ABC
SUBSEA UK - Subsea Focus on Europe and Africa
London, 12 November 2013
Subsea in Africa & Europe Finding growth in a Slowing but Growing World David Phillips*
Global Co-Head, Oil & Gas Equity Research, HSBC Bank plc
+44 20 7991 2344, [email protected]
*Employed by HSBC Bank plc, a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
View HSBC Global Research at: http://www.research.hsbc.com
Issuer of report: HSBC Bank plc.
Disclosures & Disclaimer - this report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the
Disclaimer, which forms part of it.
Source: Aker Solutions
Sources for illustrations: Aker Solutions, Island Offshore, Sealion
2
Finding growth in a Slowing but Growing World
AGENDA
1 – The ‘Known Knowns’
- Rigs and subsea backlogs
2 – The ‘Known Unknowns’
- Oil prices, industry capex
3 – Growth – Africa & Europe
- Offshore capex, key drivers,
regional issues, gas & oil
4 – Challenges
- growth pains, speed bumps,
supply chains, execution
5 – Conclusions
Source: Subsea 7
3
Source: Subsea 7
(1) Subsea markets – the ‘known knowns’
“There are known knowns; there are things we know that we know.
There are known unknowns; that is to say, there are things that we now know we don't know.
But there are also unknown unknowns – there are things we do not know we don't know.”
(Donald Rumsfeld, Feb 2002)
Offshore rigs
Subsea backlogs
4
0%
2%
4%
6%
8%
10%
12%
14%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
y-o
-y g
row
th
floaters (y-o-y growth)
Deepwater rigs
- Expansion in the floating rig
fleet an important driver of
offshore activity to come
25% fleet growth 2012-16
- more drillships than semis
. . . and +80-85% for 2008-16
- More fleet additions working
on exploration work – next
phase is production drilling
- Was a bottleneck in the last
cycle – still not easy to get a
rig when needed but better
(and rates softening?)
Source: IHS/ODS Petrodata
Growth of the floater rig fleet, 2000-16
0
50
100
150
200
250
300
350
400
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
num
ber o
f rig
s in
the
glob
al fl
eet
floaters (number of rigs)
supply growth2012-2016 +25%
(cagr +6%)
2008-2016
up 80-85%
Subsea markets – the ‘known knowns’ – offshore rigs
5
A real grower
- Subsea installation backlog
in total up 21% y-o-y
up 80% vs start 2010
- Subsea equipment backlog
in total up 60% y-o-y
up 150% vs start 2010
- Record bookings of
equipment this year, continual
growth since early 2010
Hot spots – West Africa,
Brazil, US GoM, North Sea
But order intake slowing?
Less from Brazil in 2014?
….have backlogs peaked?
Source: Company data
Subsea equipment and installation – backlog development 2005-present
Total subsea backlog now USD61bn
+35% year-on-year
Doubled vs start 2010
Subsea markets – the ‘known knowns’ – subsea backlogs
6
Source: Subsea 7
(2) Subsea markets – the ‘known unknowns’
Oil prices
Oil industry capex
7
The shale tale
- Surging shale oil supply in
North America
- But shale isn't “cheap” –
economics not dissimilar to
deepwater (USD50-80/bbl)
- Nor is it all the same –
drilling focus has been on
resource “sweet spots”
- Fuel for nice headlines in
the media but we don’t see
a world awash with shale
(gas is more important)
- Near term oil outlook softer
but in an “OK” range
Source: IEA Estimates
Subsea markets – the ‘known unknowns’ – oil prices
4
5
6
7
8
Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 - 0.5 1.0 1.5
Russia
Europe
Colombia
Process gains
Africa
Other FSU
Canada
Biofuels
OPEC NGLs
Brazil
USA
Source: EIA
Current Brent futures curve (2013-2019, USD/bbl)
Source: Thompson Reuters Datastream
US crude production (mbd) Global crude supply growth, 2016 vs 2013 (mbd)
8
Big spenders
- Overall capex at a plateau
- Overall planned spend in
the USD630bn+ range
- Uncertainty driven by cost
inflation (back to 2008
levels), politics / tax - also
relative appeal of shale
- But moving into an offshore
age – unavoidable growth
- Pace of discoveries, need
to progress prospects to
production
- Key themes – ultra-deep,
offshore gas / FLNG,
subsea processing
Overall E&P capex outlook (upper chart) Offshore capex outlook (lower chart)
Subsea markets – the ‘known unknowns’ – E&P capex
Source: EIA
Source: Infield Systems
Source: Company data
2011-2015 total
is 55% greater
than 2006-2010
2011-2015 total
is 33% greater
than 2006-2010
9
Source: Subsea 7
(3) Subsea markets – Growth
Africa - Growing
Europe – Growing but slowing?
10
Subsea in Africa & Europe - “The” growing region
Rig fleet growth
Offshore Europe
-- floater rig fleet up 40%
versus that in 2005
- bottleneck of suitable units?
Also an older fleet
Offshore Africa
-- floater rig fleet for East &
West Africa up 85% vs 2005
- East Africa only small so far
(5-7 rigs)
-- production drilling plans
imply significant fleet growth
Growing offshore floater rig fleets – Europe (upper chart), Africa (East & West, lower chart)
Source: IHS Petrodata
Start 2005 – end 2013
fleet growth of 40%
Start 2005 – end 2013
fleet growth of 85%
11
Subsea in Africa & Europe - “The” growing region
Offshore spend
Offshore Africa
- USD15bn per yr by 2016
and USD1bn per yr by 2018
in Mozambique alone
- deepwater rig access
(market tight but softening)
- installation vessel access
(market tightening)
Offshore Europe
- Europe overall USD25bn per
year by 2015/2016
- But harsh environment rig
access is a bottleneck (NCS)
Source: Infield Systems Ltd
(total includes costs for procurement, engineering, installation)
Global offshore capex – on a long term growth trend
Europe + Africa make up a rising share of the market
- was 25-30% of global offshore capex last cycle, now 35-40%
- Lat Am accounts for 15-20%
- Asia/Australasia accounts for 25-30%
Europe + Africa make up 50-60% of capex growth to 2016/17
12
Subsea in Africa - Exploration Euphoria
Similarity trends
New resources in recent
years - more gas than oil
- E Africa key, waiting for new
big numbers from W Africa
Brazil…now Angola and
Mozambique - helps if you
speak Portuguese!
Cross-Atlantic similarities
- W Africa/Brazil
- SE Africa/Falklands
Key African theme for oil
services - OFFSHORE
- presalt oil (West)
- offshore gas (East)
Source: Ophir Energy
13
Subsea in Africa - Exploration Euphoria - Gas
Gas in the East
East Africa - one of ‘the’ up
and coming gas plays globally
- Anadarko, Eni, BG, Ophir,
Shell, Statoil, Exxon
- early moves 2000-05
- key players move 2006-10
- the next step – 2010+
- Mozambique 150tcf in place
- Windjammer/Prosperidade
The OFS angle
- most supply chain
infrastructure NOT in place
- LNG, subsea, pipelines
Source: Ophir Energy
14
Subsea in Africa - Development Dilemmas
LNG options
Initial phase LNG moving
fwd, 45km subsea-to-shore
Next phases?
- expand LNG
- gas for GTL/fertilisers
- gas to South Africa
- FLNG for some fields?
But avoid being another AUS
- costs, delays, economics
And does the world need
more LNG?
- landed cost into Asia
- competition with shale LNG
(greenfield vs brownfield)
- Chinese/Asian demand
Source: HSBC
0.0
2.5
5.0
7.5
10.0
12.5
N Am East
Coast
N Am W
Coast
Qatar SE Asia Russia Australia -
NW
Australia -
CBM
E Africa
del
iver
ed c
ost
, U
SD
/mm
Btu
gas price liquefaction transport/shipping regas/other
LNG – estimated landed costs into Asia
15
Subsea in Africa – Development Dilemmas
LNG timescales
Remember timelines
-The NLNG project took 10-
12 yrs to get to 25mtpa from
FID in the mid 1990s
- West African offshore oil
projects have seen significant
delays in recent years - Egina
More ‘moving parts’
- progression of competing
LNG schemes globally
North America?
- how many LNG plants can
the world build at once?
0
0.5
1
1.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Middle East Gulf Asia Pacific Atlantic Basin Africa
2011 2012 2013 2014 2015 2016 2017 2018
T1 Pluto
Angola LNG Skikda
Gorgon T1 & Gassi Touil
Papua New GuineaGorgon T2 & Curtis T1
Gorgon T3 & Curtis T2
Gladstone T1
APLNG T1
Gladstone T2
Prelude
Wheatstone
Australia Pacific T2*
Prosperidade Phase 1
Bcf/d
0
0.5
1
1.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Middle East Gulf Asia Pacific Atlantic Basin Africa
2011 2012 2013 2014 2015 2016 2017 2018
T1 Pluto
Angola LNG Skikda
Gorgon T1 & Gassi Touil
Papua New GuineaGorgon T2 & Curtis T1
Gorgon T3 & Curtis T2
Gladstone T1
APLNG T1
Gladstone T2
Prelude
Wheatstone
Australia Pacific T2*
Prosperidade Phase 1
0
0.5
1
1.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Middle East Gulf Asia Pacific Atlantic Basin Africa
2011 2012 2013 2014 2015 2016 2017 20182011 2012 2013 2014 2015 2016 2017 2018
T1 Pluto
Angola LNG Skikda
Gorgon T1 & Gassi Touil
Papua New GuineaGorgon T2 & Curtis T1
Gorgon T3 & Curtis T2
Gladstone T1
APLNG T1
Gladstone T2
Prelude
Wheatstone
Australia Pacific T2*
Prosperidade Phase 1
Bcf/d
Source: HSBC, Company data
LNG – recent and planned LNG project start-ups
16
Oil in the West
West African presalt - one of
‘the’ global exploration plays
- Cobalt, Total, Maersk, Ophir
- onshore work in 1950s/60s
- deepwater started mid-1990s
- new seismic & rigs in 2000s
The OFS angle
- similar stresses & strains on
offshore supply chain as Brazil
- rigs, subsea, FPSOs
- Supply chain infrastructure at
least partly in place already
How big is this theme?
- discuss – 50% of Brazil?
Subsea in Africa - Exploration Euphoria - Oil
Source: Ophir Energy
17
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
capex -10% base case,
$11/boe
capex
capex +10% capex +20% capex + 30% capex + 40% capex + 50%
pro
ject
IR
R (
%)
at $
90 B
ren
t
Subsea in Africa & Europe - NPV erosion risks
Is this inevitable?
Cost inflation
- overall upstream costs back
to or above 2008 levels
- deepwater was USD15-20k
per boe/d of peak prodn, now
USD30-40k or higher
- Aus LNG looking like USD2-
3000/tpa vs USD500-1000
Politics
- local content requirements,
volatility with taxes/royalties,
tax on farm-out gains
People & infrastructure
- where are all the engineers?
lack of skilled personnel
- local supply chain
Source: HSBC
Deepwater IRRs
18
Subsea in Europe – Growing but slowing?
An Arctic Plateau
- At a high level of activity but
is there growth in subsea in
the North Sea?
- Near term yes but longer
term at a plateau?
- Value chain bottlenecks –
rigs, subsea engineers – as
well as capex & cashflow
issues with operators
- But important recent
discoveries – Johan Sverdrup
Johan Castberg, Aasta
Hansteen – sets up the
medium term potential
Subsea capex by region (upper chart) and specifically in Europe (lower chart)
Source: Infield Systems
(subsea Capex includes EPC, Installation & development drilling costs for subsea trees, manifolds, templates, etc)
19
Source: Subsea 7
(4) Subsea markets – Challenges
Growing pains
Speed bumps
Supply chains
Execution issues
20
Oilfield Services in Africa - A Reality Check
Recap - what can
go wrong?
- sdfsfsfsd
This may be too
extreme but . . .
(…as seen in a park in Hong Kong)
21
Subsea in Africa & Europe - Growing Pains
Subsea
‘speed bumps’
Record backlog growth
- 2013 has seen a record
number of ‘tree’ awards
- Industry backlogs continue
to set new records
- But executing on this
record workload is causing
challenges – supply chain
delays, higher costs
- Subsea profitability has
disappointed this year
- And likely not to see a
quick recovery
All eyes are on 2015
Subsea installation / equipment – backlog growth (upper chart), margins (lower chart)
Source: Company data
22
Subsea in Africa & Europe – Supply Chains
Expectations . . .
Brazil...“is all about tomorrow
but always will be…”
- plans have taken a step
down but still ambitious
Will Africa’s next phase be
the next Brazil?
- Handling new local content
requirements and HSE
- Specific stresses & strains
on the ultra-deep value chain
- Winners - vessel owners or
equipment/service providers?
- cost and delay scenarios –
returns OK if capex up 50%?
0
1000
2000
3000
4000
5000
6000
7000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
tota
l p
rod
uct
ion
(m
bo
e/d
)
ov erall prodn + 2011-15 plan ov erall prodn + 2012-16 plan
Poly . (ov erall prodn + 2011-15 plan) Poly . (ov erall prodn + 2012-16 plan)
Source: Petrobras
Petrobras – past & planned production
23
Subsea in Africa & Europe - A Reality Check
Recap - what can
go wrong?
- oil prices – of course . . . . . . . . OPEC spare capacity, Asian demand, Middle East politics - market volatility risks
- HSE, accidents, regulation . . . . .offshore E&P clearly can’t afford another Macondo – major delay risks
- politics and taxation . . . . . . . . . West Africa, Brazil, Australian unions, US LNG politics – project delay risks
- costs and supply chains . . . . . . local content, local costs (Brazil, Australia, Africa) – new project execution/delay risks
- asset bottlenecks – . . . . . . . . . lack of ultra-deepwater assets, lack of skilled labour – project delay risks
24
(5) Subsea in Africa & Europe . . . Conclusions
1 – THE ‘KNOWN KNOWNS’ – an expanding floating rig fleet (25% higher in 2016 vs 2012, not far off doubling vs 2008) is an
important ‘enabler’ for future offshore activity (and some rates are softening as well). Also backlogs for subsea equipment and
installation are up strongly (21% for installation, 60% for equipment) . . . But will there be order growth in 2014?
2 – THE ‘KNOWN UNKNOWNS’ – improving oil supply indicates moderately softer near term outlook for prices, but within the
USD90-100/bbl range – good enough for offshore. But E&P capex heading to a plateau – offshore a relative ‘growth winner’
3 – GROWTH – AFRICA & EUROPE – two of the “themes of the decade” are in Africa – presalt in the West, Gas in the East - key
for overall market growth in subsea. Europe also is on a growth path but a mix of brownfield and greenfield; also facing bottlenecks
in some areas – harsh environment rigs, subsea engineers. Africa & Europe drive 50-60% of medium term offshore capex growth.
4 – CHALLENGES – growing pains and ‘speed-bumps’ are a near term challenge as the industry executes on record backlog
levels; subsea companies have in general missed financial market expectations this year - all eyes are on 2015, not 2014.
Execution and project management issues are a key focus while oil companies budget for the next wave of projects
Subsea is still a growth market but this growth is more selective – no longer ‘doubling in 5 years’
Source: Subsea 7
25
Disclosure appendix Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject
security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation
was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: David Phillips
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26
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© Copyright 2013, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 110/01/2013