Supply chain over-correction to subsea project delays will result in a weaker service sector, further schedule delays and cost escalation. Axiom ask: is the sector as badly impacted as the rhetoric has us believe?

The chart below highlights Axiom’s view on how the 2020-2024 subsea market has evolved through February to June 2020.

Delays in Upcoming Subsea Tree Installations

Source: Axiom - Sunsea Market

Axiom says their research indicates that 48% of subsea tree installations are still on track to be installed within the target development timeline. Of those delayed, the majority are forecast to witness a schedule push-back of up to one year. These delays are associated with a mix of pre and post-FID projects, but are highly weighted towards those that have not reached final investment decision. Less than 10% of installations are expected to see delays greater than one year, and these primarily impact the market through 2022-2024.

Trees associated with canceled projects, or changes to field development plans eliminating subsea tree requirements, are more than counterbalanced by accelerated 2025/2026 project timelines and newly announced small-scale subsea developments. These projects could still get the green light in a 40$/bbl environment.

Axiom believe the recent impact of Covid-19 and lower oil price on the 2020-2024 subsea installation market is of the magnitude of -15% from where we were at the beginning of the year. This should not be confused with the 25%-30% budget cuts announced by the E&Ps. When looked at from a subsea investment perspective, the budget cuts have undoubtedly impacted the sanctioning of larger-scale projects. However, a sizeable component of the subsea market is linked to infill drilling and small-scale tiebacks with more favorable economics.

Subsea Tree Installation Outlook - Pre/Post Covid Forecast Comparison

Source: Axiom - Sunsea Market

Short-term installation activity is less impacted, and delays are primarily attributed to Covid-19 associated disruption, driven by restrictions on movement of people, reduced headcount in yards and logistical bottlenecks. However, the contraction across the market will be more acutely felt from 2022 onward.

Axiom's research indicates a 2020 market reduction of the magnitude of 25 trees compared to expectations at the beginning of the year. It is important to note that Axiom's pre-downturn view for 2020 was conservative. The size of the market contraction increases annually from 2021 to 2024, with subsea tree installations expected to be 35-50 trees/year fewer than previously predicted.

Axiom's pre-Covid forecast indicated a one-year contraction in activity through 2020, primarily driven by project scheduling. Installation activity was then expected to increase in 2021, returning the market to 2019 levels and continuing the sector recovery from the last down-cycle. This recovery trend has now been put on hold for 3-4 years.

Sentiment across the wider OFS space is negative and many companies have once again entered survival/crisis mode, resulting in reductions in headcount and service capacity. Moreover, an accelerated shift in focus to deploy greater resources towards offshore renewables will further dilute capacity.

A fine balance needs to be struck between hunkering-down on the one hand, and not losing the efficiency and technical gains generated by the previous downturn on the other. In addition to that, a further deterioration of the health and resolve of the supply chain could lead to the exacerbation of delays. This may result in E&P cost escalation in a lower oil price environment.

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