Norwegian companies are capitalizing on deep sea drilling boom
27 Sep 2004
Specialist Norwegian drilling companies are reporting a boom in orders as petroleum companies increasingly turn to deep-sea fields where floating and fixed oil platforms won't work. Major petroleum companies are under increasing pressure to replace their reserves. Maturing traditional oil and gas areas, dwindling exploration opportunities and a growing demand-supply gap are forcing them to turn to previously undeveloped areas including deep water field, conventionally either uneconomic or too harsh a drilling environment. And with oil prices hitting new highs, many oil majors have increased their hurdle rates, or the oil price assumptions they base their investment decisions on, upping them from around $18 a barrel to $22 to $24 a barrel, opening up previously unavailable opportunities. Having gained their expertise in the maturing fields of the Norwegian Continental Shelf, specialist Nordic companies are transferring their technology to deep-water fields in West Africa and the Gulf of Mexico, as well as to Asia and Australia and looking to increase profits. For businesses like FMC Technologies' FMC Kongsberg Subsea unit, Vetco Gray's Norwegian subsea drilling unit, Aker Kvaerner's Oilfield Products unit, and Stolt Offshore, analysts are forecasting a 7% to 8% increase in the number of specialized wells to be drilled annually for the next five years. Contracted by the oil majors, subsea companies specialize in constructing and installing drilling and production equipment mounted on the sea floor, instead of the traditional fixed and floating platforms on the water's surface. Based on the number of contracts awarded, the companies claim to have 80% of the subsea drilling market, with US based Cooper Cameron Corp. being their biggest competitor. "There's definitely been an increase in projects," said Arild Selvig, director of sales and business development at FMC Kongsberg Subsea. "It is a growth market and there are quite a few prospects out there," says Kjell Garvik, vice president of sales and marketing at Aker Kvaerner's Oilfield Products. Take FMC Kongsberg's Subsea unit. Sales have risen to $817 million in 2003 from $494 million in 2001, an increase of 65%. "If you look at FMC Technologies' core business areas, airport, food technology and oil and gas services, the growth area is in the subsea unit," said Selvig. "Its strategy is being driven to meet the market's growth." US based FMC Technology said that since focusing investment on its Norwegian subsea division, the company produced a record revenue in 2003 from new orders at $1.26 billion - up 9% on previous year, primarily from strong subsea orders. Companies such as Stolt, a contractor that primarily installs subsea-drilling systems, are a measure of the market's growth, said Jarle Sjo, an equities analyst at Oslo-based First Securities. Sjo said the analysts' consensus is that Stolt's net earnings will be up 19% in 2005 from this year, and up 60% the following year, to $80 million. "I would assume that most of the development going forward would be subsea installations," said Sjo. "It's more cost effective." Although Sjo said investment is initially more expensive than standard surface drilling and production platforms, operational expenses will be much lower, so the net present value will be better with subsea installations." Besides maturing technology and economies of scale driving down the prices of such drilling, it is often the only way to reach oil and gas as fields move farther offshore into as yet undrilled depths. Selvig said the boom is being driven by new provinces and blocks opening up in deepwater fields in Angola, Nigeria and in the Gulf of Mexico, where floating drilling platforms aren't allowed because of environmental regulations. Although he said he expected West Africa, mostly Nigeria and Angola to attract the majority of the short-term attention, Malaysia, Vietnam, India, China and Australia are seen as key growth areas. Norway's aging fields have been a natural cultivating ground for the industry. "The industry has grown up supporting companies on the NCS (Norwegian Continental Shelf)," said the head of marketing at Vetco Gray's Norway operations, Tom Munkejord. "The Norwegian market was the invention arena going back to the early 1980s," said Selvig. "Subsea had to be developed due to the water depth, and Statoil ASA and Norsk Hydro ASA pushed the subsea technology as an enabler to develop the Norwegian sector." Munkejord said Statoil, ranked 17th among world oil companies, is the second largest subsea operator in the world. "Based on that, we're now exporting the technology around the world," he said. The orders for the subsea systems have been helped recently by deep-sea, high-pressure, and high-temperature projects like Hydro's Ormen Lange natural gas field and Statoil's Snoehvit project in the Barents Sea. And such projects may also help them win a sizable role in one of the most coveted natural gas projects in the world: Russia's 3.2 trillion cubic meter Schtokman natural gas project, also in the Barents Sea. "I expect revenues up higher than 8%, easily 10% in 2005, with the expected increase in oil companies' investments given the high oil price and falling reserves," Sjo said. "It looks a very, very strong market now with the high oil price." Selvig, of FMC Kongsberg Subsea, agrees. "We should see a ramp-up of those projects next year due to an increase of the hurdle rates within the companies, so satellite projects that were previously uneconomical are now being brought forward," agrees Selvig. In 2004, there were only five subsea projects undertaken on the NCS, but next year there should be 10 to 15, he said.