Report: Falling EPC rates a speed bump in the enduring upward trend of offshore prices

By Matthew Fitzsimmons, Rystad Energy

Some price relief is coming for offshore operators and developers, but the impact will likely be short-lived.

Offshore engineering, procurement, and construction (EPC) prices for surface facilities have started falling and are expected to decrease by 7.5% annually in 2023. Equipment and material prices will drop significantly, with building components, metal, pipes and valves falling by 20%.

This year will be the first year of annual price decreases since 2020. The 7% annual decline from 2019 to 2020 was an inorganic correction due to the COVID-19 outbreak, similar to 2022’s 12% yearly increase, spurred by market pressures drastically increasing raw material prices.

However, the downward trend will not last, and Rystad Energy expects offshore EPC prices to climb by 6.5% from 2024 to 2025 due to sustained high offshore activity.

Subsurface prices will also fall but to a lesser degree due to the tight service market. Subsurface prices rose 17% from 2021 to 2022 and will experience only marginal price relief this year. The strong pipeline of subsea tree awards and subsea umbilicals, risers and flowline contracts will keep pricing elevated until 2025.

The offshore industry will see its next downward cycle start in 2025. That year will see a break in the consistent $100 billion project commitments sustained from 2022 to 2024. The offshore industry will average under $60 billion per year in project commitments from 2025 to 2028. These lower levels of activity combined with a supply chain that will continue to ramp up to meet near-term high activity levels will result in prices falling until 2027.

Heated labor market to disrupt US Gulf coast projects

As the US attempts to quench the world’s thirst for LNG, the Gulf Coast is set to undergo a further boom of LNG project sanctioning over the next few years.

The region’s LNG project capex will approach $15 billion by 2025, up from just over $5 billion in 2022. Construction activity is forecast to nearly triple as a result. The pace of this growth far exceeds what the region has experienced in the past and will significantly strain the labor market.

During peak activity across all the region’s LNG projects, Rystad sees 17 greenfield projects that will start construction. This is two and a half times the amount seen during the recent peak of 2017 and will force worker premiums in the oil and gas industry for EPC labor trades to double. LNG developers will struggle to fill vacant roles without increasing salaries considerably, and these higher rates are likely to be felt on the operator’s bottom line.

Developers will need to compete for talent with the LNG labor pool and fight off offers from other industries. The American Job Center Network estimates regional residential building construction will grow by more than 30% from 2016 to 2026. Regional employment for utility systems construction will increase by more than 30%, and highway, street and bridge construction employment will grow by more than 20%.

Risks triggered by such a hot labor market will most likely be the burden of operators. US Gulf Coast LNG capex will account for 30% of all global LNG investments this decade. This means that global liquefaction EPC contractors will see their expected revenues rise and maintain at near 70% increased levels against where they were in 2022 throughout the remainder of this decade. Liquefaction contractors are less incentivized to take on risk for US projects because there is a high volume of project work for them to win in other regions.

03.02.2023