The offshore support market is finally recovering following one of the worst downturns in its history, yet it is unlikely to return to the heights witnessed during the preceding upcycle that ended in 2014.

That appears to be the feeling among analysts as the offshore support industry, worth an estimated $150bn a year, begins to bounce back. Drilling and oil and gas services firms that provide everything from seismic data to rigs and pipeline infrastructure have seen their stock prices plummet in recent years as oil prices bottomed out, investment in renewables increased and US shale output grew.

However, research by Pareto Securities reveals offshore spending grew by 5% in 2018–19 compared with just 2% overall spending growth in 2017–18, with an additional 5% increase forecast for 2020.

“Average growth of around 5% in offshore development spend over the three years, predicated on a stable oil price, is roughly in line with our projections,” confirms Mhairidh Evans, principal analyst, upstream supply chain research at Wood Mackenzie.

“We don’t predict any big spikes in the oil price during the next 18 months or so, but there is still a considerable amount of uncertainty, a lot of it predicated on geo-political activity and the looming threat of a recession, while on the upside there are arguments for sustained demand growth in Asia.”

Size matters: the changing profile of offshore projects

Pre-downturn, from 2007–2013 – a period of very high sustained offshore oil and gas activity – the industry sanctioned around 40 major development projects each year, a figure that subsequently dropped to fewer than 10 after operators put the brakes on spending as the oil price buckled.

Fast forward six years and Wood Mackenzie expects about 50 major new projects to be sanctioned per annum, with this increased drilling and exploration activity translating into increased demand for offshore support vessels, rigs, equipment and services. However, in this context, size matters, as Evans explains.

“A crucial factor is that the scale of these projects is much, much smaller,” she says. “Pre-downturn, the average project size in terms of spend was around $6bn; now we estimate it is around half that.

“Previous down-cycles have been followed by sharp upcycles. The current recovery feels like it has been on the cards for more than a year now, but it is shallower and still slightly elusive,” she adds.

We are seeing big offshore supply chain companies dedicating more resources and directing strategies towards renewable business

While the price of oil remains the key driver behind E&P activity, this current investment cycle is also characterised by an increased focus on environmental, social and governance issues. Investor sentiment towards oil and gas is changing, and oil and gas companies are diversifying their portfolios in response to the demand for more sustainable forms of energy such as liquefied natural gas.

“Some of the European majors, for example, are investing quite heavily in renewable technologies and networks such as solar and offshore wind,” says Evans. “The dent that this is having directly on oil and gas investment is small at present, but at Wood Mackenzie we can see it growing.

“We are also seeing big offshore supply chain companies dedicating more resources and directing strategies towards renewable business. Take a company like Subsea 7; something like 20% of its revenues now come from renewable businesses, a big step up from recent years. So, there is a drive towards sustainability in the support sector too.”

Photo taken from drone showing response vessels deploying containment boom to contain the spill after the simulated spill’s location was identified. Image: Terra Drone

A tight race: the impact of the US shale oil revolution

Evans also cites the shale revolution as a significant contributory factor behind the offshore supply market downturn. Interestingly, she notes that the companies driving investment in the US shale oil sector are the same multinationals that traditionally produced oil and gas from offshore fields.

“When shale started out it was more an independent operators’ game but now international oil and gas companies such as Shell, BP, ExxonMobil and Chevron have really taken an interest,” she says.

“What that does is, again, inject a huge amount of diversification into those operators’ portfolios as well as competition for capital. Each of these operators now has a variety of options as to where it can invest its dollars, and offshore plays are now faced with competition from US tight oil projects.”

The activity that has really fuelled the recovery has been in the North Sea, in Asia-Pacific and in the Gulf of Mexico

In terms of geographical spread, exploration and development activity is spread worldwide, although there was a marked shift away from riskier frontier deepwater plays in West Africa and offshore Brazil during the downturn.

“Activity in those regions has reduced for the simple fact that it is more expensive to operate there and because those proejcts are more complex,” says Evans. “Therefore, the activity that has really fuelled the recovery has been in the North Sea – on the Norwegian and UK Continental shelves – in Asia-Pacific and, to a certain extent, in the Gulf of Mexico.

“However, we see some of these deepwater plays coming back. Guyana, for instance, has been a region that emerged during the downturn, with exploration success there driven by ExxonMobil.”

A sector in transition: business models and financing

Evans says that every segment of the offshore oil and gas support industry has suffered to a certain extent from the drop in demand thanks to the prolonged nature of the downturn – beginning with the market for seismic vessels and exploration drilling – and has had to adjust capacity accordingly.

“The offshore supply chain needs to revisit and readjust strategies and expectations,” she states. “That probably means a bit more capacity being cut out of the supply chain to manage a gradual recovery, and it probably also means the need to continue thinking about business models, with a view to forming more alliances with other companies, for example.”

As for financing upstream projects, the sources will likely remain the same (banks, bond and equity markets, etc) but the availability and cost of that financing may decrease and increase, respectively.

We still don’t see confidence from investors to really meaningfully get involved in the oil and gas sector again

“It is certainly more difficult for offshore firms to attract financing and the cost of that financing will increase as investors attach more risk to the sector as a whole,” Evans confirms. “When we visit the investment community there is definitely a willingness to look again at oil and gas, whereas before it was just a red light.

“However, we still don’t see confidence from investors to really meaningfully get involved in the sector again and that is all about the uncertainty surrounding the offshore industry, both in the short and long term.

“Pinning down the time of the recovery and the size of that recovery is still very difficult for the industry itself and therefore for the investors that back it.”