Subsea Sector Set For Continued Recovery in 2022

By Tsvetana Paraskova

Higher exploration activity and an uptick in offshore project sanctioning are set to support the subsea sector in 2022 and beyond.

Deepwater oil and gas exploration will likely lead in new discovered resources as operators prioritize highly productive reservoirs offshore South America, while decommissioning projects and subsea tiebacks to satellite developments will also drive an increase in subsea operations, vessel demand, and subsea tree orders, analysts say.

The global upstream sector is on the rebound and will continue to recover in 2022, Wood Mackenzie said in its outlook for this year.

Upstream spend set to rise

Total upstream oil and gas investment is set to grow by 9% in 2022 over 2011, to take overall spend to US$400 billion again. Despite the uptick in investment, capital discipline will continue to prevail as global reinvestment rate is expected at 40% – calculated as capital investment divided by pre-dividend post-tax operating cash flow. This is near record lows for oil prices at above US$80 per barrel, according to WoodMac.

More than 40 projects over 50 million boe are expected to be sanctioned in 2022, with a focus on advantaged barrels. Low-breakeven, low-carbon deepwater projects will dominate greenfield final investment decisions (FIDs), Wood Mackenzie reckons. Along with robust project economics, operators will be looking for short payback periods and low emissions while sanctioning projects this year.

Yet, the services sector will see inflation of 4-10%, depending on the sector, with hotspots like Norway for example impacted first, said Fraser McKay, Vice President, upstream research, at WoodMac.

In exploration, operators will prioritise deepwater plays with highly productive reservoirs, including giant prospects in Brazil, Guyana, Suriname, Namibia, and South Africa. Deepwater is likely to account for half of all new volumes, according to Wood Mackenzie.

Gas, LNG to lead rise in global investments

Overall investment in oil and gas, including upstream, midstream, and downstream, is projected to rise by 4% to US$628 billion this year from US$602 billion in 2021, Rystad Energy said in an analysis in January.

The growth will be led by a 14% increase in gas and LNG investments, the independent energy research firm said.

Offshore oil and gas investments are expected to rise by 7 %, from US$145 billion last year to US$155 billion in 2022.

Offshore projects will provide ample opportunities for contractors as TotalEnergies’ North Platte project enters the final stage of its tender process and LLOG Exploration’s Leon and Chevron’s Ballymore developments in the US Gulf of Mexico look to proceed to the development phase this year.

There are around 80 projects worth a total of $85 billion in the global approvals pipeline for offshore field sanctioning for 2022. Of these, 10 are floating production storage and offloading units (FPSO), 45 involve subsea tiebacks, and 35 are grounded platforms, Rystad Energy has estimated.

Latin America and Europe will account for around 24% each of the total offshore sanctioning values, with deepwater expansions expected in Guyana and Brazil, as well as Norway following recent tax changes.

The number of sanctioned offshore projects is expected to rise year-over-year but will remain little changed when measured by capital commitments.

An outstanding concern for 2022 is execution challenges related to the pandemic and increased inflationary costs for steel and other input factors. These are likely to make operators mildly cautious regarding significant capital commitments,

Rystad Energy noted.

Subsea sector to benefit from new cycle in offshore spending

“With a more optimistic sentiment and a portfolio of economically robust projects the EP companies are moving forward with new projects and fresh capital as part of a new investment spree. Many of these projects are smaller developments supported by subsea tiebacks and existing infrastructure such as in Norway, but also larger developments like new FPSOs to be installed in Brazil as they need to ramp up with a goal to double their production from 2020 to 2030,” Oddmund Føre, Senior Vice President, Energy Service Research, at Rystad Energy, said an overview of the offshore supply chain in November.

“Nonetheless this means a lot work to be handed out to the service sector,” Føre added.

The market for floating production, storage, and offloading (FPSO) units started to recover in 2021 and will continue to do so this year, with 10 new awards expected, Rystad Energy said in a report in early January. Two lease contracts were awarded in the fourth quarter of 2021, bringing the total for the year to 10 – up from just three in 2020, signalling a strong rebound for the FPSO market with the number of contracts surging to pre-Covid levels.

As in 2021, Brazil will continue driving the FPSO market in 2022, with three additional FPSO awards expected. The UK is expected to add two projects, and Guyana, Angola, Australia, China, and Malaysia are forecast to each award one new FPSO contract this year, Rystad Energy said.

With around 30 FPSO units under construction or queued up for construction, and another 10 expected to be awarded over the next 12 months, the market is set to build on its recent success. However, as witnessed in many other facets of the global economy in recent months, supply chain concerns linger and will test the market’s ability to take in new contracts without uncontrollable cost overruns and delays,

said Zhenying Wu, a senior analyst with Rystad Energy.

Going forward, “The world of subsea development will move more toward what you see in Norway, which is the kind of satellite developments to existing hubs,” Rystad Energy Partner Simon Sjothun said at Riviera Maritime Media’s Offshore Support Journal Subsea Conference 2021 in November.

Inflation raises subsea costs for operators

Norway will be the subsea tie-back leader in the world through the middle of this decade, Rystad Energy says, but notes that the inflation hit to projects will amount to an additional US$6.5 billion in costs for upcoming contract awards for goods and services in the offshore oil and gas industry through 2026.

Norway, western Europe’s largest oil and gas producer, will be the global leader for awards related to subsea tie-backs during the next five years, as their collective value are projected to reach US$55 billion for suppliers, based on 2021 pricing. The US subsea market will be the second largest with US$44 billion of new contracts anticipated, followed by the UK with US$29 billion, Russia with US$25 billion, and Brazil with US$24 billion, Rystad Energy’s report found.

Subsea tree demand set for highest since 2013

In the market of subsea tree contracts, Westwood Global Energy Group’s outlook for 2022 as of January 2022 points to total up to 354 units, the highest since 2013 based on US$65 per barrel Brent. Of these, 173 units, or 49 %, are classified as “Firm”, 125 units as “Probable”, and 56 units are classified as “Possible”, based on Westwood’s assessment of subsurface, commercial, and geopolitical factors. Westwood has included 53 units, or 15 % of all subsea tree awards anticipated in 2022, that have already been awarded but are subject to governmental approvals and a final investment decision on the respective fields.

Our full-year, 2022-2026 subsea tree demand outlook is currently at 1,380 units, a 25% increase compared to the 2017-2021 period. Latin America is forecast to account for approximately 36%, driven by Petrobras’ continued investment in its pre-salt basin and ExxonMobil’s Stabroek developments,

said Mark Adeosun, Lead Analyst, Subsea, at Westwood.