Some supply chain bosses may have come into 2020 hoping it would be the year when they finally get rewarded for surviving five years of low rates and cost-cutting.
But those reading Wood Mackenzie’s five predictions for the global upstream sector – offshore and onshore – won’t have taken much comfort from its section on the service sector.
The energy research and consultancy firm said 2019 would not be the “bottom of the market”, as previously thought. Indeed, the “nadir” has longer to run, meaning business will continue to be hard fought, with margins remaining under pressure.
Ahead of her presentation at the plenary session of Subsea Expo, Woodmac’s Mhairidh Evans said service companies were facing another year of tough choices as overcapacity and flat upstream spending keep trading conditions subdued.
Evans, principal analyst for upstream supply chain research, will deliver a state-of-the-nation report on the five-year outlook for the subsea market globally before zooming in on the North Sea.
It won’t all be doom and gloom, certainly. The North Sea has fared pretty well compared to other basins in terms of subsea activity over the last couple of years.
In 2019, one-third of global subsea tree awards came to the UK or Norway, putting them only behind the US, so demand has been fairly steady for the North Sea compared to global basins that have taken longer to come back to life, Evans told EV in the run-up to the show. It seems part of the reason for this stability comes from the operators, who are so often the object of resentment.
Evans said: “When it comes to the North Sea, the supply chain has benefited from very dedicated operatorship.
In Norway you have Equinor and a selection of other operators such as Var Energi and Neptune who have incentives to grow production on the Norwegian Continental Shelf.
“In the UK majors are still very active when it comes to keeping offshore assets at a good production level.”
What’s more, the UK boasts the two biggest subsea equipment manufacturing plants in the world – TechnipFMC in Dunfermline and Baker Hughes in Montrose. They are serving global projects, which is good for the UK workforce in terms of demand.
But at a global level oversupply persists, particularly in the rigs and drilling market, while overall upstream expenditure will remain flat for the second year in a row.
As such, 2020 is unlikely to bring a marked improvement in trading conditions for suppliers.
Evans said: “Although the supply and demand gap is getting narrower, we do not see growth in demand in 2020, which could be a flat year.
“When you don’t have demand growth, suppliers face a tough decision. Do they tough it out and keep the capacity they have or reduce it to stimulate a tightening of the market?
It needs a collective response from the whole supply chain but that won’t happen.
“Some companies can ride out another year of low margins and others cannot. That will be the test of this year. That’s more the case for rig and vessel contractors than subsea equipment manufacturers.
“If project FID is made now, it’s another two years before the rig and vessel scopes are executed so there is a lag effect for the supply chain.”
Meanwhile, the trend of traditional oil and gas supply chain companies expanding into renewables is going to continue.
A significant chunk of revenue at some of the sector’s larger suppliers, such as Subsea 7 and Saipem, now comes from offshore wind and renewables.
“As offshore wind grows and matures we can expect to see more traditional oil and gas players make deliberate moves to that area,” Evans said.
“Offshore wind investment is nowhere near overtaking oil and gas, but it provides a buffer against the cyclical nature of oil and gas.
“More diversified revenue is pretty welcome for supply chain players.”
Digital technology represents another real opportunity for the sector.
Evans said: “For the supply chain, digitalisation has a dual meaning. It can be a very useful tool for lowering costs.
“Digital techniques can cut out a lot of inefficiency by automation – for example in manufacturing or even drilling. This allows companies to become leaner and slicker.
“But it is also a revenue generating opportunity for the supply chain because it can offer digital services alongside traditional oil and gas services.
“Adding a digital strand to that offering is something operators are really looking for.”