FAVERSHAM, UK– There remains too much construction capacity within the offshore market that will not be absorbed even with a recovery to 2014 levels of activity, according to analyst Westwood Energy.
The result is the continued downward pressure on vessel values and day rates.
Before a recovery can occur, various issues still need to be addressed, says Steve Robertson, Westwood’s Head of Research, Global Oilfield Services: the state of the E&P companies, the global oil supply outlook, and the anticipated demand-side story.
E&P companies responded to the downturn by putting the brakes on new investment, cutting their internal costs and putting pressure on the supply chain to follow the suit. Yet despite the modest recovery in oil prices over the last year, Westwood is seeing the same internal focus on cost among its clients and a lack of confidence in oil price growth in the near term.
For the offshore market, there will always be exceptional discoveries that will be economic regardless of fluctuations in the oil, along with satellite discoveries that can be developed quickly through existing infrastructure.
But mostgreenfield activity, Robertson points out, will only go ahead if E&P companies maintain a strong free cash flow for investment, and with an expectation of higher oil prices in the mid-term.
While many offshore-orientated businesses make positive noises about recovery, he adds, there remains an inherent fragility in the recovery which may persist for several years.
Whatever further action OPEC may take, natural production decline could resolve the over-supply problem, although the Westwood production tracker suggests that over-supply will in fact return next year as new fields start up that were sanctioned prior to the downturn. This is in addition to the production gains through increased investment and activity in the US unconventional market.
At the same time, the cost per unit for renewable energy is in some areas becoming competitive with traditional energy sources.
As for future offshore expenditure, although there is a long list of still-to-be sanctioned projects, the backlog ofsubsea activity has plummeted to the lowest levels in over a decade.
Westwood forecasts offshore capital spending to range between $40-60 billion/yr during 2017-21, totaling $257 billion. However, if sanctioning of new offshore projects or those not yet past thefinal investment decision hurdle grinds to a halt, the outlook appears very different.
In this scenario, capex would decline from a peak in 2018 to $14 billion by 2021, totaling $179 billion for the 2017-2021 period.
Robertson acknowledges that the industry is often unpredictable and external factors such as major interruptions to supply from political or weather-related events can shift the balance quickly. But there needs to be a reality check, he suggests, with the risk that the current recovery could take much longer to materialize, or even bypass the offshore market during the emerging cycle in favor of lower cost, lower risk basins.