The Subsea Sector Looks Aheadto 2024 with Optimism

The offshore energy industry and the subsea supply chain sectorhad a mixed bag of fortunes in the past year, as offshore oil and gas showed it has made a comeback while offshore wind faltered amid soaring costs, supply chain issues, and project cancellations.

This year, the offshore upstream is set for further growth while the prospects for offshore wind look brighter as interest rates have likely peaked and governments, including in the UK, have raised the maximum prices available for offshore wind for the Contracts for Difference rounds for 2024.

The subsea sector contractors are poised to benefit from more awards in offshore oil and gas and a recovery in offshore wind this year.

Offshore Oil and Gas  

The offshore oil and gas sector is set for the highest growth in a decade in the next two years, with $214 billion of new project investments lined up, Rystad Energy research showed in 2023. Annual greenfield capital expenditure (capex) broke the $100 billion threshold in 2022 and was set to break it again in 2023 – the first breach for two straight years since 2012 and 2013, according to the independent energy research and business intelligence company.

Offshore activity is expected to account for 68 percent of all sanctioned conventional oil and gas volumes in 2023 and 2024, up from 40 percent in the period 2015-2018. In terms of total project count, offshore developments are expected to account for nearly half of all sanctioned projects in 2023 and 2024, up from just 29 percentin 2015-2018, per Rystad Energy’s analysis.

“These new investments will be a boon for the offshore services market, with supply chain spending to grow 16% in 2023 and 2024 , a decade-high year-on-year increase of $21 billion. Offshore rigs, vessels, subsea and floating production storage and offloading (FPSO) activity are all set to flourish,” the research firm said.

“Offshore oil and gas production isn’t going anywhere, and the sector matters now possibly more than ever,” said AudunMartinsen, head of supply chain research at Rystad Energy.  

“As one of the lower carbon-intensive methods of extracting hydrocarbons, offshore operators and service companies should expect a windfall in the coming years as global superpowers try to reduce their carbon footprint while advancing the energy transition.”

Offshore oil and gas was the supply segment that saw the strongest growth in investment in 2023, Rystad Energy’s vice president in the Upstream Research team, Sonya Boodoo, wrote in an article in Offshore magazine at the end of last year.

The industry will keep the current high level of offshore project sanctioning, which is set to keep investment in the offshore sector robust, Boodoo noted.

“The sector’s performance on key metrics suggests that offshore is one of the safer segments in which to invest, providing low breakevens, high returns and a relatively low-carbon footprint,” Boodoo said.

“As such, offshore remains a key segment to watch in the upstream landscape.”

As offshore activity picked up, the recovery in the offshore rig market continued in 2023, Westwood Global Energy Group said at the end of last year.

The year brought a further 3-percent increase in global marketed offshore rig utilisation compared to 2022 levels, a demand increase of 29 rigs, a 7-percent rise in average contract duration, 16 further reactivations and newbuild deliveries, and floating rig dayrates exceeded the ‘magical’ $500,000 mark, according to Westwood’s analysis.

“Westwood’s overall outlook for the offshore rig market remains highly optimistic, albeit with the potential for more availability during the first half of 2024,” said Teresa Wilkie, Director – RigLogix at Westwood.

Westwood sees day rates trending higher in 2024 across the board, due to tightening supply/demand balance in the rig market, costly reactivation and new construction economics, as well as inflationary pressures. However, $500,000 day rates are unlikely to be the norm.

“With that in mind, we predict that operators will continue locking in rigs earlier for their contracts in a bid to secure the right assets at as low a price as possible,” Wilkie said. 

Specifically in the UK, the offshore and subsea sectors saw in 2023 a major new oilfield development approved, Rosebank.

The UK Government approved in September the Rosebank oil and gas field, which could produce at peak 69,000 barrels of oil per day–equivalent to 8 percent of the UK’s entire output between 2026 and 2030. It could also produce in excess of 21 MMSCF of natural gas every day, equivalent to the daily average use of Aberdeen city, the leading trade body for the offshore energy sector, Offshore Energies UK (OEUK), said in comments on the approval.

OEUK, however, warned that more projects will be needed to manage reliance on imported oil and gas as UK production declines.  

“We need more projects like Rosebank if we are serious about delivering a homegrown UK energy future,” OEUK chief executive David Whitehouse said.

“We have around 283 fields in the North Sea, but over 180 of those will stop producing within the next decade. If these are not replaced, we will import 80 percent of the oil and gas the UK will need at a higher cost to the consumer, our economy, and ultimately the climate.”

Offshore Wind

While the offshore oil and gas activity picked up in 2023, the offshore wind sector suffered setbacks as several developers ditched previously announced projects offshore the UK and the US, due to surging costs, supply chain delays, and low auction prices for the future power generation contracts.

In Europe, solar installations surged, but the wind power industry had a difficult year and expansion faced hurdles, according to Rystad Energy.

“Rooftop solar is driving the transformation of Europe's renewable energy landscape, from a niche market to a powerful force in reshaping the continent's energy mix,” saysVegardWiikVollset, vice president and head of EMEA renewables research at Rystad Energy.

“However, wind energy – including onshore and offshore, both of which were previously on a robust growth path – has faced hurdles that could hinder its expansion.”

Increasing development costs, difficulty in securing desirable offtake deals, and regulatory changes challenged the industry in Europe. The European offshore wind sector was expected to see modest 2-percent annual growth in installations for 2023. Offshore wind was on a strong upward trajectory, but a recent spate of delays to key projects has highlighted the vulnerability of the market, Vollset noted.

At the end of 2023, some governments took steps to bolster the offshore wind sector. The UK raised in November the maximum price for offshore wind projects in its flagship renewables scheme, the Contracts for Difference (CfD) auction in 2024. The CfD scheme ensures renewable energy projects receive a guaranteed price from the government for the electricity they generate, encouraging continued investment in the UK, the government said.

The maximum strike price has been increased by 66 percent for offshore wind projects, from £44/MWh to £73/MWh, and by 52 percent for floating offshore wind projects, from £116/MWh to £176/MWh ahead of Allocation Round 6 (AR6) next year.  

“We recognise that there have been global challenges in this sector and our new annual auction allows us to reflect this,” Energy Security Secretary Claire Coutinho said.

According to Wood Mackenzie, “Improving tender pricing and conditions is the most impactful lever policymakers can pull following recent cost escalations,” WoodMac analysts said in December, commenting on Ørsted’s final investment decision on the Hornsea 3 offshore wind project in the UK.

Despite cost escalations and high interest rates, elevated subsidies enabled the offshore wind sector to end 2023 on a high note, WoodMac noted.

“The higher more favorable conditions of AR6 have also helped get Vattenfall’s 4.2 GW Norfolk cluster back on track and allowed Vattenfall advance the projects and now sell the cluster for an enterprise value of £1 billion to RWE who is looking to connect these projects by 2030,” Wood Mackenzie’s offshore wind and power researchers said.

“Building these projects is key for the sector because it helps provide the certainty investors in supply chain companies need to get new factories and vessels built.”

Subsea Sector Supply Chain Seeks Diversification

Companies in the supply chain are seeking greater diversification into energies other than oil and gas compared to two years ago, according to the Business Survey 2023 of the Global Underwater Hub, which represents the UK’s subsea supply chain.

Comparisons with the 2021 Subsea UK Business Survey showed a substantial broadening of focus across the full underwater market. Asked in 2021, which sectors were to be prioritised in the next three years, more than half of respondents – 60 percent – pointed to oil and gas.

Two years later and the results present a wider mix of sectors, supporting the broad attractiveness of the underwater industry, with growing constituent parts and greater opportunities for transition across them by the supply chain. Oil and gas was picked by 27 percent of respondents in the 2023 survey, with offshore wind a close second selected by 21 percent. But in the 2023 survey, wave and tidal energy, carbon capture and storage, and hydrogen were picked as a priority focus by much higher percentages of respondents compared to the poll from 2021.

“With parallel projects across multiple underwater sectors, companies have strong drivers to consider market diversification,” the authors of the survey wrote.

“As our results show, companies are keen to be, or already are active in this diversification, identifying strategic and efficient transition from their core markets into adjacent opportunities.”

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