An overview of the FPS leasing market: Growth and changes

Damilola Odufuwa

January 15, 2014

The leasing of floating production system (FPS) units is one of the main factors affecting the sector’s supply. Over time, confidence in the ability of leasing contractors to deliver and operate facilities cost-effectively has increased, and the past decade has seen strong growth in the market for leased FPSs. Chartered vessels have been used to develop fields across a range of water depths worldwide.

Economic factors which affect the decisions to lease FPS units are:

•Application

•Expected field life

•Anticipated production rates

•Vessel day rates

The decision to lease an FPS unit can be seen as a trade-off between the low capital expenditure (capex) and the increased operational expenditure (opex) incurred from the leasing charges.

Leasing tends to be most attractive when developing a field for which a relatively short production life is expected. By chartering an FPS, operators can minimize the up-front capex burden, transferring part of the risk element onto the leasing contractor. Although field opex is increased, the extra expense will be born for a limited period and will be further offset by the reduced costs of abandonment at the end of the field life, as the responsibility for the cost of field abandonment and the removal of the FPS is held by the contractor rather than the operator.

Major leasing contractors

The top three contractors in the leasing market are SBM Offshore NV, BW Offshore Ltd., and MODEC International LLC (Fig. 1). Collectively, these contractors account for 38% of the leased fleet, a 3% rise from last year. Netherlands-based SBM Offshore is the largest FPS leasing company with 17 units. Most of SBM’s operational units are in Africa and Latin America – predominantly in the fields of Petrobras. The Brazilian company operates more leased FPS units than any other operator, with only one of the company’s 20 contracted units located outside Brazil.

Norway’s BW Offshore has 14 leased units on contract globally for a variety of operators. Of the 14 units, five are in West Africa and six in Latin America. This highlights the significance of these two regions in the offshore oil and gas market. All of BW Offshore’s leased units are floating production storage and offloading units (FPSOs) with one floating production, drilling, storage and offloading vessel (FPDSO). However, recent news from the FDPSO’s operator Murphy Oil has revealed plans to termi- nate the contract for the unit from May 1, 2014, due to severe reservoir problems on its Azurite Marine field in West Africa. Nonetheless, BW Offshore has recently bounced back from its Q3 loss last year and looks to expand its fleet and extend its existing contracts.

Japan’s MODEC is also poised for sig- nificant growth over the near term. The company has 11 units on contract, and two others under construction, which are expected to begin production by 2016. The company is currently focused on three geographic areas: Australia, Brazil and the Ivory Coast. Of the three leasing contractors, MODEC operates the most units in Australasia.

Overall, the utilization rate of the leased fleet currently stands at 87%, with much of the spare capacity being delivered by single-unit providers who may find it more difficult to secure new contracts than larger contractors.

Redeployment Opportunities

A notable feature of the FPS leasing market is that vessels are frequently redeployed to new fields once the leasing contract has expired. A short contract is one of the key drivers for selecting a leased vessel. Many redeployed units will operate for less than two years on a field before moving on. Once service has been completed, contractors will need to find employment for the vessel elsewhere and this almost invariably involves some form of upgrade or modification to the vessel’s capabilities. Redeployments enable contractors to prolong the working life of vessels, allowing them to derive maximum value from their assets.

This upgrade and redeployment strategy has been used mainly with conventional FPSOs, along with a smaller number of FPSs, rather than with tension-leg platforms and spars, as these units have lesser mobility. Spars, in particular, are challenging to transport unless the topsides and hulls are disconnected.

Technical aspects that impact a ves- sel’s redeployment potential relate to the topside process capability and the hull design, including storage capacity, oil production capacity, hull configuration, etc.

It is difficult to predict with certainty the future availability of FPS units. Field plans change in response to product prices, reservoir performance, plans for third-party tiebacks, etc. Nevertheless, according to Douglas- Westwood data from the major leas- ing contractors, 25 leased FPSOs are expected to end service by 2018, therefore making them candidates for rede- ployment (Fig. 2).

Issues in the supply chain affecting leasing

Despite strong and growing demand, the FPSO supply chain is under considerable strain. This important sector of the floaters’ market continues to be beset by severe project delays and cost overruns, which threaten the ability to meet forecast demand in the years ahead. Leasing contractors are among the most severely affected by the status quo, often taking on considerable project risk that has been outsourced by the field operators.

The lessors themselves are in a difficult position. Recent years have seen at least seven lessors file for bankruptcy or be acquired. At least the same number have seen severe constraints on their capacity to execute new projects while the appetite to take on new projects of the remaining main players, including those mentioned above, is increasingly limited. Simply examining the equity stakes in North Sea-based FPSO players shows a dramatic deterioration over the past six years.

With dependence on offshore and deepwater production growing, it is a source of considerable frustration that the industry continues to face such significant challenges with no obvious light at the end of the tunnel. A number of factors contribute to this situation and each present their own challenges as demand marches on.

Operating companies are usually well-shielded from the difficulties beneath them. Contract terms generally dictate that day rates commence with first oil production. When engineering, construction, or commissioning delays occur, they directly impact the contractors’ balance sheets. While frustrated by the delay to first oil, an indirect cost with investors demanding that barrels be brought to market quickly to maximize financial returns, the agreements in place are not typically adjusted.

The complexity of offshore production presents a unique challenge to the FPSO industry. Unlike drillships, the vessels remain in place for extended periods of time and must adjust to substantially different subsurface conditions over time. Although FPSO design is engineered in precise detail it is based on very limited knowledge of the field conditions, particularly in areas of extended production. As flow rates, hydrocarbon mix, and other factors become clearer, the premise for the specific designs can be wildly inaccurate, impacting the effectiveness of the vessel. Because each field development is unique, one-off designs have been employed, leading to a fleet of units with varying characteristics. This brings difficulties when redeployment is required and increases the need for conversions and re-conversions, often the most challenging engineering, procurement, and construction projects when unknown qualities and difficulties arise throughout the latter stages of develop- ment. This has led to cost overruns above the already-high industry average.

Complexity in the decision making process also challenges FPSO proj- ect execution, particularly with the increased oversight and engagement of field operators (compared to drilling, for example) who require decisions made at project level and at management level. The impact of oil company requirements is further exacerbated by the lack of institutional experience when it comes to FPSO procurement. Few operators have completed more than a handful of projects, each materially different from the last. This limits the build-up of knowledge and process internal to the operators, worsened still by the turnover of personnel in the industry. It’s particularly rare to find an FPSO team that has executed multiple projects at the same company.

Other challenges around the historic connection with the shipping industry, highly complex and immature regulation, and the sheer size of the investment required for each new project further burden the supply chain, limiting capacity and the effectiveness of FPSO production.

As confidence in leasing continues to grow, these and other serious issues will need to be addressed if the supply chain and leasing contractors are to meet demand over the next five years.OE

Damilola Odufuwa joined Douglas- Westwood as a researcher and primarily works on bespoke consultancy/ advisory projects, including due diligence analysis and publications. Damilola is the lead author of The World Floating Production Market Forecast, 2014-2018. Odufuwa graduated from the University of Kent with a degree in Financial Economics and a master’s degree in International Finance and Economic Development.