Barclays analysts forecast offshore well spending growth will fall 7% in 2019 compared to last year, but rising offshore rig counts, subsea tree awards and vessel utilization indicate a 2020 inflection could be on the horizon for the sector.

Estimated offshore well spend—which Barclays defines as well-related offshore costs such as rig day rates and rig-related services—is forecast at $48 billion for 2019. The amount would mark the fifth consecutive year of spending declines for the offshore sector, which has taken longer to bounce back from the latest market downturn.

“While North America land has proved itself to be the shortest-cycle with a healthy recovery the past two years, offshore is at the opposite end of the spectrum as the downturn took place more slowly after oil prices collapsed in late 2014 (given multiyear contracts on offshore rigs and the longer-term nature of offshore developments) but is also slow to recover,” Barclays said in the report.

The expected spending decline will not be as dramatic as the 19% decline in 2017, but it is about the same as the 8% seen in 2018, according to Barclays.

However, analysts believe offshore well spending will increase in some regions. Based on data compiled by IHS Petrodata and Barclays Research, these include: Europe, up 18% to an estimated $10.6 billion; North America, up 9% to an estimated $9 billion; and Africa, up 5% to an estimated $5.7 billion.

The anticipated growth, though, won’t be enough to offset spending declines, which Barclays attributed mainly to legacy day rates of between $400,000 and $500,000 rolling off to the current spot market rates of $150,000 to $200,000.

“We assume the rig cost makes up 40% of offshore spend, while the spread costs (services, pipe, material, directional drilling and other ancillary equipment) make up the remaining 60%,” Barclays said. “For 2019, we expect there will be more upward pressure for spread costs and could be up 5%-10% vs. down slightly in 2018.”

The biggest spending drops are expected in the India, Asia and Australia region along with the Middle East, both with declines of 32%; followed by Russia/FSU, 17% and Latin America, 2%.

While analysts admitted assumptions have to be made on offshore spending considering companies don’t specify how much will go toward offshore in their budgets, Barclays said it can estimate anticipated spend based on data such as rig counts, subsea awards and offshore vessel utilization—all of which are forecast to rise starting later this year, indicating better times ahead for the offshore upstream sector.

Barclays forecast the floater count will jump to 130 by year-end 2019, up from 116 in 2018. The jackup rig count is forecast to increase slightly to 300, compared to 293, for the same time period. The outlook was based on anticipated retender and idled contract rate trends. Analysts pointed out that offshore rig contracting activity usually precedes spending by six to 12 months.

The report also said the supply-demand model suggests an improved offshore vessel market starting from year-end 2020 as its current state of overcapacity comes into balance.

Citing data from Wood Mackenzie, Barclays reported the subsea tree count—also an indicator of sector’s health—was expected to rise about 45% to 287 in 2018, far from the high of 547 trees in 2013 but better than the 230 seen in 2014. Wood Mackenzie forecasts 297 trees will be awarded by year-end 2019. That number is expected to increase to 305 in 2020 and rise further to 327 in 2021 before dropping slightly to 322 in 2022.

The recovery was characterized as “low calorie” in nature, and Barclays noted that there are more small- and medium-sized awards—evidence that “the era of mega deepwater projects is over” as companies opt for more phased-in developments. Small-sized awards are described as those with one to four trees, while medium-sized awards are those for five to nine trees.

“We believe if Brent stays in the $60-$70/bbl range, a number of greenfield projects will move ahead by mid-2019,” Barclays said.

Brent crude futures were up about 3 cents to $60.64 per barrel midday Jan. 16, while West Texas Intermediate crude futures were down about 33 cents to $51.78 per barrel.

Velda Addison can be reached at vaddison@hartenergy.com.

Offshore