Some disturbing reading has emerged from a meeting between industry floating production professionals and consultants convened to discuss the state of the market, which suggests that higher costs are here to stay.

Consultants Douglas-Westwood brought together 20 companies in Houston who operate across the FPSO supply chain to talk about challenges and potential solutions for their market. What emerged was a concern about growth in capital costs, with one FPSO leasing contractor (none were identified so they could speak more freely) saying: “Capital cost growth is a major problem with a strong impact on our sector.”

Another comment was: “FPSOs aren’t the only major cost item. We’ve seen well costs increase, [and] exploration cost are high,” according to a major E&P company representative.

Apparently China isn’t necessarily the cheapest place to have new FPSOs built either: “In China the economy is moving very fast. The cost advantages are diminishing – you won’t get units as cheaply anymore,” observed an FPSO leasing contractor.

After hearing what was said during the roundtable discussion, Douglas-Westwood (which released the comments as part of an industry roundup), concluded that cost increases are likely to continue, “...driven by demanding projects, tighter regulation and local content”.

One of the other themes that emerged was that project guidelines provided by operators vary a lot: “There are so many standards and requirements that this drives the cost up considerably,” according to an EPC contractor. An FPSO leasing contractor agreed, saying: “There’s a difference in the standard requirements. There’s the general industry standards, then we have the KBR/Modec standards, then higher up is the Shell and ExxonMobil standard,” they observed.

An equipment supplier added: “We see operators trying to transfer experience from the North Sea to West Africa and other geographies too often.”

A high level of variation in regulations worldwide has been observed by market participants, which will add further weight to industry calls generally for wider standardization of equipment and specifications.

Another issue is said to be poor presentation of specification requirements from operators, with one operator willing to admit: “We’ve been trying to limit the paperwork. I know that when this is presented to our contractors it’s not in a particularly usable form.”

Another E&P company representative also commented on this issue, saying: “You cannot move units between locations. There’s a tremendous amount of regulation in different regions, take Brazil for example.”

Rounding up the discussion, Douglas-Westwood consultants concluded that regulatory variation between regions is “substantial,” and is “...severely limiting redeployment opportunities”.

They also noted: “The presentation of specification requirements by operators to contractors is challenging and increases the cost of FPSO units.”

While highly detailed specifications are being pushed down the supply chain, and some with inconsistencies, the consultants accepted that some operators are trying to improve this process.

Efforts to mitigate risk by operators are seen as the crucial factor, encouraging a high volume of company specifications, while Macondo has added to the volume and variation in specific requirements.

“Safety contracts have gotten worse since Macondo. Each of the customers has had to review their safety processes and they are now more diverse,” said an FPSO lease contractor, while an E&P company added: “Operators need their own internal standards to be sure of safety and risk.”

There was also an issue identified about contract bidding deadlines being too short: “Competition is important but timelines are unrealistic. They’re so short and it’s impossible to base bids on loose data,” disclosed an FPSO equipment supplier.

Offshore