After a year with a dramatic drop in oil prices topped with an intricate corruption scandal, the oil and gas environment in Brazil is now experiencing large investment cuts and fierce competition for new contract awards between oilfield service companies, however long-term outlooks are still positive with an expected increase in oilfield purchases towards 2020 .
In June 2015, Petrobras revised its five-year business plan significantly down compared to the 2014 plan as a reaction to the market and country turbulence. The new five-year investment levels are 37% lower than what Petrobras guided a year ago. With the new investment plan, Petrobras also revised its focus areas and will now mainly focus on development of oil producing fields, with 83% of investments, while cutting back on exploration activity, now only accounting for 10% of Petrobras’ upstream investments. Estimated 2020 crude and NGL output was revised down from 4.2 million bbl/d to 2.8 million bbl/d; Petrobras is currently producing around 2.0 million bbl/d.
In the current market climate, we expect Brazil to have a yearly average decline of 10% in oilfield service purchases, from 26 BUSD in 2014 to 19 BUSD in 2017. Our analysis suggests that market fundamentals will lead the offshore E&P industry back into a growth phase post 2017; this is also the case for Brazil even though they are currently struggling. We estimate Brazil to see an average yearly increase in oilfield service purchases of 14%, from 19 BUSD in 2017 to 29 BUSD in 2020.
Well Services and Commodities and Drilling Contractors related services are the segments with the steepest decline with an average of -19% and -21%, respectively, yearly towards 2017, but will also experience the steepest recovery and brighter days, with around 21% and 25% yearly average growth, when the Brazilian market is expected to recover post 2017.
Even though the anticipated market recovery is post-2017, there are bright spots in 2016 as well. We expect three of the main service segments to recover to growth numbers already in 2016, with EPCI, Maintenance and Operations, and Seismic projected to see a YoY growth of 23%, 4.5% and 10.5% respectively from 2015 to 2016.
The offshore drilling market in Brazil, served by floating drilling rigs, has been one of the largest drilling markets in the world over the past years and is an important driver for a number of service segments within the country. We expect the Brazilian floater market to face challenges in the short run and estimate floater demand to decline 16% on average YoY, from 2014 levels of 67 units to 47 units in 2016. Exploration activity is expected to decline on average 31% yearly from 2014 to 2016, and is hence the activity, which will be hit hardest. In comparison, we expect development drilling to drop by 9% on average yearly in the same period. Post 2016 we expect the drilling demand to slowly increase towards 2020 at an average growth rate YoY of 6%, driven by both exploration and development activity. To set this development in a larger context, Brazil’s floater demand stood for around 30% of global demand in 2013, while 2020 expected floater demand in Brazil only accounts for 20% of global demand.
A good example of current challenges in Brazil is the Sete project, which originally included 29 drilling rigs. Currently the Sete project consists of 15 units, a reduction of 14 units from the original plan. Construction of the majority of the drilling units will be done at the Brazilian affiliates of the Singaporean ship and rig building majors Jurong and KeppelFELS. If one assumes that these Sete rigs will be delivered on time, the combined floater fleet in Brazil will reach around 70 floaters in 2020.
Comparing existing and planned supply in Brazil with our demand forecast, it is evident that a new wave of contracting activity will have to take place to meet expected drilling demand. However, existing units in Brazil must make room for Sete rigs entering the market towards 2020. This is most likely to affect older units coming off contract and approaching special periodic service. Typically, these older units are hot candidates for retirement and scrapping. Nevertheless, despite obvious short-term challenges, the future is brighter, with a large number of new contract awards that will send positive signals to the offshore drilling rig market and the rest of the oilfield service segments in Brazil.