The combination of growing global energy demand, evolving geopolitical dynamics, and the energy transition calls for energy supply chains to become bigger and better. Many service segments are projected to experience strong growth in the short and medium term. Alongside increased activity in the oil and gas sector, some of the fastest-growing service segments will be driven by demand from low-carbon energy sectors.
Service price levels in most segments are currently 10% to 15% higher than pre-COVID-19 pandemic levels. While there is little doubt that material prices will continue to impact inflation, we expect rising labor costs to be even more impactful over the next few years.
Binny Bagga, Vice President Service Market at Rystad Energy
Supply chains have to get bigger and better
The combination of growing global energy demand, evolving geopolitical dynamics and the energy transition calls for energy supply chains to become bigger and better, with many service segments projected to experience strong growth in both the short and medium term. Alongside increased activity in the oil and gas sector, some of the fastest-growing service segments will be driven by demand from low-carbon energy sectors. Notable examples include electrical and instrumentation services, spurred by growth in the grid and solar sectors; vessels and subsea services, primarily due to the expansion of offshore wind; and maintenance and mechanical services, driven by rising demand in solar, onshore wind, and grid operations. On the one hand, there is a growing demand for energy services, while on the other hand, the continuously evolving energy market situation has increased challenges for both buyers and suppliers of the energy supply chain. These challenges differ considerably between the oil and gas sector and the low-carbon supply chain.
High input costs grappling the oil and gas sector
In the oil and gas sector, both buyers and suppliers are grappling with high input costs, which, while having eased from record highs, are expected to remain elevated in the near future. Service price levels in most segments are currently 10% to 15% higher than pre-COVID-19 pandemic levels, and while there is little doubt that material prices will continue to impact inflation, we expect rising labor costs to be even more impactful over the next few years.
As activity in the oil and gas industry increases, so does the demand for labor, which is further pressured by rising consumer prices worldwide. In the majority of leading economies, the labor market continues to exhibit tightness despite stringent monetary policies from central banks. We expect these pressures to start alleviating materially by the end of next year.
Overall, we continue to see pricing moving up for most categories and markets, except for US shale. Furthermore, capacity measured by utilization rate is a major issue primarily in certain segments of the oil and gas industry, such as offshore drillers, offshore vessels and subsea equipment. Here, despite an anticipated demand increase, we do not see supplier capacity changing as quickly or dramatically.
Low-carbon supply chains strive to localize equipment manufacturing
In contrast, the low-carbon sector is currently experiencing an oversupply, with a high geographical concentration in manufacturing capacities for technologies such as solar, wind and batteries. Mainland China hosts significant manufacturing capacity for low-carbon technologies and is among the top three manufacturing regions for solar modules, inverters, wind turbine nacelles, blades and hydrogen electrolyzers. This has led to differences in regional utilization levels relative to global utilization, which is a concern for buyers.
Governments worldwide are pushing to localize supply chains to mitigate risks associated with international tensions and reduce their dependence on certain regions. Whether in the European Union, the US, or India, efforts are underway to localize low-carbon equipment manufacturing. By 2030, we anticipate a slight shift in the geographical concentration of low-carbon equipment manufacturing supply chains. All in all, homeshoring is gaining ground across the low-carbon supply chain.
As for prices, we see that they have dropped and stabilized recently, particularly in the case of the solar and battery sectors. In the case of the carbon capture, utilization and storage (CCUS) sector, prices are expected to rise again this year as labor-driven segments, such as onshore construction, continue their upward trend. Additionally, extended lead times for rotating equipment due to high demand will exert upward inflationary pressure. On similar lines, the tightening demand-supply balance for hydrogen electrolyzers as available manufacturing capacity utilization increases will result in upward price pressures. In the offshore wind sector, installation and maintenance segment costs are expected to soar given the bottlenecks around installation vessel supply, especially in the US owing to the Jones Act. Labor costs are also becoming a significant inflation driver amid globally tight labor markets, especially for skilled labor, where unemployment remains low.
In summary, to build a more robust and resilient energy supply chain of the future and meet growing energy demand, global energy supply chains must evolve to become larger and enhance their efficiency.
By Binny Bagga via Rystad Energy
