Venturing into the Dragon’s den
  from: Offshore Engineer
  by: Jennifer Pallanich
  Friday, September 05, 2008

Demand for hydrocarbons continues to grow in China, a country that has brought online 38 offshore fields since 2000, according to Infield Systems data. Eleven more fields are under development and expected to come online within 18 months. Fifteen more offshore fields are considered probable through 2013, and 28 are considered possible through 2016. As such, oil and gas companies are increasingly setting up shop in the mammoth country, where they expect to serve continued growth. The Chinese welcome the interest, which translates to access to deepwater technology. Jennifer Pallanich reports.

In the front half of the year, several companies have amped up their pursuit of the Chinese market while the Chinese have looked to expand into other areas.

‘People may be underestimating the power of the Chinese,’ says Will Rowley, director of analytical services at Infield Systems, noting that while the Chinese may not be a force in the offshore sector, they are moving towards becoming so. ‘In three, four, five years, they’ll be an international player.’

Strategically, Chinese companies are pushing for continued development, deepwater expertise and becoming internationally competitive, he says. Technology is integral to the march for continued development of resources. And while China’s deepwater is prospective, the in-country know-how to explore and exploit deepwater assets is lacking, he adds.

That said, the Chinese are forces to be reckoned with in terms of onshore drilling and seismic, he notes. ‘They’re very good at picking certain niches and areas and working away, building the expertise.’

Quality standards may have been an issue a few years back but decisions not to order from Chinese companies for those reasons are ‘a little unfair now’, Rowley says.

Inexperience, rather than a lack of willingness to work to high standards, was the likely culprit. Chinese companies are working hard to implement quality standards, he adds.

Rowley calls the JV route interesting as it offers access to expertise and technology. While JVs may move the Chinese companies toward their goal, it’s not the quickest route. For the Chinese to establish expertise in the deepwater realm, it will take seven to ten years, he adds. Alternatively, he notes, they may simply buy the expertise, which he considers a real possibility. The Chinese ‘want to be a great force in oilfield services’, Rowley says.

Moving toward that goal, China Oilfield Services agreed in early July to make an outright purchase of Norwegian drilling contractor Awilco Offshore for $2.5 billion. The purchase will give the Chinese company immediate access to five jackups and two accommodation units. Awilco also has three additional jackups and three semis under construction and holds options for the construction of two more semis.

In total, the combination gives China Oilfield Services a fleet of 34 operated rigs, including rigs under construction.

Subsea Engineering Solutions (SES), a new JV set up in China in May by subsea engineering and construction firm Subsea 7 and Richtech, an engineering consultancy based in China, is another example of a cooperative arrangement that gives the Chinese players access to deepwater technology. SES president Jeff Measamer notes Subsea 7 gained entry into a new market and access to engineers who could learn the nuances of subsea work, while Richtech got access to Subsea 7’s technology.

‘There’s plenty of work out there,’ Measamer says. ‘You just have to have the right team to put in front of the work.’

SES’ bread and butter will be providing subsea FEEDs, detailed design, integrity management and engineering consulting services to operators.

Setting up a company in China is not as simple as it is to set one up in the US, where it takes an attorney under a day to form the company, Measamer says. ‘In China, that process takes several months,’ he says. ‘There’s more bureaucracy than what we’d be used to in the west.’ Some of the bureaucracy he attributes to the Chinese philosophy of doing what’s better for the greater Chinese good. ‘It actually works there.’

Measamer expects the JV to face few issues while operating in China, especially given a communications link to the Houston office via video conferencing. ‘Operationally, it’s not difficult at all.’

The main issues in working in China, Rowley says, come down to the three L’s: ‘It’s just been logistics, language, location, etc.’

One of the challenges of operating in Houston, Measamer notes, is cost. But adding Shanghai to the mix means ‘we become extremely competitive,’ he says.

Bill Boyle, vice president of Subsea 7's North and Central America region, believes SES will offer ‘a value/cost proposition that will challenge the current established market for subsea engineering services.’

The JV sees its most direct competitors as Genesis, JP Kenny and Stress Subsea.

In the first six months, the new company is focusing on winning detailed design work for EPIC projects off West Africa and Brazil by bidding as an engineering subcontractor to Subsea 7.

Initially, Measamer expects SES to see work with small and medium operators in the Gulf of Mexico and obtain a couple of West Africa FEEDs per year, with the Chinese market not likely to become a force for about three more years.

‘I can’t cover every market. I have to pick and choose where we work,’ he says. ‘We’re concentrating on the Gulf of Mexico,West Africa, and the Chinese market when that happens in two to three years.’

Subsea 7 has had discussions with Chinese companies regarding FEED activities outside Chinese waters, Measamer says, adding that as the business develops for deepwater subsea development over the next several years, SES will add staff to the Shanghai office to keep pace with demand. The company does not currently plan to open an office in Brazil at present, but rather will work there as a subcontractor to a larger company, he adds.

The venture will also focus on installation analysis and subsea structures, as well as the two areas likely to make the most money: pipelines and controls.

The US Minerals Management Service has been reviewing integrity management requirements for subsea pipelines in the Gulf of Mexico and has had a draft rule out for comment for about six months. Few operators in the Gulf follow a comprehensive integrity management system, as opposed to the North Sea where operators have had legislative requirements for integrity management planning for over a decade, he says. As it is, he estimates about 10% of valves fail during tests. Depending on how the MMS treats 30 CFR 250 regarding pipelines and integrity management, Measamer says, integrity management work could become lucrative as well. He says that if the MMS decides to make the Gulf of Mexico requirements parallel to those in the North Sea, operators will have to meet more demanding requirements. ‘It could be a significant issue for operators,’ he adds.

When SES first set out its ‘open for business’ sign, it was reviewing integrity management systems and implementation for Subsea 7. Measamer says the JV will begin seriously marketing itself later this year. The new company plans to bid on two or three FEED projects coming up over the next year as well as handling a certain amount of work from Subsea 7. After the first year, he adds, the company will likely bid on five or six conceptual or FEED efforts and hope to win between two and four.

Mid-2009, the JV targets employing 30-40 people in Shanghai and 20-25 in Houston, where four are now employed.

Measamer doesn’t see the new company rushing into any acquisitions, but he says the company may consider certain specialty engineering companies known for experience. ‘It’s going to be controlled growth,’ he says.

The five Shanghai staff, he notes, all have a masters’ or a PhD in engineering but lacked practical subsea experience when they were hired. ‘They’re experienced. They’re good analytically. They just don’t know subsea,’ he says, adding the JV is relying on Subsea 7’s experience with conversion engineering training to bring the Chinese team up to speed. Those staff will go through Subsea 7’s ‘7 Advantage’ program for subsea, training two months each in the Aberdeen and Houston offices.

‘The Houston office will be very top heavy with experienced people,’ Measamer says. ‘We’re going for the top 10% of engineers here in Houston’ who all have extensive experience with putting hardware into the water.

Measamer himself has plenty of experience, with over three decades in the oil and gas industry, including senior management slots at MCS and Technip. He also spent eight years in the nuclear weapons field. For half that time, he served as site manager for the ground launched cruise missile program at Greenham Common, UK. There, he says, ‘we were taught to do it right the first time. You don’t get to make a mistake.’

With a background in quality assurance, engineering and manufacturing, he says, ‘I understand all the pieces to the puzzle. I’ve got to get it done right the first time. I can’t afford a mistake.’

New FPSO facility

Meanwhile, J Ray McDermott’s new joint venture company Qingdao McDermott Wuchuan Offshore Engineering plans to establish an 111-acre facility adjacent to two new China Shipbuilding Industry Corporation (CISC) shipyards. The area features one floating dock and five dry docks capable of accommodating vessels up to 500,000dwt.

McDermott Wuchuan anticipates focusing on FPSO vessel construction and integration. ‘FPSOs represent one of the fastest growing offshore construction segments in our industry today,’ says Bob Deason, J Ray president and CEO. ‘China already commands a significant share of this market and has developed a proven project track record.’

J Ray sees it bringing EPCI capabilities, consistency of methods, standards and procedures, project management systems, and its safety culture to the union. CSIC brings its shipbuilding history, market penetration, an ability to obtain hulls and access to a large, skilled workforce. The JV expects to offer solid and competitive solutions to the FPSO market.

McDermott Wuchuan’s new facility will include structural and pipe shops, blasting and painting facilities, module assembly buildings, covered warehousing and lay down areas. OE

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