oil will be between year four of the project and year 20. Nobody believes that $50 per barrel price will last forever. But now the oil companies are increasing their long-term price per barrel from what it has been -- $17 to $18 a barrel – to $21 to $22 a barrel. This means that a number of projects that were considered uneconomic a few years ago are now considered economic and will be launched." Valot sees the number of projects expected for the future being revised upward.
His remarks are a refreshing piece of good news to open this month's report on marine construction. Coverage includes a discussion of the world's deepest dry tree spar on the Devils Tower field in the Gulf of Mexico (page 36), an analysis of the trend to develop fields in deeper waters (page 44), and a look at the evolution of spar design (page 40). This issue also includes a Worldwide Survey of Spars in a wall-size poster insert (between pages 32 and 33).
Valot also pointed to revised forecasts for exploration and production spending. Year-over-year growth expectations have increased for each new spending survey taken in the last three years (see table). Those who forecast E&P capex are revising their expectations upward. A notable example is Unocal, which plans to spend $4 billion over the next seven years in the Gulf of Thailand alone (page 26). But that doesn't mean that the E&C market will turn around in time to save everyone.
"There have been a number of casualties in the last 10 years," Valot said, "and there will be more in the coming years.
"There has been a lot of consolidation in the past five years," Valot added, "and there might be more. The size of projects is growing extremely rapidly, so that companies that might have been competitive several years ago are now too small compared to the size of the projects in the market. So there will be more competition, I'm sure."
An example of a large project is the Phase 2 of Sakhalin II, which at an estimated cost in excess of $10 billion, is the world's largest upstream and downstream oil and gas development. Jeremy Beckman, Editor, Europe, reports on its progress beginning on page 30.
Part of the economic pressure on E&C companies has come from the onerous contract terms negotiated by operators, Valot said. This problem has reached the point that even oil company management has been concerned that contracting practices could drive so many E&C companies out of the business that there would be no one left to do the work. This concern could lead to changes, he said.
"I believe at the level of top management they realize that they are doing things that are detrimental to themselves," Valot said, "but it's not such a major worry that they pass that on to the project teams at the working level. But I would expect that, now that some people are seeing that they need to change, there will be some initiatives taken in the near future."
