When asked by an operator whether now is the time to seize opportunities to optimize costs or await further cost degradation due to falling crude oil prices, the response from Douglas-Westwood’s Mike Haney was the former.

“We see this as a window of opportunity situation,” with respect to finding ways to seize and, hopefully, lower costs from suppliers, said Haney, director of Douglas-Westwood’s Houston office.

As operators continue to cut costs and review activity levels and future spending plans, private equity firms are showing more interest in joining the space, he said, seeing oil prices as a buying opportunity for oilfield service companies. Today’s conditions also present a chance for different players to come together, identify challenges, find solutions and spread knowledge to other players in the E&P sector.

Speaking during the Society for Underwater Technology’s Learning Luncheon on Jan. 21, Haney discussed some of the trends the energy advisory firm sees in the E&P sector, production and capex forecasts based on the firm’s market studies, and how supply chain lessons learned in the FPSO space could translate to other areas.

“It’s a challenging time in our space. Crude oil price uncertainty is driving much of this,” Haney said.

His presentation showed the nosedive in the price of a barrel of oil dropping more than 44% since January 2014 to November 2014, a percentage that has since grown. Stressing the uncertainty, he recalled an interview where a BP executive predicted an oil price of about $50 for the next three years, compared to an analyst who believed the price would climb to $100 by year-end 2015.

“The key question that we are all asking is, ‘is this situation like 2008 to 2009, or is it more like 1982?,’ which took a lot longer to recover,” Haney said before pointing out several trends, including the correlation between oil prices and offshore rig orders before and after a 10-plus year downcycle that started in the late 1980s.

In addition to the dramatic drop in offshore rigs, he illustrated a shift in the type of construction vessels delivered.

“In the very short term, we’re not expecting to see a lot with respect to newbuilds in 2015. … You can also look at the construction vessel space, [where there is] a similar trend,” he said. “The subsea boom has driven demand for a newer fleet of vessels. It’s interesting to see the difference between the type of vessels ordered before the last price dip over the last decade or so. We saw the trend away from dive support vessels, which are still very important, to more of a multipurpose support vessel. We saw record numbers of vessels ordered in 2009, so it will be interesting to see what happens there. But again we see a weaker 2015 based upon what’s going on in the markets today.”

Capex compression continues to challenge the industry.

“Basically, capex compression refers to the squeeze operators have been feeling already, quite frankly, given at that point of flat oil prices and rising exploration and production prices,” Haney explained.

Unlike in the 1990s, when oil prices mirrored low global E&P spending, capex has increased by 374% since 2000. This has been driven not only by rising supply and products costs but also by costs associated with operating in technically challenging areas such as deepwater and in the Arctic.

“The divergence between oil prices and operator returns is expected to result in capex compression, leading to project delays and cancellations, especially in high-cost locations such as Norway,” according to his presentation. “Unless the industry becomes more efficient, operators will avoid capex-intensive projects.”

Haney added, “That trend will continue, as you can see in the headlines.” Shell shelved its Ormen Lange project after reassessing costs; Statoil delayed the Johan Castberg project for at least four years; and costs prompted Gazprom to hold off on its Shtokman gas field project.

Subsea processing (SSP) technology—such as boosting, separation and gas compression—could lead to cost reductions and improved recovery.

However, “With many SSP technologies still embryonic in their application, the current macro environment will be a substantial barrier to demonstrations of SSP cost advantages and establishing proven track records. Cost reduction will be required for the further implementation of SSP solutions,” Andy Jenkins of Douglas-Westwood’s London office wrote in a note on the firm’s website. “Recently, however, there have been positive developments in standardization, highlighted by the joint industry project (JIP) between Statoil and DNV GL.”

Standardization was also among the suggested solutions to challenges in the FPSO sector, according to Haney.

“These are very complicated projects that represent a very complicated supply chain. Part of the complication relates to the many shipyards and construction facilities that are out there, and the impact of local content rules can also be an interesting twist,” Haney said. He added last year the firm’s research revealed that “on average FPSO projects were almost 40% over budget and on average a little over a year delayed.”

Given the interest generated by the topic, Douglas-Westwood held a roundtable discussion on the issue with representatives from international oil companies; national oil companies; FPSO leasing contractors; engineering, procurement and construction contractors; equipment suppliers; and shipyards. The intent was to discuss the issues and challenges, which included capital cost growth, supply chain concerns, variance in regulations and guidelines, to name a few. The session ended with a number of highlighted solutions. Among these were targeted investment in long-term partnerships, fewer specifications on each unit, improved guidelines for operators on reasonable contract terms, and standardized components and designs.

“It was important because it showed how the supply chain needs to work together more effectively—the operators, the suppliers, everybody,” Haney said, noting this is an example of how all sectors could work together.

Over the next five years, Douglas-Westwood projects $81 billion of capex spend on floating production systems. Of that amount, FPSO units are expected to account for $65 billion, with Latin America and Africa leading activity.

Contact the author, Velda Addison, at vaddison@hartenergy.com.