Subsea Hardware Spending Ups and Downs

Statoil CEO Eldar Sætre recently stated that over the last ten years, the cost of subsea developments has increased by 250 percent. According to analysts Douglas-Westwood, subsea spending will continue to rise, and there are projects and locations to watch out for.

Sætre says that the rule has been that every operator- and almost every project - has tailor made their own solutions to their seemingly unique challenges. “Increased standardization could become a game changer. We think of it as putting LEGO blocks on the seabed, and we are working together with our suppliers to achieve this mission.”

Statoil is leading the industry in the deployment of subsea equipment. This year will see the world’s first subsea gas compression system come online at the Statoil-operated Åsgard field in the Norwegian Sea. The new system from Aker Solutions will extend the field’s production life by 20 years and enable the recovery of an additional 282 million barrels of oil by boosting gas pressures.

It brings the industry a step closer to having a fully-functioning production and processing system on the seafloor. Gas compressors have already been installed on platforms to maintain output as reservoir pressures drop over time. Placing them on the seabed and near wellheads improves recovery rates and reduces capital and operating costs. Subsea compression also leaves a smaller environmental footprint and is safer to operate than a platform, says Aker Solutions head of technology, Hervé Valla. “The Åsgard project is an industrial game-changer that has the potential to significantly impact the subsea production market.”

As yet Douglas-Westwood (DW) forecasts do not include subsea processing equipment hardware, but it is viewed as a growing trend that will be vital to enable long-term production from a number of fields. “At the moment however people are waiting to see what happens with Åsgard before going forward, says Ben Wilby, author of the new report World Subsea Hardware Market Forecast 2015-2019.

Wilby says that global subsea hardware Capex will total $145 billion between 2015 and 2019, representing growth of more than 27 percent compared with the preceding five-year period. 

The 350 subsea tree installations in 2014 represent the highest volume of installed units on record, a trend expected to continue until 2018 when lower orders in the current commercial environment will drive a decline in trees installed for that year.

“The crude oil price decline, apparent since June 2014, presents a major challenge for operators of subsea developments,” says Wilby. “Subsea projects are typically among the most capital intensive and technologically challenging in the industry. As operators (and their investors) have increased focus on cash flow, the higher upfront costs associated with these projects have left them vulnerable to deferrals and cancellations. Tree orders in 2014 totaled 233, the lowest volume for a decade.”

Subsea hardware spend will be the highest in Africa, Asia and Latin America, with the three regions combining to form almost half of the global total. Expenditure continues trending towards deeper waters with around 42 percent of the total spend in the next five years targeting projects in water depths greater than 1,000 meters.
Asia is mostly characterized by shallow fields but features largely in the figures as there are a number of subsea projects that are scheduled to come on stream over the forecast period in China, Indonesia and Malaysian, says Wilby. 

This includes projects like Jangkrik, a joint development of the Jangkrik and Jangkrik North-East fields located approximately 70km off the coast of Makassar Strait, Indonesia in water depths of 200-500 meters.

“What really brings spend up in Asia though is large trunklines and export pipeline. The region has numerous large pipelines that are expected to be installed over the forecast period such as the Gendalo-Gehem and Sepat pipelines,” says Wilby.

The Chevron-operated Indonesia Deepwater Development (IDD) project, which includes the Bangka, Gendalo, Gehem, Gandang and Maha fields off eastern Borneo, in Indonesia, is the country’s first ultra-deepwater natural gas integrated project. 

Chevron expects the Gendalo and Gehem fields to produce a maximum of 1.1 billion cubic feet of natural gas and 47,000 barrels of condensate per day. Gas from IDD will be shipped via pipeline for liquefaction to Indonesia's existing Bontang LNG plant.

Gas from Gendalo and Gehem will come from subsea wells and manifolds in up to 1,800 meters water depth, transported through flowlines to two separate floating production units. Pipelines of 150km and 88km in length will take the gas to an onshore receiving facility.

Subsea production equipment, SURF equipment (umbilicals, risers, flowlines) and pipelines each attract approximately one third of all expenditure by component, with higher capacity and capability equipment a theme throughout the sector, says Douglas-Westwood in the report. The development of remote fields, the addition of new project phases and the tie-back of satellite fields into subsea hubs continue to support SURF expenditure over the report’s forecast period.

Assistant report editor at Douglas-Westwood, Matt Loffman, says, “Despite these near-term concerns, the long-term fundamentals of the subsea hardware industry are strong and represent a growth story as they benefit from continued hydrocarbon demand growth, declining conventional reserves and technological improvements. Over the next five years, development activity in the established deepwater provinces, coupled with the start of field development in frontier areas, such as the Eastern Mediterranean and East Africa, will support expenditure.”

The Eastern Mediterranean will see some growth, but it will be limited for the time being, says Wilby. “Projects such as Aphrodite in Cyprus could see development in the later years of the forecast. A lot of this will depend on the Leviathan project getting sanctioned – it’s currently tied up by the Israeli government claiming that Noble Energy and partners have a monopoly.”

Meanwhile Sætre calls for fundamental change, embedded into a more sustainable performance culture to help the industry manage development costs. “Standardization, simplification and industrialization. Not yet words that are immediately associated with our industry. But the potential is large in many areas.”