The last barrel

After four years of cutbacks, oil companies are poised to increase spending and start developing offshore fields. The long-awaited rebound is expected to re-energize oil service providers that survived the deep cost reduction, due to mergers, debt restructuring and massive personnel reductions. Despite recent oil price volatility, spending on offshore oilfield services will rise 6% in 2019, reaching $208 billion, and surge 14% in 2020 (Bloomberg).

Subsea leads rebound. Oil producers are forecast to commit to 110 new subsea projects this year, up from 96 in 2018 and just 43 in 2016—when the industry slashed capex as oil slumped. The market for subsea equipment is projected to expand between 13% and 14% each year through 2023. This is set to take place, as suppliers resume hiking prices. Oilfield surveyors and providers of support and maintenance services should rebound, but at a slower pace. Overcapacity of vessels continues to glut the market and the rig sector.

London-based oilfield services provider TechnipFMC forecast that 2019 revenue for its subsea division will climb, but margins may fall. The company anticipates “continued strong activity” for investment in small-to-mid-sized projects, and “an increasing number of the larger greenfield subsea projects,” CEO Doug Pferdehirt said in December. Many of these projects are in deep waters, which should benefit subsea manufacturers including, TechnipFMC and Subsea 7.

Rigs and seismic should benefit. While operating companies press ahead with new developments, they will most likely focus on developing production from existing fields. However, some may take on more risk and drill wildcats in riskier exploration projects, forcing surveyors and drillers to send more vessels and rigs to scrap. “With oil prices trading below $60/bbl, there continues to be some uncertainty on 2019 E&P spending, particularly offshore,” Kristian Johansen, CEO of Norwegian oilfield surveyor TGS Nopec Geophysical said in January. However, TGS should benefit from its solid balance sheet, while Petroleum Geo-Services may face “challenges ahead, in terms of an oversupplied seismic vessel market and approaching debt maturities,”

Nordea analysts Glenn Lodden and Even Mostue Naume said, France’s CGG should be more attractive, once it completes a plan to shed its remaining seismic vessels. However, restructuring takes time, and the company may incur additional costs, the analysts said. There should be a “slight rise in demand from drilling,” meaning that just 30% of deepwater rigs may remain idle this year, down from 35% last year, Mhairidh Evans, an analyst at Wood Mackenzie, said in an interview. “Some more overcapacity needs to be taken out of the supply chain.” Transocean, which last month announced an $830-million drilling contract, may benefit from the rebound as it focuses on deep water, while Shelf Drilling may also gain from its exposure to the Middle East.

Still hard times for some. On the other hand, the market for equipment used on shallow-water platforms, such as pumps, turbines and heat exchangers, may lag, partly because they tend to be ordered later in project cycles.

Bourbon Corp., a French operator of support vessels for offshore industry, is also looking for signs of recovery, as persistent low rates have forced it to suspend payment of its debt. Bourbon’s situation is “worrying,” as it operates in an oversupplied market, said Kevin Vo, an analyst at AlphaValue in Paris.

“As a company sanctions a project or an exploration campaign, that cash doesn’t flow through the supply chain, until perhaps one or two or three years, so the supply chain isn’t out of the woods yet,” said Woodmac’s Evans. “So, 2020 looks like the year, where many parts of the supply chain will start to feel better.”

Large deepwater discovery. South Africa’s first deepwater discovery, by French oil major Total, is exactly the type of news that the offshore industry needed to kick-start other similar ventures. The Brulpadda find, estimated at about 1 Bbbl by Total CEO Patrick Pouyanne, could be enough to supply South Africa’s refineries for almost four years. That’s a boon for a country that has always been short of oil and is running out of its scant domestic supply of gas. “It is really transformational,’’ Andrew Latham, V.P. of global exploration at consultant Wood MacKenzie, said Thursday.

The field, which produces mostly gas-condensate, was discovered 109 mi off the country’s southern coast in the Outeniqua basin. The area may now draw further interest, especially since South Africa is due to introduce new legislation later this year aimed at spurring exploration. The find “is potentially a major boost for the economy,” said Minerals Minister Gwede Mantashe. “We welcome it, as we continue to seek investment.”

Total’s discovery is a “catalytic find” for the country, said Niall Kramer, CEO of the South African Oil & Gas Alliance, an industry lobby group. “There’s nothing that has been on this kind of scale.” The resource could be about three times the size of all of South Africa’s gas finds to date, according to WoodMac’s Latham. Total, operator of the license, now plans to acquire 3D seismic data before drilling as many as four more exploration wells.

More good news. With 12 recent discoveries by ExxonMobil, the deepwater Guyana finds have shed new light on the entire South American offshore industry. ExxonMobil recently reported its 12th discovery in January. It also announced that its recoverable resource estimate for the Stabroek Block grew another 1 Bboe, to more than 5 Bboe.

Another phoenix rising. As witnessed by the amazing rebound in the U.S. shale fields, offshore suffered a mighty blow, but with the industry’s typical never-say-die attitude, the deepwater fields are starting to recover with an eye on the prize. 

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com