2020 Expected to Transform the Offshore Supply Chain
The offshore supply chain started 2019 with the momentum of strong award levels of subsea equipment and FPSO hulls as well as improved floating rig rates. However, uneasiness has been building around the financial health of the offshore supply chain, and 2020 is likely to see a transformation, says Hoang Lu, from Wood Mackenzie’s upstream supply chain team.
“Margins are razor thin and cost pressures continue to bear down. Meanwhile, the energy transition and threat of oversupply compete for attention. Ultimately, the offshore supply chain may take on a whole new look through 2020.”
Wood Mackenzie forecasts that oil demand will peak in 2036, and the energy transition continues to accelerate towards that point.
Hybrid batteries have been a conduit of transformation, says Lu, noting Transocean’s first-of-its-kind hybrid energy storage system deployed on the Spitsbergen semi-submersible in the North Sea. Transocean’s patented hybrid power technology, developed in partnership with Aspin Kemp and Associates, reduces fuel consumption and increases a dynamically positioned rig’s station-keeping reliability by capturing energy generated during normal rig operations that would otherwise be wasted, and storing it in batteries. This energy is then used to power the rig’s thrusters.
“Seadrill has made similar strides with the West Mira, another hybrid-powered floating rig employing a similar battery energy storage system. We expect any orders of newbuilds will require a renewable element, like Awilco’s two green newbuilds currently on order.”
Environmental, social and governance (ESG) criteria are increasingly important, and, as a result, are shaping offshore supply chain brands. TechnipFMC announced it will now be known as Technip Energies to highlight its ambition to be a global energy transition player. BHGE has become the Baker Hughes Company in a similar pivot towards energy-focused technology. Look out for much more of this rebranding in the near future, says Lu.
“A lower margin supply chain is a reality for the near term,” he said. “Contractors will likely seek ways to broaden their scope of services to balance portfolios with the growth of renewables. Offshore wind projects are increasing in complexity, with larger developments being installed ever further offshore. This presents new opportunities for the supply chain. The next phase of offshore will ultimately be highly competitive; adapting early is vital.”
The Majors
Meanwhile, the exploration sector heads into 2020 facing increasing pressure from the energy transition, says Alana Tischuk from Wood Mackenzie's global exploration team. While capital discipline and portfolio high-grading remain key, the shift to a low-carbon world poses a fundamental challenge, and this year is likely to show the sector’s direction of travel in the years ahead.
“Some investors are questioning the need to explore at all given the vast discovered resource base yet to be developed," says Tischuk. “However, lower-carbon opportunities very often have lower costs and better economics. The challenge is to achieve success at scale. Companies will drill in the hope of finding better resources than those they already have – lower cost barrels with a higher margin.”
She said that while new opportunities exist, these large, valuable prospects lie mostly in new and emerging plays. The Majors are likely to remain prominent participants in high-impact exploration plays. National oil companies (NOCs), which are less exposed to investor concerns, may also be able to step up their exploration game.
Some companies may announce a strategic move towards acquisition-led growth or new energy businesses. Others are boosting their gas portfolios, viewing it as the fuel that will power the energy transition.
Tischuk said the move towards gas shows that exploration is not mutually exclusive with a low-carbon future. A diverse inventory of low-breakeven opportunities will be key as the energy transition unfolds. Those prospects with a clear route to commercialisation are likeliest to be drilled. One of the characteristics of successful, independent explorers is quickly exiting plays where they have limited early success, she said.
“Traditionally, Majors have held their acreage to the end of term, but we expect them to adopt the swift turnaround approach of their smaller, nimbler cousins. Many of the areas the Majors have added are ultra-frontier, giant blocks, added for minimal commitments. This trend of fast turnover of new acreage may not become apparent in 2020, but instead materialise in the next three years or so.”
Globally, Wood Mackenzie expects 500-600 wildcats to be completed during 2020, adding around 15 billion barrels of oil equivalent resources, in line with industry performance since 2014. Investment should hold steady at between $25 billion-$30 billion, similar to that spent in 2019. However, spend could slip by as much as five -15 percent as cost efficiencies continue.
Tischuk said the Americas will continue to see increased levels of exploration this year, particularly Brazil and Mexico, as will sub-Saharan Africa. Total has high hopes for South Africa after making the giant Brulpadda gas condensate discovery in 2019. The company plans to drill up to four exploration wells in the country in 2020, three targeting oil in the deepwater Outeniqua Basin. The company will also drill its giant (two billion barrel) Venus oil prospect in deepwater Namibia. Shell and Kosmos are also among the companies hunting giants offshore Namibia in 2020.