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offshore platform

Long-term ambitions remain for offshore, despite challenges from COVID-19.

Oil price volatility since the start of 2020 has added to the challenge of COVID‑19 project delays in the oil and gas sector, but nonetheless opportunity remains strong, according to LR's head of offshore, Sean van der Post.

The past six months have been tumultuous for the oil and gas sector. Not only have operators had to navigate COVID‑19 challenges and work around quarantine requirements, they have also had to ride the wave of oil price volatility.

The pandemic has limited the movement of people and restricted access at facilities and offices across the globe, along with the major offshore yards in China and Korea, which has led to delays on many projects. This disruption in North Asia has been relatively short‑term as activities have recovered to near pre‑COVID‑19 levels over the past couple of weeks. A lower oil price and how this changes the project landscape for operators is a greater concern.

Reduced demand due to COVID‑19 has affected the oil price, but the sparring among the big producing nations around market share and associated output has had a more significant impact that has required the industry to recalibrate medium to long‑term prospects.

Having started the year well, with prices above $60 a barrel, there has been a historic slump which has seen oil prices dipping below $0 a barrel in April. Fluctuations in the oil price have affected operators’ cash flow and the funds they have available for investment, especially among those companies still recovering from the 2014 downturn.

There will be projects that move forward, but most operators are treading a cautious path and delaying CapEx investments while re‑evaluating the market and expected return on their investment, given a lower oil price environment. In the aftermath of the 2014 downturn, CapEx expenditure on new projects has undergone rigorous sensitivity checks to pricing fluctuations, but even these did not foresee the demand destruction resulting from COVID‑19 lockdown measures and the recent oil price war. It is no surprise therefore to see these delays being announced. While these actions will leave scars for some years to come, as we look forward to 2021 and beyond, we see a more optimistic future for the sector.

Oil demand has taken a knock from COVID‑19, but as the global economies begin the difficult journey to recovery from the pandemic, it will return. This poses the question about whether future supply, given the recent project delays, will meet demand forecast in years to come, and which of the major supply countries will be best placed to grow and meet this demand forecast. The low‑price environment is seriously affecting the gross domestic product of many exporting countries, resulting in significant budget deficits and limiting capital available for future investment.

While there is agreement between the OPEC++ nations to meeting production cut targets, the need to meet national obligations will place significant pressure on this agreement while they collectively work towards bringing supply in balance with demand and tackle reducing the 1bn barrels in storage.

For shale producers in North America, it has been a particularly difficult time. While we are now seeing that associated production shut‑ins are beginning to make a significant contribution to the global supply reductions, the lasting impact of this recent downturn across the supply chain is expected to make recovery to the production levels seen earlier this year very difficult over the coming years.

Current uncertainties have affected market confidence and decisions around project plans are being given careful consideration. But future investment will be required as a recent Rystad Energy report suggests a significant shortage of global supply of oil and gas by 2025. Getting the timing right to rapidly bring new capacity on stream has also never been more critical, especially for companies that are so clearly feeling the pinch.

Big players like the international and national oil companies that are eyeing large CapEx investments, will almost certainly bide their time before committing to these, but smaller players or newcomers financing smaller investments are still looking to push ahead with projects. These agile organisations are well‑placed in getting projects producing in the next three to five years, when forecasts indicate the demand will be there. Projects that are sanctioned or continue towards final investment decisions during 2020/2021 will need to approach project execution differently. With restrictions on travel likely to be in place until the end of year, ensuring resources and expertise are available to a project is going to be critical success factor for a timely and on‑budget delivery.

Many of the organisations across the oil and gas sector will be open to different ways of working, given the experience of lockdown. Where previously the use of remote technology was happening in baby steps, the acceptance around remote capability has leapt forward.

Therefore, LR is readily able to support clients across the world, and importantly, share our global expertise and experience in a manner that is easily available locally to project teams and operations on short notice. In the past, clients would have requested support on the ground, but now there is a greater willingness to utilise remote services, so that costly commitment and delay of relocating teams in the early stages can be avoided without compromising the expertise available to a project. This allows for relationships to be built and knowledge to be shared; clients can then bring in physical expertise when the time is right. It’s essential flexibility for those navigating oil price volatility but still determined to push forward with their plans.

Horizons October 2020

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Horizons brings together insight into current trends and hot topics in the maritime and offshore sectors, alongside expert views from our people on regulation, safety and innovation.

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