Analysts warn of multi-year blow in umbilicals segment
The Covid-19 pandemic could see demand for umbilicals fall by 32 per cent this year, Rystad Energy impact analysis reveals.
According to Rystad, expected demand could fall to just 713 kilometres of lines in 2020, from 1,041 kilometres last year.
Umbilical demand will not match or exceed 2019 levels until after 2023, Rystad says, despite definite cost savings in materials.
Before the pandemic demand for umbilicals was due to slightly decrease this year compared to 2019.
But, it should have rebounded and exceed last year’s levels from 2021 onwards.
Initially, Rystad saw a umbilicals cost reduction of approximately 5 per cent taking place from 2020 to 2022.
However, if global recession and O&G industry downturn take place simultaneously, it could go to almost 14 per cent.
Rystad Energy oilfield service analyst Henrik Fiskadal, said:
“This will provide umbilical manufacturers short-term relief regarding their own costs as material prices fall, allowing them to maintain production volumes and recover some of their margins despite cutting their own prices.
“However, this short-term relief may not last long as the global economy recovers from the Covid-19 pandemic.”
Limited options to cut costs
The materials most commonly found in the manufacturing of umbilicals are high-grade stainless steel, carbon steel armor wire, hydraulic hoses, power cables, fiber optic cables and thermoplastic resins.
In addition to the materials, engineering labor is the next largest cost input involved in the manufacturing of umbilicals.
Therefore, the more complicated and unique is the design, the more strenuous and costly the fabrication and installation processes.
Prices for materials have remained relatively flat since 2014, whilst the service price for SURF equipment has fallen significantly.
Rystad believes that operators have exhausted most of the cost cutting potential in the years following the 2014 downturn.
Should we see a global recession, materials such as high-grade stainless steel may decrease significantly in price.
However, when the global economy rebounds from Covid-19, material pricing could increase before the oil and gas industry is ready to accept higher prices for umbilicals.
Also, in 2021, demand could reach 798 kilometres, growing to 819 kilometres the following year and to 979 kilometres in 2023.