Onshore Spending on the Cusp of Recovery?

DW’s recently released quarterly World Oilfield Services Market Forecast (OFS) and World Oilfield Equipment Market Forecast (OFE) continue to suggest 2016 will see the start of a barren period for the offshore OFS and OFE sectors. In line with previous editions of the report, a significant drop in project sanctioning, coupled with low rig dayrates, will see annual OFS expenditure average $49 billion (bn) over 2016-2020, while OFE expenditure will decline from $69bn to $43bn over the same period.

Growth in offshore drilling seen since 2010 has been sharply halted – offshore well spuds saw an 8% reduction last year and a further 9% is anticipated for 2016. Even in the event of a rapid recovery in oil prices, offshore activity will be supressed due to the deferral of final investment decisions (FIDs) for several developments in key offshore basins.

In addition to the drop in drilling activity, offshore rig supply will be a major issue for offshore OFS and OFE expenditure. The offshore drilling sector is currently heavily oversupplied with units brought to market during the boom years of 2011 to 2014, despite widespread scrapping of older rigs. The resultant low levels of utilisation have and will continue to drive down rig dayrates. DW estimates offshore rig & crew spending will decline 2% year-on-year over 2016-2020. Over the same period, DW expects the offshore rig construction market to decline 24% year-on-year. Even in a scenario of a rapid recovery in oil prices, it is unlikely spending will recover to 2014 levels until well into the 2020s.

Offshore Oilfield Services and Oilfield Equipment Expenditure 2010-2020

Offshore Oilfield Services and Oilfield Equipment Expenditure 2010-2020
Source: Douglas-Westwood World OFS and OFE Market Forecast Reports Q2 2016

Onshore, the picture is notably more positive – if only because 2016 will see the bottoming out of the industry downturn. DW’s OFS report shows onshore spend increasing 11% year-on-year, while the OFE report shows a healthy 8% annual growth. All regions are expected to see positive expenditure trends as commodity prices begin to move upwards and onshore drilling recovers. The strongest growth will be seen in North America at 20% and 10% year-on-year for OFS and OFE respectively, as rising oil prices bring lower-quality shale acreage back into the economic window. Eastern Europe & FSU will also recover well from the downturn as a large number of wells are drilled in Russia to satisfy the demands of LNG plants and Chinese gas exports.

OCTG is anticipated to be a particularly strong area of growth within the onshore OFE and OFS spheres, after declining an estimated 56% in 2015. A compound annual growth rate of 13% is expected globally for onshore tubular goods, while onshore casing & tubing services is expected to see 8% growth year-on-year over 2016-2020. Increased horizontal drilling will be a predominant driver of growth in these sectors, increasing the average depth of wells globally. In addition, slowing economic activity in China will likely impact steel production – driving up the price of steel – in tandem with a recovering oil price.

Despite strong growth profiles for the onshore OFS and OFE sectors, it is important to note that expenditure levels in 2020 will remain at a significant discount to 2014 levels. While this will largely be due to service and equipment pricing, drilling activity in North America is not expected to reach pre-downturn levels. Similarly, operators are expected to maintain tight purse-strings for years to come – as they look to recoup losses incurred in the last 18 months.

Onshore Oilfield Services and Oilfield Equipment Expenditure 2010-2020

Onshore Oilfield Services and Oilfield Equipment Expenditure 2010-2020
Source: Douglas-Westwood World OFS and OFE Market Forecast Reports Q2 2016

Matt Adams, matt.adams@douglaswestwood.com
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