(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OUTLOOK
Overall Outlook - The price of crude oil moved higher in the quarter despite the volatility experienced early in the period. However, oil prices were still down more than 30% since the start of the year, primarily due to the excess market supply. The significant demand destruction related to the COVID-19 pandemic continued throughout the quarter. The short-term outlook improved as the OPEC+ countries adopted a more constructive approach toward managing the oversupplied market.
Long-term demand is still forecast to rise, and we believe this outlook will ultimately provide our customers with the confidence to increase investments in new sources of oil and natural gas production. We continue to believe that offshore and deepwater developments will remain a significant part of our customers' portfolios in the long-term. TechnipFMC's strong positioning in transition fuels, such as natural gas, will also allow us to play a key role in the energy transition markets.
COVID-19 - Beginning in the first quarter, we experienced operational impacts as a result of COVID-19. These impacts included supply chain disruptions; productivity declines; and logistics constraints. There has been a resumption of activity from some suppliers, and we expect that other supply chain impacts will subside as regional restrictions are removed, subject to any future deterioration in the global COVID-19 situation. We believe, given the long-cycle nature of our projects, that we will be able to mitigate a majority of the impacts related to supply chain disruption.
Even though many of our locations remained open, we experienced productivity declines as a result of the pandemic. The energy sector was deemed to be an essential business in most countries, which provided us the flexibility to keep offices and manufacturing centers open. We allowed all non-essential personnel to work from home but in some cases we experienced reduced productivity as employees transitioned to the new work environment. We also experienced periodic productivity declines in our manufacturing facilities as employee groups were isolated in the event of a COVID-19 exposure.
We also experienced logistics impacts related to the movement of personnel and equipment due to new COVID-19 regulations. Specifically, these impacts included delays in crew changes on vessels due to quarantine periods and limitations on travel to and from points of embarkation.
In addition to these operational impacts, we incurred incremental, direct costs related to voluntary measures implemented to ensure the safety of employees, contractors, suppliers, and clients. We activated a COVID-19 Incident Management Team in order to administer a consistent response throughout our global operations and provide coordinated support to localized events. Specific actions taken by the team included the following:
-Established a thorough Business Continuity Planning process, which included the work from home initiative, when practical, to support continuity of operations; -Adopted enhanced sanitation practices across all offices and facilities, implemented personal hygiene protocols and measures to restrict non-essential business travel, and restricted non-essential visitors from visiting our offices and facilities;
Senior management is continuously monitoring the situation and providing frequent communications to both employees and external clients and partners. Regulatory directives and COVID-19 case management continued to
result in the periodic full or partial operational disruption of some of our facilities, vessels, and suppliers beyond the first quarter, and we expect some level of disruption to continue in the second half of the year.
More specific impacts of COVID-19 and the commodity price decline as well as the outlook for the business segments are provided below.
Subsea - The impact of the low crude oil price environment has led many of our customers to significantly reduce their capital spending plans. TechnipFMC continues to engage with its customers and alliance partners as they work to update their business plans. We did not receive any cancellations for projects in backlog during the period.
We believe that deepwater will become an even more prevalent piece of the energy mix as project economics remain attractive, particularly for brownfield developments. Sanctioning on a number of greenfield projects has shifted from the current year, impacting our previous projection for 2020 orders. We continue to evaluate approximately $11 billion of large project opportunities that we believe are still likely to move forward over the next 24 months. Additional projects approaching $6 billion in value have been extended beyond this timeframe but remain active and subject to future award. Large project activity continues to demonstrate our strength in important basins such as Brazil, Guyana, and Norway.
Beyond this large project activity, our orders have been supported by subsea services, direct iEPCI(TM) awards and small project activity, much of which is exclusive to TechnipFMC. These opportunities have generated over $3 billion of inbound orders in each of the last three years and are enabled by our installed base, growing list of alliance partners, and unique integrated FEED capabilities. We anticipate resiliency in services activity, where we expect to benefit from the industry's largest installed base of subsea equipment in operation today, as well as a likely shift by some clients from greenfield developments to brownfield intervention.
We continue to work closely with our customers through early engagement in iFEED(TM) and the use of iEPCI(TM) to allow more project final investment decisions through the cycle. iEPCI(TM) can support our clients' initiatives to improve subsea project economics by helping to reduce cost and accelerate time to first oil. TechnipFMC's integrated commercial model now accounts for a significant portion of our orders and revenue and will serve as our standard approach to new business going forward.
As the subsea industry continues to evolve, we are accelerating actions to further streamline our organization, achieve standardization, and reduce cycle times. Continued rationalization of our global footprint will also further leverage the benefits of the integrated offering. We aim to continuously align our operations with activity levels, while preserving our core capacity in order to deliver current projects in backlog and future order activity.
Technip Energies - Given the long cycle nature of the business, the resilience and maturity of the projects in backlog and our diversified global footprint, we have been able to mitigate a significant portion of COVID-19 operational impacts. The near-term effects relate more to operational efficiencies and timing issues and not the stoppage of projects.
Onshore market activity continues to provide a tangible set of opportunities, albeit at lower levels than previously forecast. We expect natural gas and renewables to take a larger share of global energy demand as evidenced by the record level of new LNG capacity sanctioned in 2019.
Market dynamics for LNG have shifted in recent months, and this will alter the broader LNG landscape in the near-term. The number of economically viable LNG projects is likely to decline, and many of the remaining qualified EPC contractors will be challenged in this period of subdued project sanctioning. Technip Energies has demonstrated remarkable resilience through past cycles, and we do not believe this is the start of an extended downturn for our Company. We have already been awarded two additional projects, Rovuma in Mozambique and Energia Costa Azul in Mexico, although both remain subject to final investment decision, and neither of these projects are included in our backlog today. In addition, we are actively tendering a major project in the Middle East and performing front-end work on other LNG prospects, some of which are likely to move forward due in part to their strategic importance to their host country. We continue to believe that the long-term fundamentals for natural gas - LNG in particular - remain strong given its critical role as a transition fuel.
As an industry leader, TechnipFMC is well positioned for growth in new liquefaction and regasification capacity as well as opportunities in biofuels, green chemistry, and other energy alternatives. Active engagement in FEED studies provides a platform for early collaboration with clients and can significantly de-risk project execution while also supporting our pursuit of EPC contracts. Our direct engagement led to the signing of a major EPC contract in July for the construction of a new hydrocracking complex for the Assiut refinery in Egypt. Additionally, we continue to selectively pursue refining, petrochemical, fertilizer and renewables project opportunities in the Middle East, Africa, Asia and North America as these sectors typically prove to be more resilient through a downturn.
Offshore market activity is expected to weaken in the near-term as sanctioning on a number of greenfield projects is likely to shift from the current year. Recent discoveries of offshore fields with reserves in regions such as Australia and East Africa are expected to benefit future activity; however, the timing of increased investment in these regions could be deferred. In the long-term, new upstream investment will also be required as gas becomes a bigger portion of the global energy mix.
Surface Technologies - North American activity declined significantly during the second quarter as evidenced by the more than 60% sequential decline in rig count and fracturing crews over the period. We have taken rapid and aggressive actions to reduce our costs as we look to mitigate the steep sales decline anticipated in the current year. The number of U.S. fracturing crews has started to recover from the recent trough reached in May, and activity more broadly is expected to remain flat during the second half of 2020.
Activity outside North America is expected to remain more resilient. We also continue to benefit from our exposure to the Middle East and Asia Pacific, both of which are being supported by strength in gas-related activity. The business mix outside of North America is expected to account for as much as 60% of total segment revenue for 2020.
Jul 31, 2020
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