Global floating production capex (US $m) spend by region 2004-2013. (Source: “Global Perspectives Floating Production Market Update 2009/13”)

The impact of the current financial situation will have short-term and long-term effects on the floating production systems market segment. The lack of credit and falling oil prices, which are considered short term, are causing a number of problems within the industry — such as project delays and cancellations — and are raising concerns about many operators’ financial and operational stability.

Looking at the current market headlines, those companies of greatest concern are highly leveraged independents that are struggling due to the lack of cash flow, especially those that sanctioned projects with peak oil prices in mind. Most of the oil majors, on the other hand, have been less prone to over-optimistic oil price prognoses and are more equipped with cash and positive cash flows. This edge gives them the opportunity to move ahead with those projects that have been sanctioned with more conservative oil prices in mind. Among them, Petrobras is expected to be the most active player with a forecasted US $15 billion of capital expenditure, followed by Total, Chevron, Shell, ExxonMobil, and BP.

In the longer term, tightness in supply and decreasing reserve replacement ratios mean that accessing new hydrocarbon reserves will remain a priority for oil companies even if demand stays stationary. Therefore, it is expected that new offshore oil and gas developments will continue to face strong market fundamentals that will push their sanctioning forward.

Spending continues

Even with project delays and deferrals, the total global floating production systems market over the period 2009 through to 2013 is set to exceed $85 billion of capital spending, an increase of $32 billion over the previous five years.

During the forecast period 2009 to 2013, Infield expects further growth and capital intensive developments associated with deep and ultra-deepwater projects, which are crucial drivers for floating production market growth. The whole industry is moving toward deepwater and ultra-deepwater developments, in more severe environmental conditions and more remote locations.

Floating production, storage, and offloading (FPSO) vessels will command the majority of the expenditure within this sector, with expenditure likely to reach $48.6 billion, of which 45% will be newbuilds and 55% conversions. This reflects the advantages they offer over other development solutions.

Within the FPSO market, the leasing option is a developing area that gives operators certain advantages. The option to lease rather than commission the building of a new FPSO allows the operator the opportunity to avoid putting this asset onto its own balance sheet and also to pass on the risks associated with construction (in particular, delay) to an FPSO owner, with extreme penalties incurred if deadlines are missed. The FPSO leasing market has recently seen the addition of several new small entrants to the large companies such as SBM and Modec, long established as major leased FPSO suppliers

Work commitments, construction concerns

Due to the current problems of securing their debt positions, there could be a wave of consolidation within the FPSO vessel fleet as financiers and exposed smaller companies look to offload their assets if they cannot find suitable employment for them.

There are currently three main interrelated areas of concern affecting the contemporary global oil and gas market: potential future under-investment, declining revenues of oil and gas companies, and the financial crisis leading to recall or repayment of loans ahead of time as well as the lack of re-financing. This has caused a number of project cancellations and deferrals. Units built on spec have been hit hard in the wake of the current economic climate as FPSO suppliers either struggle to finance projects or have to abandon them altogether. Among those canceled are the East Venture and East Challenge FPSOs. Another casualty of the global downturn has been FPSOcean, which recently entered into liquidation proceedings, having failed to secure financing or win a contract for its spec built Deep Producer 1 FPSO. Trying to raise capital, FPSOcean sold an Aframax tanker to Greek buyers for $22 million, a tactic which has been common with many FPSO suppliers holding tankers as possible conversion candidates. Deep Producer 1 remains unfinished at Dubai Drydocks.

Nexus Floating Production also has been experiencing difficulties in finding a solid contract for the Nexus 1 FPSO. In 2008, Nexus signed a letter of intention with Burgundy Global Exploration Corp. for the seven-year lease of the unit for an estimated $800 million for use in the Camago-Malampaya oil rim project. As of mid-April, BW Offshore, which has a marketing agreement with Nexus, had signed a letter of understanding with Premier Oil for the potential charter of Nexus 1 for use offshore Vietnam.

Samsung Heavy Industries expects to deliver Nexus 1 in June. The Nexus 2, also under construction at Samsung, has been deferred due to the lack of leasing opportunities.

The new delivery date is November 2012.

Potential deferrals and elongated lead times for some projects could create issues in the future because they will increase the volume of engineering and fabrication needed, which could create a demand peak and a potential undersupply if the supply capacity stays static. If demand perks up as expected, there is potential for a shortfall in engineering supply as early as next year.

The floating production fabrication market has traditionally been very tight. However, any potential future constraints are likely to be delayed as large shipbuilders place an increasing emphasis on winning offshore projects.

Offshore contracts are currently believed to be the predominant engine of growth for the large shipyards of South Korea and China as merchant ship newbuilds have dropped off dramatically. This decline in ship building can promote competition for offshore contracts among shipyards as order cancellations free up vital dock space.

The top five floating production yards, located in South Korea and Singapore, include in descending order by tonnage throughput from offshore projects: Hyundai Heavy Industries, Samsung Heavy Industries, Keppel Offshore and Marine, Sembcorp Marine, and Daewoo Shipbuilding and Marine Engineering.

Floater market still strong

The future for the floating production systems industry is still expected to be strong with a variety of water depths, project sizes, and locations expected over the next five years. More in-depth analysis and forecasts of the floating production systems market can be found in Infield Systems Ltd.’s fifth edition of the “Global Perspectives Floating Production Systems Market Update.”