Keeping afloat

Ben Wilby, Douglas-Westwood

September 1, 2016

The market for floating production systems may have stalled, but FPSs will still be a key part of the offshore technology tool kit, outlines Douglas-Westwood’s Ben Wilby.

The FPSO Cidade de Saquarema departs from the BRASA shipyard bound for the Lula Central field in the Santos Basin, off the coast of Rio de Janeiro, Brazil. Photo from SBM Offshore.

The oil price collapse has deeply impacted the floating production systems (FPS) market with orders declining dramatically as operators focused on cutting budgets and redesigning projects.

With high costs and long construction periods, the FPS market was one of the worst affected sectors across the oil and gas industry. There were four orders in 2015 – down from 12 in 2013 and 17 in 2014. The order value of vessels ordered in 2015 was also low, with average cost at US$750 million, down from close to $1 billion in 2013.

Despite this negativity, Douglas-Westwood remains confident that the FPS sector will continue to play a large role in developing the oil and gas sector, remaining a crucial component of deepwater and marginal field development.

The lack of new orders will not affect capex (capital expenditure) until 2018, as a large number of FPS units are due to be installed in 2016 and 2017. However, following this influx, a lean period for the FPS industry is expected, due to the current lack of orders. This will begin in 2018, but will grow worse from 2019-2020, with the two years accounting for just 18% of total forecast spend. By contrast, 2017 alone is expected to account for almost 40%.

The outlook

To 2020, Douglas-Westwood expects capex of $58 billion on FPS units – an increase of 31% over the preceding five-year period. A total of 63 floating production units are forecast to be installed, a decrease from 70 in the hindcast. This demonstrates the escalation of costs in the FPS sector from 2012-2014 with a number of units such as the Ichthys floating production, storage and offloading (FPSO) vessel and floating production semisubmersibles (FPSS) and the Egina FPSO costing multi-billion dollars each.

FPSOs represent by far the largest segment of the market in terms of numbers (49 installations) and capex (80%). With units such as Ichthys and Appomattox, FPSS units will account for the second largest segment of capex (9%) with tension leg platforms third (8%). The smallest segment, spars, have a forecast capex of $1.2 billion, with only two installations over the forecast.

Global FPS installation capex by region 2011-2020. Source: Douglas-Westwood, Q2 World Floating Production Market Forecast 2016-2020.

Late in Latin America

Latin America accounts for 35% of both installations and capex, with all but one of these units being FPSOs. Brazil will dominate the region and will see 20 of the 22 expected installations in the region. The majority of these FPS units were ordered before 2014, with delays heavily impacting activity in the country. This has affected all of the FPSOs that are part of the “replicant hull” project – initially designed to reduce costs and time.

Eight converted FPSOs were ordered with identical hulls, however a number of issues including: inexperienced shipyards and late payments have meant that none are planned to be installed until 2017 – with some not expected until the 2020s. Petrobras has not ordered a unit in approximately two years. However, the contract for the Libra FPSO is expected to be awarded in Q3 this year.

Deepwater dominates Africa

Africa will be the second largest region, with forecast capex of $13 billion (22%). The vast majority of this spend will be in the first few years of the forecast, with capex in 2019–2020 limited to $200 million. The majority of FPS units in the region are large and in deepwater areas – typically resulting in high costs and long lead times. This is the driver of high capex in the early years of the forecast with units such as Kaombo (ordered in 2014) and Egina (ordered in 2013) due to be installed before 2019. Prior to the oil price collapse, East Africa was expected to develop into a major hub, however, expected units have been stalled or canceled due to low oil prices.

Asian interest wanes

Statoil’s Aasta Hansteen development – one of the few Spars being built.
Image from Statoil. 

In Douglas-Westwood’s 2015 forecast, Asia was the third largest market and was expected to see a substantial number of installations – second only to Latin America. The region is now expected to see capex of $5 billion from nine units – 10 less than the hindcast with a 40% reduction in capex. This is due to delays to large projects such as the IDD (Indonesia Deepwater Development) project in Indonesia and the cancellation of a number of smaller FPSO units.

European resurgence

By contrast, a resurgence of activity is expected in Western Europe. In the hindcast, the region saw capex of $3 billion from six installations. To 2020, the number of installations will double with spend increasing 180%. The increase in cost per vessel is due to a number of large, complex FPSOs for fields in the UK such as the Greater Catcher project and Dana Petroleum’s Western Isles Development. The Western Isles Development was initially expected onstream in 2015, but was delayed until 2017 – with the shipyard falling behind schedule due to the challenging design of the Sevan vessel.

FLNG flounders

Over the forecast period, a stormy ride is expected for the LNG industry, as the fall in natural gas prices limits investment in capital intensive liquefaction projects. Furthermore, the success of the pioneering projects will serve as a yardstick for stakeholder’s confidence. Douglas-Westwood expects a pause in investment and the sanctioning of FLNG projects due to the market downturn.

Douglas-Westwood forecasts the capex on floating liquefaction projects will be $16.7 billion in 2016-2022, as the technology begins to emerge as a viable solution for gas developments, with the first unit of its kind expected to commence commercial production in late 2016. This landmark FLNG liquefaction project is Petronas’ PFLNG Satu, which will be producing from the Kanowit gas field offshore Malaysia.

The long-awaited Shell Prelude FLNG unit, which was sanctioned in 2011, continues to experience further delays as a result of the complexity of the processing module. This unit is now expected to be in operation by 2018 – barring any further delays.

Other liquefaction vessels currently under construction and due to start-up before the end of 2018 include Perenco’s GoFLNG, and Exmar’s FLNG. However, Exmar is currently in talks with several parties regarding the final deployment of their unit. This is due to the termination of an initial agreement with Pacific Exploration & Production (PEP) to deploy the unit offshore Colombia. Other projects currently under construction but experiencing considerable delays include Ophir Energy’s Fortuna FLNG (OE: June 2016) and Petronas’ Rotan FLNG (PFLNG 2).

Many current FLNG projects have opted for newbuilds, however, the two proposed units in Africa, have opted for converted LNG carriers for fields offshore Cameroon and Equatorial Guinea. Africa will account for 49% of floating liquefaction expenditure over the forecast period. Yet, most of the East African projects – which account for majority of expenditure – are at an early stage.

Eni is expected to make its final investment decision on its $5 billion Coral South liquefaction vessel offshore Mozambique in 2017. The sustained industry downturn has resulted in substantial delays to capital intensive projects. This has particularly impacted developments in Australia, with delays to Browse, Scarborough and the Cash-Maple as project developers look to maximize profits for stakeholders.

Conclusions

The oil price collapse will have a significant impact over the forecast period for both the FPS and liquefaction markets, leading to substantially reduced expenditure than previously forecasted. Orders in 2015 were severely affected by the downturn and 2016 has continued this trend – though Douglas-Westwood does expect improvement in 2H 2016.

This improvement will lead to a growth in orders from projects that have been re-engineered or seen extensive cost cutting. One example is BP’s Mad Dog Phase 2 in the Gulf of Mexico, initially considered uncommercial at $110/bbl oil, but is expected to be sanctioned by the end of the year – demonstrating the extent to which costs have been reduced in the wake of the oil price collapse. If cost control continues, the FPS market may emerge as a leaner, refined sector. However, this will require operators and manufacturers to remember lessons currently being learned when oil prices recover.

Marginal, deepwater and remote fields will continue to be areas of focus for the exploration and production industry. Furthermore, FPS units 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.

This year will be a landmark year for the floating liquefaction industry, as the PFLNG-Satu enters commercial production. This will be the first in an early wave of FLNG projects before there is a pause in investment due to the currently depressed LNG price.

Despite this, in the decades ahead, natural gas will continue to play an increasingly important role in meeting the world’s energy demand. Aside from escalating gas demand, other key factors driving FLNG demand include technological advancement, monetization of stranded gas reserves, rising costs for the development of onshore terminals, shorter lead times, relocation flexibility and lower space requirements. Over the long-term, massive gas reserves discovered in remote regions such as the East African basin will continue to make the case for FLNG as development solutions.

Ben Wilby is an analyst at Douglas-Westwood and the author of the North Sea Decommissioning Market Forecast. In addition, he has authored Douglas-Westwood’s’ Subsea Hardware, FLNG and FPS reports. He holds a BA in history from the University of Chichester.