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Deeper & Smarter: The Subsea Oil & Gas Growth Outlook

Right now, we’re looking at a 70%-30% spread for total global onshore and offshore oil and gas production, respectively. Of that 30% of offshore production, subsea oil and gas production represents 9%. That is about to change as E&P companies go deeper and deeper, taking advantage of new technology that can handle higher pressure and higher temperatures to ward off declining production.

Subsea production systems are wells located on the sea floor rather than the surface. Petroleum is extracted at the seafloor, and then 'tied-back' to an already existing production platform. The well is drilled by a moveable rig and the extracted oil and gas is transported by riser or undersea pipeline to a nearby production platform. Subsea systems are typically in use at depths of 7,000 feet or more, and do not have the ability to drill, only to extract and transport.

The real advantage of subsea production systems is that they allow you to use one platform—strategically placed—to service many well areas.  And as the cost of offshore production rises, this could represent significant savings.

Subsea production could rival traditional offshore production in less than 15-20 years, and we’re looking at expected market growth for subsea facilities of around $27 billion in 2011 to an amazing $130 billion in 2020.

Subsea Oil & Gas Production

Subsea capital expenditure is set to grow at 14.8% to 2017, according to Infield Systems, and driving this growth is investment in Northern Europe, West Africa, Brazil and the US Gulf of Mexico.

This year is already showing growth, and that growth is expected to continue unabated over the next five years—as demonstrated by the demand for subsea infrastructure.

There are vast opportunities here in a multitude of sub-sectors—from subsea technology development and manufacturing, to supply, installation, service and maintenance and exploration and production (we’ll talk processing next week).

Analysts expect E&P companies to invest more than $19 billion in subsea production equipment in 2013 alone--and up to $33 billion by 2017.

According to Infield, the outlook for subsea equipment manufacturers is optimistic. “The market outlook shows a well-supplied market with a total capacity of 690 trees. Towards the end of the forecast period, Infield Systems expects higher utilization rates and the start of a saturated market, driven mostly by the increasing demand for subsea trees in main phases in Brazil and West Africa. Global subsea tree manufacturers' utilization rates are expected to increase to an average of 75% in the next 3 years, up from 49% in the 2009-2011 period.”

Subsea Trees: Investment Photosynthesis

A subsea tree monitors and controls subsea well production, while also controlling the fluids or gas injected into the well. They are used both in shallow and ultra-deep water wells. Right now, the deepest subsea trees have been installed offshore Brazil and in the US Gulf of Mexico.

They’ve been around for ages, but in combination with other new technology that can unlock hydrocarbons trapped deeper under the water in a more cost-effective manner, subsea trees are experiencing a new boom.

Types of Underwater Platforms

The trees themselves have seen many advances. They can operate in waters up to 10,000 feet deep, and the latest systems can manage troubleshooting, well servicing and well conversion operations. There are also high pressure-high temperature trees that can be maintained in rough environments, as well as horizontal trees, mudline suspension trees, monobore trees and large bore trees.

Infield Systems estimate that ultra-deep installations will account for almost 25% of the annual tree market by 2016.

Subsea hardware market

The key manufacturers are Aker Solutions, Cameron, FMC Technologies, Schlumberger and National Oilwell Varco. (We’ll talk about these companies more in the next newsletter).

In October 2012, GE announced it would  help Chevron Corp. with its large subsea oil and gas field off the coast of Africa near the Congo River estuary by building 9 subsea control modules, seven subsea “trees”, and other technology valued at $165 million for the $2 billion project called Lianzi Field. GE plans to complete the first subsea tree for Lianzi within a year. Chevron expects to start pumping oil from the field in 2015.

Another Chevron subsea darling, the Gorgon Project in Northwest Australia—which is estimated to hold 40 trillion cubic feet of gas, has seen Chevron order $1.8 billion in GE subsea machinery and services.

In Nigeria, Total has ordered 35 trees for its Egina field, 150km off the country’s coast. This is Total’s 3rd deep offshore field in Nigeria. Total owns a 24% interest in the field along with China’s CNOOC (45%) and some smaller partners. Production is scheduled to begin in 2014-2015. There are five wells on this site and oil reserves are estimated at 550 million barrels.

Initially, this field was envisioned as a subsea tieback to the Akpo floating and production storage and offloading vessel. However, due to the scale of discoveries in the area, Egina will now be a standalone development.

The Egina field infrastructure includes an FPSO unit, an oil offloading terminal and subsea production systems.

In Angola, BP will finalize the award process for subsea equipment its deep-water projects in Blocks 31 and 18 offshore Angola this spring, and we may be looking at two other award processes for equipment in other major BP subsea projects in Angola before the end of this year.

In Brazil, Petrobras is working towards an award of the first tranche of subsea infrastructure for its Libra and Carioca fields and a second tranche for its Franco development.

The bottom line here is that orders for subsea tree systems are up. According to Infield Systems, for the first time since 2008, subsea tree orders were up: 416 new orders in 2012, compared with 321 in 2011. Infield also expects over 500 new subsea tree orders for 2013, with as many as 370 new subsea tree systems coming on line this year.

Watch for Market Integration for Offshore Production Equipment

Last year and the first quarter of this year have seen new orders for newly built semi-submersibles and drillships particularly the Asian shipyards.

It’s not only the hunt for new hydrocarbons in higher-risk environments that is bolstering the offshore equipment sector, but the high day rates of offshore production and more rigid safety requirements are leading operators to seek rig upgrades. They’re looking for the latest designs to prevent blow-outs and other safety hazards, and to cut day costs, which can sometimes exceed $60,000.

Shipyards are diversifying into deepwater rig construction and subsea equipment manufacturing—and we expect to see their profit margins grow as a result. We should see some joint ventures here to this effect. Southeast Asian shipyards are looking to mergers with subsea technology companies. For example, Samsung Heavy Industries is shopping around for foreign companies that would give it access to the subsea equipment development market. UK-based AMEC engineering company is already in a joint venture with Samsung Heavy Industries—AMEC Samsung Oil and Gas LLC (ASOG). What they’re eyeing is contracts for the design of fixed platforms, floating offshore platforms and subsea pipelines. 

Where to Look for Subsea Project Growth

While Norway takes the lead now, the future is likely to see this status rivaled first by Australia and West Africa, and then by Brazil and the US Gulf of Mexico.

The Shell Perdido
The Shell Perdido is the first full field subsea separation and pumping system in the Gulf of Mexico.

•    North America: There are currently some 55 subsea projects going on in North America. Compliance of equipment and infrastructure will necessitate higher expenditures on subsea development

•    North Europe: There are almost 75 subsea oil and gas projects in existence in North Europe, with Norway taking the clear lead, though analysts expect it could lose this status as major subsea projects come online in other countries, on other continents over the next 3-5 years. The UK is the second major subsea venue—for now. 

•    Africa: With around 20 existing subsea projects online, we expect more as the majors like Total (which will spend around $8 billion in subsea projects in Africa over the coming years), BP, ExxonMobil, Chevron and Eni take advantage of vast reserves here. West Africa in particular could rival Norway as the next wave of projects comes online)

•    South America: There are 8 subsea projects online in South America, with most of them in Brazil, and one in Trinidad & Tobago. We expect subsea growth here as Petrobras ups its estimates of pre-salt finds that could be a major boost to Brazil’s reserves. Pre-salt projects will absorb almost 40% of subsea investment. Brazil will be the major player here and is likely—along with the Gulf of Mexico—to follow nicely behind Australia and West Africa on the subsea development stage

•    Australia: More than 50% of the forecast subsea market will likely be related to subsea tiebacks to fixed, floating or terminal facilities here. (Along with Africa, Australia is the next big venue for subsea)

•    Asia: there are 19 subsea projects in Asia

•    Middle East: There are 2 subsea projects here, including the South Pars gas field (the largest gas field in the world shared by Qatar and Iran), and the Scarab and Saffron Gas fields in Egypt’s Eastern Mediterranean.

For a broader look at the world’s subsea oil and gas fields, check out this directory.

NEXT WEEK: Stay tuned as we delve into the darker depths of subsea investment opportunities when we take a look at the riskiest growth area: subsea processing.

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