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Horizons article 14 April 2021

Decision-making and investment now may come at a price for oil & gas

  • Maritime energy transition
  • Digital transformation
  • Offshore
Issue 57
Offshore rig and ship in the sunset.

The oil & gas market has been subject to gross underinvestment for the last decade, says Sean van der Post, LR’s Global Offshore Business Manager.

Sean van der Post

Sean van der Post

Global Offshore Business Manager, Lloyd's Register

While the COVID-19 pandemic has taken its toll on the oil & gas market in terms of decreased demand and thus reduced capital – and there is a growing need for operators and members of the supply chain to transition towards a net-zero target – market investment was already at an all-time low following more than a decade of gross underinvestment. And this does not involve just new projects – existing infrastructure is currently on an ever decreasing production curve and investment is needed to maintain even flat production.

Recent reports from Rystad Energy, International Energy Forum (IEF) and Boston Consulting Group (BCG) warn that significant investment is desperately needed to prevent a looming global energy crisis. Without it, the industry will be short 27 million barrels of oil equivalent per day by 2022 (IEF and BCG, December 2020), and at least $3 trillion is needed to meet demand (Rystad Energy, December 2020).

Oil & gas projects, old and new, need urgent attention and investment if we want supplies to meet the demand of coming years. There is already underlying concern in the industry of the short window to get the right supply/demand balance.

How did we get here?

If we look back to circa 2008-2010, while the world was suffering from economic collapse, the oil & gas market remained relatively strong. We saw financiers and other stakeholders invest high amounts of CAPEX into projects while the price of oil was approx. $100 a barrel. Unfortunately, this came to a crashing halt when the price of oil dramatically decreased, and with many projects delayed, the oil & gas market garnered a reputation of putting money into questionable projects. Consequently, financiers and investors did not see the return on investment they expected so they lost confidence in the sector and investment dwindled.

To address this, from 2014 until around 2017, the sector took steps to improve the way project costs are estimated, evaluating risk and reducing the delivery timeframe, in the hope of delivering the results investors were looking for – all while waiting for the price of oil to improve.

While the oil & gas market started to reinvent itself, another area of concern emerged. A new generation of industry professionals was required. Core expertise and experience was leaving as people were retiring and ageing, but there was a real difficulty in attracting new people to the sector. To combat this, a big drive for apprenticeship programmes and scholarships was put into motion between 2010 and 2014. Since then, however, there’s been a fall-off in the investment of people and recruiting talent. So, if and when we get the capital and projects start moving – the ability to find the right crew will be just as vital.

So, what can be done?

Standardisation is key. Making facilities more standardised and therefore more cost effective, helping investment by addressing trust issues between operators and investors and financiers. Standardisation of industry standards is also important. Joint Industry Programme (JIP) 33, which LR is part of, is charged with standardising procurement specifications in an attempt to bring harmony across the industry and avoid the need to introduce new requirements, making standardisation its core.

Some operators are exploring near-shore facilities as a way of mitigating risk. This is where operators bring facilities closer to the shore to avoid exposure to harsh elements. Breakwater is another option which is an operator’s own version of a benign nearshore met-ocean, so the facility can be offshore, but the breakwater will protect against the harsh ocean. This is an option BP are looking into.

On average, it takes 3-5 years to build a facility, not to mention the time it takes to plan and design these assets. Delays experienced in the 2010s compromised the relationship between operators and investors, so reducing the time it takes to get projects moving from design to implementation will also assist the industry with getting the capital it needs. This not only helps investors get onboard but also gets new supply on stream quickly. We’ve seen leading oil & gas service provider, SBM, do this particularly well with its fast-forward design that has standardised assets an operator can tweak and get on the market in 18 months.

Extending the life of existing assets may also be an option for operators. Risk-based inspection, which looks at a specific component within an asset with the purpose of detecting and monitoring degradation, can provide a clear understanding of the life of an asset and how to economically maximise it.

The industry knows it needs to reduce its CO2 footprint and this must be a key consideration going forward. To get the investment the operator requires to be successful, it’s important the industry adopts tried and tested technology as investors need certainty if they are going to invest in a project. And it’s important that investment into traditional oil & gas projects should not be siloed with investments into renewable energy. The two must go hand in hand if we are to meet the short-term oil crisis as well the ongoing need to achieve net-zero targets.

Urgent action needed

It is positive to see the price of oil returning to 2019/2020 levels, with Goldman Sachs Group Inc. predicting prices will advance into the $70s in the coming months (World Oil, February 2021), as this will certainly boost investment... but it won’t be enough. The industry has already suffered 10 years of gross underinvestment, not helped by the COVID-19 pandemic and the growing need to decarbonise, so action is needed now if we are to prevent an oil shortage in years to come.

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