Troubling trends

Joel Hancock, Douglas Westwood

December 1, 2016

For the offshore oilfield equipment and services industries, 2016 was a difficult year. Douglas Westwood’s Joel Hancock looks forward to see if there is a light at the end of the tunnel.

The Maersk Deliverer was one of many rigs that had its contract cut this year. In March, Chevron’s Angola affiliate, Cabinda Gulf Oil Co., sent an early cancellation notice to Maersk Drilling for the ultra-deepwater semisub, ending a contract in effect since May 2012. Photo from MEDVIND/Bent Medvind Sørensen/Maersk Drilling.

The global trend of declining offshore oilfield equipment (OFE) and oilfield services (OFS) expenditure, which began in 2015, continued through 2016.

Between 2015 and 2016, offshore OFS expenditure contracted by 16% to US$49 billion, while OFE expenditure fell by 2% to $67 billion over the same time period.

Longer term, Douglas Westwood’s (DW) analysis suggests that the decline in expenditure will persist through to 2020, indicating that 2016 marks the start of a barren period for the offshore OFS and OFE sectors. Low rig day rates, coupled with a significant drop in project sanctioning will result in offshore OFS expenditure stagnating in the long-term, averaging $49 billion between 2016 and 2020, while annual OFE expenditure is set to decline from $67 billion in 2016 to $43 billion in 2020.

At a regional level, DW’s analysis suggests that the largest offshore OFS year-on-year decline in expenditure will be seen in Africa, which is forecast to undergo a 3% year-on-year decline between 2016 and 2020.

Hard hit Africa

Much of the decrease can be attributed to the lack of project sanctioning in high-cost deepwater plays, such as the Kwanza Basin offshore Angola, which have been particularly hard hit in the low oil price environment. Similarly, negative trends are present within the offshore OFE market. Significant contractions between 2016 and 2020 of 18% and 15% year-on-year, respectively are seen in Asia and Latin America. Capex cuts by Asian national oil companies (NOCs), driven by the low oil price environment, are the cause of this especially poor forecast for Asia. In Latin America, financial pressure for Brazil state player Petrobras has resulted in a downward revision of 25% to its investment plan for 2017-2021 compared with the previous iteration.

Offshore production is set to increase by 16% through to 2020, primarily due to projects sanctioned prior to the 2014 oil price downturn being brought online. The vast majority of OFS and OFE expenditure associated with these projects has already been spent during the project development stage, therefore these projects have little influence on the forecast.

Much of the production growth seen through 2016-2020 will occur in the medium-term, with a lack of project sanctioning in the near-term affecting greenfield additions in the long-term due to lead times in the order of several years for offshore projects.

Developments in Brazil and West Africa will contribute to strong deepwater production growth through the remainder of the decade, from 7.5 MMboe/d in 2016 to 9.8 MMboe/d by 2020. However, the recent oil price downturn has affected project sanctioning and will result in a significant drop in drilling in deepwater basins in the medium-term.

Even in the event of a rapid recovery in oil prices, offshore activity will be suppressed due to the deferral of final investment decisions for several developments in key offshore basins. Bonga South West-Aparo (Shell) and Etan (Eni) in Nigeria, as well as Cameia (Cobalt/Sonangol) and Chissonga (Maersk Oil) in Angola are amongst the high-profile deferments that will contribute to the poor offshore OFS outlook through to 2020.

Source: Douglas-Westwood’s World Oilfield Services Market Forecast Report Q3 2016

Too many rigs

In addition to the drop in offshore activity, offshore rig supply will be a major issue for offshore OFS and OFE expenditure. The offshore drilling sector is currently heavily oversupplied with units brought to market during the boom years of 2011-2014, despite widespread scrapping of older rigs.

The resulting low levels of utilization have and will continue to drive down dayrates for rigs entering new contracts. DW estimates offshore rig and crew spending will decline 2% year-on-year over 2016-2020, after already experiencing a sharp 18% drop from 2015-2016.

The largest decline will once again be seen in Africa at 6% annually, as project deferrals mount up and reduce the drilling backlog as well as operators scaling back on exploration plans. Even in a scenario of a rapid recovery in oil prices, it is unlikely dayrates will recover to 2014 levels until well into the 2020s due to the saturated market.

The oversupply will also result in extremely low levels of rig construction – DW’s forecast shows the construction of just 17 mobile offshore drilling units (MODUs) over 2016-2020, down from the 298 built in the preceding five-year period.

Bright spots

Despite the depressed market conditions, DW’s analysis has picked out bright spots through the remainder of the decade for both OFS and OFE expenditure. Australasia bucks the trend in a weak OFS market – expenditure in the region is set to increase 8% year-on-year between 2016 and 2020, driven by growth in offshore gas developments. Inpex’s Ichthys project, expected to ramp-up production over the next four years, is a particular highlight that will drive expenditure through the forecast period.

Australasia will also show positive trends in the offshore OFE market, along with Eastern Europe and the former Soviet Union (FSU). Both of these regions historically account for a small proportion of total offshore OFE spend, with Australasia and Eastern Europe accounting for 5% and 3% of cumulative 2011-2015 expenditure, respectively. From this small base, DW has identified growth potential as these regions develop their offshore resources through the forecast period.

By 2020, DW expects Australasia and Eastern Europe’s share of offshore expenditure to have increased to 6% and 4%, respectively.

As with OFS, Australia’s liquefied natural gas (LNG) projects are the key driver for Australasia’s positive offshore OFE outlook. Despite cost overruns and difficulty in obtaining long-term supply contracts, DW expects LNG projects, fed by offshore gas fields, to increase Australia’s offshore gas production 66% over 2016-2020. This drive will boost offshore OFE spend, with Ichthys (Inpex), Scarborough (ExxonMobil) and Greater Western Flank Phase 2 (Woodside Energy) in particular.

Production in Eastern Europe and FSU has historically been dominated by onshore fields, with 92% of total production in the region attributed to onshore developments in the five-year period ending in 2015. A similar dominance is expected in the forecast, however, numerous high profile offshore developments will cause a surge in offshore OFE expenditure – resulting in the region’s positive offshore growth outlook. BP’s Shah Deniz 2 project, due onstream in 2018 with a subsequent four-year ramp up, is one such project.

Looking for easier work

The negative picture for offshore OFE and OFS expenditure is reversed onshore, with both OFE and OFS onshore expenditure set to record strong growth profiles through to 2020. For OFE, expenditure is set to recover from lows of $61 billion in 2016, global onshore expenditure is set to increase at a rate of 8% year-on-year through the forecast period to $83 billion by 2020. For onshore OFS, DW expect 2016’s total onshore expenditure figure of $125 billion to represent an industry nadir, with expenditure increasing 10% year-on-year between 2016-2020, reaching $187 billion in 2020. Both these recoveries are linked to a rebound in North American drilling – in particular in the US shale plays where rising oil prices will bring lower-quality shale acreage back into economic viability.

The recovery of onshore expenditure, coupled with decreased offshore spend, will result in the market share of offshore, in terms of total expenditure, declining through the majority of DW’s forecast period. The offshore proportion of spending will decline to from 38% in 2016 to a low of 27% in 2019 as operators switch focus to less challenging onshore developments.

Joel Hancock joined Douglas-Westwood after graduating Imperial College London with a geology MSci in June 2016. Hancock now works in DW’s Drilling & Production (D&P) team that authors DW’s D&P, Oil Field Services and Oil Field Equipment market reports.