Depressed commodity prices and a supply-demand imbalance have crushed orders for floating production systems (FPS) by about 73% since 2014; however, the U.S. Gulf of Mexico (GoM) appears to be among the sector’s bright spots.
“A few years ago this would have been unthinkable, with interest in the deepwater GoM waning as numerous companies gave up their offshore acreage to focus on the shale market onshore,” energy consultancy Douglas-Westwood said Nov. 30 in its weekly market report. “Yet the declining oil price has, if anything, bolstered interest in the region.”
If all goes as planned, the GoM region could have four orders for FPS units in 2016. The amount is the same as the number ordered worldwide this year. Globally, orders for FPS units have fallen from 15, mostly for FPSOs, in 2014. Twelve FPS vessels were awarded in 2013. As the oil and gas sector copes with the prolonged downturn with the price for a barrel of oil hovering around $42.46 (WTI), compared to $66-$69 a year ago, companies are focusing on lowering costs.
What makes the U.S. GoM appealing despite the lower oil price, according to Douglas-Westwood’s Ben Wilby, comes down to two factors.
“For lowering costs the U.S. seems to be an area where major cost savings can be achieved. The fact that Mad Dog Phase 2 is likely to be sanctioned next year despite previously being uncommercial at $110 a barrel demonstrates the value that can be found in projects,” Wilby told Hart Energy. “The region is also stable and importantly, well-established, with oil development in the Gulf of Mexico stretching back many decades.”
Shell’s Appomattox deepwater development in the GoM is also among the projects moving forward. The development, which will be the company’s largest floating platform in the GoM, will initially produce from the Appomattox and Vicksburg fields with an average peak production of about 175,000 barrels of oil equivalent per day.
Targeting the Norphlet geologic trend, the development will be a four-column floating production facility with a subsea system that features six drill centers, 15 producing wells and five water-injection wells. In a news release Shell noted how it was able to lower the total project cost by 20% through supply chain savings, design improvements, and by reducing the number of wells required for the development.
When put next other areas such as East Africa, where costs are likely to be high due to a lack of existing infrastructure, the GoM compares favorably, he said
“On top of this the area has a lot of established and secure infrastructure that allows operators to opt for cheaper and more flexible development solutions,” Wilby added. “Vessels can be smaller as usually there is no need to perform processing on the vessel, leading operators to use FPS types like spars and FPSS instead of the large FPSOs that are common elsewhere in the world, where the network of export lines and onshore processing plants does not exist.”
Elsewhere
In Latin America, where the number of FPS units—mostly FPSOs—usually outpaces orders elsewhere, the corruption scandal involving Petrobras has contributed to the slowdown in Brazil where massive presalt hydrocarbon resources are being developed in the Campos and Santos basins.
“Brazil’s expansion up to 2014 was incredibly quick and saw the award of unprecedented numbers of vessels for one country. The scandal that has engulfed Petrobras (Operation Car Wash) has ended much of this expansion,” Wilby said. “The company has taken steps to remedy this and now has a much more rational development plan for the coming years.”
Focus is likely to be on getting the FPSOs already on order onstream instead of new ones, he added.
“As a result orders next year are expected to be dramatically lower and this is likely to be the case for the remaining years of the decade as they look to reduce the large levels of debt they have accrued which has seen them become the most indebted oil and company,” Wilby said.
However, a more stable Petrobras coupled with the opening of Mexico’s energy sector could result in Latin America dominating the FPS market in the 2020s, he said. But that remains to be seen, given the role of oil prices and whether investors will show up and bid when Mexico offers deepwater acreage.
Elsewhere, the future appears promising for Asia, where Wilby said final contract awards are expected for the China National Offshore Oil Corp.’s Liuhua 11-1 and 16-1 fields in the South China Sea. Options being considered include two tension-leg platforms tied to an FPSO or a semisubmersible.
The Asia region typically has a high number of FPS unit orders, but the units are usually small FPSOs, meaning the overall cost of units in the region pales in comparison to other regions.
Falling Prices
In an update to its World Floating Production Market Forecast 2015-2019, Douglas-Westwood forecast that units ordered next year will be less expensive than prior to the downturn.
For 2016 orders, the average expected price is $408 million, down from an average of about $750 million in 2015, Wilby said. He warned, however, that the number does not tell the whole story. For starters, the sample size for 2015 is small. Plus, two units ordered this year—for the Appomattox and the Sankofa East fields—are expensive compared to other units.
“Next year’s low average order prices shows the move to more sustainable and sensible capex for vessels overall, with the number of vessels ordered expected to be higher,” he continued.
Moreover, prices vary depending on each development.
“For the U.S., cheaper developments were already the norm due to smaller reserves, leading to a preference for ‘mini-FPS’ developments,” Douglas-Westwood said in its report. “Regardless, any upturn after a dismal 2015 will be greeted gratefully from the array of shipyards and suppliers who are hurting badly in the current environment.”
Velda Addison can be reached at vaddison@hartenergy.com.