Floaters at full-sail on prevailing wind
  from: Offshore Engineer
  by: Darius Snieckus
  Friday, April 04, 2008

Even before the headline-making announcements of Petrobras’ elephantine deepwater Tupi discovery off Brazil and the US Minerals Management Service’s blessing of a flagship FPSO development in the US Gulf of Mexico, the international oil and gas industry had already pledged close to $40 billion to sail 120 FPSs into service over the next five years. Darius Snieckus tests the waters of a market still on a rising tide.

Plain sailing for the floating production sector in these days of $100/bbl crude, and, it would appear, more blue sky in forecast. Ever-expanding development activity in the world’s deepwater provinces, heightened interest in the exploitation of remote offshore prospects, and the pan-industrial push to produce economically challenging small fields around the globe are together supercharging the floating production systems market, with total offshore oil and gas output now seen as being on-track to soon to break the 60 million boe/d mark fuelled mainly by growth from projects in more than 500m of water. Indeed, according to a recent study from UK researcher Douglas-Westwood, such is the commitment of the international oil industry to floating production, that some $38 billion has been budgeted to add a further 121 FPSs to the global fleet by 2011.

Nor are aggressive drillbit-led exploration and production strategies the only reason that FPSs are continuing to find such favour with operators working up new field development schemes. That floating production units are redeployable, leasable, and provide the promise of a fast route to first oil are also key drivers of this mushrooming market, as is the accelerating uptake of subsea development technology that still more often than not depends on a vessel stationed on the surface to complete the development concept jigsaw. And, to stack up the numbers, the past five years are going to pale by comparison with the next five.

‘The floating production business has grown rapidly over the last five years, with 81 units installed over the period,’ outlined Douglas-Westwood managing director John Westwood, speaking at IBC’s recent Global Floating Production Systems conference in London. ‘The next five years should see continued growth with a total of 121 installations forecast. Developments such as Tupi offshore Brazil are likely to require a phased development programme with a number of units used over the life of the field, starting with a dynamically positioned FPSO achieving first oil as soon as 2010.’

Much as the colossal Tupi development – which operator Petrobras calculates to hold between 5-8 billion barrels and may be flowing up to 1 million b/d by the middle of the next decade – is a prime candidate for floater-centered development, it is the flexibility of floating production technology that is keeping the sector in the ascendancy. For an industry now instinctively looking to deepwater to replace falling reserves levels while wrestling with a priority list of remote and marginal oil and gas prospects to round out the global asset portfolio, the implications for the FPS sector, as Westwood underlined, are that ‘the overall picture is one of strong market growth’.

‘Orders are now climbing and expected to lead to some major installation activity towards the end of the decade,’ he noted. ‘Annual global expenditure in the FPS sector is expected to increase from an estimated $6.4 billion in 2007 to $9.8 billion in 2011. The continuing shift to deepwater remains the major motivation.We forecast that around 70% of the global spend will be on floaters moored in water depths of 500m or greater.’ Through to 2011/12, five operators are expected to stump up nearly 40% of the total spend on floating installations and 50% of the worldwide capex forecast, according to Westwood, with Brazilian national oil company Petrobras likely to be the biggest spender, followed by Total, Chevron, Shell and BP.

Oil company devotion to floater-driven development of deepwater reserves is ultimately a response to the unpalatable reality that the world’s easy oil has notionally all been found – the same reality that has the industry setting sail for the Arctic, and revisiting the hardbitten economics of various HPHT and heavy oil plays. Another dimension of the FPS picture now emerging is the momentum-gathering move to monetise gas, not least the 150bcm-plus that is flared each year – equivalent, as Westwood noted, to one-third of US gas consumption or three-quarters of global LNG trade, and responsible for the addition of some 390 million tons of CO2 in greenhouse gas emissions.

‘There is an awful lot of gas stranded out there that cannot be reached from existing infrastructure,’ underlined Westwood, ‘and floating production looks like providing an answer as to how to monetise it.’ Taken together, the wide variety of applications suited to floating production units makes plain why the most flexible of floating concepts, the FPSO, is to account for 73% of forecast capex in the sector going forward through the next five years.

Balancing act

If there is a cautionary note to be struck in looking at the high-flying FPS sector, it is on the level of the market’s supply/demand balance, particularly when it comes to FPSOs. Consensus on the near-term future of floating production remains ‘optimistic’, suggests Crondall Energy Consultants managing director Duncan Peace, but he acknowledges that the unprecedented growth in the numbers of FPS-orientated contractors is almost marching in step with the number of new field opportunities up for grabs for floaters, as traditional shipping and offshore companies edge into the sector and investment firms jockey for position to capitalise on what is perceived to be ‘high-profit’ FPSO ownership.

On the demand side, the global order book has 66 floating production and storage vessels catalogued as under construction at the moment, 51 of which are FPSOs, with a further 100 or so newbuilds and conversions being planned for or studied – and this on top of the 122 FPSOs that make up nearly two-thirds of the floating production fleet now in the field. Given that the US Minerals Management Service has just sanctioned the first FPSO project in the Gulf of Mexico with go-ahead for Petrobras’ Cascade development, underlined Peace, FPSOs now must be recognised as the ‘numerically dominant technology’ for offshore developments.

Flipside, there has been an ‘explosion’ in the number of contractors angling to supply the FPSO market with new vessels, some 30-plus at last count. ‘Ten or 12 years ago there were ten contractors concentrating on floaters,’ he stated. ‘If we look at the distribution of floater contractors now it can be seen that only the top seven contractors have three or more operating FPSOs – there are a number of contractors building on speculation of course – whereas there are 13 that each only have a single unit in operation.’

Speculative building, as Peace points out, is a telling hallmark of today’s floater market. Like in the 1990s, the current newbuild and conversion boom will ‘not necessarily be a good thing’. The sector appears to be in rude health to judge from the construction projects under way right now. Currently, Nexus is building two new Suezmax-sized vessels at Samsung Heavy Industries in South Korea, and Sevan has its sixth and seventh cylindrical hulls under construction on a speculative basis at China’s Yantai Raffles yard. Aker FPS, Nortechs, FPSOcean, Rubicon and Helix Energy, meanwhile, each have or are planning an FPSO conversion to be built on spec. But the impact of the new entrants, he notes, in total, has been to ‘dilute the concentration of the ownership of FPSOs’.

‘Those people with long memories and grey hair to go with it will remember an earlier splurge in speculative vessel building in the 1990s where the outcome had both good and troubled parts to it. We’d do well to look at the lessons learned during those days,’ Peace advised.

For the yards it has also been a case of plus ça change, with the rise of the Chinese construction force putting pressure on the South Korean shipbuilding triumvirate of Samsung, Hyundai Heavy Industries, and Daewoo Shipbuilding & Marine Engineering – which, though they together continue to be the ‘main source’ of purpose-built FPSOs, were this year for the first time outpaced by China in compensated gross tonnage for the compound weight of hulls sailed out for the wider offshore sector. It is a changing of the industrial guard that, Peace reckons, will eventually mirror ‘what the Koreans did to the Japanese yards 10 years ago, though now as the Chinese yards are expanding capabilities beyond hull building, the Koreans have moved fully into supplying the complete FPSO to their customers’.

What has remained the same over the past decade is extreme pressure on costs and margins, a fact not helped by the sudden jump in demand in the space of the last few years. ‘There is a considerable increase in tightness [of the market] and I would submit that part of that has been driven by increasing costs,’ asserted Peace. ‘After being driven down achieving production efficiencies and seeing a continual erosion of their margins over a very long period of time, shipbuilders found that when the market got good there was little expansion in their margins as well as an increase in cost.’

Present-day demand pressures and the general fluidity of the FPSO market has given a boost to redeployment of operational vessels – 3-5 FPSOs currently in the shop window – and a growth in the buy-to-let segment, with 45% of the FPSO fleet owned by leasing contractors led by the likes of Bluewater, Modec and SBM. Following a period of consolidation new entrants, such as Prosafe, Teekay and Bassoe, set up offering ‘everything from a shallow water unit on charter off Vietnam at $50,000/d to a deepwater floater stationed off Brazil at dayrate of $210,000’. The Northern Producer semisubmersible production unit that until recently was on Talisman’s Galley field in the UK North Sea was leased at a rate tied to production levels with a daily charge of $105,000 plus a tariff of between $1.25-$2.00/bbl.

Striking a balance between the two sides of the FPS market given the myriad tensions of the sector, he argues, will require that industry fashions a way to ‘get the two markets to fit’.

‘You are talking about a market that doesn’t have the homogeneity of the tanker business or indeed the drilling business,’ offers Peace. ‘And this really is because of the complexity of FPSOs, a complexity that you cannot define on one axis. Getting the demand to match supply will require that we intelligently manage a combination of newbuilds, conversions and redeployments to do so.’

It is just possible that the industry will build enough new tonnage in the shortterm to temporarily meet with current levels of demand, he suggests, ‘but you will have to wait at least two years before [the rate of vessel construction and conversion] calms down’. In the meantime, a gradual shift toward greater ‘contractorisation’ of floater construction projects, further consolidation of the FPS contracting sector, and more conversions of new tonnage will be three of the market trends of note in this hectic sector.

Sailing the ‘five Cs’

There are dissenters from the rosiest of views of the FPS market who, like Swire Production Solutions general manager George Horsington, do not see it as a latterday ‘crock of gold’. ‘We all know FPSO to stand for “floating production storage and offloading”, he stated, ‘but I believe with regard to the FPSO industry that it should stand for “flat profitability and speculative overcapacity”.’ To Horsington’s mind, the industry’s buoyant take on floating production – a market he acknowledged is in a bull cycle – is a failure to ‘separate growth in an industry from success of the individual companies within that industry’.

From the FPS contractor’s perspective, challenges of revenue constraint – ‘the money coming through the door through charter-hires of our clients’ – and cost – a ‘fifth C’ in a list that includes competition, capacity, commoditisation, and compliance’ – are making it feel rather less like the good times it appears ‘on the macro level,’ he said.

‘Everyone is singing from the same song sheet: buoyant industry, buoyant demand, increased FPSO numbers, underlying market fundamentals have never been stronger,’ said Horsington. ‘But I am somewhat more pessimistic: it is possible for an industry to grow, for a market to be strong, but for the players in that market to not make very much money. The big picture of the buoyant industry doesn’t necessarily translate into value for the shareholder.’

Charted against oil and gas production figures recorded over the last 20 years, the current record-setting crude prices can arguably be seen, in pace the peak oil faithful, as being predominantly under the sway of forces geopolitical, military, and technological – to say nothing of the destabilising effect of a shaky US dollar. Future oil supply will be dictated by these ‘above-ground’ factors rather more than by the total remaining hydrocarbon resource in the ground. And given that flow from the shallower water areas is in long-term decline, deep and ultradeepwater necessarily represent some large part of the supply-side solution to offset waning global production.

Today’s FPS market – and tomorrow’s – cannot help but be perceived as bullish when seen from this angle, though there are all too apparent stumbling blocks ahead that need to be stepped over. ‘Overall there is a very positive outlook for the FPS market, a great future, but,’ cautions John Westwood, ‘there are also a number of possible external disruptions lying in wait: politicians, project costs, and, indeed, that bottom line issue of a lack of skilled managers and manpower’ – any or all of which have the power to cloud otherwise blue sector skies. OE

Hope floats for stranded gas

Floating production solutions are enjoying a ‘resurgence of interest’ for the transportation of captured stranded gas reserves around the globe as the international offshore sector trains its sights on the 3000tcf estimated to lie in fields located in areas without commercially viable access to world markets, according to US classification society ABS.

Evidence of the industry’s push to develop this untapped resource – thought to account for more than one-third of global gas reserves – can be seen in the ‘expanding repertoire’ of proposed transport systems coming on to the market, said ABS Europe president William Sember, speaking at the World LNG Summit in Rome last month.

‘ABS has now provided its “approval in principal” (AIP) to numerous emerging proprietary technologies or transport designs that are intended to economically develop these remote gas fields,’ said Sember. ‘The increasingly competitive cost and the operational benefits of these gas concepts are what developers hope will lead to sustained growth in this niche market.’

Compressed natural gas and floating LNG concepts are leading the run in this bull market. Though CNG has been proposed as an effective method of transporting stranded gas for some years, the first project has yet to be launched. Now, however, noted Sember, nearly a dozen CNG projects are on the ‘verge of commercialisation’ in different parts of the world. ‘ABS has granted AIP to all the leading technical concepts that have been developed for this sector, including variants such as compressed liquid natural gas – it is only a matter of time before the first major contract is finalised.’

Numerous floating LNG terminal projects are also under way with ABS recently giving an AIP to a concept proposed by Japan’s Inpex for the Abadi gas field in the Timor Sea off Indonesia. Another concept reviewed by ABS recently was a self-supporting, prismatic Type B gas containment LNG FPSO designed by SBM Offshore and German-based gas processor Linde.

‘With interest continuing at such high levels, designs and proprietary processing technologies are now on the eve of being commercialised,’ said Sember. OE

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