The Focus Is Offshore

Gregory Brown, Maritime Strategies International - The Focus Is Offshore

Why Middle East oil business is likely to benefit first from the energy upturn

Energy analysts generally agree that the oil sector is now emerging from what has proved to be one of the deepest and certainly the longest-ever recession. But who stands to benefit from the upturn, and when?

Here, Gregory Brown, an offshore energy expert with Maritime Strategies International, a business consultancy, explains why Middle East oil companies are likely to benefit first from the upturn, and why this is good news for offshore energy contractors, service suppliers and workboat operators

Growing oil demand shows no sign of slowing down. The dramatic cuts in exploration and production (E&P) spending implemented by energy majors in the wake of the 2014 oil price crash has meant that the world’s oil reserves are not being replaced by new projects coming on stream. In the long run, this is not sustainable. However, there are now signs that the worst of the recession may be over, with leading energy companies easing budgetary constraints and investing again in new projects.

“We troughed last year,” said Brown in a recent interview. “We believe that we are on the upturn. You can see that in terms of contract awards. Utilisation rates are ticking up. Pricing will come next.

“What we see is that because of years of underinvestment – we’re in this four of five-year downturn – there is a supply side crunch coming.”

FULL INTERVIEW: Gregory Brown, Associate Director for Offshore, Maritime Strategies International

Growing oil demand shows no sign of slowing down. The dramatic cuts in exploration and production (E&P) spending implemented by energy majors in the wake of the 2014 oil price crash has meant that the world’s oil reserves are not being replaced by new projects coming on stream. In the long run, this is not sustainable. However, there are now signs that the worst of the recession may be over, with leading energy companies easing budgetary constraints and investing again in new projects.

“We troughed last year,” said Brown in a recent interview. “We believe that we are on the upturn. You can see that in terms of contract awards. Utilisation rates are ticking up. Pricing will come next.

“What we see is that because of years of underinvestment – we’re in this four of five-year downturn – there is a supply side crunch coming.”

Workboat upside

Brown’s comments will play well with workboat owners and operators, many of whom depend on healthy energy markets, both directly and indirectly. This is particularly evident in the Middle East where spending cuts impact not only the energy sector itself, but also other national infrastructure and marine engineering projects which are fundamental in fuelling workboat demand.

There are caveats, however. Although the oil sector is now in the early stage of the upturn, it will take time. This time, however, could prove invaluable to workboat owners as they fine-tune their portfolios to meet the likely requirements of energy clients and contractors in the future.

“The recovery is coming at a slower rate than what we have seen in earlier cycles,” Brown declared. “And we don’t believe that there is the structural level of demand to take us back to the peak of the last cycle. So the recovery is slower and we don’t recapture the volumes we had before the downturn.”

However, Brown believes there are wide variations between regions, some of which demonstrate robust levels of demand. The Middle East is one of these, Brown explained, because of investment in major oil projects in Saudi Arabia and the United Arab Emirates (UAE) as well as Qatar’s ambitious plans to raise LNG production by more than 40% over the next five years – from the current 77 million tonnes per annum (mtpa) to 110 mpta.

“All of these projects have an offshore lean to them,” Brown pointed out, “in terms of new platforms, new pipelines, and new wells being drilled and completed.”

Crucially, for the workboat sector, these projects are catalysts in stimulating vessel demand, either directly or through the requirements of offshore contractors retained on major project developments.

Country value

As in most energy-reliant regions, politics play a big part in Middle East energy development and Brown noted that demand in those countries is driven largely by national oil companies. Saudi Aramco, the world’s largest energy company, is the most obvious example but others include ADNOC, Qatar Petroleum and the Kuwait Petroleum Corporation.

Throughout the region, there is a drive to promote national interests, with ‘Saudisation’ and ‘Emiratisation’ key priorities in those countries. Brown explained.

“If you’re working with the national oil company, the key thing to manage is ‘local content’ and a key trend across the Middle East is increased in-country value. And if you’re actually able to achieve that and if you’re able to deliver back to the local economy, it gives you a real competitive edge in terms of their supply chain,” he said.

Age – a differentiating factor

Brown then identified some of the requirements relating to the assets themselves. Charterers’ demands – whether they be national oil companies or offshore contractors – are significantly more demanding than they used to be: traditionally, the Middle East as a region has hosted a large number of relatively standard, and often elderly, rigs, offshore support vessels and workboats.

Many of these, Brown suggested, are being “managed out the door”. He said that recent tenders have seen oil companies requesting vessels that are less than ten years old on contract signing, and less than 15 years old by the end of the contract.

“So that manages out some of those older assets. This particular trend is perhaps indicative of the fact that there’s a lot of younger vessels out there and the oil companies feel that they’ve got the power to require those sorts of vessels.”

However, Brown also noted that it is not particularly costly to lay up older standard vessels, so some owners may be waiting for the demand/supply balance to tighten in the hope that charterers may be forced to take older vessels because there are no younger ones available.

It is a conundrum, however. “The longer they are stacked and the more spare parts that are cannibalised, the more expensive it is to get a boat back into the water.”

If the remobilisation cost for a typical offshore support vessel were $1 million, say, after a year or 18 months, that could easily become $2 million after 24 or 30 months.

“You’re starting to think, then, about the economic realities of bringing these vessels back to the market. It becomes harder and harder to reactivate those older vessels.”

More sophisticated assets

Rather like the tightening age requirements, charterers are increasingly aware of advances in vessel design and operation which make new vessels more efficient, enabling wider operating weather windows, lower maintenance costs and improved fuel consumption. This latter point is of growing importance to charterers, especially offshore contractors, who typically pay for fuel.

Many energy companies are only too well aware of technology advances which raise vessel efficiency and cut fuel burn. They have seen these advances pioneered in other offshore deep-water regions where conditions can be more challenging. The North Sea, offshore Brazil and the Gulf of Mexico are examples.

Brown highlighted hybrid power arrangements as being an increasingly popular innovation and, he said, it may well be possible to install battery power packs on existing vessels at a manageable cost. “So, although a number of vessels sat in yards right now haven’t got any provision for battery power, it’s very simple to install. You can put them on for a pretty low initial capital expenditure and you become competitively differentiated by having them.” 

Furthermore, Brown noted that the benefits are more than simple economics. If it can be shown that fuel costs are 20% lower by using a hybrid power arrangement, then the economic proposition is very obvious. You’ve got the economic story plus you’ve got the environmental story as well, because you are running with lower emissions.”

Digitalisation is another aspect of steadily improving vessel operating efficiency. Brown noted that the ability to look at real-time data being relayed both to the operator ashore and simultaneously to the end clients has significant appeal. Not only can the performance of the asset be gauged, but also its precise location. Maintenance can also be made more efficient, by using predictive maintenance techniques, with benefits accruing across large fleets but also, through third party systems, to smaller owners with perhaps only a few vessels.

The call of Africa

Whilst local content is essential in most developing African offshore markets, the Middle East – and Dubai in particular – is an important regional hub for a number of offshore and workboat companies operating there. So far, most offshore developments have centred off the west coast of the Continent – Nigeria, Angola and Ghana – and Brown noted that Senegal and Mauritania are also now areas of focus. The possible development opportunities off Africa’s west coast include the harnessing of additional reserves, through tiebacks at existing installations as well as the development of new ones.

Meanwhile, an entirely new ‘greenfield’ gas play is under development in Mozambique, in the Indian Ocean. Following a recent green light from the Mozambique Government, the Rovuma project is now going ahead, developing the reserves from three ultra-deepwater reservoirs in Area 4 off the island nation’s coast. The first stage of development in Mozambique, Coral LNG 1, is due on stream in 2022 but will be followed by further developments as well as several other LNG projects over the next decade.

The Coral Sul will be the world’s first ultra-deepwater floating LNG plant and brings together a roll-call of leading offshore energy majors and contractors. They include ExxonMobil, Eni, China National Petroleum Corporation, Mozambique’s Empresa Nacional de Hidrocarbonetos EP, Portugal’s GALP Group and South Korea’s KOGAS. Other companies participating in the project include Aker, Baker Hughes, JGC Corporation, Italy’s Saipem, Samsung Heavy Industries of South Korea and TechnipFMC.