FPS market expected to rise

Ben Wilby

September 1, 2015

Spending on floating production systems is expected to increase 73% in 2015-2019, with US$81 billion due to be spent over that period. Douglas Westwood analyst Ben Wilby sets the scene.

BG Group’s Knarr FPSO, moored offshore Norway. Photo from Teekay. 

Douglas-Westwood (DW) forecasts that between 2015 and 2019, $81 billion will be spent on floating production systems (FPS) – an increase of 73% over the preceding five-year period. A total of 110 floating production units are forecast to be installed – a 41% increase.

A continuing trend towards newbuilds and conversions compared to redeployments as well as projects that have already been sanctioned will ensure that spending in the sector will remain high over the forecast period.

While the FPS market will still grow, this growth is significantly less than expected due to the collapse in oil prices and installations in 2018 will decline significantly as a result (i.e. there is a dip in orders expected in 2015 and we anticipate that this will last well into 2016 with the impact on installations being seen in 2018.

Market forecast

Shell’s Bonga North West deepwater project. Photo from Shell.

Floating production, storage, and offloading (FPSO) units represent by far the largest segment of the market in terms of numbers (87 installations) and account for 81% of the forecast capex. Tension leg platforms (TLP) account for the second largest segment of capex (9%) with FPSs third (7%). The smallest segment, spars, has a forecast capex of $2.9 billion (2% of the total forecast capex).

The forecast period highlights the continued increase in TLP installations and capex, continuing on from 2014, which saw two TLPs, the Olympus and P-61 units, installed. While no units were installed from 2010-2013, 10 TLPs with a total capex of $7.6 billion are expected to be installed over the period.

Figure 1: Global FPS Installation Capex by Region 2010-2019 

Source: Douglas-Westwood, World Floating Production Market Forecast 2015-2019

Latin America

Latin America accounts for 28% of the 110 installations forecast and 32% of the projected capex, with the majority of these units being FPSOs. The disparity between the two figures is from Latin America having higher than average capital costs compared to other regions due to Brazil’s higher proportion of expensive deepwater projects and high local content requirements. While the region is expected to have the highest capex, it is unclear whether this will continue into the 2020’s with the low oil price adding to ongoing problems faced by Brazilian operator Petrobras. These include a status as the world’s most indebted company and a corruption scandal that has engulfed much of the oil and gas industry in the country. All of these issues are likely to have an impact on the capital the company can assign to new units, but are unlikely to affect the numerous sanctioned projects due to Petrobras having plans in place that ensures units are ordered many years before they are required.

Africa

Africa will be the second largest region for spending over the forecast period with a capex of $17.8 billion (22%). Like Latin America, a large proportion of installations will take place in deepwater and this will continue to drive spend in the region. The impact of deepwater will be particularly prevalent in 2015-2017 when a number of >1000m water depth fields are anticipated to come onstream. After this there will be a drop in capex as the impact of a low oil price impacts the market. This will hit the frontier area of East Africa hardest due to the unknown nature of developments in the area, and as a result, East Africa will have extremely limited deepwater production over the forecast period. If it was not for this East African-led drop in capex, Africa would likely have been close to Latin America in spend and possibly overtake it as the region with the highest FPS capex.

Asia & Western Europe

Although Asia has more installations (25) forecasted than Africa (20), it will account for only $10.4 billion (13%) of global capex. This is due to the majority of units being located in relatively shallow water and benign environments, requiring more straightforward FPS designs and hulls sourced from converted vessels, which are usually cheaper than newbuilds. This is unlikely to change over the forecast period with major deepwater developments such as Chevron’s IDD project seeing delays.

Although a predominantly shallow water region where fixed platforms are utilized, Western Europe is expected to see a respectable number (19) of FPS installations over the next five years. Some of these projects revolve around the rejuvenation of mature producing areas.

Key demand drivers

Three main factors are driving the sustained FPS sector growth:

As shallow water opportunities become increasingly scarce, the development of deepwater reserves will accelerate rapidly. For a field in deepwater, FPS is the development method of choice, since fixed platforms are often ruled out on technical and/or economic grounds.

As a result, floating production expenditure in deepwater is expected to total $55 billion over the 2015-2019 period, 68% of the value of the global FPS market. Deepwater capex would likely have been more significant if the oil price had remained high, but since deepwater developments generally cost more they are more likely to be deferred until there is a favorable oil price. As a result, much of the capex in deepwater will come from projects that have already been sanctioned.

Considerable versatility enables FPSs to be used for a variety of different applications besides conventional life-of-field production. These include extended well testing (EWT), early production systems (EPSs) and rejuvenation projects.

FPSOs are also an attractive solution for marginal field developments, particularly where an existing unit can be renovated, modified and redeployed at a significantly lower cost than a newbuild. This is something that can be seen in a number of projects in Western Europe and this trend will likely increase in the future as frontier areas such as East Africa or the Arctic are developed.

The FPSO Cidade de Ilhabela is producing the Petrobra-operated Sapinhoá field. Photo from BG Group. 

Lease versus own

Three main factors will affect the supply of units in the FPS sector:

Financing remains a challenge for leasing contractors and smaller exploration and production companies, as a result of the lower oil prices which have placed additional strain on company budgets and greater efforts are being made to ensure delays and cost over-runs are avoided to maintain project economics. At the same time local content requirements are pushing up prices and extending lead times, particularly in Brazil.

For the oil company field operator, FPS ownership becomes the more cost-effective option where production extends over a long period. However, given the current macroeconomic environment, such capex commitments may be deferred. Therefore, the decision to lease an FPS can be seen as a trade-off between the lower upfront capex and the increased operational expenditures as a result of the leasing charges. However, leasing also brings advantages in terms of the cost of field abandonment.

The top three leasing contractors are SBM Offshore, MODEC and BW Offshore, which collectively account for 35% of the leased fleet. The FPSO leasing sector has seen slight improvements with 87% utilization at present. However, the sector continues to be affected by severe project delays and cost over-runs, with contractors still reporting write-downs on new projects.

Dealing with delays

The FPS supply chain is causing concern amongst investors and exploration and production companies. The challenges in delivering large and complex production systems on time and on budget are such that cost over-runs have become the norm and delays in both project sanctioning and project execution are more common than delivery on time. The industry is looking at ways of approaching FPSO projects differently, perhaps through a standardized approach to FPSO engineering.

Local content requirements are also causing delays in project execution and cost overruns. The ambition of creating value and employment locally will need to be balanced with the need to have an efficient, competitive and competent supply chain. These ambitions may continue to prove to be mutually exclusive. Political risk often compounds the challenges of local content requirements, with issues such as unstable fiscal regimes, changes of government and regional conflict present in a number of upstream environments worldwide.

Conclusions

The oil price collapse will have a significant effect over the forecast period, leading to significantly less spending than would have been expected if oil had stayed at a high price. Orders in 2015-2016 will be the most affected, with a knock-on effect on 2018 installations. Up until the oil price collapse, the FPS sector recovery following the 2008-2009 downturn had continued steadily. A total of 68 units were ordered in 2011-2014 compared to 23 units during the downturn.

According to DW, there are 51 units in-build at present – a slight decrease compared to DW’s last edition of the report. With fewer units expected to be ordered, a downward trend may be seen for the next few years.

Marginal, deepwater and remote fields will continue to be areas of focus for the exploration and production industry and FPS units are a key enabler for production. Growth in these areas will however be tempered by the low oil price.

There is upside potential, if the supply chain can deliver and if the operators are willing to move ahead. DW are tracking more than 160 FPS deployment opportunities and have taken a realistic appraisal of these projects to arrive at our forecast of 110 installations. Ultimately, FPSs are likely to remain the only option for deepwater oil developments for the foreseeable future and an attractive proposition for marginal and remote fields. Given the increasing reliance upon reserves in these areas, we have confidence in the long-term proposition of the FPS sector, despite the current risks and disruption that are evident.


Ben Wilby joined Douglas Westwood as a researcher and primarily works on the continual updating of the Offshore Oil and Gas Database and is one of the authors of The World Floating Production Market Forecast 2015-2019. Ben graduated from the University of Chichester with a degree in History.