Douglas Westwood : Global Oilfield Services – Offshore Spending Stuck in the Doldrums

2016 will see the start of a barren period for the offshore oilfield service (OFS) sector. A significant drop in project sanctioning brought about by the downturn, coupled with low rig dayrates, will see annual expenditure average $48.6 billion (bn) over 2016-2020, 25% lower than 2014's annual total of $65.3bn. The recent growth in offshore drilling seen since 2010 has been sharply halted - offshore well spuds saw an 8% reduction last year and a further 9% is anticipated for 2016. Even in the event of a rapid recovery in oil prices, offshore activity will be supressed as a result of final investment decisions (FIDs) for several developments in key offshore basins have been deferred - including Anadarko's flagship Shenandoah project and Woodside's Browse FLNG.

Asia - the largest-spending region - is predicted to see a 9% drop in drilling activity in 2016 as a result of Capex cuts from China's CNOOC as well as independents and supermajors cutting back in Indonesia and Malaysia. Also contributing to the decline is the scaling-back of operations by Chevron in the Gulf of Thailand - where in recent years the company has drilled thousands of wells. DW predicts offshore spending in Asia will decline to $15.2bn in 2017 before rallying slightly to $16.5bn by the 2020 - though it must be noted this is still 74% of 2014's peak.

Elsewhere, all other regions covered in this report will see declines in spending over the forecast period with the exception of the Middle East - where annual spending will increase 5% year-on-year from $6.6bn to $7.4bn over 2016-2020. This will largely be as a result of the full implementation of the giant South Pars gas development as well as brownfield developments of some of the world's largest offshore oilfields - namely Safaniya (Saudi Arabia) and Upper Zakum (United Arab Emirates).

As well as the drop in drilling activity, suppression of offshore rig dayrates will be a big issue for offshore OFS expenditure. The offshore drilling sector is currently heavily oversupplied with units brought to market during the boom years of 2011 to 2014, despite widespread scrapping of older rigs. DW therefore estimate offshore rig & crew spending will decline 2% year-on-year over 2016-2020.

Considering operators significantly cutting spending in most offshore plays and the current rig oversupply, DW foresee a flat trend in offshore OFS expenditure for the rest of the decade following declines in 2015 and 2016. Even in a scenario of a rapid recovery in oil prices, it is unlikely spending will recover to 2014 levels until well into the 2020s.

Global Oilfield Services - Offshore Spending Stuck in the Doldrums