No one should really be surprised. Offshore oil and gas is the ultimate boom or bust industry. But the last boom resonated for years and years longer than normal. People forget that a great fall must follow. Now the resetting of the industry is deeper and more brutal than most will have ever seen. Knowing where you are in this cycle is fundamental. Especially as the industry has not quite bottomed out.
That’s not the end of the world. The industry is not going to shrivel up and die. Far from it. Subsea is still vital to existing production and paramount for new projects. But the industry will have to deal with a harsh new reality and a completely different bottom line, in an industry thrown onto a cash crash diet.
What companies do in the bad times is more important than how they behave when the getting is good. Both clients and contractors alike. That’s a test of their metal. There are still opportunities. There can still be winners and losers. Just that the number of winners will be limited.
A lot of money is on the line. Fortunes could be blown as easily as if they’d been at the roulette table. There are lots of opportunities at the bottom of a market, though the set of risks are different. What’s for sure is that everything could change.
Almost all of the market players could see something happen. Aggressive acquisitions, mergers, having their backers quit, having financing pulled - anything and everything could happen. Every corner of the market could be redefined like never before. Within a year or 18 months the landscape of contractors and vessel owners could be completely different. Maybe even for oil company end clients too. For some, just surviving will be an achievement.
Our annual Global Subsea Market to 2020 report tells you what you really need to know about the market. All the needless noise and wailing of the industry is stripped away for straight to the point answers. For this year, the report format has also been refreshed and enhanced. The report gives you the brass-tacks of where the market is, and is going. With the market tougher than ever before, being aware of what the issues and risks are has never been more vital.
2. Upstream: Money Turmoil
- A Tight Oil Market
3. Demand Review: Stone Cold Reality Check
- Adjacent Markets
4. Supply: Huff And Puff Blows House Down
5. Demand Forecast: Troubled, Murky Waters
- The North Sea
- Rest Of World
- Global Demand
6. Balance And Day-Rates: All About Money, Now Missing In Action
7. Business Environment
- Subsea Support Newbuilds
- Current Subsea Support Vessels And Their Classifications
8. Glossary Of Terms
The market had problems anyway. Costs had got so inflated as to threaten the economics of new projects. Costs were too high for clients to swallow. Then the oil price tanked resetting everything. All the way to the point where just surviving will be a good result for some of the contractors and vessel owners.
2016 is very likely to be the bottom of the market. The depth of this year’s drop is keenly dependent on what level of remedial work appears. Experience suggests remedial levels should be there regardless. But don’t count on that. With oil companies belts so tight, remedial work can still be postponed. Even seemingly critical tasks can be put off and left to some later date when budgets are available or just under less pressure.
A slow recovery thereafter appears, but is still at risk. The normal drivers of new projects are completely disconnected. Normally that would be project economics and a need to replace production decline. For now, the only driver is the desire, or lack of therein, to spend money. And that totally ignores whether projects are economic or not. Even then, years will pass before demand levels come back anywhere close to where they were.
That everything is about a simple decision to spend or not has to be a huge concern. All markets are about money. Or they should be if they are functioning normally. Don’t forget the prime directive of any oil company is to make money. Producing oil is second on that list. With the commodity price on the floor then the oil companies have to squeeze their suppliers until the pips pop so they still make money. They’ll also gain new reserves and production just by buying other oil companies.
Even if oil prices go up, oil companies don’t have to react. They can use the current market funk to reset their own and the open market cost base. When commodity prices go up, they’ll send windfall profits, even if production numbers are falling. That will start a whole new cycle of increased activity but the start will be slow and measured so that costs for the operators are kept low. Whether that’s by design or circumstance doesn’t matter, the effect will be the same. That means that the next overheating cycle will take time to build momentum.
However, there’s a problem in the meantime. Oversupply of expensive ships, and too many players chasing two few new contracts. Massive capital expenditure programmes, wild expansion programmes, and corporate structures that have only ever known the great times, now do not clever at all. Money to do that did not grow on trees. Financing issues will have to be addresses and the questions posed unseemly.
Everything is different, and everything has to change. After an unprecedented – in terms of heat and length – market peak, the following reset is like no other. Brutal does not even come close to describing the change. All of those moves that were foolhardy or too bold will not be shown as folly. Almost all of the market players could be forced to change. Some will consolidate, and some will go to the wall. From top to bottom the contracting side of the market could be completely redefined and littered with casualties.
This isn’t quite doomsday. There are still opportunities. Those that have planned their positioning for the very long-term will still make it. Those will some useful specialities will have to lean on them too. As we head to the bottom of the market, there is the opportunity for distress sales and for someone to make some bold, contrary moves that might eventually pay out. The risks that come with that are still huge.