Wood Mackenzie: Smoother sailing ahead for upstream supply chain players

The global offshore upstream supply chain saw signs of recovery in 2018, and this looks set to continue in 2019, according to Wood Mackenzie. As project FIDs increase, demand for equipment and services are buoying the prospects for the upstream supply chain.

But the downturn left its mark on the sector. Projects remain leaner and phased, and cost discipline remains high on the agenda. The supply chain continues to focus on compact, modular and standard solutions as operators seek the shortest cycle times.

But can this be maintained as the market improves?

Subsea demand increasing

“Demand for subsea equipment is one of the best leading indicators of offshore market activity,” Mhairidh Evans, Principal Analyst, Subsea Supply Chain, said. “Volumes are recovering, and Wood Mackenzie expects an approximate 40% increase in 2018 in comparison to the previous year.”

“It’s likely that demand will remain steady for the next few years, averaging about 300 subsea trees per year, an encouraging sign for the sector,” Ms Evans said. “The supply side story has evolved too. Consolidation was necessary to survive the down cycle, which represented the lowest demand floor and longest depressed market in recent history. We estimate subsea manufacturing capacity reduced by 25% simply by closing plants and redistributing resources.”

“The result is manufacturing plants that can tighten much quicker than before, even with the smaller, more efficient operations that today’s projects demand,” Ms Evans added.

“Key operators in the subsea space are becoming aware of this shift in the market. Procurement teams and category management will need to strategize internally and with their preferred suppliers, preparing for anticipated price inflation and potentially increased lead times,” Ms Evans said.

“While the subsea market as a whole remains oversupplied still, another busy year in 2019 will change that. We think the window of opportunity to lock in preferential conditions in 2019 is dwindling and this will be more pronounced as we edge closer to 2020,” Ms Evans concluded.

Floating production revisiting historic highs but looks different

Demand for floating production, storage and offloading vessels (FPSO) should be near the highest seen since before the downturn. Adopting modular and standardized FPSOs in shipbuilding lends itself to cost savings and efficiencies – ideally suited to operators looking to scale down and reduce costs.

“Overspending is a thing of the past. Despite the market’s recovery, we expect development budgets will have to stretch further than ever,” Catarina Podevyn, Senior Research Analyst, said.

“Operators will be under added pressure to maintain project discipline, and we can expect to see alternative contracting models that reduce technical and financial risk to operators and optimize efficiency,” Ms Podevyn said.

“We expect a higher uptake of the build-own-operate-transfer (BOT/BOOT) contract models. With this approach, operators lease an FPSO at a higher rate before buying it outright,” Ms Podevyn added. “This frees them form the upfront financial risk that would normally accompany a turnkey approach. Contractors, however, take on project execution risk and must hit deadlines or face losses. We expect this will prompt more sub-contracting, particularly with many FPSOs nearing award.”

Opportunities for competitive floating rig rates remain

It’s been a buyer’s market in the offshore rig segment, as operators hold contracting power for all but the ultra-deepwater, harsh-environment rigs, where supply is limited. Dayrates for floating rigs stayed low in 2018. How long will this last?

“Despite encouraging signs indicating the potential for higher demand, we believe dayrates will remain low throughout 2019,” Leslie Cook, Principal Analyst, said.

“Because of low dayrates, drilling contractors have preferred short-term contracts, hesitating to lock in assets on longer charters. Market utilization hovered near 65% on continued rig oversupply. This, coupled with rig owners needing to bid aggressively for contracts, or else see their assets idle, will keep rates for most rig types low.”

“However, exploration is increasing,” Ms Cook added. “That, together with the likelihood of further consolidation among rig contractors and older assets being taken off the market, should drive market fundamentals to a point where dayrates begin to rise appreciably towards the end of the year. We expect the rig market to balance out in 2020.”