Preparing for recovery - be first in the queue

In this week’s DW Monday report Douglas Westwood highlighted the opportunities the downturn offers to operators who are focused not just on cost reduction but are positioning themselves for the recovery.

In the report, DW explain that subsea equipment manufacturers have to date been shielded from the full effects of the downturn whilst working through order backlogs placed in 2013-2014. This backlog of work however is quickly being eroded and these manufacturers are facing delayed exposure to the reality of the downturn and the expected fall in installations being completed in 2017-2018.

The article goes on to ask what operators are doing to position themselves for the recovery and asks whether they are continuing work on already delayed development projects in order to maximise the benefits of a lowered cost base and be prepared to hit the ground running as the oil price recovers. Their analysis shows that those operators who took the opportunity to progress development concepts and initial engineering work on stalled projects during the previous downturn, benefitted the most when the industry recovered.  DW expects the same to occur during this cycle.

Specifically, they note that “…being ‘first in the queue’ as a result of a strategy to continue FEED work through the cycle may be vital in maximising the net present value operators can achieve from future field developments.” In this latest downturn, spare capacity in the industry has pushed down prices across the board and, alongside depressed commodities prices, can be used to save considerable CAPEX and improve project value.

As we have noted in previous posts, the success of marginal fields relies on operators and supply chain taking every opportunity to minimise costs. Scheduling projects so that the fabrication of facilities and equipment occurs at the bottom of the market will have a positive impact on returns for projects and, should the facility be funded separately, for the investors in the facility owner.

In the past we have reiterated the importance of project management to deliver field projects on budget and within schedule. Recognising that lead-times for delivery and prices typically increase during the recovery, as DW suggest, we are working with operators to transform the economics of projects in such a way that they can be approved in the current market conditions, enabling us to take advantage of lower prevailing costs and avoiding the risk of backlogs as the market recovers.

In summary, whilst every operator is focused on cutting costs to survive in this market, those who position themselves to exploit the opportunities that reduced activity and manufacturing costs provide, will be best placed to profit as activity increases. We are also looking to maximise this opportunity to further reduce the cost of building our production facilities which, with or without recovery of the oil price, can lead to greater returns; being able to advance projects during the downturn we will be able to place operators at the front of the queue to maximise the NPV of their projects.

Source: Douglas Westwood