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Could capacity be a potential bottleneck in the subsea market?

Should operators be concerned about the new rounds of cost-cutting by subsea companies constraining manufacturing capacity? To answer this question, Rystad Energy has analyzed the impact of workforce reductions in terms of subsea tree manufacturing utilization. Our analysis shows that workforce utilization at subsea tree manufacturing plants is expected to increase dramatically from 2021. Subsea tree suppliers will likely see a widening gap in their capacities going into 2022 if the workforce decreases any further from what it is today.

Should operators be concerned about the new rounds of cost-cutting by subsea companies constraining manufacturing capacity? To answer this question, Rystad Energy has analyzed the impact of workforce reductions in terms of subsea tree manufacturing utilization. Our analysis shows that workforce utilization at subsea tree manufacturing plants is expected to increase dramatically from 2021. Subsea tree suppliers will likely see a widening gap in their capacities going into 2022 if the workforce decreases any further from what it is today.

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Gearing for further growth
During the heydays of the oil and gas industry from 2012 to 2014, subsea tree manufacturing plants pushed capacities to their limits, causing suppliers to boost workforce and invest in new state-of-the-art facilities to gear up for further growth. Several ambitious expansion programs were realized in the three-year period from 2011 through 2013. Aker Solutions, for instance, expanded its manufacturing plants at Tranby (Norway) and Port Klang (Malaysia), while also starting construction of a brand-new facility in Sao Jose dos Pinhais (Brazil) to replace its Curitiba facility. Not to be outdone, OneSubsea upgraded its facilities in Taubate (Brazil) and Johor (Malaysia) in 2012, adding a total of 22,000 square meters as well as several new generation machines and tools. TechnipFMC invested in a brand-new headquarters in Houston (US), effectively doubling its subsea capacity in the region in the process. Meanwhile, Baker Hughes upgraded its subsea tree manufacturing plants in Montrose (UK), Batam (Indonesia) and Jandira (Brazil), substantially boosting its workforce as well as its manufacturing capabilities.

Oil price collapse
Little did the subsea tree suppliers expect that the oil price would collapse in 2014, causing demand for new subsea trees to drop by 60% from 2013 to 2014. Luckily for the suppliers, 2013 was a record year with awards for 527 subsea tree, thereby providing them a backlog to work down. However, by the time the new manufacturing facilities of TechnipFMC in Houston and of Aker Solutions in Brazil were up and running by 2016, global orders for subsea trees had nosedived to only 97 trees. Aker Solutions announced workforce reductions at Tranby; OneSubsea shut down and demolished its facility in Leeds (UK) and downgraded its workforce at its plant in Johor. Job cuts were also revealed at Baker Hughes’ facility in Montrose, and TechnipFMC slashed its workforce in Dunfermline.

A new wave of downsizing
In the wake of the oil market crash at the beginning of this year, service companies again unveiled cost-cutting measures. In April, Aker Solutions decided to accelerate cost-saving initiatives within key segments as a result of the market turmoil. The measures included moving all subsea tree manufacturing at Tranby to the company's more cost-competitive facilities at Port Klang and Sao Jose dos Pinhais from 2021 – removing manufacturing capacity representing the equivalent of around 60 subsea trees per year in the process. Moreover, workforce levels at Port Klang and Sao Jose dos Pinhais were also felt the squeeze, as the Norwegian service provider announced reductions at both facilities.

Other major subsea tree suppliers have also announced comprehensive cost-cutting measures as a result of the Covid-19 disruptions. Baker Hughes made reductions to its oilfield service and equipment portfolio, whereas TechnipFMC had already laid off employees at its facility in Dunfermline. Schlumberger announced 21,000 job cuts across the organization.

By analyzing the activity and workforce levels related to subsea tree manufacturing, we can obtain a view of the utilization of the manufacturing plants. Utilization is estimated as the ratio between the two-year moving average of subsea tree awards and the total workforce at subsea tree manufacturing sites. This ratio is then indexed back to 2013 levels, when subsea tree awards activity was at a peak. As illustrated in Figure 2, manufacturing plants were operating at low utilization in 2016 and 2017 and workforce reductions were implemented. At the same time, the number of new awards for subsea trees began to recover, thus spawning an uptick in utilization levels in 2018 and 2019.

Subsea tree suppliers are likely to see a widening capacity challenge going into 2022 if the workforce is decreased further from where it is now. This result should be a concern for the operators going forward, as activity is expected to pick up in both Norway and in South America. Equinor has even urged Norwegian oilfield service companies to maintain capacity given that the Norwegian continental shelf is expected to see a ramp-up in project sanctioning following a recent tax relief package.

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