Global Subsea Sector Set for Comeback

The surge in oil and gas prices have not led to a jump in investments in offshore exploration and drilling in recent months. Yet, operators are now more confident of supplying the oil and gas resources the world needs in the aftermath of the Russian invasion of Ukraine and the change in global oil and gas trade flows it brought.

The subsea sector is set to benefit from high-impact exploration in South America, the Gulf of Mexico, emerging plays offshore Namibia, and in the Eastern Mediterranean. In Europe, Norway is starting up new oil and gas fields and awards exploration licences that could lead to more discovered resources and to keeping a high gas and oil production on the Norwegian Continental Shelf (NCS) in the coming years, helping Europe replace part of the Russian energy imports it has lost in the past year.

Moreover, global deepwater oil and gas production is expected to jump this decade, bringing more opportunities to the subsea industry to help keep reliable sources of supplies in a world where energy security is now the top priority of energy-importing nations.

In the UK, the offshore industry has warned repeatedly that the hike in the windfall tax on North Sea operators – with total taxes on UK oil and gas production now at 75% – risks undermining future investment in the area. This would threaten to drive out investors, drive up UK’s oil and gas imports, and leave consumers increasingly exposed to global shortages, industry body Offshore Energies UK says.

Africa, Americas To Lead Subsea Tree Orders Through 2027

Subsea tree orders jumped in 2022 compared to the previous year, and project sanctioning activities in Africa and the Americas will lead global subsea tree demand over the next five years, Westwood Global Energy Group said in a monthly update in early January 2023.

Subsea tree contract awards in the fourth quarter of 2022 closed at 81 units, driven by the sanctioning of Aker BP’s Yggdrasil, Valhall PWP-Fenris, and Skarv Satellite projects. This brings 2022 total subsea tree orders to close at 294 units, a 79% increase compared to 2021, Westwood said.

Major subsea tree contract awards anticipated in the first quarter of 2023 include Azule Energy’s Agogo development in Angola, Eni’s Baliene Phase II project off the Ivory Coast, and Petrobras’ SEAP development offshore Brazil.

“Our full-year 2023-2027 subsea tree demand outlook is forecast at approximately 1,310 units, with sanctioning activities in Africa and the Americas expected to account for over 66% of forecast demand,” Mark Adeosun, Director, SubseaLogix at Westwood, wrote.

Per Westwood’s base case, Petrobras will lead the subsea tree awards between 2023 and 2027 with expected 218 units, followed by ExxonMobil with 187, Equinor with 122, Woodside, and TotalEnergies. China’s CNOOC, Shell, Chevron, and BP follow in the list of operators expected to award the most subsea tree contracts through 2027.

High-Impact Drilling Improves Performance in 2022

In exploration, high-impact drilling in 2022 remained stable and improved performance and success rates despite a turbulent year for the energy markets, Westwood said in an insight in January 2023.

Discovered resources rose from 7.4 billion boe in 2021 to a preliminary estimate of 9.2 billion boe in 2022, and the commercial success rate increased from 29% in 2021 to 36% last year.

The number of high impact wells to be drilled in 2023 will likely be in line with the 2020-2022 trend, according to Westwood.

In 2023, South America will continue to be a key region for high impact exploration, particularly in the Suriname-Guyana Basin and offshore Brazil, while Argentina will see its first ever deepwater well drilled in 2023.

Drilling in North America is expected to rebound this year following a quiet 2022 when only nine high impact wells completed. This will include more than five high impact wells in the US Gulf of Mexico, further commitment wells offshore Mexico, and a key frontier basin test in the Orphan Basin offshore Canada.

Africa – with Namibia and frontier tests offshore Morocco, Gabon, and Mozambique – is also expected to be a top region for high impact exploration, as well as the Eastern Mediterranean, Westwood noted.

In the Eastern Mediterranean, Eni already announced in mid-January a significant new gas discovery at the Nargis-1 exploration well in Nargis Offshore Area Concession offshore Egypt.

Norway Looks To Develop More Resources While Uncertainty Rises for UK

In Europe, the two biggest oil and gas producers seem to be going in different directions. While operators offshore Norway continue to invest and approve new developments, UK North Sea operators are hesitant to invest and are scaling back commitments and evaluating each project, after the windfall tax on the profits of the companies was introduced in May and later raised to 35% in November.

In early January 2023, Norway’s Ministry of Petroleum and Energy offered 47 new production licenses on the Norwegian continental shelf in the licensing round APA 2022, of which 29 in the North Sea, 16 in the Norwegian Sea, and 2 in the Barents Sea.

“The annual allocation of exploration area is a pillar in facilitating a stable level of activity on the Norwegian continental shelf and in achieving the main goals of the government's petroleum policy. The petroleum sector is a highly productive industry that contributes large revenues, value creation and employment,” the Minister of Petroleum and Energy, Terje Aasland, said.

Norway is also expected to continue to pump the current high volumes of natural gas for at least another five years as operators have pledged around $30 billion (300 billion Norwegian crowns) to develop new fields and extend the lifetimes of producing fields, the Norwegian Petroleum Directorate said in January.

“Only rarely have we seen so much oil and gas produced on the Norwegian shelf as was the case last year – and only rarely have we seen such significant investment decisions,” the regulator said in an annual overview of the activity on the Norwegian Continental Shelf.

At the same time, operators in the UK North Sea have criticised the Energy Profits Levy – the so-called windfall tax. The tax changes threaten the long-term investment in the UK North Sea and consumers’ energy security, Offshore Energies UK warns.

“The tax changes would impact not just North Sea operators but the hundreds of other companies in their supply chains, operating in towns and cities across the UK. Many provide specialised services such as marine engineering, deep sea diving or subsea communications, and will face cutbacks or being driven abroad if investment declines,” OEUK said.

“No industry can invest or plan without knowing what kinds of tax regime will be in place. We want to work with the government to build a long-term tax regime that will let us play a full role in the energy transition,” the then OEUK’s chief executive, Deirdre Michie, said in November after the Chancellor of the Exchequer Jeremy Hunt announced the hike in the windfall tax.

Despite the fact that new investment allowances in the Energy Profits Levy offering 85% tax relief should stimulate activity, “Willing explorers are thin on the ground,” Wood Mackenzie said in November.

“Most companies that could take full advantage of the EPL allowances have shown little appetite to explore. IOCs have retreated, hastened by high political risk as new projects come under increased scrutiny. Drilling activity is at historic lows,” wrote Neivan Boroujerdi, Director, Research, Upstream Oil and Gas, and Glenn Morrall, Research Analyst, North Sea Upstream, at WoodMac.

Globally, deepwater oil and gas production is expected to increase by 60% by the end of this decade, Wood Mackenzie said in a report at the end of 2022.

“Deepwater is the fastest growing upstream oil and gas resource theme,” WoodMac said, noting that production jumped to 10.4 million boed in 2022, from just 300,000 boed in 1990. By the end of the decade, production is expected to top 17 million boed. The share of deepwater production of overall upstream production is set to increase from 6% now to 8% in 2030, with Brazil and Guyana leading the way, according to Wood Mackenzie.

Cost inflation and constraints in equipment and services availability could be a concern about project economics, the energy consultancy said. Still, the fastest growing resource theme in the industry has inherent emissions advantages for the sector, it noted.

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