Defining key drivers for the offshore energy sector
VP Refining, Chemicals and Oil
markets EMEARC Research
As part of its forward planning, Damen consults industry experts on their assessments of what changes lie ahead. In the offshore oil and gas industry Damen works with Infield Systems, now a subsidiary of Wood Mackenzie, the leading provider of commercial intelligence to the natural resources industry.
Positive outlook in the medium term
It goes without saying that the price of oil is critical to the rates of activity in offshore exploration and production. Infield / Wood Mackenzie expects the recent excess of supply over demand to start rebalancing, with a notable impact in H2 2017 when stocks will begin to be drawn down significantly for the first time in two years. This will support prices and the effect will be further enhanced if OPEC can sustain the 750k barrels a day (b/d) cut that it announced in October.
Structurally, a recovery of the oil price will be driven by anticipated annual growth in global demand of 1m b/d plus a fall in non-OPEC production due to the recent decline in investment hitting field production levels. This could cut as much as 2m b/d (5%) off overall output. The result will be a typical supply gap that grows at 2-3m b/d each year. So prices will need to recover to support future projects.
Infield / Wood Mackenzie forecasts that the oil price will around $80 a barrel by 2020. Fracking and other ‘tight’ oil sources plus renewables will replace some of the lost production, but new conventional projects including offshore will need to come on stream to fill the supply gap.
New projects will mean increased rates of capital expenditure. However, these will come slowly to the offshore sector. The onshore sector in the USA will feel the effect first, and even there many producers will need to see their corporate balance sheets improve before they can raise the necessary finance at reasonable rates. Investors will need to be reassured that the new price level for crude is there to stay to support higher capital expenditure.
Suppliers to the offshore oil and gas industry will also be affected by the changes in the strategies of their clients. Infield / Wood Mackenzie anticipates three main themes in the coming years. The first of these will be the need of production companies to access new sources of low-cost supply. At the same time they will seek to exploit those assets in their existing portfolios which can profitably be brought on stream in the near term. This will mean a continued drive to push down break-even points and may also result in the scale of projects being reduced. Lastly, Infield / Wood Mackenzie expects the oil majors to pursue partnerships in the Middle East to exploit high volume, underdeveloped resources that again can come on stream quickly. All these offer opportunities for suppliers. Those that can offer competitive pricing and rapid delivery will benefit the most, as always.
For LNG, the outlook is tougher. With large amounts of capacity still coming online, particularly in the USA and Australia, and strong competition in Europe between USA suppliers and Gazprom, prices are expected to remain soft until 2023-24. Investment will inevitably fall off during the intervening period, which is to be expected following the high levels in recent years.
On the plus side, at least in north-west Europe, is the prospect of major investment in decommissioning. Infield / Wood Mackenzie expects over $50 billion to be spent between now and 2050 on decommissioning redundant offshore production facilities on the UK continental shelf in the North Sea. It estimates that over 140 of the 800 existing fields will cease production over the next five years alone. Price spikes and actual abandonment rates will affect the speed at which this happens, but as the fields become uneconomical, even at $80 a barrel, mass closures are inevitable. This will create many new opportunities across the wider industry.
Overall, the outlook for the offshore oil and gas market is positive in the long term, with prices set to rise and a requirement for new sources of production. Add into that decommissioning and the expansion of the offshore renewables sector, and the prospects for those suppliers that listen to the needs of the sector and deliver the pricing and quality that the customers demand look set to be on an upward trajectory.