As UKCS capital investment continues to collapse – the 2017 forecast is £5.7billion – and backlogs evaporate, pressure on the subsea community remains intense. Jeremy Cresswell caught up with Subsea UK’s CEO Neil Gordon.
“Green shoots to some companies might be quite near, green shoots for others could be a couple of years away,” says SSUK’s Neil Gordon.
“I don’t think there’s anywhere around the world that’s attractive at the minute.
“But what a lot of operators are looking at, and I think this is one of the things that we in the UK have as a potential opportunity, is getting more (oil & gas) out of older assets.
“The UKCS especially is full of old assets long past their original design life while, in other regions, operators are currently not investing in big deepwater projects because of the cost, but have existing assets that could be pushed harder.
“The thing they all need is cash and getting more out of existing assets can help them achieve that whilst avoiding huge investments in new deepwater projects.
“If for example we can get the small pools initiative moving here in the North Sea, and there’s a full day session at Subsea Expo with a big input from the OGA, OGTC, a number of companies and the Efficiency Taskforce, that could help stimulate investment.
“In any case, most recent investment has been tie-backs into existing infrastructure.
“Short-term, it’s how we can stimulate UKCS investment. If we can do that, which I believe is possible, I think this could provide a benchmark for others.”
Gordon is certain that the UKCS provides a role model for others to follow. An example is an initiative looking at the feasibility of Mexico as a market. There are no subsea wells there as yet but Mexico has offshore production infrastructure in the Bay of Campeche that’s getting old and which could benefit from the North Sea touch, in his view.
Then there’s Brazil, despite the Car Wash scandal that engulfed Petrobras and others besides.
A measure of the scale of corruption exposed by the Brazilian federal police is that, in December, Odebrecht SA, Latin America’s biggest construction company, and an affiliate agreed to pay more than $3.5billion to resolve bribery allegations involving Brazil’s state-run oil company, the largest corruption penalty ever levied by global authorities.
Nonetheless, Gordon sees a future for European companies in Brazilian waters.
Turning to West and East Africa, both have come to a virtual halt.
But things are stirring and, for example, Chevron has just appointed a new country boss for Nigeria. Jeffrey Ewing was previously in charge of CVX’s deepwater operations in the Nigerian sector.
As for Asia-Pac, Gordon says it resembles the North Sea 10-15 years ago.
“They’re getting to the stage of ageing assets and so there are good opportunities on the IRM (inspection, repair, maintenance) side, also life extension and tie-backs.”
Zooming in on the North Sea the bottom line is that it should be possible to make reasonable money at current oil prices, so long as operators and the supply chain play ball sensibly. Gordon agrees with that.
However, even in the IRM market, times are hard right now though it remains essential to ensure that infrastructure is properly cared for and that generates work.
Everything has been “pushed to the right” and that’s making it hard to get new projects off the ground.
“How do we get new investment in for tie-backs which will, in turn, generate opportunities?” asks Gordon.
“Taken together, the small pools are potentially large. If we can get that cracked through the various initiatives, then such projects will provide a benchmark for others to follow in different parts of the world.
“Short-term, operators really do want to get more out of their existing assets rather than spend mega-amounts of money on projects that will take a long time to deliver a return, particularly while oil prices are trapped in this lower for longer situation. And it could become lower forever, as is also talked about.”
But even with small pools, every field is different. And yet surely operators must finally accept that there is a serious need for standardisation … commoditisation of what it is they’re actually doing.
“Standardisation’s a difficult one,” replies Gordon.
“Yes, we’re dealing with Mother Nature and so one size doesn’t fit all but what the industry should be looking at is simplification.
“It could be that you have standardised building blocks that fit together in different ways … modular. There is also a need for cross-compatibility between different manufacturers’ control systems so they are capable of ‘talking’ to different wellhead assemblies.
“When times are difficult, companies are forced to collaborate and find ways to make what they do more efficient. It’s not about being independent and trying to do things your own way, today is about how can we make this industry more competitive.”
However, this conversation’s been going on for more than 25 years to Energy’s certain knowledge. This is the third kick in the crutch that the North Sea’s had.
But the industry’s in a very different place to the last two downturns. The backlogs have all but disappeared; hedging on the oil price is falling away; and yet one could also argue that there’s no real reason why the North Sea cannot do relatively well on $50 oil.
“You’re right, we can,” says Gordon.
“The theme of this year’s Expo is adapting to the new norm. Don’t think we can put our heads in the sand and wait for things to get better. We can make money at $50 and with mature assets too.”
Witness the role models of Beryl and Forties, both operated by Apache and both still money-spinners.
Gordon: “Most of the operators are on the path cut by Apache and are getting there. They’re having to be ruthless, but they must be careful; not to kill off what sustains their business.
“And that’s where the industry has to be very smart when it looks to operations in the future. It’s about what can we do differently to add value.
“Again, talking with many of our members, if they have been doing something historically that doesn’t add value in today’s market they really need to think about their offering.
“We’ve been through downturns before and yes we’ve had initiative … CRINE, Logic and others. Great initiatives at the time but when the industry recovered, old habits crept back.
“This time it’s about making behavioural changes that stick … don’t trash the achievements after things pick up.”
One of Energy’s abiding concerns is that many people in this industry seem not to understand just how long the first two big downturn recoveries took. It was at least seven years in both cases.
Surely this time it could take even longer?
Also, in the past downturns, very few companies in the supply chain actually died though many were quietly picked off in bargain basement deals to save them from death. This time a stack of firms have gone bust … not been picked up. Look at Harkand for example.
Gordon: “Prior to this current downturn there was a huge amount of activity going on. Was this sustainable long term? Perhaps not. There has to be a correction. But if that correction goes too far and things start to recover then the stage will once again be set for boom and bust.
“The firms that have gone bust this time tend to be those that came into the market late, are relatively new and were built on a lot of borrowing. And when they don’t generate the cash, investor confidence drops rapidly.
“Historically, the companies that are strong are those that have been around for many years, which have cash reserves and an understanding of how to see out a storm. While they might trim their business, and many have, they’re unlikely to downsize considerably.
“The danger we do have with an industry like this is that if we lose a lot of people it will be hard to take advantage of a recovery. We need to make sure that there are people still coming into the industry and that as much knowledge and expertise as possible are retained.”
So how damaging to future recovery does Gordon think deep job cuts will be?
“The industry has lost a lot of people over the past year. But how long could they have remained anyway?
“Here in the north-east of Scotland there’s very little else for such people, so they have to go elsewhere.
“Are they managing to sustain some sort of quality of life here without having to go and search for work elsewhere?
“And if they are going to remain in the industry are they waiting to come back into the industry?
“Quite a number of companies have made interesting decisions … some reducing the working week and salaries to eke things out. It’s a case of if everybody takes a little less it becomes easier to get through a downturn such as this.”
And yet, as the M2 Subsea story on pages 12-13 shows, new companies are being born out of the conflagration. Led by Mike Arnold, the firm has just picked up the former Harkand ROV fleet, presumably at a bargain price.
“If you buy into a marketplace low, then you can offer something a lot more competitive; you can make a living and give operators a better deal than might be possible with established companies,” says Gordon.
“The ROV market will be strong … it’s growing anyway. While it has so far been largely underpinned by oil & gas, there are other opportunities emerging … like renewables.”
Meanwhile, in effect, 2017 is about stabilising and starting to grow. But Gordon is clear that it will be slow and based on an oil price that with luck won’t drop below the current mid-$50 range.
A crucial element of getting smarter is embracing new technologies that enable greater efficiency and, if possible, higher recovery rates.
“But how do we get technologies needed for this and which are perhaps not yet fully developed ‘over the line’?
“We might be looking to the likes of the OGA and the government for incentives to get these small fields moving. We need traction.”
And yet surely the technology thing is an old chestnut. There’s a shedload of new technologies dropped at various stages of development gathering dust.
One still finds operators refusing to play ball with SMEs developing apparently no-brainer ideas like Dan Purkis’ one-trip logging tool for late life and near abandonment production wells.
So where’s the change of attitude? There remains a barrier to innovation on the UKCS.
How do you change that?
Gordon: “We have been working on that; particularly with Scottish Enterprise. We’ve done a fair bit of work with the NSRI as well in order to find out what could we do to prove up new ideas/technologies infield. We should hopefully have news on that early year.
“We would like to have some sort of proving facility. We need to discover exactly what it is the industry needs.
“Could it be for oil & gas, could it be for renewables, could it be a full dummy field where equipment could be trialled and new IRM thinking tried out?
“I’m pretty confident we’ll have something in the next year or two that will be beneficial.
“Of course, as an industry, we are still so reticent about taking on new technology risk.
“You can test something as much as you like in a benign, controlled environment, but it still has to be live tested. On the other hand, you have a well, it’s producing and generating cash-flow and you don’t want to take on additional risk.”
A possibly increasingly pervasive trend is protectionism, of which the US’s Jones Act of 1920 is a prime example. It looks as if the new Trump Administration will push greater protection for American businesses and make it harder than is currently the case for foreign firms to gain a foot-hold.
But Gordon has so far seen no change beyond the long-time impacts of Jones.
“We’ve not long since had a meeting with Karen Bell of the Houston British Consulate. I asked her whether she had noticed any changes or attitudes in terms of protecting their domestic supply chain. We have to watch and wait.
“Will we see a change in attitude? Obviously with Trump as the new US president and given the rhetoric that he will protect US industry, we should be looking to ensure we maintain relationships with partners and clients in the US.
“If we can demonstrate that the supply chain in the UK can add value then that is surely important.
“Big deepwater developments in the US Gulf of Mexico have so far required the large European subsea contractors and that looks likely to continue.
“Quite a lot of smaller companies in the subsea supply chain are doing OK too. Don’t forget, a growing number have US subsidiaries anyway. How would that be judged by federal government under Trump? We’re not sure and it’s something that our companies have to be aware of.”
What about Brazil? Car Wash, government scandals and all that?
“I know Brazil reasonably well and set up a joint venture there in my previous life,” says Gordon. “It is a challenging place in which to do business.
“I went to Rio Oil & Gas in October and we had a stand right next to Petrobras. On the first day of the conference Brazil’s federal president attended our stand as did Petrobras and others. He said that he planned to make Brazil a place to do business … much more pro-business (than predecessors). He seems to want to clear away the mess that has built up over recent years. It is to be a real overhaul but will take about a year.
“Even the approach to pre-salt is changing. Once only for Petrobras, the government has opened the ultra-deepwater up to the IOCs (international operating companies).
“Brazil has been seen as a difficult place to do business. But, in the current crisis, there are few places around the world where there is significant investment ongoing. However, Brazil is still investing in new projects. Subsea 7 still has a big presence there while Technip has a manufacturing plant for umbilicals. Aker has invested heavily in that area too.
“It’s probably quite well structured for growth in the future but I still think there’s a big opportunity for a lot of the companies here (in the UK). But they will have to be careful.”
In contrast and according to Gordon, the shutters have been pulled down on just about any investment in West Africa. Nigeria also still has its troubles including lawsuits between government and oil companies amid allegations of corruption.
“West Africa doesn’t have a major central hub for activity, it is operated from Houston, London or Paris. And that’s why Africa has to a great extent been left to its own devices despite the huge investments of recent years,” says Gordon.
“Once the industry has finished restructuring and can see its way ahead, then things will move again.”
Meanwhile, there is a cadre of African national oil companies (NOCs) and they play differently. They are breathing down the necks of the IOCs. And if they don’t get the action that they would like to see from their IOC contractors, then they will go and ring the Chinese. Then they will chuck the incumbents out.
Finally, a little more on Asia-Pac, which Gordon finds hard to read; not surprising as it’s a tough area to analyse and draw conclusions. However, one view appears well-formed.
“From a subsea community perspective, I think that area has yet to flourish, with not a lot invested in deepwater yet.”
He doesn’t see Asia-Pac companies causing problems for the subsea contracting establishment in other parts of the world, despite the large amount of construction tonnage already working or in-build, mostly with Chinese backing, directly or indirectly.
“I met with Sinopec recently and they are looking for partners around the world. They don’t have the capability. What they’re doing is in 50m of water currently. I still think Asia-Pac is a big opportunity. I think it has yet to fully flourish. But it won’t grow at pace without input from the Europeans and probably the Americans too.
“I think that if we are as an industry have got to look at operating in some of those places which may be seen as, well, don’t dance with the devil. You don’t know where you may end up,” adds Gordon.