Welcome to our June edition of the Supply Chain Insights

Energy transition is at the front and center of the energy industry. How is this likely to play out for the part of the energy service sector that is most exposed to offshore oil and gas activity?

Oil prices that have stayed well above $80 per barrel since January have allowed oil companies to harvest from a very competitive portfolio of offshore fields with low breakeven prices. This cash can be used to further invest into new and green energy sources as part of the long-term energy transition. At the same time, it’s important that the companies plow some of this money back into shorter-term investments in their legacy oil and gas business. This has become a top priority for the industry as oil and gas demand has grown steadily after the pandemic, with a strong additional boost in recent months as many Western countries are shutting out oil and gas supplies from Russia due to the invasion of Ukraine.  It is therefore time for the legacy oil and gas industry to step up and make sure more barrels are lifted to meet the surging demand for liquids in the short to medium term. This will benefit the workhorses of the oil and gas service industry, such as offshore vessels and rigs. Utilization is on the rise, followed by dayrates, finally allowing a market that has been in distress for many years to reap the benefits of the hard work that has been put down in the interim. This is why Rystad Energy expects that many service players in the oil and gas industry have a bright future ahead and that many of these companies are now on track for a recovery.

Thank you for reading.

Oddmund

Oddmund Føre

Senior Vice President
Energy Service Research

The future looks bright for legacy energy services

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Even before Russia’s invasion of Ukraine, a Brent oil price at $80-$90 per barrel was sufficient to ensure increased activity levels for oilfield service companies. Since the war started nearly four months ago, oil prices have climbed far above the levels required for the oil and gas industry to turn profits from operations. Coupled with a growing consensus that the world will need fossil fuels for years to come even amid the ongoing energy transition, the macro-economic outlook has become increasingly favorable for service providers exposed to legacy activities within oil and gas.

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The maintenance, modifications and operations (MMO) sector is important for when looking at legacy activity and short- term performance in lifting barrels to meet the demand for liquids. The biggest growth through 2030 – inclusive of both onshore and offshore – is actually expected in the maintenance segment. Offshore wind and deepwater oil and gas projects will account for most the majority of the increase in seen for offshore maintenance. 

Another segment one of the disciplines benefiting forom the current momentum is anchor handling tug supply (AHTS) vessels and platform supply vessels (PSVs), as shown in Figure 2. We expect to see these workhorse vessel segments to maintain the strong trajectory they have displayed since the Covid-19-constrained year of 2020, extending their strong comeback in the short term (see Figure 1). Our forecast in the fourth quarter of 4Q 2021 projected marginal growth of only 1% this year, with the AHTS segment going from 830 vessel-years in 2021 to 837 vessel-years in 2022. In our latest revision, we have lifted the expected 2022 expect a growth rate ofto 8%, with AHTS demand climbing to 900 vessel-years this yearin 2022. The outlook for PSVs is a similar story, as we now expect growth of 6%, rising from 750 vessel-years on contract in 2021 to 800 in 2022. Thisese developments are is related to the strong exposure of offshore supply vessels to the brownfield sector. High oil prices are making it attractive for the , where the industry to can optimize its production from profile by lifting more barrels from existing infrastructure in a highly profitable segment where the that has already sunk the largest investment commitments have already been sunk during earlier stages.

One key region for brownfield activity is the Middle East, where operators are ramping up rig activity to boost production and spare capacity, with positive implication for AHTS demand. This comes alongside an increase in greenfield activity as operators move forward with new field developments on the back of final investment decisions and fresh capital. Another key market is Brazil’s offshore sector, where demand for oilfield services has flourished as operators strive to deliver on ambitious production targets.

The rig market has seen the needles pointing firmly upwards in recent months. Brazil is showing strength and willingness to move forward with its ambition to install 15 FPSOs in the next years and has several rigs working to get a large number of wells on stream, while in the Middle East, Saudi Aramco is stepping up from 50 jackups this year to 80 in 2023 and 90 in 2024. The Saudi player is putting money and rigs behind its words as it moves to raise production and spare capacity. Overall, the average number of contracted rigs shrank by 2% during the fourth quarter of 2021 in our group of 11 companies (Figure 3), and contracted a further 1% in the first quarter of this year. So far in the second quarter the trend is positive, and several drilling contractors now have almost as many rigs on contract as they had before the 2020 downturn.

The increased rig activity levels will inevitably translate into higher spending from operators on drilling and completion services, which are expected to increase by 25% from $315 billion in 2020-2021 to $395 billion in 2022-2023. Out of the total $395 billion in the current two-year period, around $150 billion will be spent on well intervention and production-related services, and the remainder on drilling and reservoir evaluation-related services. This increase is not entirely caused by higher activity levels but is also driven by inflation, which has become a major concern for the oil and gas industry over the past year. North America is one of the regions with high inflationary pressure, with an expected 30% growth in drilling and completion service expenditure this year. The impact on the North American oilfield service industry can be gauged from the fact that a majority of the exploration and production players in their recent quarterly reports largely maintained their production guidance despite raising capital expenditure.

In addition to the current momentum, there is still some potential upside that could have a material impact on legacy activities within oil and gas. The European Union’s proposed ban on imports of Russian oil, if approved, could lead to a cut of 3.0 million barrels per day of EU crude imports by the end of this year. This would present vast opportunities for players within the rig and well segment as European energy consumers would be forced to find large replacement volumes within a short space of time. Even if the EU stops short of a full freeze on imports of Russian crude, it appears inevitable that Europe will heavily reduce its imports from Russia and will be shopping for alternative sources of oil supply.