IFP: Oil equipment, services demand growth slows

Doris Leblond
OGJ Correspondent

PARIS, Oct. 23 -- Globally, oil field equipment and services have been in tight supply since 2005, but the demand growth rate is beginning to slow and may plateau in 2008, said officials at Institut Francais du Petrole (IFP).

Investment growth in exploration and production jumped by 25% to $214 billion in 2005 and by 29% to $275 billion in 2006. However, this growth rate slowed to 13% in 2007, reaching $312 billion, because of soaring costs of both equipment and services.

In 2008, investment growth should plateau at 10-15%, reaching $340-$350 billion, IFP reported. The slowdown is masked by higher costs and is primarily due to postponement of a number of projects pushed back on average 6-7 months because of high costs.

"These costs account for 80% of the expenditure growth rate, leaving only 20% for volume growth," explained Nathalie Alazard, IFP's head of economic studies.

IFP noted investments in drilling onshore in North America, mainly in Canada, and in US shallow waters are on the wane. But the slack should be taken up 22% by China and 24% by Russia, officials said.

Geophysics companies posted a 19% growth rate in the first half of this year, pulled along by onshore seismic projects. The offshore sector is slowed by lack of equipment, as the seismic marine fleet is slow in renewing its units, and their availability remain tight.

Construction of new vessels will start this year and extend into 2008. Turnover this year is expected to hover around $11 billion, rising to $13 billion next year.

Drilling growth rates
The number of wells drilled rose 9% to 103,000 in 2006 and should reach 105,000 this year, only a 2% growth due to stagnating North American activity, which is up 12% in the US but down 27% in Canada. Drilling activity is growing worldwide, where 96% of the wells drilled are onshore.

The Middle East, especially Saudi Arabia, with its target of producing 12.5 million b/d by 2009, posted the highest drilling growth at 13%. In Africa the rate was 10%, pulled along by Egypt and Libya.

Compared with last year's offshore drilling growth rate of 7%, this year's offshore drilling growth should slow to 3%, with the steepest drop in the US as mature shallow fields are abandoned for deep offshore prospects.

Offshore drilling is highest in Latin America, especially Brazil and Mexico, up 15%. Asia accounts for a third of the wells drilled, some 1,500, and it has posted regular growth of 7-8%/year since 2005, mainly pulled along by Australia, India, and Malaysia.

The utilization rate of drilling rigs is stabilizing at a high level. In the North Sea, full utilization is pushing up already high daily rental rates to $240,000 for jack ups and $425,000 for semisubmersibles. In the Gulf of Mexico, jack ups are renting at $86,000/day as new units reach the market, down from $124,000 last year. But semisubmersibles are beating record rates at $515,000/day. In Southeast Asia, rig rental rates have risen by as much as 110% to $410 000/day on average.

Driven by both volumes and costs, the drilling market rose 42% in 2005-06 to about $43 billion. But in 2007 a stagnating onshore market likely will not exceed $17 billion. Rising costs should pull the offshore market up 45%, however, to $38 billion. Costs should slow in 2008 as newbuild offshore rigs reach the market, slowing the growth rate to 15-20% to $40 billion.

This year the offshore construction market was up 30% to $42 billion and should grow to $49 billion in 2008. A recent IFP study indicates the rate of new deep offshore fields coming on stream should increase threefold during 2007-12 in water exceeding 1,000 m deep, with operators preferring floating production, storage, and off-loading vessels. This presages a flourishing market over the next few years.

In the refining industry, IFP said investments increased 9% in 2007 to $57 billion, up from 4.8% last year. That will provide new capacity in 2010-11. But that will only account for 4.3 million b/d by 2012. IFP said the expansions would be "insufficient" to meet the 1 million b/d crude demand increase every year, even though they should "relieve tensions on the market in the medium term."

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