With an offshore network of over 7000 production platforms, 180,000km of pipelines and 40,000 producer wells already installed, the global offshore operations & maintenance market could be worth more than $330 billion over the next five years - and, unlike some industry sectors, this business is here to stay. Douglas-Westwood analyst Thom Payne assesses the size of the prize.
In 2008 the global offshore energy industry produced over 16 billion barrels equivalent of oil & gas. While capital expenditure led activity such as the contracting of mobile offshore drilling units (MODUs) and the construction and installation of production platforms is required to develop new reserves and bolster output, it is the ongoing, or operational, costs that are an absolute necessity for sustaining current production levels.
Indeed, the 16.7 billion barrels of offshore production anticipated in 2009 depended on the constant maintenance, monitoring and servicing of an offshore network of over 7000 production platforms (both fixed and floating), 180,000km of pipelines (both export and infield) and 40,000 producer wells (both subsea and platform completed). The Offshore Operations & Maintenance Report 2010-2014 released recently by energy analysts Douglas-Westwood examines the opportunity in this large and diverse market sector covering over $330 billion of potential expenditure expected over the next five years across 19 key markets, including: subsea IRM, power generation, produced water management, well stimulation and catering services.
In 2009 Douglas-Westwood tracked $53 billion of expenditure, having increased year on year at a compound rate of circa 12% over the past five years. Whilst this growth may not have been as rapid as that witnessed in the offshore drilling markets the importance of O&M;spend to continuing production make this market far less vulnerable to downturns in oil price as reflected by market growth 2008/09 compared to a drop of 14% over the same period in the drilling market. Over the next five years we expect demand for O&M services to grow at a compound rate of 8% to reach a market total of circa $77 billion by 2014. Market growth will be driven by a combination of activity and pricing as service related markets, such as well stimulation, recover from the severe price deflation suffered as fallout from the global recession of 2008.
Over the lifecycle of a field (for example Brent in the UK North Sea), capital and operational expenditure grow somewhat inversely – initial capital costs are high, yet as a field ages, the ongoing cost of producing each barrel of oil increases due to increased maintenance costs on old infrastructure, modifications made to existing offshore platforms through the re-vamp of accommodation, structures or topside processing facilities. (Shell’s Brent field lifecycle is illustrated in Figure 1.)
One of the most rapidly growing markets is subsea inspection, repair and maintenance. IRM is driven by a combination of legal, economic, and technical factors that lead field operators to develop production and facility maintenance strategies. The IRM strategies employed, and regularity of inspection in particular, depend on a variety of factors, principally: type of structure/equipment, ease of access, availability of vessels, cost of inspection, technical maintenance expectations and legal obligations.
In 2009 Douglas-Westwood estimated global demand for subsea IRM expenditure at $4.5 billion and we expect growth both in regard to spending levels and volume – with anticipated compound growth of 10.2% over the next five years. Historically, this market has been dominated by the inspection, repair and maintenance of subsea pipeline infrastructure which accounted for 43% of the total market in 2005. However, the trend towards subsea and deepwater developments within the offshore oil & gas industry will drive the demand for subsea well intervention services which will see its share of the total subsea IRM market grow from 33% in 2005 to 54% by 2014 (Figure 2).
However, not all the markets in the report show such growth. In 2006 the offshore stimulation market peaked at $2.1 billion. Although activity increased by 6.5% in 2007 market expenditure shrank by 4.6% in the same year due to a drop in dayrates for stimulation vessels caused by a combination of a slowdown in demand, an evolving client base and the arrival of newer, ‘fit for purpose’ vessels. For reference, the average hydraulic horsepower rating of new vessels entering the market between 2007 and 2009 equalled 9611, considerably lower than the average of 14,525 seen between 2000 and 2006.
One reason for the influx of smaller vessels over the 2007-2009 period was a reaction to operator requirements to justify the use of WSVs for smaller fracturing jobs. This resulted in a drop in the average dayrate for vessel-deployed fracturing services. Over the forecast period Douglas-Westwood expects activity to grow year on year at a compound rate of 4.8% with recovery to 2007 highs expected by 2012. However, while dayrates are expected to also grow year on year we do not expect a recovery to historic highs over the next five years.
Supporting many of the markets covered in the report is a wide-ranging fleet of dedicated offshore support vessels. The Offshore Operations & Maintenance Market Report estimated a global demand for just under 2000 vessels in 2009 including: platform supply (PSVs), crew boats, well stimulation vessels (WSVs), dive support vessels (DSVs) and light well intervention vessels (LWIVs). The report also contains detail and in-house assumptions of vessel day-rates both historic and forecast as well as an overview of supply chains and basic contract structures.
On a regional basis expenditure has historically been dominated by the mature offshore provinces of North America and Western Europe which accounted for 24% and 25% of 2008 global market demand; however, a combination of flailing local production and the growth of deepwater basins elsewhere will see these shares of the market drop to 23% and 20% respectively by 2014. This gap will be filled by combination of other regions including the deepwater dominated regions of Africa and Latin America as well as the shallow water Middle East region which is expected to see compound market growth of 11% over the next five years.
By contrast, the UK market is experiencing a slowdown in growth. This can be attributed to the divestment of assets and the fragmentation of the region’s E&P sector which has led to the rise of small ‘tail-end’ operators. This trend has seen a scaling back of O&M;related spend as cost-sensitive operators look into Opex-reduction strategies such as subsea tieback technology and de-manning to improve the economics of marginal fields. This in turn has led to a spate of acquisitions by UK based contractors seeking to expand their influence in more robust regional markets, as exemplified by the Wood Group’s purchase of US- based Baker Energy last October. OE