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Subsea Oil & Gas Industry- What lies ahead?
Subsea Oil & Gas Industry- What lies ahead?

April 11, 2022

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Subsea Oil & Gas Industry- What lies ahead?

During the pandemic, curtailment in many activities such as mobility, construction, and manufacturing, dropped the global energy demand by 4% in 2020 (YoY) - the most significant decline since World War II.

All fuels have not witnessed demand erosion evenly; oil was by far the hardest hit as its demand declined by 9% (YoY)- majorly due to mobility restriction. The news was not getting any better for the oil industry as amid the pandemic, an oil price war between Saudi Arabia and Russia erupted in March 2020 when both nations failed to reach a consensus on the production levels. Both events led to the oversupply in the market, which resulted in a collapse in oil prices. In April 2020, the WTI crude plummeted from $18/bbl (barrel) to around -$37/bbl.

However, the industry is now gradually emerging from the setback. During the mid-2020, the countries started to ease on the lockdowns, and the Organization of the Petroleum Exporting Countries (OPEC) agreed to production cuts resulting in a brent spot increase to an average of $43/bbl in Nov '20.

The collapse in oil prices and the erosion of energy demand have been a significant setback for the offshore industry, accounting for 30% of the global oil production in 2020. These two powerful blows resulted in the 19% (YoY) decline in offshore oil and gas capital expenditure in 2020.

This article aims to examine the offshore oil and gas industry's mid-term future (focusing till 2025).

Energy mix pointing towards the dominance of the oil and gas

In 2020, Oil and Gas collectively contributed to 56% of the global energy consumption, followed by coal with 27% (Exhibit 1). International Energy Agency (IEA) forecasts that the natural gas demand will grow by 1.5% per year till 2025 and will reach 4,370 bcm (billion cubic meters) - including 75 bcm of demand erosion due to the pandemic. The Asia-pacific region remains the hotspot for half of this incremental demand.

Oil demand will continue to grow and likely reach 103.2 mmbbl/d (million barrels per day) by 2025- a 4% increase from 2019 levels, backed by growth in the petrochemicals and transportation sector. However, post-2025, the oil demand is expected to slow down due to improved fuel efficiency and increased electric vehicles penetration.

Renewable energy, which has shown resilience to the crisis, is showing robust growth with the contribution of 95% in the net increase in global power capacity through 2025 on the back of cost reductions and sustained policy support from growing economies.

Source: BP Statistical Review 2021

Offshore project commitments by 2025 to increase on the back of stable oil prices and declining breakeven

Oil prices play a crucial role in making an economical sense from the subsea production. Exhibit 2 provides a closer look at the price performance of two benchmarks- Brent and WTI.

Subsea Industry has witnessed a 30% cost reduction in shelf and deepwater projects between 2014 and 2018. In 2014, the average breakeven price for all unsanctioned deepwater projects was around $77/ bbl, which came down to $50/bbl in 2020.

One of the key drivers for improved breakeven prices is the industry's declining unit prices as the oil field service companies reduced the cost they charged to remain competitive. Additionally, technologies such as automation, AI, digital transformation are helping the offshore industry optimize E&P efforts.

Al, digital transformation is helping the offshore industry optimize E&P efforts.

With the recovery in oil prices, the global offshore project commitments during 2021-2025 are likely to reach a record high of 592. Deepwater projects to witness the most prominent growth from 106 in 2016-20 to 181 in 2021-25 (Exhibit 3)

Out of the total 592 project commitments during 2021-25, South America primarily accounts for 50% of the total committed value in Ultra-deepwater activities. At the same time, the Middle East leads 40% of the shelf developments, and Europe accounts for 25% of greenfield expenditure in Deepwater activities.

 

Chart

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Source: Rystad Energy

European supermajors are cutting offshore oil and gas capex to enhance the renewables portfolio

After a 19% Capex decline in 2020 (YoY), the offshore sector is now on a recovery path - albeit with a different future growth trajectory compared with 2019, as electric vehicle adoption has accelerated.

European supermajors such as Equinor, Shell, TotalEnergies, ENI, and BP are adjusting to the new reality and have announced significant growth targets for renewable energy investments. These supermajors may look for divestment opportunities in their existing hydrocarbon investments to fund new renewable projects. Additionally, they plan to invest more in low-carbon business than oil and gas over time to reduce emissions. BP announced that it would increase the investment in clean energy businesses by ten times over the next decade, to $5 Bn a year, and shrink its oil and gas production by 40%. Other European supermajors have set similar targets.

American supermajors such as ExxonMobil and Chevron are sticking to the oil and gas, focusing on shale drilling, deepwater offshore production, etc. Chevron acquired Noble Energy in 2020 to strengthen its upstream portfolio, including new offshore assets addition in Israel that Noble Energy brings to the table post-acquisition. Exxon Mobil is divesting some of its oil and gas assets in Asia, Africa, and Europe. The reason is not a shift towards renewables but to raise capital of $15 Bn as the company suffered a historical loss of $22.4 Bn in 2020. The company has confirmed its focus on production ventures in Guyana, offshore Brazil, and Permian. These IOCs plan to reduce carbon emissions by decarbonizing their existing assets cost-effectively by bringing in new technologies. For example, Chevron is increasing the use of renewable energy to power its operations - a step to reach net-zero (scope 1 and 2) by 2050, and ExxonMobil is investing heavily in CCUS (Carbon Capture Utilization and Storage) facilities.

Exhibit 4 shows the cumulative offshore Capex allocation of 2021-25 versus 2016-20. European supermajors have reduced the offshore oil and gas Capex, whereas Americas' operators have increased their commitments. Chevron is an exception with a 39% Capex reduction as the company has announced massive overall spending cuts by 2025. ExxonMobil also announced Capex cuts; however, its offshore Capex allocation likely to surpass 2016-20 levels by 51%.

This is the part 1 of the article. The other parts are covered in part 2. Click here to access Part 2.  

 


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