Offshore costs: why planning and relationships are key

Authors: Andrew Thorburn, Director - Research (WMC), Leslie Coo, Principal Analyst, Hoang Lu, Research Analyst (WMC), Krystal Alvarez, Senior Research Analyst, Catarina Podevyn, Senior Research Analyst, Erin Moffat, Principal Analyst, Michael Mendrek-Laske, Senior Data Manager (WMC)

Strong demand across the offshore supply chain over the past two years has resulted in heavy cost inflation, causing some projects to be deferred or even cancelled. So, what’s the outlook for pricing across the various supply chain segments going forward, and what can operators do to keep costs down? 

We recently published an outlook for offshore supply chain costs across subsectors in H2 2024 and beyond. Fill out the form to download an extract from the report, or read on for a summary of the situation in each subsegment. 

Offshore rig rates: reaching decade highs 

Wood Mackenzie Offshore Drilling & Rigs Service data shows that rig utilisation rates have climbed steadily over the past four years. This increase has been driven by strong demand at a time when fleets were being rationalised. Suppliers have made the most of their resulting pricing power: average rig rates are at decade highs, while drill ships in the Golden Triangle comprising the Gulf of Mexico, Latin America and West Africa can command over US$500,000 per day. We expect rig demand to be relatively flat over the next few years, but suppliers will keep a focus on consolidation, capital discipline and margin expansion rather than constructing new rigs. As a result, we forecast utilisation rates will climb even higher in 2025, keeping pricing power with contractors. 

Drilling and completion: high rig rates dominate costs 

Based on data from our Offshore Asset Cost Modelling Tool, rig costs now make up more than 50% of total drilling and completion (D&C) costs. The next largest factor, accounting for around 13% of the total, is the rolled metal products including pipes and other accessories known as oil country tubular goods (OCTG). Lower steel prices have brought OCTG costs down over the last year, but we expect that trend to reverse as steel prices rise again over the next 18 months. Higher well services costs have also been a factor, driven by pent-up demand, tight equipment capacity and rising labour costs. These should stabilise, but we still expect overall D&C costs to be up 4% year-on-year in 2024. 

Subsea: soaring prices will ease 

Wood Mackenzie Subsea Market Service data shows that subsea costs have shot up by around 20% over the last two years as the market has tightened. Demand is stabilising, but as in other subsectors, cautious suppliers are favouring margin expansion over adding capacity. As a result, costs will continue to rise, albeit at a more moderate pace. Having said that, with the market so tight, even a modest increase above forecast demand could drive costs above peak levels.  

Marine installation: bigger price hikes still to come 

Installation costs in the offshore market have risen by 12% over the last two years, according to figures from our Marine Construction Service. Higher labour and vessel costs are a factor, but the main drivers are higher utilisation rates and growing backlogs. With subsea umbilical, riser, and flowline (SURF) demand still climbing, it’s a seller’s market; operators should expect even bigger price hikes in future as suppliers seek to double their margins. What’s more, if utilisation rates for installation vessels pass 75%, the impact of weather windows and supply chain bottlenecks could start to cause project delays. 

Facilities: moderate rises overall 

In the facilities subsector, strong demand for redeployed floating production storage and offloading (FPSO) facilities will temper cost increases in newbuild and tanker conversions. Many oil companies have moved towards standardised facilities for larger capacities to bring down costs. However, where a bespoke newbuild is required, the limited number of fabricators possessing the required expertise can push up prices dramatically. The added complexity from incorporating carbon emissions reduction systems is also a contributing factor. 

Conclusion: plan ahead and build relationships with suppliers 

In a competitive market, strong relationships will be a key differentiator. Operators who do not have a strategic relationship with a supplier are likely to have to pay more (potentially much more) to access capacity. They may also face longer lead times for equipment and services, potentially resulting in project delays. To mitigate the risk, operators should opt for standardised solutions and employ longer-term planning horizons, engaging with suppliers as early as possible to book in capacity.  

Don’t forget to fill out the form at the top of the page to download your complimentary extract from this report.