Apr 30 | 2021
Industry Forecasts Energy-related Infrastructure Demand
By Amy McLellan
The early months of 2020 saw analysts crunching through models that would quickly become obsolete as the Covid-19 pandemic changed our world. What followed was unprecedented in modern times: overwhelmed healthcare systems, national lockdowns, grounded flights and strict border controls.
Twelve months on, and the cycle appears to be repeating itself. While vaccines seem to offer a route back to normality, at the time of writing a third or even a fourth wave, depending on the region, of infection and fears about the spread of new Covid-19 variants was leading to further lockdowns and travel bans in Europe, Asia and elsewhere.
Prior to the latest resurgence of infection, many analysts were bullish about the oil markets, with sentiment buoyed by the amazing progress of the multiple vaccines developed in record time over the past 12 months.
Now, however, there’s increased uncertainty and oil analysts find themselves in the unenviable position of having to not only model the usual geopolitical and economic variables, but also a whole host of factors outside their expertise, from epidemiology to vaccine distribution.
Chris Midgley, global head of analytics at S&P Global Platts, pointed out that the vaccines have created a wave of optimism that isn’t necessarily underpinned by any change in the fundamentals. “While in the long term we are more optimistic about a rebound of oil demand, causing us to upwardly revise our 2021 demand outlook, in the short term, we expect things to worsen,” Midgley said.
Increasingly, it seems, the world is split between those economies still reeling from the pandemic, and those countries that took a so-called Zero Covid approach, imposing strict border controls along with effective test, trace and supported isolation policies, which are now reaping the economic dividends. China, for example, looks set to post economic growth in excess of 6 percent this year, with some analysts even tipping growth of 8 percent.
Vietnam’s economy expanded by 2.9 percent in 2020, one of the highest growth rates in a pandemic-hit world, and is expected to nudge 6.5 percent this year. Taiwan saw record growth in 2020, even outperforming China, and analysts are projecting growth north of 5 percent for 2021.
Demand and Pricing
Resurgent growth in Asian economies is good news for oil demand, which has rebounded from the lows of 2020. Energy intelligence consultancy Wood Mackenzie, for example, expects world oil demand to increase 6.6 million barrels per day, or bpd, year-on-year in 2021, reversing about two-thirds of the nearly 10 million bpd collapse in 2020.
This resurgent oil demand is already feeding into higher oil prices, with benchmark Brent trading at US$65 a barrel in late March. Analysts have been sufficiently encouraged to increase their oil price forecasts for 2021, with the U.S. Energy Information Administration forecasting Brent spot prices averaging US$60.67 per barrel and West Texas Intermediate, or WTI, spot prices averaging US$57.24 per barrel this year. Fitch Ratings has increased its price assumptions to US$58 a barrel and US$55 a barrel for WTI, reflecting the stronger-than-expected oil demand and OPEC+’s supply management.
“We consider such supply management policies as being prudent,” said Dmitry Marinchenko, senior director, corporates, at Fitch. “Furthermore, oil prices will continue to benefit in the short term from positive sentiment due to successful vaccination rollouts and the upcoming US$1.9 trillion stimulus package in the U.S.”
Last year may have been one of the toughest in the oil industry’s history – and these are companies used to boom-and-bust cycles – but it has forged a more resilient industry. Savage cost-cutting saw international oil companies reduce their corporate cash flow breakeven from an average of US$54 a barrel to US$38 a barrel, which means today’s higher prices could see plenty of cash returning to corporate coffers.
“At an average price of US$55/barrel, our US$140 billion estimate of 2021 free cash flow before shareholder distributions exceeds any previous year since 2006,” said Tom Ellacott, senior vice president for corporate analysis at Wood Mackenzie.
Oil Companies Remain Cautious
While oil and gas contractors, still hurting from last year’s cost-cutting, may be salivating at the thought of a major spending splurge, analysts expect oil companies to favor a cautious approach, reducing gearing and buying shares to restore investor confidence.
“The sector is in ultra-capital-disciplined mode to win over investors,” Ellacott said. “We think the industry will stick to its tight management of investment for some time.”
Indeed, contractors hoping for a rapid rebound in activity levels after a lean year may be disappointed. Fraser McKay, WoodMac’s head of upstream analysis, for example, expects investment levels in the upstream sector to stay flat at about US$300 billion in 2021, as oil companies remain hesitant to take advantage of a nadir in service sector costs.
“We expect 20 or so big projects to be sanctioned in 2021, up from just over 10 in 2020, but just half the prevailing pre-pandemic trend,” he said.
When it comes to upstream, offshore greenfield project commitments in 2021-25 are expected to be worth more than US$480 billion. Drilling activity will rebound from 2020’s low, with Oslo-based energy consultancy Rystad Energy expecting about 54,000 wells (2,500 of them offshore) to be drilled worldwide in 2021, up 12 percent on last year, and 64,500 wells in 2022, still short of 2019’s tally of 73,000.
South America will attract spending on deepwater projects offshore Brazil, Guyana and Mexico.
The Middle East is another strong market, dominated by Qatar’s move to sanction the US$30 billion North Field Expansion project. According to Rystad Energy, some US$98 billion of projects in the Middle East will be sanctioned between now and 2023, including ADNOC’s project pipeline of about US$40 billion in the UAE, Saudi Arabia’s US$12 billion giant Zuluf oil development, and projects in Oman, Iraq and Iran.
In Australia, Woodside’s 4.5 million tpa Pluto LNG Train 2 project is expected to take final investment decision this year, which would be developed with the Scarborough upstream asset. Santos’ Barossa gas field US$3.7 billion development could also reach FID this year.
Winds of Change
Increasingly, of course, these multibillion-dollar long-life investments need to be weighed against a backdrop of rising concern about climate change. Analysts said that projects will increasingly be weighed for their sustainability in a low-carbon world. “The class of 2020 will not all be low-carbon, low-cost trailblazers,” said WoodMac’s Ellacott. “But the direction of travel is one-way in terms of industry stakeholder aspirations.”
There is certainly growing pressure from investors for action on emissions. A group of 30 fund managers with US$9 trillion under management, for example, have committed to work towards net-zero emissions across their portfolios by 2050, with an intermediate goal for 2030 that would be consistent with limiting global warming to 1.5 degrees Celsius. Big Oil is, finally, taking note, with a number of companies setting net-zero targets and taking bigger bets on renewable and clean energy technologies.
BP, for example, recently spent US$1.1 billion buying a 50-percent stake in two major lease areas off the U.S. East Coast to develop up to 4.4 gigawatts, or GW. The Empire Wind and Beacon Wind projects are part of the London-headquartered oil giant’s ambition to grow its net renewable generating capacity from 2.5 GW in 2019 to 20 GW by 2025 and to about 50 GW by 2030. It also aims to increase annual low-carbon investment 10-fold by 2030 to about US$5 billion a year.
This is no longer greenwash; it’s increasingly a legal and commercial imperative. Analysts at McKinsey & Co expect renewables to become cheaper than existing fossil fuels plants within the next decade, triggering fivefold growth in the installed capacity of solar PV and onshore and offshore wind by 2035.
The pandemic, of course, has made a dent in global emissions, but perhaps not as much as last year’s shuttered factories and silent skies might have suggested. Analysis by Bloomberg New Energy Finance, or BNEF, suggests Covid-19 will subtract some 2.5 years’ worth of aggregate emissions over the next 30 years.
More significant are longer term trends, such as mass working from home and adoption of electric vehicles along with a massive ramp-up in solar and wind, which are expected to meet 56 percent of world electricity demand in 2050, and some serious investment in batteries, green hydrogen and smart grid infrastructure. BNEF forecasts suggest an eye-watering US$14 trillion in grid investment will be needed between now and 2050 to enable the power system of the future.
Good News for Lifters and Movers
This transition is good news for the heavy-lift and project cargo industries. Not only will they be hired to install the new giant wind turbines, generators and grid infrastructure to deliver a greener future but they will also have to remove the remnants of the old world. According to Danny Cain, director of safety and risk management at Edwards Moving and Rigging in the U.S., these two trends ensured that, despite the pandemic, 2020 proved to be one of the company’s busiest years.
“A lot of this work was across the energy sector onshore U.S., where there has been a lot of major new construction underway and conversion of old coal plants to gas-fired facilities,” Kentucky-based Cain said. “Our infrastructure in the U.S. has deteriorated greatly over the years, so as well as new construction and expansion projects, we’re also involved in taking out the old equipment, particularly in coal and nuclear.”
Indeed, the challenge for Edwards is finding enough staff with the right skills and experience. “There’s a real skills shortage,” he said. “You can’t just quickly train people up to do these specialist jobs, there’s a lot of experience needed to maneuver turns with these long configurations.”
For many heavy-lift and project cargo contractors, the energy industry remains a significant part of their order books, but it’s green energy where the opportunities lie.
“The energy transition is definitely starting,” said Yannick Sel, global sales director at heavy-lift specialist Mammoet. “Some projects will take time to develop and we are likely to see them in execution from 2023 onwards.”
Ole Schmidt, vice president at global transport and logistics provider DSV Projects, DSV Air & Sea, sees a similar trend. “The majority of project cargo volumes are within the energy segment and our main focus is on renewable energy,” he said. “While Covid-19 had some interference and still does, with constraints due to slower operations, we expect considerable growth in the coming years, especially in renewables with a number of projects on hand for execution in 2021-2022.”
According to Rystad Energy, capital expenditure for renewable energy projects is expected to reach a record US$243 billion, narrowing the gap with oil and gas spending. Most of the renewable energy spending will go towards onshore wind projects, rising to US$100 billion from $94 billion in 2020. Offshore wind will see capital expenditure grow to US$46 billion from US$43 billion.
Most of the expenditure stems from Asia, which had 156 GW of capacity under construction as of January 2021, followed by Europe with 32 GW. Big spend projects include China’s 800-MW Rudong offshore wind farm and 2 GW Zhuozi County Project, as well as Ørsted’s 1.4 GW Hornsea 2 project off the UK.
The U.S. is another hugely promising market, with the new administration in the White House triggering a splurge of renewables activity. “Since Biden won, it has been like a tidal wave in terms of requests for proposals,” said Jeff Andreini of Florida-based Crowley, which has formed a New Energy division to capture these new opportunities. “There’s a paradigm shift underway and everything is moving at breakneck speed.”
Crowley has formed a partnership with Danish shipping company ESVAGT to address shortages of Jones Act compliant vessel capacity for this emerging industry and more partnerships are expected to be announced in the next six to nine months to “solidify us on the logistics side for offshore wind,” said Andreini, who is vice president of the new division. “We’re providing a full turnkey service. We have the marine assets, marine engineering, logistics, ship management, terminaling and decommissioning. There’s no one else as a Jones Act player in the U.S. who can do all of this in one package.”
It is not just the U.S. offshore wind market that is expected to boom. Companies in other markets are also reporting busy order books. Felix Peinemann, commercial manager, shipping at Netherlands-based heavy-lift specialist Jumbo, expects 2023-2027 to be “really booming years for offshore wind.” He expects key markets to be the U.S., Japan, Vietnam and the UK, with emerging opportunities in Norway and the Baltic.
“We see there will be high demand for vessels at the higher end of the segment,” said Bremen-based Peine-mann, noting the ever-increasing size of next-generation wind turbines. In 2005, the average offshore turbine had a capacity of 3 MW; projects on the books for 2022 have an average turbine size of 6.1 MW while next-generation turbines will be double that.
This will strain the capacity of the existing fleet capable of transporting and lifting this specialist hardware. “We see that unlike oil and gas, where the lead time might be two to three years, some of these offshore wind projects have lead times of five to six years,” said Peinemann, whose company is in the process of forming a joint venture with SAL, the German-based breakbulk and project cargo specialist. “Order books can fill up rapidly so is there going to be enough capacity to supply the demand? If oil and gas activity comes back over the same time frame, then it’s going to be tight.”
Crowley’s Andreini agreed. “If oil and gas come back, then the two industries will be competing for the same assets, which means there will be a premium on available assets,” he said.
Even so, companies are being cautious before committing to any newbuild activity, not least because of advances in turbine technology. “They’re getting bigger and this will affect what’s needed,” Peinemann said. “If you develop something today it might not be right in three to four years’ time.”
Analysts at Rystad Energy have run their own calculations and reckon the fleet will be outstripped by demand after 2025. There are 32 active turbine installation vessels (five more have been ordered) and 14 dedicated foundation installation vessels (another five have been ordered), but with only four vessels currently capable of handling the next generation of turbines, such as GE’s Haliade-X 12-MW, the existing fleet will soon be insufficient. It’s not just that there will be more orders – Rystad Energy’s offshore wind specialist Alexander Fløtre points out that each project can be hugely intensive, requiring the transit and accurate positioning of installation vessels at least 100 to 300 times in quick succession.
“We identify the heavy-lift vessel segment as the key bottleneck for offshore wind development from the middle of this decade, and the need for next-generation vessels may slow the cost reductions expected in offshore wind,” said Fløtre.
Creating the solutions to unplug bottlenecks and optimize operations to ensure the green energy solutions of the future are competitive will require innovation and collaboration across the supply chain.
“We need to get engaged early to be able to find solutions that can optimize the transport and/or construction process, thus saving time and costs,” Mammoet’s Sel said. “Clients are also looking for integrated solutions, where we expand our scope, not limiting to equipment rental.”
In renewables this might mean modularized construction techniques, where plants or installations are fabricated in modules away from the build site and brought together for integration, enabling construction to take place in parallel, shortening completion times, widening the talent pool and increasing cost-efficiency, Sel said.
One thing is clear: while the energy transition has been much discussed, it finally seems to be underway and gathering traction. Oil will continue to play a role, but analysts are inching the date of peak oil ever closer.
Analysis by McKinsey suggests oil demand peaks in 2029 and gas in 2037, with coal, having peaked in 2018, continuing its decline. The future will be greener, which means the contracting industry needs to be adjusting its capacity and its fleet now to be able to serve the demands of this greener world. Whether it is moving ever larger turbines into place or removing the aging infrastructure of the fossil fuel age, this is the time to be making connections, forging partnerships and horizon-scanning for new opportunities.
Freelance journalist Amy McLellan has been reporting on the highs and lows of the upstream oil and gas and maritime industries for more than 20 years.
Image credit: Shutterstock