Westwood: More offshore EPC spending in 2020, prices remain a focus

Significant cost reductions have improved E&P cashflows and should drive increased offshore tendering activity in 2020 with pricing expected to remain competitive, according to market research provider Westwood Global Energy Group.

Westwood said on Thursday that contractors would need to remain focussed on profitability and avoid being locked into low-margin purgatory.

The company identified that oil markets were off to a rocky start in 2020 over several unrelated circumstances, namely, heightened tensions in the Middle East, Australian bushfires, and the rise of the COVID-19 (Corona) virus in China.

For the offshore oil & gas sector, however, 2020 should be the second year of growth for an industry still reeling from the most severe downturn in its history.

Westwood Global expects $63 billion of contract awards for new offshore oil and gas production infrastructure in 2020 – a 49 percent increase over 2019 and the highest in seven years.

Floating production systems (FPS) spend is projected to reach $20 billion in 2020 after hitting $13.5 billion last year.

Latin America will dominate activity with major awards such as Mero 3, Itapu, and Sergipe underpinning $7 billion of spend. Africa will also feature with Woodside’s focus FPSO already awarded to MODEC in January and BP’s PAJ, and Shell’s much anticipated Bonga SW projects currently expected to be awarded late in the year. Other major awards anticipated are Western Gas’ Equus in Australia and LLOG’s Shenandoah in the USA.

Subsea tree contract awards underwhelmed in 2019 with only 212 tree orders – significantly lower than the 263 in 2018.

Much of this can be attributed to delay in award of certain key contracts such as Payara, Mamba, and Sangomar. With these major projects now expected this year – Sangomar was awarded to Subsea Integration Alliance in early January – 2020 looks like a bumper year with 321 of projected tree awards and $10 billion of subsea equipment order value for contractors.

Increasing orders are a welcome reprieve for a beleaguered offshore EPC supply chain still reeling from the worst downturn in its history. The recovery remains fragile, according to Westwood.

With most E&Ps budgets based on $60-$65/bbl, there is very little room for pricing growth, meaning contractors must continue to look within themselves to improve margins and profitability of their operations.

“If oil prices do continue to stick to their current $55-$65/bbl groove, contractors will more than ever need to clearly understand future tender activity and contracting dynamics. This will enable them to prioritize internal resources and stay right-sized and relevant. Overall, 2020 is expected to see a jump in offshore E&P infrastructure tenders, as E&Ps rush to lock in low costs,” the company stated.

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