Rolling the Energy Dice

BREAKBULK MARCH-APRIL 2022 COVER STORY

By Amy McLellan

Just two months into 2022, as many pundits were theorizing that the Omicron variant would hasten the end of the pandemic and return life to normal, Russia sparked a new crisis by invading Ukraine. Oil prices surged to US$105 a barrel as Western nations unleashed a barrage of sanctions to isolate Russia, one of the world’s top producers of oil, gas, metals and agricultural products.

The EU, the U.S., the UK and Canada announced that the assets of Russia’s central bank would be frozen and some Russian banks were excluded from SWIFT, the so-called plumbing of the international payments system, piling further pressure on the ruble, while the EU barred Russian planes from its airspace. At the time of writing, fighting was underway in many parts of Ukraine, with the Russian forces finding fiercer resistance than expected. Russian President Putin moved the country’s nuclear deterrent status to high alert, ahead of planned talks to try to find a solution.

Oil markets were keeping a nervous eye on events, fearful of energy disruption from a country that supplies about a quarter of the EU’s petroleum oil imports and about 40 percent of its gas. At the time of writing, an oil depot south of the capital Kyiv was ablaze, BP was to offload its 20 percent stake in Russia state-owned oil company Rosneft while Norwegian energy group Equinor was divesting its Russian holdings.

Even before the Russians began amassing troops on the Ukrainian borders, the price of oil was on an upwards trajectory, driven by a resurgence in demand following the worst of the disruption of the Covid-19 pandemic. Indeed, despite the emergence of a vastly more contagious variant towards the end of last year, oil demand defied expectations in Q4 2021, rising by 1.1 million barrels per day, or bpd, to 99 million bpd. This prompted the International Energy Administration, or IEA, to raise its global demand estimates for the year ahead, which is expected to grow by 3.3 million bpd to its pre-Covid levels of 99.7 million bpd.

The rebound in demand has been compounded by the hangover of pandemic-postponed exploration and production spending, which has curtailed new supplies coming onstream. 2022 is starting off with global oil inventories well below pre-pandemic levels, with the Organization for Economic Co-operation and Development, or OECD, total industry stocks ending 2021 at their lowest levels in seven years. This could be enough to see OPEC+ unwind the cuts imposed in response to the Covid-19 crisis, with commentators expecting to see more oil coming to market from the producing nations. Ecuador, Libya and Nigeria are already ramping back up and there’s the potential for Saudi Arabia and Russia to set records if remaining OPEC+ cuts are fully unwound.

Non-OPEC production is also forecast to grow, with the U.S., Canada and Brazil set to pump at their highest ever annual levels in 2022. According to the IEA, U.S. oil output is forecast to rise by 1 million bpd on average, to 17.7 million bpd, as operators respond to higher prices by putting more rigs to work.

It’s also important not to discount the impact of the Iran nuclear deal between Tehran and the five permanent members of the UN Security Council along with Germany and the EU, which provided sanctions relief for Iran in exchange for curbs on its nuclear program. “The wildcard is the Joint Comprehensive Plan of Action and whether a deal can be reached that would bring more than a million barrels back online quickly and ease near-term pressures,” said Craig Erlam, senior market analyst, UK & EMEA at forex and futures exchange OANDA.


Reversing Under-investment

With prices in a much more comfortable range for producers, the question is whether they now have the capacity and appetite to respond. “It’s clear that oil demand is going to be strong over the next year or two; the question is whether producers can ramp up production and respond to these inflated prices,” Erlam said, pointing out that OPEC+ has shown that is not so straightforward after a period of underinvestment.

According to IEA data, annual investment in upstream oil and gas peaked at around US$780 billion in 2014 – since then the highest annual spend was 2019 at US$483 billion. The pandemic hit the industry hard, with plans shelved and budgets retrenched: spending was US$320 billion in 2020 and US$351 billion in 2021, less than half the level of 2014.

But this isn’t just price-related retrenchment, it is part of a structural shift as the industry responds to climate change pressures, both internal and external. These include a sensible wariness not to invest in assets that could well be left stranded should policymakers decide fossil fuels must stay below ground to prevent catastrophic climate change. Already some banks have disavowed fossil fuel investments, making it increasingly difficult for companies to finance new developments. The lack of investment is already being felt at the front edge of the exploration and production business, where global oil and gas discoveries in 2021 were on track to hit their lowest full-year level in 75 years, according to analysts from Oslo-based energy consultancy Rystad Energy.


A Stubborn Status Quo

Even so, it’s clear that fossil fuels will be with us for many years to come – and current high prices will only prolong their dominance of our energy supplies. According to the latest World Energy Outlook 2021 from the IEA, demand for fossil fuels will peak by 2025 if countries meet their climate pledges to limit global warming to 1.5 degrees C, but that “if” is doing a lot of heavy lifting. Indeed, while the IEA acknowledges that the “new energy economy is coming into view,” it also accepts that it is not coming forward quickly enough to avoid severe impacts from a changing climate. The Paris energy watchdog also injected a sobering dose of reality, warning that “every data point showing the speed of change in energy can be countered by another showing the stubbornness of the status quo.”

That status quo can be seen everywhere, from the busy order books of yards building floating production storage and offloading units to the North Sea oilfields getting the nod to proceed to the ongoing consumption of coal, with demand expected to hit an all-time high this year.

Indeed, as Erlam of OANDA pointed out, the transition away from fossil fuels is going to take many years. “Prices could remain high during that period which will always attract investment,” he said. “Producers can’t ignore high prices, especially those that can produce as much lower costs, like U.S. shale.”

This is particularly the case as prices nudge north of the psychologically-important US$100 a barrel threshold. According to shale researcher Artem Abramov of Rystad Energy, up to 2.2 million bpd of U.S. tight oil could be unleashed in the event of a supercycle. Already production from the U.S. Permian Basin, Eagle Ford, Niobrara, Bakken and Anadarko basins has been gushing with black gold, with output of 7.7 million bpd in Q4 2021 and an expectation of 8 million bpd by Q2 2022, potentially rising to 9.9 million bpd by Q4 2023 should prices remain above US$100.

It’s not all green-for-go in U.S. shale, however, with Rystad’s Abramov highlighting “acute supply chain bottlenecks,” winter-related weather disruptions and rising prices of materials, including sand used in tight oil production, that could act as a drag on production growth.


Supersized Offshore Wind Opportunities

While fossil fuels remain stubbornly in demand, there’s no doubt that for heavy-lift and project cargo contractors there’s enormous growth in renewables, particularly offshore wind.

“Offshore wind keeps double-digit growth on an annual basis,” said a spokesperson for Jumbo, the Dutch heavy-lift specialist. “Europe is still a big player. However, the U.S. and the APAC countries are also investing heavily in this market.”

The rapid emergence of the U.S. market is confirmed by Danny Cain, director of safety and risk management at Kentucky-based Edwards Moving. “Many of the heavy-haul companies are taking a chance going after the offshore wind activities,” Cain said of the White House’s green energy push.

President Biden’s US$1.2 trillion Infrastructure Bill to unlock federal investment in bridges, roads and rail as well as the nation’s broadband, water and energy systems is anticipated to unlock new contracts, although Cain said he worries the much-needed investment in new bridges could be a wasted-opportunity if engineers don’t accommodate the needs of super heavy loads. “There is no real reserve capacity built into these new bridges to handle heavy super loads,” he said, pointing out this could be an issue as heavy-lift specialists stay busy delivering the transformers, generators and other energy-related equipment that will be required to upgrade the U.S. energy grid for the 21st century.

Offshore wind is pushing the industry to scale-up its capabilities. Turbines have doubled in size in recent years, from around 3 MW in 2010 to 6.5 MW today, with some of the biggest weighing in at 10 MW. Turbines larger than 8 MW accounted for just 3 percent of global installations between 2010 and 2021 but will be 53 percent by 2030. Some projects will be even bigger, with 13 MW turbines set to be in action at the Vineyard Wind development in the U.S. and Dogger Bank in the North Sea and 14 MW turbines offshore Taiwan. Projects in Germany and the U.S. involve 15 MW turbines.


Keeping Up With Growth

One potential brake on growth is a shortage of vessels capable of lifting and moving these mega machines. “When turbines were smaller, installation could be handled by the first-generation fleet of offshore wind vessels or converted jack-ups from the oil and gas industry,” explained Rystad analyst Martin Lysne, who forecasts a bottleneck of capacity as soon as 2024. “However, as operators continue to favor larger turbines, a new generation of purpose-built vessels is required to meet demand.”

He pointed out that currently only a handful of purpose-built vessels can install 10 MW+ turbines and none are currently able to install 14 MW+ turbines.

This is echoed by the Jumbo spokesperson, who said that from 2025 there will be a shortage of vessels to lift and install new generation turbines. While contractors are investing in newbuilds to handle the bigger lifts, there will be a bottleneck as a result of the mismatch between supply and demand. “Cable laying, given the market’s fast growth, is another challenge where there simply will not be enough vessels to meet the demand,” said the spokesperson.

Floating wind is also seen as a major future market, described by one operator as a “vast market to grow in.” The development of this emergent market will only exacerbate the vessel shortage: with stronger winds in the deep offshore, larger turbines will be required, necessitating investment in specialist vessels.

This market is still in its infancy but is expected to grow fast. Companies are already cutting their teeth on pioneering projects, such as the Kincardine Offshore Wind Farm in UK waters, which will be the largest offshore wind farm in the world, and Windfloat Atlantic, off the coast of Portugal. Mammoet successfully completed the loadouts of five floating wind platforms at the Navantia Fene Shipyard in Spain, destined for Kincardine.

The energy transition is reshaping the size and capabilities of the heavy-lift and project cargo industries. Whatever the current crisis in Ukraine, however the oil price responds to that situation and no matter the latest twist in the Covid-19 pandemic, climate change currently represents a non-negotiable seismic shift in how the energy markets are structured. The good news is today’s contractors are readying their capabilities to respond to this new reality.

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.

Photos 1: Companies such as Mammoet are cutting their teeth on pioneering projects, such as the Kincardine Offshore Wind Farm in UK waters, which will be the largest offshore wind farm in the world. CREDIT: MAMMOET

Photo 2: Craig Erlam, senior market analyst, UK and EMEA, OANDA

Photo 3: "Offshore wind keeps double-digit growth on an annual basis," said a spokesperson for Dutch heavy-lift specialist Jumbo.