August 2019

Fabricators are building backlog

SPE Offshore Europe 2019

Aberdeen, UK
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September, 3rd to 6th  
 
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Article: FPSO market is booming with Brazil fueling demand

Article: Employment is shifting from shale to offshore


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The outlook for offshore service providers has brightened, as contract backlogs reported in the first half of 2019 grew for the third consecutive quarter for the first time in five years. This improved backlog is driven by the wave of project commitments so far in 2019, which stands at $56 billion and counting. As forecasted in our July 2019 Project Sanctioning Report, this year could see the offshore industry sanction $123 billion worth of projects. In contrast, the industry only sanctioned 69 billion worth of projects for the entire year of 2018.

Rystad Energy tracks the backlogs of top service providers in the subsea and EPCI sectors, and analyzed reported numbers from SBM Offshore, TechnipFMC, Samsung Heavy Industries (SHI), Saipem, and other top players. All achieved record numbers back in 2014, with collective orderbooks exceeding $197 billion before the downturn struck. By the end of 2018 however, the combined backlogs of the same group had dwindled to a mere $84 billion, representing a perilous drop of 57%. But the tide has since turned, as the collective backlog rebounded to $103 billion by the end of June 2019, and appears to be growing at a rapid pace. Backlog is the booked future revenues from awarded contracts – increased backlog indicates that revenues are likely to trend upwards soon.

A bar chart showing the offshore projects greenfield commitments by commitment year in billion USD from 2010 too 2019. Source: Rystad Energy - ServiceCube

One company with a swelling backlog is TechnipFMC, which landed contracts worth a record sum of $11.2 billion during the second quarter of 2019. The company’s order intake – in other words the total value of contracts awarded – is already 22% higher in 2019 than it was for the entirety of 2018. Smaller companies, such as Keppel and Dril-Quip, also benefitted from increased market demand, with both adding 20% to their backlog compared to last year.

After consistent growth in the run-up to 2014, backlogs in various segments fell precipitously. Backlogs for contracts within facility fabrication fell by 47%, SURF dropped by 64% and subsea equipment plummeted by 71%, before the market hit bottom in 2017. The offshore industry has sluggishly inched towards recovery since then – facility fabrication backlogs, for example, now stand at $33 billion, still 28% beneath the peak achieved in 2014. Still, the subsea market continues to struggle, as combined expenditures in the sector were effectively halved from $47 billion in 2014 to $23 billion in 2018 before demand finally started rising again. EPCI businesses targeting facility fabrication were helped by the increased volume of floating production, storage and offloading vessels (FPSOs) sanctioned and increasing demand for onshore construction, especially related to unconventional projects, midstream and LNG.

The global market for FPSOs, having seen seven contracts awarded so far in 2019, is headed for a major renaissance with as many as 24 additional FPSO project commitments expected to be made by the end of next year. Offshore operators are finding their footing again after the downturn of 2014, as a robust rise in free cash flow has fueled a significant uptick in deepwater investments. South America leads the pack with 12 sanctioned FPSO projects planned through 2020, followed by Asia with four, Europe and Africa with three each, and two more in Australia. Rystad Energy anticipates that a total of 13 FPSO contracts will be awarded in 2019 alone, a significant increase from last year’s eight awards.

The six remaining awards expected this year include three projects in Brazil and one each in Malaysia, Senegal and Australia. Looking beyond 2019, Brazil is set to award seven more FPSO awards in 2020, thereby bringing the country’s tally to 12 out of the 15 total FPSO commitments in South America for 2019-2020, and more than one-third of the 31 awards anticipated globally in 2019 and 2020. Following Brazil’s 1.5% oil production decline last year, the addition of the multiple new FPSOs will contribute to new growth going into the next decade.

A graph showing the indexed market concentration among E&Ps, Oilfield Service companies from 2014 to 2018. Source: Rystad Energy - ServiceCube

In addition to the recovery of the FPSO market, we also see the realization of the backlog in the deepwater drilling segment. In the fix six months of 2019 there has already been six deliveries of floating drilling rigs to their respective rig managers. The semisubmersible floater Deepsea Yantai was recently delivered to Odfjell Drilling, the Norwegian company’s second floater delivery this year after having received the keys to the Deepsea Nordkapp in January. Transocean and Seadrill having taken the delivery of one semisub apiece, with two new drillships having been handed over to Sonadrill.

This trend could accelerate in the second half of the year, with another eight units scheduled for delivery. If these schedules hold true, that would raise the tally of newbuilds to 14 for 2019. But still the fabricators have several projects in their pipeline. In 2020, 11 additional floaters are likely to be completed and delivered, followed up by another five in 2021.

A graph showing the major equipment vs. topside weight for selected operators in tonnes, million USD, offshore commitments from 2010 to 2019. Source: Rystad Energy - Cost estimating and analysis

Assuming commodity prices remain at current levels, a wide variety of undeveloped oil and gas projects could help the fabrication and subsea market build further backlog by large volumes of order intake. According to Rystad Energy’s ServiceCube, the next few years have the potential to bring consistent contract awards for the subsea and fabrication markets. Contracts in these sectors are projected to total $118 billion this year – close to double the value of contracts seen in 2016 – and we expect contracts will stay above $100 billion per year through 2021. The increase in fabrication contracts stems mainly from the Middle East and the US, where numerous offshore platforms and LNG developments are on the drawing board.

A graph showing the offshore unit prices from 2014 to 2019 by contract award year