Contrary to the optimism for expansion seen in 2019, there is no escaping the fact that 2020 has been a difficult year for the FPSO industry, and the situation remains somewhat precarious. Market threats have appeared in many guises, not least COVID-19, and the global move towards energy decarbonisation.
Does this signal the start of prolonged decline for the FPSO market, or is it a substantial, but temporary, retraction that will be reversed as we move into 2021 and the remainder of the decade?
2020 - COVID-19
2020 has seen the sector buffeted by the outbreak of the COVID-19 pandemic. Leading construction yards in the Far East have been closed, resulting in project delays, and demand for oil used for transportation has plummeted as global restrictions on movement continue.
Over the short term, the International Energy Association (the "IEA") believes that global energy demand will not recover to 2019 levels until early 2023 in a best-case scenario. It is inevitable that the longer COVID restrictions persist, the greater the risk that capital investment projects, such as FPSO orders, will be cancelled.
According to the IEA, "Uncertainty over the duration of the pandemic, its economic and social impacts, and the policy responses open up a wide range of possible energy futures." In terms of its influence of energy markets, the enduring legacy of COVID could well be how it shapes behaviours and policies with respect to climate change, potentially acting as a catalyst for a dynamic and radical transformation in the approach taken to reducing carbon emissions.
Decarbonisation and the UK Energy Transition
The UK is a leading exponent of ambitious environmental targets. The Government has legally bound itself to achieving net zero carbon emissions by 2050 (2045 for Scotland). This will require considerable investment in, and prioritisation of, renewable energy sources, including wind and solar power. Oil and Gas UK's Energy Transition Outlook 2019 has outlined a decrease in the use of oil and gas as a "primary energy supply" in the UK from three quarters to one third by 2050.
Nevertheless, this still represents a vital role to be played by fossil fuels in meeting our energy needs over the next three decades. The report:
- describes the continuing need of gas production, particularly with respect to meeting domestic heating demands or for hydrogen production;
- highlights that projections "consistent with Paris agreement underline a continued requirement for oil and gas investment and production, albeit at lower levels than today"; and
- states that even by 2050, domestic gas production is expected to be outstripped by UK demand.
Recent technological advancements in FPSO carbon capture and storage, such as the Aker Solutions Just CatchTM technology, may provide a significant tool for reducing its carbon footprint and place FPSO's in a strong position to drive the net zero strategy.
The enduring need for oil and gas as a resource is reflected in the FPSO market position. According to GlobalData, 51 new FPSO's will be operational over the next five years. The leading destination for these new units will be Brazil, with eighteen new units to be deployed by 2025. The next most popular destination is the North Sea, where we shall see deployments at fields including at the Shell-operated Penguins field that is due to produce first hydrocarbons in 2022.
Overall, the message for the FPSO market is that there is cause for some optimism. Recognising the continuing need for oil and gas through the transition, and the role that FPSO's can play in meeting those needs, justifies a more positive outlook.