With the oil price relatively low, the whole industry still faces challenges. However, the surge of collaboration and optimization, in tandem with a general belief that an upturn is coming in 2018, gives the subsea sector some cause for cautious optimism, delegates were told at last week’s Subsea North East Conference & Exhibition in Newcastle, England.
Malcolm Dickson, research director for Europe upstream at Wood Mackenzie, told delegates at the NOF Energy–organized event that he forecast a price range of $50-$53/bbl for the next two to three years.
“Toward the end of the decade we see oil prices rising but until then, we see prices at around $50-$53 per barrel for the next couple of years,” he said.
If that had been the case during the industry boom prior to mid-2014, then doom and gloom would be the outlook. But following the price crash, both operators and contractors, as well as the supply chain, had to work together to streamline processes and slash costs.
This major challenge has been accepted by nearly all players and the positive results mean projects are finally starting to reach sanction—with final investment decisions (FIDs) on the rise this year compared to last.
Upturn Is Coming
“An uptick is coming for the subsea industry,” Dickson noted, adding that global investment levels are up “mostly due to U.S. tight shale projects but pre-FID projects are crucial to the mix.”
In terms of FIDs, he said that before the price slide of 2014 there were about 40 FIDs a year, this dropped to less than 10 a year between mid-2014 and year-end 2016. The good news is that 2017 is looking more positive, with 20 to 25 expected by year-end following a total of 15 FIDs so far this year on projects of more than 50 MMboe.
“Now is the time to make FIDs because we are at the bottom of the market,” Dickson said, adding that the wave of optimization has helped make many projects viable because without lower costs and more streamlined developments the margins would be too tight.
This optimization push has often meant operators using fewer wells and opting for subsea solutions rather than platforms, as well as planning phased developments instead of much more expensive fully integrated options.
There is also a swing to gas over oil projects, with Dickson saying that of the 7 Bboe of reserves involved in FIDs this year about 70% is gas.
These gas FIDs need to be feeding national or regional markets, such as the Leviathan development in the east Mediterranean Sea. Other examples are Egypt’s offshore Zohr project and Indonesia’s Tangguh LNG development, both of which have strong local markets to supply.
Dickson said oil projects do offer quicker returns, making them attractive at this time—especially brownfield projects such as Snorre Expansion, Njord (both off Norway) and Mad Dog 2 in the U.S. Gulf of Mexico.
Phased projects such as the 827 Mboe Liza development offshore Guyana are also positive signs for the industry.
Breakevens Fall
Dickson said a 4% increase in spending is expected this year in the industry, once again with a major slice due to investment in U.S. shale, especially the Permian Basin.
This hike is needed because the downturn has resulted in “more than $1 trillion being taken out of the industry between 2015 and 2020.”
All of this means breakevens need to keep coming down, but progress is being made and the lower cost environment helps enormously, meaning “we are at the low end of the cost curve now,” Dickson noted.
In 2014 breakevens were about $95/bbl, which Dickson described as “pretty crazy.” Now the breakevens are $54/bbl.
“The ripple effect of optimization will see breakevens dropping further. Conventional projects can compete [with shale], it will just take a bit of time for the ripple effect to bring down breakevens more,” he said.
Subsea Tree Decline
The industry is now seeing fewer christmas trees used on developments, with the result being longer subsea tiebacks. With projects costs “just about halved” from pre-2014 levels, more projects will get the green light.
In terms of 2018 subsea FIDs, Dickson said the average project would use eight trees.
“Between 200 and 250 christmas trees a year is the new industry normal,” he said. Although he said the global demand for trees is set to grow up until 2021: about 200 will be needed in 2018, 300 in 2019, 350 in 2020 and 360 in 2021.
North Sea Changes Ahead
The mature North Sea region is facing “a changing of the guard” as the traditional majors become less involved in the area—with the vacuum being filled by a new wave of smaller private-equity-backed players, such as Aker BP.
“The new exploration drive by these new players is very interesting,” Dickson noted, adding that although the subsea sector will not return to the boom times “we can see a recovery coming from 2018 onward.”
BP Eyes New Fields
With an eye on the predicted upturn and given some confidence by the productive phase of collaboration and optimization over the last few years, one major still sees some life in the mature North Sea arena.
Calum Hayton, Hardware Delivery Lead, Global Subsea Systems at BP, told delegates, “We need to keep competitive and we need to develop the reserves that we could not produce before.”
Offshore the UK, Hayton said BP was looking at developing four fields: Alligin, Clair South and Foinaven South West (all West of Shetland) and Vorlich (Central North Sea).
“This is happening now; we are looking at manifolds, jumpers, wells,” Hayton said, adding that the next step is to call for competitive bids.
—Steve Hamlen