November 2019

Offshore activity on the rise again in Southeast Asia - greenfield sanctioning to follow?


A review of the 2019 service market as 2020 approaches

Audun Martinsen will discuss main events of the service market in 2019, shift in the service market in 2020s and how will market kick off in 2020.  



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Brighter days could be on the horizon for the oilfield services industry in Southeast Asia, as operators in the region have started to increase their upstream budgets. This applies in particular to Malaysia, where national oil company Petronas is planning to spend 50% of its upstream capex domestically this year compared to 31% in 2018. While sanctioning of new greenfield projects has been moderate in Southeast Asia this year, a boost in brownfield expenditure has been the main driver for higher activity for oilfield service players in the region.

Malaysia represents the largest offshore market in Southeast Asia measured in production, followed by Indonesia and Thailand. These mature markets collectively provided about 70% of offshore production in the region last year, but all have been facing declining output – which has accelerated in tandem with decreasing rig counts – as operators have cut spending during the downturn.

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

The jackup count in Southeast Asia fell from 67 units in January 2014 and to only 23 towards the end of 2016. Activity in Malaysian and Indonesian markets started to grow again in 2017, and has seen even further increases this year, particularly in Malaysia, with a net rise of eight jackups under contract over the past eight months. Thailand has been lagging behind, but the market is poised to improve from two contracted jackups in March this year to five by year-end. Rig activity is an important driver for many oilfield services segments, and the market for completion activity is expected to increase by 11% this year and 9% in 2020. Although well service companies like Halliburton and Schlumberger are getting more work, margins are still low in the region due to a high level of competition in the market.

Operators in Southeast Asia have been very been careful about locking in long term work. Average contract duration for new mutual contracts for jackups in Southeast Asia for 2018 has been about six months. This is short compared to other large jackup markets like the Middle East, India and Mexico, where the average durations average 27, 15 and 14 months, respectively. But in 2019, the trend has shifted and more long term contracts have been seen in the Southeast Asian market as well. In 2018, Petronas exclusively awarded short term work for local drilling company Velesto, adding up to 1.45 years of work for three rigs. Year to date, Petronas has awarded 6.5 years of work, and over 60% of the contract awards were one-year contracts. A recent example seen in the market was when Velesto announced that its jackup Naga 8 secured a three- year contract with Carigali Hess valued at about US$131 million. Looking at some upcoming tenders, there seems to be more term work in the region. Hess is considering issuing a tender for a jackup to drill high-pressure, high-temperature wells in the North Malay Basin in Malaysia. In Thailand, PTTEP has issued a tender for four rigs at the Bongkot/Erawan fields. Each contact will be for between three and five years of work, most likely for one jackup and three tender barges.

Sanctioning of new greenfield projects has again been muted in the region this year. The outlook for next year, on the other hand, appears to be much more bullish for the Southeast Asian OFS sector. A fresh wave of project sanctions in 2020 is forecast by Rystad Energy to boost capex commitments by about 70% versus 2019 numbers, driven by new mega-projects spread across Malaysia, Myanmar and Vietnam. New FIDs in 2021 are then expected to sound the starting gun for big contract awards in Vietnam, Indonesia and even politically troubled Brunei.

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

On the supplier side, established local yards are poised to make a splash, as are major international players like McDermott, Saipem and others that are already involved in a handful of FEED studies. While these commitments are largely within the EPCI sector, the subsea market is also expected to flourish, with numerous FPSO developments and subsea tie-backs on the horizon. A selection of expected contract awards from 2019 to 2021 are summarized in Figure 2.

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

The deepwater market (125m+ water depth) has always been, and will continue to be, relatively small compared to the shallow-water market in Southeast Asia. But there are several projects located in deeper waters expected to be sanctioned over the next two years that could boost activity. Petronas’ Limbayong development was recently delayed and approval is now expected in the first quarter of 2020. There are several players in the race for the FPSO charter contract, but a joint venture of Yinson and MISC is a strong candidate to win the award. In 2021, ExxonMobil’s Blue Whale project in Vietnam and Petronas’ Kelidang project in Brunei are expected to be approved. Expenditure from deepwater projects could spark investments of US$12 billion in the market between 2020 and 2024, as seen in Figure 3. It can be noted that some of the deepwater projects currently in the pipeline for approval face uncertainties, as details on territorial jurisdiction are still being decided.

Activity levels in Southeast Asia are now on the rise and better days for service companies operating in the region seem to be on the horizon. While higher investments will mean increased opportunities for international players in coming years, the primary beneficiary in the immediate term will in all likelihood be local players, thanks to domestic content requirements – especially in Malaysia and Indonesia.