Drilling in deeper waters is a necessary step for international and national oil companies to grow production of hydrocarbons to satisfy increasing energy demand. As a result, a larger portion of the world’s oil and gas production will come from water depths greater than 4,000 feet.

“We expect deepwater spending as a percent of global upstream spending to increase from 20% to 30% over the next few years. With this deepwater shift and the eventual deployment of over 70 deepwater rigs currently under construction, we believe there is a foundation for long-term growth in the subsea market, increasing the visibility of our growth projections through 2015,” according the report on “Subsea Acceleration: Fathoming New Technologies,” by Quest Offshore Resources and CLSA/Credit Agricole Securities (USA) Inc.

The Quest mean-case subsea tree award forecast calls for over 3,200 new subsea tree orders from 2011 through the end of 2015. In just five years, this figure will almost match the total number of orders from the last decade. The global average cost of a subsea tree is $5.5 million.

“Current subsea tree award activity has been rebounding at a tempered pace since the low watermark of 2009 and is on the verge of exponential demand growth through the rest of the decade,” the report noted.

Almost 40% of the 2011-15 demand will occur offshore Brazil. Africa ranks second after Brazil with more than 20% of future global subsea tree demand, stated the report.

Overall spending on subsea trees, controls and manifolds is expected to exceed $15 billion by 2015.

“Quest Offshore Resources indicates subsea tree orders will double in 2012. We believe visibility into near-term orders is quite high with the swing factor in order timing being the Petrobras orders. The Quest base forecast is for 600 trees this year; the low forecast is 500; and the high case is 700. The base forecast for 2012 is about twice the number of tree orders in 2011,” said Mark Urness, managing director, Oil Services Research, CLSA/Credit Agricole Securities (USA) Inc.

“With almost 33% of the total tree orders coming from Brazil this year (approximately 200 tree orders from Brazil out of 600 total orders), we believe Cameron will win at least 40% of those tree orders, which should lead to a slight market-share increase for Cameron in the subsea market,” Urness continued.

“Of the subsea tree awards from Brazil, we expect the split will be roughly even between Cameron and FMC Technologies with 80% of the orders with GE getting 10%-15% of the remaining orders, followed by Aker,” he added.

The report pointed out that “the subsea industry has deployed over 4,100 subsea trees ordered globally since 2000. Over 65% of that historical demand came from the Golden Triangle of West Africa, Brazil and the U.S. Gulf of Mexico. The North Sea has been the most stable area of subsea tree demand over the past 11 years, never dipping below 60 orders per year and with most over 90 orders.”

Outside the Golden Triangle, a new wave of deepwater exploration activity is emerging in new frontier areas, including: East Africa (Mozambique, Tanzania, Kenya and Madagascar); West Africa (Liberia, Sierra Leone and Ivory Coast); eastern Mediterranean Sea (Israel and Cyprus); Arctic (Greenland, Barents Sea, West of Shetlands and Alaska); Eastern Europe/Russia (Black Sea and Caspian Sea); South America (Falklands, French Guyana and Suriname); Mexico deepwater; China deepwater; and Cuba.

The report noted that near-term prospects for growth in the U.S. Gulf of Mexico were severely stunted, and the Asia-Pacific region has the greatest potential for overall growth in subsea demand.

“Previously stranded, large gas fields off Australia are now beginning to gain speed towards project sanction. In addition, we expect deepwater China, Malaysia and Indonesia to provide a significant portion of demand within the overall regional forecast.

“Major regional drivers for the increase in subsea tree demand in the future include an expected step-change in Asia driven by long-distance subsea tiebacks of stranded gas fields. In addition to tree demand, these long-awaited developments will utilize hundreds of miles of subsea pipelines and production umbilicals, potentially providing lucrative contracts for both equipment manufacturers and installation contractors,” the report explained.

“Brazil is expected to lead demand for subsea trees over the next 15-plus years as Petrobras develops its pre-salt fields while maintaining its development goals in traditional deepwater fields,” said the report.

“The North Sea has always been and is expected to continue to be a consistent base of demand. The region has been resilient to recent global events over the past three years and is expected to see increased demand over the next 18 months,” noted the report.

In the subsea equipment and control markets, Cameron International and FMC Technologies have won the majority of subsea tree orders, while Aker Solutions and GE Oil & Gas lead with subsea control awards. The report also included numbers from Dril-Quip.

Following the global economic meltdown in 2008, independent operators lost access to project financing to fund marginal field developments. “Independents are regaining traction with their subsea developments, but not at the same rate as international oil companies. Future growth in the deepwater oil and gas market will require stable oil prices (above $65 per barrel) and a healthy global economic environment,” the report emphasized.

In regards to new technology, Quest expects the water depth for a subsea-tree installation to continue to go to greater depths than the current record of 9,627 ft.

“This progression will demand new subsea technology to overcome the challenges of producing hydrocarbons in deeper water. Some of the new subsea technologies that will lead to more record-breaking accomplishments include subsea processing, boosting and separation.

Urness pointed out, “We continue to recommend increasing holdings of Cameron, FMC Technologies and Oceaneering based on strong growth in the subsea market. We believe significant new project awards over the next two years will help the subsea market grow meaningfully faster than the rest of the oil service industry.

“Our near-term focus for the three subsea companies we cover is revenue growth, followed by potential margin expansion beginning in 2014. Even though there have been some signs of pricing improvement in the North Sea and early indications of improving prices in Brazil, we believe it is unlikely pricing will meaningfully improve before 2013,” he said.

“Subsea equipment manufacturers have prepared for this increase in orders by increasing capacity. Illustrating this expansion were meaningful increases in capital spending last year. In 2011, both Cameron and FMC increased capital expenditures by 100%. Before 2014, the upturn will be about top-line growth instead of margin expansion.

“Eventually, as the companies build backlogs, we expect companies will start to have pricing power in 2013, which should lead to solid margin expansion in 2014,” he explained.

Contact the author, Scott Weeden, at sweeden@hartenergy.com.