Archives for category: subsea

Drilling wells offshore always has an element of risk attached, and comes with significant upfront cost. Yet only a few appraisal campaigns end in ‘mega-finds’, and not all wells drilled indicate volumes of oil or gas worthy of stand-alone development. Whilst many such fields were side-lined as ‘non-commercial’ in the boom, since the downturn there has been an increasing push to develop more marginal satellites.

For the full version of this article, please go to Offshore Intelligence Network.

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There are a range of indicators that can be used to gauge activity in the subsea segment of the offshore industry, including the number of tree awards, the EPC/SURF contractor work backlog and subsea support vessel utilisation trends, for example. Another is the backlog of subsea trees on order at tree fabricators. So where is this indicator now and what might it suggest about the subsea sector generally?

For the full version of this article, please go to Offshore Intelligence Network.

Over the course of the last 20 years, oil and gas companies have cultivated a vast metallic forest beneath the world’s oceans, consisting now of some 5,800 installed subsea trees. The growth of this artificial arboretum has supported an array of related offshore fabrication, installation and IMR industries. But how to assess the outlook for this complex sector? Well, one key metric is the subsea tree backlog…

Into The Woods

The tree ‘backlog’ is the ‘orderbook’ of subsea trees. It is constituted by trees ordered by oil companies from subsea fabricators that have not yet been installed. A tree itself is the tall array of valves that caps a well; unlike ‘dry’ trees, subsea or ‘wet’ trees are located on the seabed, rather than on fixed platforms or MOPUs. While fields can host various subsea structure types, trees are at the core of nearly all subsea developments. Hence, the backlog is a key proxy for subsea CAPEX and subsea construction vessel demand. The real boom for the subsea sector came in period of high oil prices after 2009, as innovation in the subsea sector facilitated deepwater frontier projects in West Africa, Brazil and the US GoM. The backlog grew from 647 units in Q3 2009 to a peak of 1,158 at start Q4 2014 – an increase of 79%. At this point a number of large projects utilising subsea trees had recently reached the EPC stage, including TEN (Ghana, $4.9bn, 36 trees), Egina (Nigeria, $15bn, 44 trees) and Buzios (Brazil, $2.6bn, 20 trees). The charter rate for a large (250t crane) MSV in the North Sea, meanwhile, stood at around $52-59,000/day.

Cut Down To Size

However, like other offshore sectors, the subsea sector has been adversely affected by weaker oil prices (and the paralysis at Petrobras). Initially the backlog provided a degree of insulation for fabricators and installation contractors. The backlog is eroding though, having fallen y-o-y in each of the last nine quarters by between 1% and 14%. As at start Q2 2016, it stood at 876 units, down 24% on the Q4 2013 peak. Installers have been working through the backlog while new awards have dwindled (only 59 trees have been contracted in 2016 as at start May) due to a dearth of project FIDs. True, the subsea sector has held up better than the rig or OSV sectors (in part due to IMR demand, not captured by the backlog size) but North Sea dayrates for a 250t MSV have fallen by 34% since Q2 2014, to $32-43,000/day at start May 2016.


New Spring?

Could things in subsea get as challenging as in the rig and OSV sectors? Perhaps, but that depends on the timing of the recovery in offshore project FIDs. Besides, the downturn is not all bad for subsea – in the long run. In order to reduce field development costs, companies are increasingly relying on subsea efficiency gains – Statoil’s subsea standardisation drive is a notable example of this. As costs at subsea projects fall, more such projects are likely to receive FIDs. New tree awards are expected to recover to around 300 per annum by the end of the decade.

So subsea seems to be becoming more challenged, as reflected in the falling subsea tree backlog. But subsea is likely to play a key part in the recovery too. The arrival of new awards, followed by a sustained increase in backlog, will be a good indicator of when the offshore market is out of the woods.

OIMT201605

The current conventional wisdom is that the market for subsea installation and maintenance is slightly more insulated from the worst effects of the oil price fall, given the long project timelines and high capex involved. But with new short-term investment set to be cut, and reports of declining vessel utilisation, it seems likely that the potentially positive longer-term trend will be preceded by short-term challenges.

Subsea Construction

A key indicator of subsea construction demand is the backlog for EPC work held by major subsea companies. The growth rate of this year-on-year is shown on the graph (red line). Broadly, this follows the oil price, going into negative territory in Q1 2015, just as it did during 2009.

The remaining two lines on the graph show the year-on-year growth in two parts of the fleet related to subsea construction and subsea support. Growth in both accelerated in 2009 (albeit from a relatively small fleet). A rush of deliveries hit the wrong part of the market cycle and exacerbated the demand weakness caused by the 2009 oil price drop. It is also noticeable that, back then, the growth of the support fleet was more rapid than growth in the fleet of the larger construction assets, despite the fact that the IMR fleet was already 91% larger.

Calm Beneath The Storm?

Of course, the key question now is: will it happen again? The industry is likely to have to weather multiple quarters of declining backlog given that oil price weakness is discouraging IOCs, whilst another major demand source, Petrobras, clearly has issues to resolve. Unfortunately, the answer is, to some degree, yes. Ordering in the last few years means that fleet growth is set to accelerate in 2015.

So will it matter? Again, the answer may well be yes, in the short term. Few would deny that all markets, including subsea, face short-term challenges. However, the longer-term fundamentals give cause for optimism. As subsea well completions age, their maintenance requirements are likely to increase. A decade ago, 15% of installed subsea wells were over 15 years of age: today 35% are, and the volume of such “middle-aged” subsea structures has been growing at 20% per annum. This is a supportive trend for the longer-term future of the IMR fleet, whilst those assets focussed on new construction are more dependent on the fortunes of EPC companies’ backlogs, which, as shown below, are currently in decline.

Beneath The Waves

A wildcard which may help the IMR fleet is the share of smaller-craned units ordered by new, Asian players. The Asian share of the MSV orderbook is now 25%: double that in 2005. The largest areas for subsea production (the North Sea, Brazil, West Africa) are in the Atlantic. If operators there take an attitude of preferring more experienced subsea owners, this could constrain vessel supply in the Atlantic more than the orderbook picture would suggest.

So, weaker markets are already very evident, with declining backlogs, idle vessels and companies announcing job cuts. Yet there are reasons to be optimistic about the longer term future, particularly for maintenance requirements. However, the market will clearly first have to surmount a short-term future of excess supply and muted demand.

OIMT201505

OIMT01Since the start of 2010, the drillship fleet has grown 98% and the number of semi-subs capable of drilling in >5,000ft of water has grown 45%. This suggests increasing demand for rigs capable of drilling in deep and ultra-deep water, but how much is currently taking place at these depths?

Rigs In The Middle

The Graph of the Month shows known current water depths in which active drilling rigs are deployed. Whilst jack-ups dominate shallow depths, floaters are drilling mostly in “midwater” (500-5,000ft), where 57% of semi-subs and 45% of drillships are currently deployed.
In deeper water (5,000-7,500ft), 19 >5,000ft semi-subs and 33 drillships are known to be currently drilling. However, only 10% of the active drillship fleet and only 1% of semi-subs are currently deployed in ultra-deepwater. Overall, this means that only half of the active drillships and less than a quarter (24%) of >5,000ft semi-subs are currently located in deep and ultra-deep water. Only 4% of the current floater fleet are currently deployed in ultra-deepwater.

Deeper Potential

Although the current active drilling fleet contains over 105 floaters capable of drilling in >7,500ft water depths, the graph shows that only 9 floaters are currently deployed at such depths. The remaining rigs are therefore deployed in water depths much shallower than their specifications allow.

For example, of the 25 rigs in the current active fleet capable of drilling in water depths 12,000ft or greater, only 5 are currently known to be drilling in ultra-deep water. Of the remainder, 8 are in deepwater and 12 are in midwater. Despite the fleet’s ability to drill in ultra-deepwater, present demand is at mid- and deepwater depths.
The newer generations of floating MDUs have additional advantages in terms of technological sophistication (such as secondary derricks or drillfloor automation), which can make them attractive to operators that might not necessarily need their full depth capabilities. This can make them attractive in midwater harsh environments (e.g. in the North Sea).

Floater Flexibility

However, demand for ultra-deepwater drilling is increasing and expected to continue growing. Bearing this in mind, the orderbook for rigs capable of drilling >5,000ft remains strong (16 semi-subs of this ability and 76 drillships are currently on order). As ultra-deep fields are increasingly explored and developed it is anticipated that a greater share of floaters will be deployed in deeper water, maximising their capabilities.

Ultra-deepwater is expected to be the most rapid source of future demand growth for floating MDUs. However, mid/deepwater demand will remain important. As shown, the existing fleet and orderbook is well equipped to cater for this shift. Depths in which floaters are deployed in the future depend on whether there is investment in next-generation specialist midwater floaters, equipped with the technical innovations of recent ultra-deep rigs. Alternatively, operators may prefer to add to rig supply for ultra-deepwater drilling, which will still provide options for deployment in a broad range of water depths if required.

SIW1098In 1961, the world’s first subsea completion was installed on a well in the Gulf of Mexico. Over the last 52 years the use of subsea trees has spread to the majority of offshore producing regions, with a total 4,851 trees installed by end-2012. Since 1990, the world has seen a growth in the number of deep water (>500m) tree installations. The use of subsea trees and developments appears set to revolutionise the offshore oil and gas industry, placing more focus on subsea fabricators.

Into the Deep End

The Graph of the Month shows the number of subsea trees installed per year from 1990 to 2016 (potential/under construction post-2013) and a breakdown of shallow versus deepwater installations. During 2011, the subsea tree demand hit a low point in the wake of 2008’s economic troubles. Since then however, the sector has seen a boom in tree installations, with expected future installations for 2014 up by 77% on 2013 and 2016 projected installations up a staggering 174% on 2013, with a total of 916 potential trees. Furthermore, the near future will demand more subsea trees with deep water, high pressure technologies, as shown by the increase in the share of trees in deep water of around 40 percentage points since 2000.

Subsea Honeypots

The region utilising the most subsea trees is NW Europe, with 1,638 active. The region’s ageing fields, containing smaller, marginal pay zones, mean that subsea trees and tie-backs provide a solution for continuing productivity in the North Sea. In Latin America, subsea trees are allowing for the development of wells in the ultra-deep water pre-salt plays of Brazil. The region has 919 active trees and accounts, along with West Africa, for many of the potential installations over 2013-2016. Subsea is not for everyone however: in the shallow Middle East, less than 40 trees are active, with wellhead platforms preferred.

Ready Yourselves

Given the extra subsea tree demand, how will the market cope? As previously highlighted, demand will have a bias, with many being required in the North Sea and Brazilian pre-salt areas. GE Oil & Gas have reportedly stepped up their UK manufacturing capacity for trees by circa 40%. However, with only 4 major subsea tree fabricators worldwide, supply may bottleneck in the coming years.

A boom in subsea tree demand will also affect the installation vessel markets. Traditionally, MODUs and other drilling vessels were used for tree installation. However, with the hike in rig costs (45% since end-2010 for jack-ups), installation contractors have been increasingly turning to installation by relatively cheaper MSVs. A total of 68 MSV vessels are on order, which despite accounting for 25% of the current fleet, may grow. There is also an additional 10% of the Dive and ROV Support fleet on order, a number which is likely to increase over the next 4 years.

So, Petrobras, Statoil and the supermajors are employing subsea technology increasingly frequently. Demand is growing for trees and associated infrastructure, along with installation units, promising a positive period for subsea fabricators.