Release Notes QUE$TOR

Transcription

1 Release Notes QUE$TOR 2016 Q3 Release November 2016 QUE$TOR is a registered trademark of IHS. Windows is a registered trademark Corporation. of Microsoft

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3 Contents Introduction 2 Version compatibility 3 What s on the CD-ROM 3 System requirements 4 Application execution 5 General upgrades in QUE$TOR 2016 Q3 6 Carbon steel X52 material option for onshore pipelines and flowlines 6 Tanker and Topsides leasing 6 Commingling manifold subsea distribution unit 8 Equipment in Subsea component 8 Addition of comments on locked values 9 Selected other technical revisions 11 Cost database update 12 General 12 Oil Price Trend and Currency Market 13 Steel 17 Equipment 18 Bulks 19 Offshore rigs 21 Offshore vessels 24 Subsea 26 Labour 28 Land rigs 30 Contacting customer support 32 IHS November 2016 Page 1

4 Introduction We are pleased to provide the 2016 Q3 release of the QUE$TOR cost estimating software. All cost databases have been reviewed and updated to incorporate current unit rates, exchange rates and man hour costs for all regions to reflect third quarter 2016 prices. The main technical enhancements made to QUE$TOR 2016 Q3 are: Carbon steel X52 material option for onshore pipeline and flowlines. A leasing option on the OPEX cost sheet for tankers and topsides. Subsea distribution unit on commingling manifolds. User definable subsea equipment. Addition of comments on locked values. The above changes as well as numerous other improvements and minor bug fixes have been made at the request of users and through internal review. We actively encourage feedback from users as a means of improving the accuracy and ease of use of the program. Page 2 November 2016 IHS

5 Version compatibility Projects created in QUE$TOR v8.0 and later are compatible with QUE$TOR 2016 Q3. However, projects created or saved in QUE$TOR 2016 Q3 cannot be opened in earlier versions. Opening a project created in an earlier version of QUE$TOR will result in the costs and technical calculations automatically being updated, except where unit rates or results have been locked when creating the original project. Changes will be made permanent when the project is saved and the case will no longer open in the earlier version. It is therefore advisable to make a copy of your project file before opening it in the new version. QUE$TOR allows multiple versions of the program to be installed side by side in order to view projects created using earlier databases. What s on the CD-ROM The QUE$TOR 2016 Q3 CD-ROM contains the following: QUE$TOR (2016 Q3) installation files. An Application directory containing QUE$TOR (2016 Q3) program files. A Documents directory containing a copy of the full help file, the quick start guide and a copy of the full and short release notes in portable document format (.pdf). A dotnet Framework directory containing the executable to install the required.net Framework on your machine if it is not already installed. A FlexNet directory containing the executables and installation instructions necessary to set- up and manage a network licence server. A Sentinel SuperPro Driver directory containing the executable to install the licence security key (dongle) driver (for single user licence dongles) on your machine if it is not already installed. A Utils directory containing a set of utilities to assist IHS support staff with troubleshooting should any problems arise whilst installing or running the application. IHS November 2016 Page 3

6 System requirements QUE$TOR 2016 Q3 Operating system Application disk space Disk space / project Disk space / procurement strategy Windows 7 SP1 / Windows 8 / Windows 8.1 / Windows 10 [1] 275 MB ~1 MB ~3 MB Minimum monitor resolution 1024 x 768 Licensing Network or USB port [1] The 32-bit (x86) and 64- bit (x64) versions of these operating systems are supported. Installing the software from the QUE$TOR installation CD-ROM The software on the QUE$TOR CD-ROM can only be run if you have a valid security key (dongle) or access to a network licence but these are not required when installing the software. Load the CD-ROM into your CD drive. The setup program will automatically detect if you don t have the required Microsoft.NET Framework version already installed and provide a warning. It can be downloaded from Microsoft s website by clicking on the Yes option. Alternatively, run the file located in the dotnet Framework sub-folder of the QUE$TOR CD-ROM. To install the Sentinel SuperPro dongle driver (if not already installed) run the Sentinel System Driver Installer msi located in the Sentinel SuperPro Driver sub- folder of the QUE$TOR CD- ROM. Reboot your machine to complete the installation of the Sentinel driver. Note, this step is only required for single user / standalone licensing. Page 4 November 2016 IHS

7 To install QUE$TOR 2016 Q3 run the file setup.exe in the root folder of the QUE$TOR 2016 Q3 CD-ROM. Once installed, an icon for QUE$TOR 2016 Q3 will appear on your desktop. A group will also appear on the start menu under All Programs\IHS\QUE$TOR 2016 Q3 containing shortcuts for the Database editor, the Project editor, the Project viewer, the main QUE$TOR application and the Unit editor. If you get any warnings during the installation then please contact the QUE$TOR support desk, support_questor@ihs.com. You are now ready to run QUE$TOR providing your dongle or network licence has been updated to run QUE$TOR Offshore or Onshore 2016 Q1. Note: QUE$TOR 2016 Q3 supersedes previous versions but can be installed alongside them. You should install the Sentinel security key software before the dongle is plugged in. If your dongle has not been updated to run QUE$TOR 2016 Q1/Q3, contact the QUE$TOR licensing desk (questor_ licensing@ihs.com) to get an update for your dongle licence. If you use a network licence please ask your licence administrator to contact the QUE$TOR licensing desk. Application execution To run the software click Start and follow All Programs > IHS > QUE$TOR 2016 Q3 > QUE$TOR 2016 Q3 or double-click the icon created on your desktop. IHS November 2016 Page 5

8 General upgrades in QUE$TOR 2016 Q3 In response to feedback the following features have been implemented in QUE$TOR 2016 Q3. Carbon steel X52 material option for onshore pipeline and flowlines. A leasing option on the OPEX cost sheet for tankers and topsides. Subsea distribution unit on commingling manifolds. User definable subsea equipment. Addition of comments on locked values. Carbon steel X52 material option for onshore pipelines and flowlines Carbon steel X52 has been added as a material option for onshore pipelines and flowlines. This is in addition to the current Carbon steel X60, Clad 316 stainless, Duplex, CRA and GRP options. The new Carbon steel X52 material is in many ways similar to Carbon steel X60 although is a cheaper alternative when yield stress is not a determining factor in pipeline sizing. In lower pressure scenarios QUE$TOR will often default to a minimum wall thickness for a given line size based on industry standards. In some of these scenarios a cheaper material with a lower yield strength can be selected with no increase in the pipeline wall thickness resulting in a cheaper overall pipeline. The new Carbon steel X52 has no other changes in installation durations or ancillary costs as compared with the default Carbon steel X60. The new Carbon steel X52 is never selected by default but can be chosen by the user. Tanker and Topsides leasing The option to evaluate a lease cost for the tanker and topsides has been included. When a tanker or topsides is added to the main schematic the option to lease is available on the component Lease tab. When the option is active a lease calculation is added to the OPEX/Leases sheet. The leasing calculation will convert the CAPEX amount into an annual leased amount. The calculated CAPEX cost can be split between the lease company and the operating company with the lease company CAPEX being converted into an annual operating cost. The leasing option can be configured Page 6 November 2016 IHS

9 depending upon the amount of capital being leased and the economic environment of the leasing company by adjusting the amount of corporation tax and expected discount rate for the lease company. Figure 1 - Tanker and Topsides leases The lease calculation can be modified depending upon the terms of the lease. The model assumes that the asset will be leased for its entire useful life which is the same as the project field life. The calculation for the lease cost is performed on a quarterly basis solving to give a Net Present Value (NPV) of zero for the leasing company. The following formula is used: Where NPV= T t=1 Ct C C t (1+ r) 0 + t = Time interval (with T equal to the field life) T IHS November 2016 Page 7

10 C t = Net Cash Flow at time t. ($) Income OPEX Tax Rate( Income OPEX Depreciation amount in year t) r = Real discount rate. (%) C 0 = Initial CAPEX amount.($) (1- Tax rate) * Upfront costs CAPEX outlay C T = Residual CAPEX amount.($) The leasing rates are editable on the leases sheet in OPEX and modifications can be made to allow for: Projects where the asset life is greater than the field life Using an asset that has been previously deployed Lease purchase (fixed percentage or remaining book value) Joint asset ownership Commingling manifold subsea distribution unit The option to add a subsea distribution unit to commingling manifolds has been included. This can enable individual wells or templates and clusters to be controlled from a distribution unit connected to the commingling manifold. The size of the distribution unit is dependent upon the number of umbilical connections that are being made to the unit. It is assumed that the distribution unit will not be automatically enabled but can be selected if the design requires it. Equipment in Subsea component The option to add bespoke equipment in the subsea schematic is now available which will create an equipment line on the subsea cost sheet where the unit rate can be entered. Page 8 November 2016 IHS

11 Figure 2 - Subsea equipment input form The equipment form shown in figure 2 allows for the DSV installation, design and project management durations to be configured. The DSV installation duration for each subsea equipment item is determined based on the water depth and type of equipment the custom equipment item is treated as. The design and project management manhours are based on the treat as equipment type only. Addition of comments on locked values The option to add comments to locked values has been extended over the last release to allow users to attach comments to all locked cost sheet and sub cost sheet values both quantities and unit rates plus editable values on the OPEX and Investment and Production Profile (IPP) sheets. Editing a comment is done by right clicking on the value to reveal the context menu with the menu options "Locked", "Insert comment", "Edit comment" and "Delete comment" if a comment is present. Comments on a locked value can be identified through a red triangle above the lock symbol. The comments on locked values are reported in the locked values report and the text can also be seen on the tooltip when hovering over the locked value. In addition the tooltip shows the login identifier of the commenter, the date and time comment was modified. For input values the precision of the number is also displayed. IHS November 2016 Page 9

12 Figure 3 - Comments on locked cost sheet values Note: Unlocking a value removes any user comment that is associated with it. Page 10 November 2016 IHS

13 Selected other technical revisions QUE$TOR 2016 Q3 Release Notes A number of other technical revisions have been made to the application. When there are living quarters on topsides unit, the input report now has a manning breakdown list by type and shift rotation, along with the total number of beds required. The ghosted status of a component (CAPEX & OPEX) now appears in the locked values report when the component is ghosted to make the ghosted status of the component clearer. Onshore construction civils costs (General, Foundations, Roads and Buildings) unit rates are now reproduced from the civils sub cost sheet onto the main cost sheet. This change applies to wellpad groups, production facilities, terminals, pipeline booster stations and LNG regasification components. Oil export now includes an export rate input box; this allows for explicit specification of the export rate used in sizing the export pumps. By default, this equals the pipeline oil flowrate when export is via pipeline or ten times the Topsides oil capacity when export is via offshore loading/ship to ship. Note: A previously locked Civils or Civils construction unit rate or quantity on the main cost sheet will be lost when upgrading to the latest release. IHS November 2016 Page 11

14 Cost database update Substantial effort has gone into reviewing all cost databases to bring them in line with third quarter 2016 costs. Note: On saving the project, the QUE$TOR 2016 Q3 cost estimate will overwrite earlier costs except where those costs were locked on the cost sheet or in the database. Therefore if you wish to retain a copy of your original estimate you should first create a duplicate of the project before opening and saving it in QUE$TOR 2016 Q3. The following sections outline where the most significant changes to the regional cost databases have been made. General Global upstream activity has been slowing uninterruptedly since the crude oil price crashed at the end of Despite oil prices recovering from a twelve- year low in January 2016 of below $30/bbl and now stabilising at about $50/bbl, spending and activity levels in the industry remain suppressed. The number of visible Front End Engineering Design (FEED) awards has increased compared with 2015, although it remains below 2014 levels. Suppliers and contractors have continued to respond to the challenging market situation by cutting costs, reducing supply capacity, workforce, and capital commitments. Costs have seen massive declines, significantly lowering breakeven prices of new project developments. Operators have continued to cut internal costs, renegotiate prices with contractors, rethink projects and in general to place a high focus on cost reduction, which has yielded huge results. Breakeven project prices have fallen dramatically as the downturn has progressed, creating some optimism despite oil prices having remained relatively low. Workforce reductions among the largest service contractors have been massive in all regions and further layoffs are expected as the downturn continues and activity levels remain weak. In addition, responding to the current oversupply, contractors have cancelled or postponed new build programmes in order to reduce future capital commitments and not flood the market with additional capacity. Page 12 November 2016 IHS

15 With this current downturn being lower for longer, service companies are encountering further financial challenges, most likely resulting in a major restructuring of the service industry. As a result, the operators should be prepared to face a completely different service sector once the downturn ends. After two years of deflation, upstream costs have started to trend upwards in the second quarter of 2016, essentially on higher material prices, most notably higher steel prices. Although the rise in material prices is likely to fluctuate in the short-term, with adjustments expected in the remaining part of this year, some project costs have started to increase. Annual cost escalations are expected from 2017 onwards, on both industry recovery and stronger fundamentals in the global economy, likely pushing material and labour costs up. Oil Price Trend and Currency Market Crude oil has shown a slow rebound in prices after reaching the bottom in Q when oil prices went below the $30/bbl mark, as shown in the graph below (Figure 4). Figure 4 - WTI and Brent crude oil prices In Q oil prices almost reached the $50/bbl level (exceeded in October), showing some volatility and similar variations for both the West Texas intermediate (WTI) and Brent price. Table 1 shows how the minimum and maximum oil prices have varied in the last two years. IHS November 2016 Page 13

16 WTI (USD/bbl) Brent (USD/bbl) Time period Min Max Min Max Q Q Q Q Table 1 - Crude oil price spread At the end of September 2016, at an informal meeting in Algeria, the Organization of the Petroleum Exporting Countries (OPEC) reached a preliminary agreement to cut oil production, the first time since the financial crisis hit the global economy in The decision caused global oil prices to jump only six percent, not as much as expected, due to the fact that there are still a few obstacles to overcome. Among these, the lack of guidelines on how the output reduction will be split among members and procedures to ensure that all parties respect the deal seem to put at risk the accomplishment of the final agreement, scheduled for end of November Other factors, which will likely play an important role in the negotiations, include whether or not Russia takes part in the accord; the expected increase in oil production in Libya and Nigeria following severe supply disruptions; and the ongoing rivalry between two major producers - Saudi Arabia and Iran. OPEC s attempt to curtail oil production, if it materialises at the November meeting, could boost crude prices and bolster oil revenues. However, Iran s intention to keep pumping oil to reach pre- sanction levels threatens to pose a serious barrier to reaching a final agreement. At the moment industry experts have no other option than adopting a wait-and-see approach as the positive impact of the preliminary oil deal in September has been overshadowed by doubts about its effective implementation. The currency market has shown a mix of depreciation and appreciation of foreign currencies versus the US dollar (USD), with the Euro (EUR) holding strongly whilst the British pound (GBP) lost almost 10% compared to Q1 2016, as result of the Brexit decision. The USD is ending the third quarter of 2016 on a strong note, despite the uncertainty related to the imminent presidential elections. On the other side, the strength of the Euro seems destined to fade given the forthcoming election cycle involving several of the major EU players. Page 14 November 2016 IHS

17 The Norwegian kroner (NOK) exchange rate has remained highly dependent on oil, and gained around 3% of its strength against USD since the first quarter of The GBP is extremely vulnerable as uncertainty stemming from the Brexit vote will continue to deter investment. The initial Brexit shock on business and consumer confidence was slowly fading at the end of the summer, after a weak pound helped to boost British exports; but the recent declaration by the UK Prime Minister that the UK will trigger Article 50 in March 2017 has generated further instability. However, chances are high that negotiations will not start any time soon since the UK government has ruled out the initiation of the formal negotiations this year and progress will likely be limited at least until after general elections in France in At the moment of writing, the GBP has lost a further 5% compared to the rate used as representative of Q in Table 2; however the financial market seems to be considering the possibility of a further depreciation in sterling in the short-term. Emerging-market currencies enjoyed a steady rally since late February, with the exception of the Chinese yuan renminbi (CNY) which weakened broadly. The Russian rouble (RUB), primarily influenced by energy price dynamics and European growth prospects, seems to have found a period of stabilization after a steady six-month rally. The Brazilian real (BRL), influenced by more stable industrial production as a result of the new government s fiscal austerity, has recovered well, up by 11% between Q1 and Q Latin America s economy remained weak, with the Argentinian peso (ARS), Venezuelan bolivar (VEF) and Mexican peso (MXN) all weakening against the USD since Q The outlook for Mexico has an added degree of uncertainty, due to its important ties to the USA and the latter's impending presidential election. Table 2 gives the exchange rates, averaged over the last two weeks before the end of each quarter, of the major local currencies expressed as local currency equivalent to 1 USD, and the percentage change between Q and Q IHS November 2016 Page 15

18 Region Country Local Currency Q Q Percentage Change North America Canada CAD % South and Central America West Europe East Europe Asia Africa Middle East Argentina ARS % Brazil BRL % Chile CLP % Colombia COP 3,058 2, % Mexico MXN % Peru PEN % Venezuela VEF % Eurozone EUR % Norway NOK % UK GBP % Czech Republic CZK % Kazakhstan KZT % Poland PLN % Russia RUB % Turkey TRY % Ukraine UAH % Australia AUD % China CNY % India INR % Indonesia IDR 13,142 13, % Japan JPY % South Korea KRW 1,167 1, % Malaysia MYR % Singapore SGD % Taiwan TWD % Thailand THB % Vietnam VND 22,096 22, % Algeria DZD % Nigeria NGN % Angola AOA % South Africa ZAR % Saudi Arabia SAR % UAE AED % Table 2 - Exchange rate fluctuations of major local currencies Page 16 November 2016 IHS

19 Steel After bottoming- out in the first quarter of 2016, steel prices for all products recovered sharply. Prices rallied for months before faltering and falling slightly, undermined by the unchanged fundamentals of the market. The reality remains that the steel industry grew to its current proportions in order to supply the Chinese construction sector. Until mid-2014 China was producing and consuming 50% of the world s steel. Since its policies shifted towards generating growth through a consumer economy, China has tried to hold on to as much steel production as possible (mainly to stave off mass- unemployment), exporting vigorously to replace its internal consumption. This has flooded global steel markets, leading to the closure of mills around the world and the recent enactment of anti-dumping measures to prop up local producers. When iron ore prices spiked early in the second quarter of the year, mills in China raised their prices and passed on their higher costs since they were producing at-cost and had no other option; some are only breaking even, thanks to government subsidies. Mills around the world also took advantage of this rare reprieve to raise their own prices. Products covered by new anti-dumping legislation managed to hold on to their increases and surged even further as mills no longer saw themselves in competition with cheap Chinese steel. Even though their prices fell after the rally ended, overall they still increased greatly, some by double-digit percentages. In order to best understand how steel costs have changed in the past 6 months, it is helpful to break the market down by its dominant endusers. As far as upstream development is concerned, the two main categories are steel products that are impacted greatly by upstream spending (i.e. Oil Country Tubular Goods [OCTG] and linepipe), and those that are dominated by construction and automotive spending (i.e. structural steel and reinforcing bars for construction, hot rolled sheets and coils for automotive). The former has not recovered very much at all over the past 6 months. While linepipe prices in some regions are modestly higher (especially in Europe), OCTG prices have continued to fall unimpeded as the industry oversupply has been largely left untouched due to another year of low upstream spending. Steel consumption by the construction and automotive industries has not been especially strong, but that did not stop prices from experiencing a great deal of volatility. The relentless exporting of Chinese steel products for construction has led to protectionist measures being taken in North America and Europe, resulting in the IHS November 2016 Page 17

20 first price hikes in around two years. While construction spending is yet to recover meaningfully, it has been far more stable than upstream spending and as a result products consumed by its activities have fared better and their markets do not suffer from oversupply. This has helped structural steel and reinforcing bar maintain more of the rise in their prices from the second quarter compared to other products, especially those in oversupply. The rally in the second quarter of 2016 was unexpected both in timing and severity. Its collapse later that quarter (and more recently) lends credence to the idea that market fundamentals have been left unchanged. While some products will see further declines in their prices, the bottom hit early this year is unlikely to rematerialize. Equipment Global equipment costs have not changed much over the last six months. While prices for most product categories were flat, decreases were observed in some, especially highly- engineered equipment. Overall this continues the trend of falling equipment prices for upstream development. When the downturn began equipment prices were under much less downwards pressure than other categories. This was because lower oil prices encouraged downstream investment, and equipment suppliers could adjust their output thanks to the modular nature of equipment manufacturing. This protected suppliers for around a year, and since then they have been competing to capture business as projects get cancelled and delayed worldwide. Lead times for a wide variety of equipment have fallen over the past six months due to anaemic demand. Rotating equipment is the category most impacted by the downturn since the first quarter of This category had the lowest combination of demand and backlog activity, leading to a reduction of over 20% in lead times. Complex pumps and centrifugal compressors were down the most, while turbine costs increased modestly. Heat exchanger costs fell slightly, again due to competition over limited demand. Vessel prices for both atmospheric and pressurised storage were down slightly despite strengthening material costs. Metering, control, and communications equipment costs seem to have not experienced any change. Page 18 November 2016 IHS

21 Drilling equipment costs fell over the past six months as well. Demand for wellheads and trees can only come from upstream investment, and so suppliers lowered prices once more to attract enough business to weather the downturn. Equipment costs usually track globally, with regional aberrations usually being caused by volatile exchange rates. The only regions to experience significant deviations from the changes described in this section are Russia and Latin America. Both saw currencies strengthen versus the USD, leading to higher equivalent costs for items manufactured locally. While higher metal prices have been recorded recently (especially carbon steel), equipment prices are being driven by supply and demand. Equipment manufacturers avoided reacting to the lower oil price environment by maintaining prices and so today they still have a little further before they bottom out. It is unclear if this will be the case however, as stabilizing oil prices are beginning to generate more optimism in the industry about the return of investment confidence. If more projects start going through, competition over existing demand may ebb, halting the fall in equipment prices. Higher material and labour costs will also contribute to this, though only after supply and demand balance more closely and suppliers return to the backlogs they are most comfortable with maintaining. Bulks The upstream bulk market is strongly correlated with construction spending as activities in both markets share their items of largest expenditures (i.e. concrete and cement, insulation, wiring, electrical components, simple valves). This has meant that costs in this market have declined globally once again, with some significant regional differences. As bulks are relatively straightforward to produce, they are available for purchase from many different regions, each with a supply chain dominated by its local currency, thus increasing the divergence in regional costs. The North American construction sector is the healthiest of all regions, with the US housing sector leading the resurgence in spending, especially after a long summer season. This has kept most bulk costs steady, even as metal prices fell slightly in the past 6 months. Suppliers have been reluctant to pass on their savings as they anticipate a quick IHS November 2016 Page 19

22 recovery. This is especially true of wires and cables; on the other hand, valves, switchgears, and transformers all benefited from the fall in metal prices, leading to slightly higher demand. Latin American bulk markets are suffering from a number of different factors. The end of the Olympics in Brazil has also brought an end to the country s rampant construction spending. Budget constraints now prohibit governmental spending on public works, and a resurgent local currency has made exporting more expensive. Colombia and Argentina have also had a tough time clearing financial hurdles to regain access to credit at rates that can sustainably fuel construction activity through government spending. The fall in metal prices is global and so was apparent in this region as well, with lower costs for wires and simple electrical components. European construction has been very mixed, and will be quite unclear going forward. Before the Brexit vote, construction had been strong in the UK, but the country s sudden change in direction has added a dose of uncertainty to many parts of its economy. As a result of the fall in value of the GBP, all bulk prices have declined. Other parts of Western Europe have not seen very much construction activity, leading to lower local bulk prices. However, increasing amounts of bulks consumed in Europe are now being bought from Russia. Construction spending in Russia has declined by over 20% in USD terms so far this year, and with the massive devaluation of the local currency as a result of sanctions, Russia bulks are by far the cheapest on the continent. It should be noted that Eurocement Russia s biggest producer has not been subject to sanctions. While Russian suppliers are exporting as much as possible, overall consumption of their products is still down. Nigeria and Angola have both suffered from lower oil prices. Both countries have seen their local currencies lose much of their value over the course of this downturn. This has led both countries to experience inflationary increases in costs for a variety of bulks. The situation has become so bad in Angola, that industry officials report that the country may not have enough foreign exchange cash to import clinker, one of the raw materials used for manufacturing cement. While public spending in the Middle East is still falling, signs of stabilization are emerging. The fall in oil prices has led to some of the first budget deficits in years for oil- rich countries in the region, prompting most of them to review and rationalize their expenses. The governments of oil-rich states tend to play an outsized role in their own economies, and so these changes have had wide- ranging consequences on labour, materials, and bulks. For example, the export Page 20 November 2016 IHS

23 ban on cement might be lifted in Saudi Arabia for the first time since it has been placed as demand dwindles due to project cancellations. Most metal bulks are imported in this region, and so their prices have tracked with their global counterparts. In global terms, bulk prices will not rise appreciably until construction demand pulls back up. Regional markets may buck these trends as bulks are easy to manufacture and are usually though not always locally available. Rising metal or oil prices can contribute significantly to costs in these markets as they are competitive (i.e. they will pass on savings from lower input costs quickly and efficiently) due to the large number of suppliers. Offshore rigs Global offshore rig demand has remained very low since the last market update, in the first quarter of 2016, as oil and gas companies have continued to reduce their spending in the current challenging oil price environment. As a consequence only a few new fixtures have been signed in the last six months, while a significant number of drilling contracts have been terminated early or suspended and some have been allowed to expire without the exercise of options or renewals. Some rig operators have chosen to accept dayrate discounts instead of cancelling contracts as this was the only option to keep their units employed in a market environment with a worryingly high idle rig count. In this environment of low commodity prices and spending cutbacks across the whole upstream industry, there is not much to report for the offshore rig market segment worldwide due to the limited numbers of new contracts. Table 3 shows the worldwide average changes for the different classes of offshore rigs used in QUE$TOR, again all negative, although the reduction is more moderate than what was experienced in the first quarter of IHS November 2016 Page 21

24 QUE$TOR Rig Classification Worldwide Average Change Floater > 7500 ft -11% Floater ft -10% Floater ft -10% Floater ft -6% Floater <1500 ft -5% Jackup -12% Table 3 - Floater and jackup dayrates average variations since Q The most significant fact is that the Middle East has shown to be one of the few remaining hotspots in the world where offshore activity has not fallen as much as in other regions. The number of contracted jackup drilling rigs today is very similar to that recorded two years ago, before the oil price crashed in the second half of The Middle East has proven to be more resilient than most other regions largely because of the high level of state participation in its petroleum industry, particularly in Saudi Arabia, Iran, UAE, and Qatar. These countries are heavily reliant on oil and gas revenues and oilfield developments are facilitated by typically lower project costs compared to places such as offshore Northwest Europe and West Africa. However these remain challenging times for rig contractors even in this region as they are under cost reduction pressure and have to accept operators terms and conditions. In the US Gulf of Mexico, the makeup of the rigs by type has changed dramatically over the last ten years. This market has changed so much, passing from a net predominance of jackup and barges to having drillships as the largest and more important segment in the sector. The maturity of the shelf has played a big role in the reduced demand for jackups and inland barges, but rig contractors have also been forced over the years to face a new reality of tighter budgets and reduced demand, and to adapt to new contracting terms in the region. Semisubmersible rigs are struggling to maintain their place in the US Gulf market. The increased preference for drillships is mostly attributable to the effect of hurricanes on moored units in recent years, pushing the market to select dynamically positioned rigs, which can move out of a storm s path very quickly. Deepwater is expected to continue to play a big role in the future of the US Gulf, so drillships and semis are expected to remain key units in this region, with their capabilities likely to undergo a step change as technology improves and more challenging well conditions call for higher-specification rigs. Page 22 November 2016 IHS

25 In the North Sea offshore rig market, day rates have remained low although there have been a steady amount of new tenders and requirements being released with work planned for 2017 and 2018 from various operators. In the past months, the Norwegian market has seen a number of rig contract suspensions and rigs becoming idle while operators have no current work to keep them busy. West of Shetland has seen a slight upswing in overall activity with arrivals and departures. Meanwhile, the UK standard semi market has seen a relatively quiet time. The West African floater sector has been relatively busy in terms of enquiries and requirements compared with past months; however, only a few fixtures have been made. The situation in the jackup sector is more dramatic as it continues to stagnate with only deferrals and further rigs becoming available in the already oversaturated market. In Latin America several contracts on semis were terminated in Brazil and rigs have continued to leave the region, although at a slower rate than previously recorded. Only recently there was some news of tendering plans for work in the Falkland Islands and Mexico. Lack of fixtures has made this update quite challenging. The spider diagram in Figure 5 shows the percent changes implemented in QUE$TOR to the offshore rig dayrates depending on rig class and region. Only Australian deepwater rigs and South American jackups had a small positive variation in their rates which should not be seen as a real market trend but rather more as an adjustment of the dayrate value in those regions to be closer to the most recent marketed contract value. IHS November 2016 Page 23

26 Figure 5 - Worldwide offshore rig rate changes Offshore vessels Trading conditions for owners and operators of offshore supply vessels remain extremely challenging worldwide. Demand for offshore vessels, both Platform Supply Vessels (PSVs) and Anchor Handling Tug Supply (AHTS) Vessels, has weakened significantly in all regions, pushing vessel owners into some very hard decisions. In all regions vessels owners were forced to continue stacking vessels in the hope of reaching a point when they can charge decent day rates again. Nobody though can predict how soon that will be and many vessel owners have started to be more realistic about the fact that it may still be a long time before the market will fully recover. Regionally, the largest number of lay-ups were in the US Gulf of Mexico, followed by Southeast Asia and then by Northwest Europe. As in the case of the offshore rigs, the offshore vessel market did not register a significant number of fixtures to allow a reliable statement of what the market trend is. Therefore the implemented variations should be intended more as adjustments rather than well-defined market movements. Page 24 November 2016 IHS

27 The market across Asia-Pacific was characterised by weaker offshore activity, lower utilization and falling day rates. Long-term charters were few and far between, and vessel owners have been competing for occasional spot jobs in the oversupplied offshore vessel market. In Latin America, the limited demand for offshore vessels created by sporadic activity has increased competition. Similar to other worldwide markets, day rates have remained depressed as vessel owners are fighting to keep tonnage operating under contract. Due to the gradual decline of the number of contracted rigs in Brazil, vessel owners have been laying up idle tonnage as the current stagnation persists. Without a significant improvement in global oil prices for a sustained period of time, the Brazilian market will continue to weaken, with lower utilisation for both rigs and vessels. In the Mediterranean, the prospects of new term contracts for offshore vessels within the drilling support activity remain limited across the region. Production support requirements throughout the Mediterranean and Black Sea region are predominantly covered by existing term contracts and the spot market. In recent weeks, new term fixtures have largely centred around a number of long-distance towage contracts for rig mobilizations and vessels destined for the recycling and scrap yards. Term demand for the Middle East PSV segment fell to historical lows in August. The weakness across the offshore sector continues to result in tonnage being stacked, and low demand for PSVs in the region indicates that this will continue over the short to middle term. While new build PSVs continue to enter the market, many committed new build orders from Middle Eastern owners are known to have been deferred or cancelled. Most of these orders are for medium to large sized PSV classes that were initially planned for fleet expansions some years ago. The situation in the North Sea for owners and operators of PSVs and AHTS vessels remains unchanged. Most still have vessels laid-up, and several have vessels idle and available for immediate charter. The downturn shows little sign of easing up in the short term, with many vessel owners now embarking on strategic and long- term plans to ensure that they can remain competitive throughout the rest of the downturn. Some are looking at employing their vessels for work outside of the traditional supply vessel sector, some are merging, and others are going through major debt restructuring to ensure their financial future. The summer proved to be a disappointing time for owners of medium AHTS vessels on the spot market, with day rates down from IHS November 2016 Page 25

28 the first quarter. On the PSV side of the market, meanwhile, there was plenty of activity with dayrates remaining low but slightly picking up quarter to quarter. In West Africa, there was a small number of term fixtures awarded during the summer. Looking ahead into the next twelve months, demand for offshore vessels in support of drilling operations is unlikely to see significant net change in demand. Offshore vessels utilization in the US Gulf has been more severely affected than the other major offshore markets of the world. While the fall in rig activity has flattened out, deepwater day rates have decreased over the last few months. Demand for large deepwater PSVs had seen a slower fall than the collapse experienced by the shallowwater sector of the market. In the construction vessel sector, utilization decreased almost across all vessel segments. While some vessels, like accommodation, heavy lift vessels and multiservice, experienced a more drastic decrease, other segments, like diving support, pipelay and ROV support, went down more moderately. In some regions and specific sectors, it is believed that day rates have bottomed out. However, competition in the market for any jobs is at a very high level and operators continue to negotiate any new and existing contracts much like how they are re-budgeting their project portfolios. The list of confirmed cold- stacked vessels continues to grow and vessel owners are being forced to change their business methods to survive the low oil price environment. Among these strategies are company mergers, seeking wind farm or government work, entering the decommissioning market, and financial restructuring. Subsea Upstream developments that require subsea components tend to be quite expensive and as a result have high break- even costs. These projects were some of the first to be cancelled or postponed when oil prices crashed in late While this did have an effect on suppliers, their long backlogs protected them for over a year, after which spare capacity had begun to grow to alarming rates. With no end to the downturn in sight, suppliers began pursuing a number of different strategies to survive. Page 26 November 2016 IHS

29 It is difficult to describe the extent of shrinkage the subsea market has experienced so far this downturn. While subsea trees are only one of the components this market includes, order levels for trees can serve as a useful bellwether of overall subsea activity. Compared against 2015, new orders for this year and total number of trees to be installed are down by over 65% and 45% respectively. It should be noted that 2015 was already a bad year for subsea suppliers, down over 25% from the year before. The total annual value of the subsea equipment market today is down to $2.1 billion. In reaction to the shrinking market spend, subsea companies have offered lowered prices, downsized, and in some cases merged with other service companies. While lower prices do send the right signals to potential customers and make the market more competitive, they do not appreciably impact break-even prices and therefore are ineffective at generating demand. Therefore while subsea companies did not officially lower their prices, buyers can negotiate rates lower than they would have been able to before the downturn. However, without more demand to fill order books subsea suppliers cannot justify maintaining the capacities they built up to before oil prices fell. As a result, most companies have downsized significantly, with most recent job losses appearing in Norway where Aker Solutions and FMC Technologies both have a large presence. With low capacity utilization across the market and pessimism surrounding an oil price recovery, downsizing is one of the only ways of balancing supply and demand in order to regain some pricing power. Finally, two big mergers took place in the subsea market that show how dire things have gotten for its players. FMC Technologies merged with Technip, and Cameron was acquired by Schlumberger. While in the long term these consolidations will lower costs through standardization, for right now they promote further downsizing and the rationalising of capabilities. After almost two years of contraction, it is unclear that the subsea market can get any smaller. Now that oil prices have stabilized somewhat, subsea suppliers need to be able to operate profitably at the current levels of demand, which are much lower than what the industry had grown used to since If oil prices do not fall further over the next year, demand is expected to grow as projects that were postponed for fear over lower prices begin to become safe investments again. Having excess capacity when that happens will exert considerable downwards pressure on prices, so suppliers are already addressing the fundamentals that are holding their market back from recovery. IHS November 2016 Page 27

30 Labour As a result of the current global downturn in the oil and gas industry, 2016 has proved to be another difficult year for the labour sector. The number of workers laid off or made redundant has continued to increase globally although recently there have been some positive signals that maybe the bottom has been reached and the market will start to strengthen. How quickly the market will recover though is still uncertain; some analysts believe that the crude oil price is likely to stay low for an extended period whilst some others expect to see a quicker recovery. Whatever will happen, it is fair to say that the industry will definitely face some tough challenges in the coming years. Even when the oil crude price does recover, it is likely that a constant pressure to reduce costs and increase efficiency will persist. Up to now, the cost reduction activity implemented by employers has resulted in a large number of redundancies and layoffs worldwide. These changes in the workforce, together with early retirements, will leave employers with a large knowledge gap in their workforce once the industry activity starts to recover. The drilling market in North America has been hit particularly hard and the trend of the labour market in this region has been unpredictable over the last two years. Layoffs were announced in both multinational and small independent companies. In the United States, drilling activity has seen a considerable slowdown and only in the second half of the year the rig count has started to go up, recovering marginally from its historical lows. It has also been a rough ride for the Canadian oil and gas industry, with several key projects having delays or being cancelled. As in the United States, job cuts have been severe and have resulted in an exodus of talent that will be hard to attract back. In the UK, the economy was recovering well after the oil price crash at the end of 2014, but deteriorated due to the political instability following the result of the EU referendum. During the summer a rebound in the UK economic data was suggesting that the Brexit shock on business and consumer confidence was slowly fading out, helped by a weaker pound able to boost local manufactured products. However, pressure from pro-leave campaigners have forced the Prime Minister, Theresa May, to declare the date when the UK will trigger Article 50 of the Lisbon Treaty. This has generated further instability with rumours that major international companies and banks will move their headquarters to continental Europe to maintain their access to the European single market once the UK leaves the European Union. Page 28 November 2016 IHS

31 The Eurozone has shown to be more resilient than expected to the Brexit earthquake, with the Euro keeping its value against the US dollar, but this may soon change as it is about to enter a very busy election cycle. Political deadlock has continued in Spain and the country could face a third round of general elections in one year. Italy will face a critical referendum on Senate reform on 4 December, which has the potential to shake up political stability. Looking into 2017, a number of countries face key elections, including major players France and Germany. Support for the status quo is fading across the Eurozone and this could lead to deep instability in many countries governments. In Norway, unemployment hit the highest rate since the middle 1990s as major oil and gas companies were forced to downsize and announced significant layoffs. As global prices for crude are still low, Norwegian oil companies cannot afford to meet the requests from workers for higher wages, which prompted a strike in September. In the Middle East and North Africa (MENA) regions, economic activity seems to have bottomed out in the second quarter of Growth in the region continues to be constrained by subdued commodity prices, weakness in global financial markets, and security threats. The poor policy response from governments of the region s oil- producing countries has escalated uncertainty and deterred investment. The Nigerian naira (NGN) depreciated drastically in Q3 and a ceasefire between the government and the militant group, whose attacks on infrastructure caused Q2 s drop in oil output, failed to hold in late September, renewing concerns about production. Angola is currently facing a foreign currency crunch which has hampered banking activity, investment, and output in the non- oil sector. The preliminary agreement reached by OPEC members in late September to cut output comes as good news for the oil- rich country; nevertheless, doubts remain as to whether the agreement will provide enough support to improve the country s battered finances. In Latin America, economies remained depressed in the first half of 2016 and became even weaker in the third quarter. Weakness persisted with Argentina and Venezuela s currencies showing instability at the end of Q3. Brazil s deep recession showed some signs of recovery at the end of September although austerity measures, tight credit conditions and high unemployment still put pressure on consumption. The only countries in which economic growth has gained momentum are Mexico, Paraguay, and Uruguay. IHS November 2016 Page 29