HI Uplift: Offshore oil & gas sector ‘set for sustained growth’
The offshore oil and gas sector is set for several years of sustained growth, after seven thin years, generating rising demand for helicopter support. That’s the view of Steve Robertson, director of offshore energy consultancy Air & Sea Analytics.
“You’ve got to remember the oil industry has suffered a seven-year period of under-investment, following the oil price crash in 2014. We haven’t had one year of low prices, we’ve had seven,” Robertson tells Helicopter Investor (HI). Excess supply in the system has eroded against a background of rising oil prices caused by lack of spare capacity combined with other factors, such as a reduction in Russian supply and rising demand in China. “So, the lack of investment in new capacity should support oil prices for a reasonable upcycle of at least a few years.”
While it’s impossible to accurately forecast oil prices, Robertson highlights the abundance of bullish predictions. For example, the US Energy Information Administration and many investment banks are forecasting oil prices of more than $90/bbl (barrel of crude oil).
On the supply side, Air and Sea Analytics identifies 40 key projects with expected sanction (or Final Investment Decision, FID) dates this year. “This suggests there is potential for more than $50bn of commitments to new offshore platform projects in the next 12 months, which could see an additional 124 platforms added to the backlog,” says Robertson.
While not all projects are certain to go ahead, their volume is a healthy indicator, he adds. It also explains why some platform constructors have been trying to secure shipyard capacity ahead of these awards being made.
“All this is good news for the offshore helicopter business,” Robertson tells HI. “The utilisation now of offshore oil and gas helicopters is becoming very high for the modern types. The excess that existed a year ago has been wiped out by increasing demand. So, the lessors are happy because their aircraft are earning money.”
Predictably, helicopter leasing rates are rising in response to tightening demand. Higher rates, together with other rising costs (not least fuel) and rising inflation are leading some to worry about operators’ margins. “There’s some concern around the supply chain that there’s going to be a squeeze on operators unless they’re able to push some of these higher costs onto the oil companies which, up until now, they have been very reluctant to accept them.” That is despite oil companies making record levels of free cash flow over the past year.
While the UK remains a significant producer of oil and gas, Air & Sea Analytics has noted helicopters leaving both UK operations and storage. “Over the past couple of years aircraft have been moving out of the UK and into other regions like Australia, Brazil or Guyana to accommodate growth in demand,” says Robertson.
Plus, there’s an urgent need for fleet replacement. “We are going to have to see the ordering of new equipment very soon,” he says. Some aircraft have hourly limits on their airframe (the S92 has a 30,000-hour limit), so will come up against “a hard end point in their lives”. Others might be replaced due to oil companies’ contract requirement for helicopters to be fewer than 10 years old.
One frustration, both for operators and lessors, is cancellation for convenience in oil contracts. “All the lessors are saying the same thing, which is that it’s very hard to finance investments when you don’t have solid contracts.”
Another factor is manufacturers’ lengthening backlog, reflecting partly OEM’s production discipline and the growing importance of supplying defence contracts. For example, the delivery of a new Sikorsky S-92 may take up to three years or for a Leonardo AW139 probably two years.
Nevertheless, his assessment of current offshore prospects remains optimistic. “We are in a strong market for offshore crew transfer and a strong market for search and rescue tied to oil and gas activity,” he says. “Most of the challenges are due to the market being overheated and having come back at a much faster rate than anybody anticipated – even 12 months ago.”
An equally upbeat assessment of the prospects for offshore oil and gas is offered by analyst Ascend by Cirium’s report Team Perspective: Offshore – Reasons to be cheerful. “The current demand indicators for the oil and gas sectors are indeed likely to be cheerful after a seven-year slump,” writes Sara Dhariwal, senior aviation analyst, Ascend by Cirium.
That’s notwithstanding predictions of a slowdown in economic growth, supply chain challenges and concerns about MRO capacity. Cirium’s Fleet Analyser data reveals an average of just over 100 delivered helicopters per year between 2010-2015, falling to fewer than 30 in the following five years between 2016-2021. Last year there were 14 recorded, although this may change since OEMs have yet to release official figures.
The Ascend by Cirium 2022 Helicopter Fleet Forecast predicts the industry will continue to see low levels of deliveries for the immediate future, with a focus on replacement of around 20% of the current fleet.
“While declining deliveries may seem a bad omen, the OEM restraint over the past few years is commendable and supports the strong residual values of the asset class,” according to Dhariwal. “There is a clear argument for using existing fleet, rather than ordering new, to maintain the useful economic life and continuing to make investments highly attractive. Not to mention the environmental advantage in reusing, rather than buying new.”
Meanwhile, both Robertson and Dhariwal will be taking part in our Helicopter Investor London 2023 conference panel, The state of the fleet, Trading and offshore, on Wednesday March 22nd, 2023. Read the full conference agenda here and book your conference place at the Royal Garden Hotel here.