APAC Pipeline Market Outlook

DNV Pipeline Day 2015

21 May 2015
Prepared by Douglas- Westwood
Calvin Ling

www.dw-1.com

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 Client Base Is Varied Across Offshore Stakeholders

Our client base is mixed, but mainly focused on analytical and commercial services

Majors

E&P

OEM &
Service
Providers

Construction

Macro-Economic Environment
Onshore Pipeline Overview
Subsea Pipeline Overview
Conclusions
 Macro-Economic Environment
Onshore Pipeline Overview
Subsea Pipeline Overview
Conclusions

The Oil Story

Oil prices driven down by US surplus

12000 000boepd Higher prices improve the viability of
US Crude Production more capex intensive projects such
10000
as deepwater or EOR programmes.
8000
2010-14 witnessed the longest period
6000 US Crude Imports of high oil prices in history.
4000
2000 Between January 2011 and October
2014 US crude production increased
0
by around 3.8 million barrels a day
12/06/2013
12/30/2010

11/11/2011

11/21/2012

10/04/2013

10/17/2014
12/19/2014
3/04/2011
5/06/2011
7/08/2011
9/09/2011

1/13/2012
3/16/2012
5/18/2012
7/20/2012
9/21/2012

1/25/2013
3/28/2013
5/31/2013
8/02/2013

2/07/2014
4/11/2014
6/13/2014
8/15/2014

2/20/2015

(67%).

Consequently, US imports (mainly

from Canada and the Middle East) fell
120 $/bbl Brent Production/Import Surplus 1.6 by around 4 million barrels over the
100
BRENT 1.4 same period (20%).
1.2
80 1
60 0.8
US Production/Import Ratio
40 0.6
0.4
20 0.2
0 0
12/30/2010

11/11/2011

11/21/2012

10/04/2013
12/06/2013

10/17/2014
12/19/2014
3/04/2011
5/06/2011
7/08/2011
9/09/2011

1/13/2012
3/16/2012
5/18/2012
7/20/2012
9/21/2012

1/25/2013
3/28/2013
5/31/2013
8/02/2013

2/07/2014
4/11/2014
6/13/2014
8/15/2014

2/20/2015
 The Oil Story Impact on Offshore Sanctioning

Current pricing is a threat to subsea project sanctioning

140
Most deepwater projects need $70- $/bbl (Brent)
90/bbl oil to be sanctioned Brazil as
low as $41-57/bbl. 120
Saudi Arabia 2014
Fiscal
breakeven price
100
Many US shale oil projects need $98/bbl

>$70/bbl oil to be economically viable. Typical Deepwater Approval Threshold

80
US Shale Oil
OPEC (mainly Saudi Arabia) Breakeven Price
reluctance to cut production and lose 60

market share to US Shale exporters is

expected to keep prices low in the Petrobras Pre-Salt Approval Threshold
40
short term.

20
Saudi Arabia Onshore Oil Breakeven Price

0
Sep-2005

Jan-2007
Sep-2007

Sep-2009

Sep-2011

Sep-2013

Sep-2015

Sep-2017

Sep-2019
Jan-2005

May-2006

May-2008
Jan-2009

May-2016
May-2010
Jan-2011

May-2012
Jan-2013

May-2014
Jan-2015

Jan-2017

May-2018
Jan-2019
Brent Oil Price & Various Sanctioning Thresholds

Industry response

TOTAL MAKES 10% BUDGET CUT TO $23-24BN

Marathon reduces its per well cost

by $1.3m to an average of $6.3m BP to spend $20bn in capital projects
compared with $23bn in 2014

Number of active US oil

Schlumberger to cut 9,000 jobs
rigs continues to plummet
Royal Dutch Shell shelving plans to
Apache to cut rigs from 91 to 27 build a new oil sands mine

Pemex postpones certain deep

water exploration projects

exploration drilling to be cut

10
 Oil prices must rise to protect producer economies

Brent $66.57
18 May 2015

Oil Price to Balance Budgets

Will Saudi keep its nerve and wait for US shale production to
fall?
Will other NOCs cut back?
Will OPEC survive?
source: Deutsche Bank Oct 2014
11

What shape will the oil price recovery be?

The longer prices stay down, the steeper the recovery will be
OPECs El-Badri: $200 oil possible if no one invests
12
 Where is the offshore industry heading?

2015-20 Spend by Region Many offshore projects are long term and
Western rarely cancelled post-FID
Europe Africa
15% 13%
North
America
Asia
25%
Momentum following several years of high oil
17% prices 2011-mid 2014 will carry the industry
through a flat period of spend to 2017
Middle
East
7%
Latin Eastern
America Europe
Australasia Recovery 2018 onwards
5%
16% & FSU
600
2%

500 Offshore Capex Actual and Forecast

400 Flat
$billions

300

200

100

-
2008 2010 2012 2014 2016 2018 2020
Source: Douglas-Westwood, Jan 2015
13

Global Energy Demand Outlook Growing Importance of Gas

100% 6,000
mtoe
90% Oil 2020-2035
42% 5,000
80%
70%
51%
4,000
60%
50% 3,000
40% Gas 2020-2035
2,000
30%
20%
Power Transport Industry 1,000
10%
0% -
1990 2035 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Global Energy Demand by Sector Global Energy Demand by Fuel

The combination of increased energy efficiency throughout OECD states and growing
economies in Asia is driving demand for power generation at the expense of transportation.
Natural gas is becoming an increasingly popular fuel for power generation offering a relatively
safe (compared to nuclear); cheap (compared to oil); and clean (compared to coal) energy
source.
Demand for natural gas to increase by 55% over the next 20 years...
 Macro-Economic Environment
Onshore Pipeline Overview
Subsea Pipeline Overview
Conclusions

Onshore Pipeline: Supply Chain Map

Operators: Pipeline operators within the

onshore pipeline industry consists of oil & gas
E&P companies (and the corresponding
consortiums) and pipeline specialists.

Pre-FEED & FEED: Involves the site appraisal

work of geophysical & feasibility study
specialists and the approval of regulators and
the local government.

EPC: This process is undertaken by the

engineering, construction and turnkey
contractors. Sometimes these contractors act
as a consortium

OEM: Component suppliers and

manufacturers supply to turnkey EPC
contractors and construction companies.
 Onshore Pipeline: Material Selection Option

Material selection criteria are governed by temperature variation, process medium,

environmental parameters and operating criteria.

Most of the pipeline would require internal lining to insulate them from the corrosive process
medium.

Exotic materials such as duplex and super duplex stainless steel are also becoming more
common.

Global Onshore Pipeline: Key Markets and Trends

100%

80%

60%

40%

20%

0%
2008 2011 2014 2017

DW expect the gas-focus trend to sustain over the forecast period given the move
towards gas in the global energy supply mix.

The share of gas pipeline will generally stay above 60% of annual installation length

Gas pipelines will maintain their dominant position over liquid pipelines due to the
move towards gas in the global energy supply mix.

The shift towards larger diameter pipelines implies an increase in expenditure per
added km.
 Asian Onshore Pipeline: Key Markets and Trends

100%

80%

60%

40%

20%

0%
2008 2011 2014 2017

Asia is expected to have a sustained level of pipeline development over next 5 years.

The increasing dominance of gas pipelines is caused by the combination of a high

growth rate in Chinese gas pipeline construction and a slowdown in oil pipeline
construction in India.

We expect a shift towards larger diameter ranges, which will cause expenditure per
km to increase by 9% compared to the previous period.

Macro-Economic Environment
Onshore Pipeline Overview
Subsea Pipeline Overview
Conclusions
 Subsea Hardware: Supply Chain Map
Operators: The customer group
for production hardware & SURF
related engineering, procurement
and construction (EPC) services.

Design Engineering: The

operator will normally contract a
specialist consultancy for advice
on field development strategies at
the FEED stage.

Primary Hardware Suppliers:

Subsea equipment manufacturers
are contracted directly by the
operator to provide critical process
modules.

Pipelines, SURF and

Components: Primary hardware
suppliers contract pipeline and
SURF manufacturers if they are
providing an integrated service to
the operator.

Global Subsea Pipeline Capex: By Component

The subsea pipelines industry is impacted by a small number of major projects which
are dependent upon various political and economic factors which make the sector
unstable. There will inevitably be delay or cancellation of some projects.

Pipelines: $46.3bn expected to be spent over 2015-2019.

 Asian Subsea/Trunkline Capex: By Component

Pipelines: $10.3bn (2015-2019) 23% of total market. Decline in pipeline expenditure

seen post 2015, a result of project being on hold.

The pipeline market will grow again in 2018 and 2019 with the anticipated start of the
456km Gendalo- Gehem, the 400km Sepat pipelines, and a number of other projects.

Asian Subsea Capex Ctnd: By Depth

The subsea market expenditure in Asia is moving into deeper waters bulk still shallow.

Developments in water depths <250m set to see a decline in share of Capex from 79% to
54% between the past and the future five years.

Current backlogs and small amounts of wellhead installations will drive KM demand for
pipelines / flowlines from 2015 2017.

Expected market improvement beyond 2018 will drive additional platform installation and
gas activities increase in pipeline / flowline demand.
 Subsea Pipeline/Flowline Capex: Malaysia

1.40
Capex - Pipeline
Pipelines: $3.5bn; Flowline:
Capex - Flowline $1.4bn (2015-2019).
1.20

1.00 Decline in pipeline expenditure

Expenditure ($bn)

seen post 2015, a result of

0.80
project being on hold and only
0.60 two over 100km lines expected
0.40 after 2015.

0.20 Expected number of fixed

0.00
platforms decline also a factor
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 for less pipeline installation.

Subsea/Trunkline Capex: Indonesia

1.80
Capex - Pipeline
1.60 Capex - Flowline

1.40
Expenditure ($bn)

1.20

1.00

0.80

0.60

0.40

0.20

0.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Pipelines: $3.9bn; Flowline: $1bn (2015-2019).

The potential start of installation on the long delayed East Natuna field will account
for most of offshore installation in Indonesia (2019). In total the two different East
Natuna pipelines will have a length of 1800km.

New gas fields in Indonesia to drive offshore pipeline installations beyond 2016.
 Subsea/Trunkline Capex: Australia

2.50
Capex - Pipeline
Capex - Flowline
2.00
Expenditure ($bn)

1.50

1.00

0.50

0.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Pipelines: $3.2bn; Flowline: $3.7bn (2015-2019).

2015 spike due to the Ichthys pipeline. The shallow water

section (164km) was installed last year while the
deepwater section (718km) will be installed this year.

Huge growth in 2019 is down to a couple of major subsea

developments which are expected to see development at
the end of the forecast.

Macro-Economic Environment
Onshore Pipeline Overview
Subsea Pipeline Overview
Conclusions
 Observations and Conclusions
Macro-economic Environment:
Long term fundamentals of the oil & gas industry remain highly robust.
Key industry risks include rising costs and manpower.
Onshore Pipeline Outlook :
Increasing gasification is shaping the long term demand profile for pipelines. With an
anticipated 35% increase in global energy demand over the next twenty years, natural gas
is expected to account for 26% of total energy consumption by 2030.
Rapid demand growth in Asia is also providing new markets for Russian oil & gas. With
traditional importers in the West expected to curb their energy demand requirements major
new projects such as Russia South Korea connector are in prospect.
Growing demand for larger diameter pipes will compete with the OCTG sector for steel
production capacity.
Geopolitics still remains a key threat to transnational projects.
Subsea Pipeline Outlook:
Subsea pipeline expenditure to dominate Asian, Australasian, Eastern European & FSU
and Middle Eastern markets.
Spend decline from a high this year (backlogs) before more limited activity is seen until
2019, echoing the rest of the market. This is driven by a few large offshore pipeline
projects, and several smaller tie-back pipelines.

Thank you
Calvin.ling@douglaswestwood.com