Oil & Gas Outlook

I expect order flow recovery in 2010. The sharp financial meltdown in 4Q 2008 has led to temporary and indiscriminate stalling of projects in 2009 was more of a reaction to an exogenous factor. As such it is likely that to see the new orders returning quickly back to the levels in 2007/08 as in the past year of cautious contract wards act like a compressed spring that is finally being released.

Companies that have raised equity in early and mid 2009 should benefit as the industry recovers in 2010. Asset acquisition news is likely to be one of the key pillars in 2010.

The International Energy Agency (IEA0 has revised upwards its global oil demand projection in mid November to 84.4mbd for 2009 (+1.7%yoy) and to 86.2mbd for 2010 (+1.6%yoy). The IHS Cambridge Energy Research Associates had earlier predicted that the global oil demand would start growing by 2010, rising to 89.1mbd in 2014.

More governments are encouraging more investment in downstream petrochemical facilities, especially in the Middle East. The award of sub-contracting works in the Middle East to pick up momentum by 1H2010 versus the more usual exporting of crude oil. This growing preference towards producing higher value derivatives and functional products have resulted in the award of construction projects like the Saudi Aramco Total Refinery and Petrochemical Company’s Jubail Refinery and Petrochemical Complex in Saudi Arabia.

I expect new orders for deepwater rigs to flow through more strongly from mid 2010. The conversion/new build of fixed/floating production platforms will lead the way in 2010. My industry compilation shows that 21% of the leading global rig owners’ offshore drilling rig fleet is currently warm/cold stacked, in line with global rig utilization rates. Most of these rigs are able to find new offshore exploration jobs as oil price stabilizes amidst strengthening oil demand.

Pressure on AHTS may also mitigate in 2010. As the rates have fallen about 35-40% from peak levels in 2008, further downside from the current US$1.55-1.60 per bhp is likely to be limited in 2010.

Key inflection points for my view will be (i) W-shaped economic recession, (ii) dip in oil prices back to less than US$50/bbl or sharp run in oil prices to beyond US$85/bbl, (iii) weaker-than-expected margins for new orders due to stiff competition which to be met with global players who are relatively more desperate for new jobs and (iv) failure to secure big offshore vessel/onshore plant construction contracts in face of slower than normal easing of tight credit.