Energy Market Outlook: Surge, Setback, or Slump?

Bolstered by the development of oil-rich shale plays in Texas and North Dakota, U.S. crude oil production swelled to levels not seen since 1972, coming on par with the crude output of Saudi Arabia. But a stagnant world economy no longer absorbed every drop of oil that was produced and surpluses began to accumulate. In less than a year the price of crude dropped from more than $100 per barrel to the $40 per barrel range.

Will the sudden drop in prices affect the demand for satellite bandwidth and services in the near term? How will video fit into this new market dynamic? Will High Throughput Satellite (HTS) services impact the market?

The Near Term

“There has certainly been a shift in the market with a number of rigs being cold-stacked or simply scrapped,” Morten Hansen, chief technology officer at RigNet, says. “During the last surge in drilling activity, none of the drilling companies retired any of their rigs. Although the number of working rigs is currently going down, there are a number of new rigs being built and coming online. It is important to note that the new rigs are much more complex and highly automated. All of the computer systems on board require connectivity and this is driving the demand for bandwidth.”

Hansen pointed out that 20 years ago, rigs were generally equipped with a single computer and an Inmarsat dial-up connection, or fax machine. In addition to automation systems, the new generation of rigs is outfitted with asset management and asset tracking systems. “The Macondo Blowout was the genesis for these systems,” Hansen explains. “Prior to that event, maintenance logs were kept onsite that everyone onboard would use. But in the event of a catastrophic event, the logbook ends up on the bottom of the sea and there are no records for the engineers tasked with sorting out the cause of an accident. Asset management systems replace notebooks, allowing personnel on shore and on the vessel to access the data.”

Hansen adds that asset tracking systems allow companies to see where their assets are located. “If two rigs are working in the same area, it would be nice to know that a nearby rig has a spare part, rather than ordering something from around the world,” he says. While these systems help optimize the supply chain, they require connectivity — this is where satellite comes in.

Tracey Haslam, president at Harris CapRock Communications, notes that rigs have become more sophisticated, which means more throughput demand per asset. “Increasingly sophisticated equipment on rigs and vessels is driving the need for additional bandwidth,” she adds. “If a critical piece of equipment on a rig malfunctions, it could lead to an emergency situation, so it must be diagnosed quickly. If it is an emergency, the service provider’s network must be dynamic enough to pull down crew morale applications and pour all available bandwidth into the incident resolution. The satellite bandwidth must be able to reprioritized, allowing experts onshore to review diagnostic data and equipment history, so the proper steps can be taken to fix the problem.”

Within the current oil industry reality, Haslam continues to be very optimistic about satellite’s role in this market.”Even though there are some short term sales glitches, there is only one trend when it comes to demand for satellite bandwidth, and that is up,” she says.

A representative from one of the supermajors, which wishes to remain anonymous, gives a better understanding of the expected demand for satellite services over the next few years. “Ten years ago, we used to deploy a standardized kit to each rig, consisting of a VSAT, a router, and a handful of telephones,” explains the communication engineer. “That has been replaced with a full server infrastructure. Geologists want to process geophysical data onboard so they can minimize drilling time, but when a complete server infrastructure goes on a vessel you have to be concerned with data replication, a production control network, and databases. The onboard data has to be backed up and also accessible back on the beach. This approach is manpower intensive and hugely wasteful because you are duplicating infrastructures. A 2-megabit connection simply isn’t reasonable to support all of this, but that is all the drillers have ever known. Satellite connectivity will increase in the future.”

The relatively stable demand and pricing for offshore services offsets the depressing news from the onshore market, where service providers have stacked many assets due to the smaller number of working land rigs. Compounding service provider’s woes, day rates have taken a nosedive, with too many service providers fighting over too few opportunities. The result: a bloody game of Limbo, with energy companies squeezing service providers to see how low their pricing will go.

Offshore Video

Communication providers agreed that the use of video in the offshore environment is growing, but none seemed to think that video was going to be a huge driver of services by itself until looming regulations from the Bureau of Safety and Environmental Enforcement (BSEE) are finalized. In 2014, BSSE, which replaced Mineral Management Service (MMS), conducted a study on increased video monitoring on rigs and platforms. There are ongoing discussions with energy companies regarding video surveillance, as well as the collection and archival of the videos. These regulations could have a major impact on the satellite service providers that support the energy industry.

“In addition to regulatory requirements, video is being used for equipment monitoring, management data, and social media for crew members,” Haslam says. “While crew morale applications have been a big driver, offshore video hasn’t caused a huge step change in demand.”

Hansen wondered about looming regulations and the amount of video to be recorded, transmitted, and archived, by asking how much this will all cost. “The regulators want to build their own real-time monitoring center. There are lots of discussions going on right now. As an industry, we need to explore this issue and come up with viable solutions,” he adds.

“HTS have lots of benefits but they add a lot of complexity. Overall, HTS will lower the price per bit and this will enable more content to be transmitted, like real time seismic data,” Haslam says.

Price is the main point for satellite services. “The price point will always be the deciding factor whether bandwidth will be used or not,” Hansen says. “Each HTS system is different and each has a different sweet spot. Some are better suited for certain applications.” Haslam, however, looks at the big picture saying that HTS is only part of the answer; satellite still needs to do more. “Satellite bandwidth needs to be more agile. Agility can mean three different things: a flexible pipe that can burst at a higher rate when needed; a fixed rate pipe that can reprioritize the data travelling down the pipe; or a connection has the freedom to move from one region to the next,” she says. “The last point is particularly important in today’s business climate. Our clients are chasing after day rates like never before. That means an asset might shift from the Gulf of Mexico to Africa or Brazil with very little notice. This a new set of circumstances that didn’t exist five or 10 years ago. HTS services are highly regionalized, sometimes making them a challenge to work with in this new business dynamic.”

The Analysts Weigh In

“The upstream market has taken a hit with the downturn in oil pricing,” explains Susan Bull, of the U.K.-based consultancy COMSYS. “This definitely affects the demand for satellite capacity in the exploration segment, with production being affected to a lesser degree. Oil companies are cutting back their exploration budgets massively. Petrobras is a good example, recently cutting their drilling budget by 40 percent.”

Bull says production departments haven’t been affected as much, especially offshore, mainly because the investments oil companies make in production platforms are usually 20 to 30 year commitments. Ultimately, deep offshore rigs and platforms will continue to use satellite, she says. “It costs hundreds of millions of dollars to run fiber to an offshore so satellite service will continue to be the first choice,” Bull adds.

Brad Grady, analyst for Northern Sky Research (NSR), said the next two years were critical for the energy market. “Regarding demand for capacity, we see the market in 2015 and 2016 taking a bit of a dip, with market growth returning in 2017. You can see evidence of this in annual reports, such as KVH and Iridium’s. Both companies noted that demand wouldn’t be as strong due to weakness in the energy market.” Grady continues saying offshore opportunities will drive demand. “The offshore sector is more robust than onshore and you won’t see as much price erosion. Fleet operators secure three-year contracts, allowing them to weather variable business conditions. They will continue to use lots of satellite capacity for the next several years,” he says.

“The current situation has energy companies exploring their options,” Bull noted. “They are using this hiatus in the market to change anything from the antennas they use, to the terms and conditions they agree to, to the service providers that serve their fleets.” Bull wasn’t overly optimistic regarding the impact that HTS service providers would make in the energy market. “Consumer-focused HTS operators aren’t that interested in companies that sell 50 to 200 dishes per year. They need someone who can sell hundreds of VSATs per month. They also need ground segment systems capable of supporting high touch customers,” she says. “An energy company’s top concerns are availability and reliability. They simply won’t settle for less reliable services. As such, they will be more focused on C- and Ku-band services in the near future. HTS services will have some impact on the energy market but they won’t provide the same level of flexibility and they will most likely be crew welfare orientated.”

“The price collapse of crude oil has accelerated the adoption of new technologies in the quest to save money,” Grady says. “Everything is on the table right now. This is good for the satellite industry as new, innovative services are being considered. It is a good time to bring new services to market, if they can reduce cost and improve performance … HTS services are one of those technologies being introduced. Spot beams from the HTS operator will need to be integrated into a service provider’s architecture. This will add a layer of complexity between the operator and service provider, and lots of details need to be worked out.”

Grady noted Inmarsat and O3b Networks as operators with interesting value propositions for the oil industry. Global Xpress offers “one type of terminal that can be used anywhere around the globe where a typical VSAT receives coverage, with the same Service Level Agreement (SLA), and same end user experience,” he says. As for O3b, “energy companies have 100-megabit plus platforms on the roadmap. Now that O3B is fully commercialized, they will be strongly considered for very large, deep water assets and backhaul applications,” he added.

Game Changers

The disruptive mindset is alive and well in the satellite industry. Advances in technology happen every day, but the march forward is typically in inches. Once in a while, technologies come along that have a major impact, fundamentally changing established paradigms. Two such technologies have the potential to make a major impact on the satellite industry.

Acceleration Systems can offload 40 to 60 percent of the traffic traversing a satellite link, allowing service providers to buy less satellite bandwidth and drive cost out of their business model immediately. Acceleration Systems didn't invent data compression, traffic shaping, or the 27 other techniques the company uses to optimize the traffic over a link; they eliminated the need for complex and expensive hardware, moving it into the cloud, allowing one system to support thousands of customers. This patented approach dramatically drives down the cost of link optimization, allowing any service provider to reduce their cost of bandwidth. Compression efficiency is based on the type of data being sent and certain data streams, such as MPEG 4 and VOIP, are already highly compressed. Acceleration Systems provides services on a subscription basis with hardware costing less than $1,000.

Phased array antennas are made up of multiple elements formed into a flat panel. The elements work in conjunction with each other and the antenna is electronically steerable, eliminating or minimizing the need for gimbaled antennas, motors, belts and pulleys. These antennas have been used in radar systems for many years but have seen primarily military duty due to their high costs. An affordable, electronically steerable, phased array antenna has been the dream of satellite engineers for decades.

The recently announced development partnership Kymeta and Sharp could yield a cheap, mass produced, flat panel antenna. Under the agreement, Sharp will use its Liquid Crystal Display (LCD) production technology to manufacture Kymeta’s new flat-panel satellite antenna, allowing both companies to create new opportunities for the satellite communications industry. VS