Oil & gas sanctioning in the gutter, industry waiting for business to pick up

Global oil and gas project sanctioning in 2020 made a colossal drop in comparison to 2019 levels with Norway, and somewhat Russia, attempting to increase the total sanctioning value.

It appears that 2020 will pan out to be the “before and after” kind of year. There is a high probability that we will look back on the period up to 2020 as the “before the pandemic” and 2021 onwards as the “after the pandemic” in pretty much all facets of life. That means that 2020 will just be the time we don’t speak of – ever.

The oil and gas industry has already had some previous years it tried to forget as quickly as possible.

Some of those include 1973 in which oil prices went up by 400 per cent, 1979 with another 100 per cent increase, and 1990 when the prices went sky-high for nine months.

The 2000s were all about the increase in crude oil prices. The prices peaked in the summer of 2008 followed by a market crash later that year.

Each of these was a “before and after” moment for the industry and somewhat the world as the price of oil often dictates prices in other industries.

With 2020 already being the year of the COVID-19 pandemic and being marked by the massive price drop due to the Russia–Saudi Arabia oil price war, which even saw WTI prices go into the negative, it is certainly looking like this year will be similar to those already mentioned.

But it was not supposed to be this way. Experts were predicting an exciting year with a lot of new drilling plans, FIDs, project completions, and first oil.

According to a December 2019 statement by Rystad Energy, around 250 new oil and gas projects were supposed to be sanctioned for development in 2020, up from 160 in 2016.

The intelligence firm even predicted inevitable bottlenecks among suppliers. It claimed at the time that floating production contractors, subsea installation players, and fabricators of liquefied natural gas facilities will “struggle to keep up with the surge in demand for their services, thus causing projects schedules to slip”.

In the same article, Rystad said that contractors secured 13 orders for FPSOs in 2019, raising the total number of units currently under construction or on order to 28.

Also, companies ordered 600 Xmas trees in 2018 and 2019 for the years ahead with marine contractors already scheduled to install about 4,000 kilometres of subsea oil and gas flowlines and umbilicals in 2020.

So, the concern for the experts, before the coronavirus pandemic came, was the number of orders fabricators and service companies had for 2020 and beyond and the question was could they keep up. But as we all know – the coronavirus changed all of that.

It would take too long to go project by project and say which are on schedule and which are not but the overall theme of the first half of the year were delays due to the coronavirus pandemic and the oil price drop.

Oil companies delayed projects and drilling campaigns – like Aker BP, in the case of Norway – 10 exploration wells were put on hold by April and 2 more after that, major LNG projects – such as Greater Tortue Ahmeyim and Qatar Petroleum’s expansion project – were also delayed.

Offshore wind did not suffer as much, but some companies did have trouble caused by the pandemic. One of those is Ørsted and its offshore wind development projects in the U.S. Although its projects are moving forward, the pace was slower than originally expected.

It also didn’t take long for Rystad to change its outlook as it revised its annual global oil demand growth forecast. It claimed the demand would go down by 25 per cent to 820,000 barrels per day (bpd) in 2020 due to the effects of the coronavirus.

The company soon after claimed that the coronavirus could delay FPSOs under construction in Asia up to one year since 22 of the 28 FPSOs under construction were being built at shipyards in China, South Korea, and Singapore all of which were heavily hit by the pandemic.

This was also followed by a massive spree of rig cancellation deals. The list is too long to go through but Maersk Drilling, Diamond, Prosafe, Valaris, Shelf Drilling, and others were all victims of companies cancelling drilling campaigns across the world.

The rig deals falling through wrecked expert estimates. The new expectation for 2020 is that the number of drilled oil and gas wells would hit a 20-year low.

The number of drilled wells globally is expected to reach around 55,350 this year, the lowest since at least the beginning of the century. The decline is a huge drop from 2019’s number of 71,946 wells. It is also predicted that 2019 levels would not be reached by 2025.

This leads us to sanctioning. All the above of course indicates that project sanctioning could by no stretch of the imagination hit 2019 levels. Much less exceed them. But how big would the drop be?

So the answer is simple, global project sanctioning is set for an epic decline this year of over 75 per cent from 2019 levels.

This makes some estimates even look optimistic. Due to the pandemic, E&P spending dropped much lower than what was expected at the beginning of the crisis.

Total sanctioning value will end up at around $47 billion for 2020. This would be far lower if it were not for developments in Norway and Russia.

Rystad Energy said last week that of total global sanctioning value in 2020, some $27 billion is expected to be for offshore projects, with the remaining $20 billion for onshore. In 2019, the total sanctioning value reached $197 billion, with $109 billion going to offshore projects and $88 billion to onshore projects.

So far this year, the projects that have been committed are worth a combined $29 billion, with $16 billion going to offshore and the remaining going to onshore. Going forward, sanctioning will not pick up again and recover to 2019 levels anytime soon.

It is a grim read but there is one positive in this pool of negativity. Total sanctioning was projected even lower a month ago but developments in Norway and Russia have given it a boost in July.

Namely, Gazprom awarded contracts for phase one of its Kamennomysskoye-More project with an estimated development cost of over $4 billion. The Russian major Gazprom also made a final investment decision on the Semakovskoye field development in onshore Russia. A project worth nearly $1.2 billion.

Meanwhile, the tax relief package announced by the Norwegian government last month helped oil and gas operators improve project economics in Norway.

Helped by the program, Aker BP started development activities on its Hod redevelopment project by awarding Kvaerner a $106 million contract for the topsides and steel substructure of an unmanned wellhead platform, in addition to the subsea pipelines and umbilicals contract to Subsea 7 in a deal valued between $50 million and $150 million.

Equinor also signed the letter of intent last month for both the Breidablikk and Askeladd West projects off the coast of Norway. The Breidablikk development is expected to cost nearly $2 billion.

Aker Solutions has been awarded a letter of intent to supply the subsea production system and associated equipment, which includes 15 subsea trees in a deal worth $206 million.

Aker Solutions has also been awarded a letter of intent for the subsea production system at the Askeladd West development, valued at $41 million. The scope includes two subsea trees and one template with a manifold and associated equipment.

TechnipFMC won deals for pipelaying and subsea installation on both projects.

However, the letters of intent for both projects are subject to a final investment decision, which the operator plans to take later this year.

Lastly, LLOG has taken a final investment decision for the Taggart deepwater development in the U.S. Gulf of Mexico. The development plan includes tiebacks for two existing wells to the Williams-operated Devils Tower spar. Rystad Energy estimates the development will cost over $300 million.

Like everywhere else, activity on the Norwegian shelf was characterised by the corona situation with restrictions on activity, a drop in demand, and a declining oil price.

Along with the previously mentioned tax relief package, Norway decided to cut oil production as of June and through the rest of the year to contribute toward a more rapid stabilisation of the oil market than what the market mechanism alone would have ensured.

The Norwegian oil production was cut by 250,000 barrels per day in June and will be cut by 134,000 barrels per day in the second half of the year. Production from gas and condensate fields, transboundary fields with short remaining production lifetimes, and mature fields will not be cut.

Despite COVID-19 and the production regulation, oil production was around 70 million barrels higher than in the first half of 2019, primarily caused by the overachieving Johan Sverdrup Phase 1 which started full production this spring.

It is worth noting that the NPD report from last week stated that development drilling was close to 2019 levels with 84 new development wells drilled so far this year.

Eighteen development projects are underway but the NPD did warn that some of these developments could be delayed due to COVID-19 restrictions.

Projects currently underway are Johan Castberg, Balder Future North, Duva, Hanz, Johan Sverdrup Phase 2, Martin Linge, Nova, Snorre Expansion Project, Solveig, Tor II, Troll Phase 3 Step 1, Yme New Development, Bauge, Dvalin, Fenja, Njord Future, and Ærfugl. Total investments for these projects amount to more than $32 billion with overall recoverable resources estimated at more than 5 billion barrels of oil equivalents.

In addition to this, 100 more discoveries are still being evaluated, and have not yet submitted a plan for development and operation (PDO) to the authorities.

Twelve exploration wells were completed in the first half of 2020 with ten of them being wildcat wells. Five discoveries were made – three in the North Sea and two in the Norwegian Sea.

The second half of the year is also off to a good start with three discoveries near infrastructure in the North Sea.

The NPD expects that about 30 exploration wells will be drilled in 2020. However, this is less than expected, primarily due to delays related to COVID-19. To remind, 58 exploration wells were drilled in 2019.

NPD’s director of exploration Torgeir Stordal said: “We’ve noted that as many as 12 exploration wells have been postponed for operational and preparedness reasons in connection with the ongoing pandemic. We expect these wells to be drilled as soon as possible, and no later than during 2021.

“It also seems that five other wells could be postponed. This is a type of postponement that we always account for in our forecasts“.

It is obvious that some recovery signs are there. But it is even more apparent that the oil and gas industry will take a long time to fully recover – if it ever does.

Head honchos of several oil majors, like Bernard Looney of BP and Ben van Beurden of Shell, have already expressed their concerns of oil demand never returning to pre-COVID levels.

Norway is obviously doing as much as possible to mitigate the effects of the coronavirus pandemic and the oil price drop but not even well-timed Government measures we mentioned are not enough to keep the oil and gas industry boat afloat.

Currently it is unknown if companies will have to push back their plans further if the coronavirus pandemic restrictions persist and if the oil price does not rebound fast enough.

Adjustments for all plans were made early in the pandemic and before the oil price issue was resolved via the OPEC+ agreement. Will the affected plans remain on the new target – it remains to be seen.

For now, 2020 is the year to forget and skip, if possible. Maybe that is why many people across social media are already sharing “Plans for New Years’ Eve 2021” memes, hoping to move the year along as quick as possible.

It looks like most just gave up on this year which pretty much had all the bad things you could imagine – apart from a meteorite and an alien invasion (but the year is just halfway done, who knows what can happen by New Year’s).

Oil and gas companies are not far off since most found it easier to delay than push through the difficult events of 2020.

For now, it looks like we will be looking at the “after the pandemic” period for any sort of noticeable recovery of the industry, so maybe it is not such a bad idea to go into hibernation and wait for New Years’.

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Featured photo by SP Mac – used under permission from photographer