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FPSOs: robust prospects, primed for solid growth.

THE floating production market is on a strong upward surge, but there are still plenty of pitfalls looming for companies with their eyes on the prize.

All the evidence for the future of the floating production system (FPS) market supports the strong growth forecasts that abound. The industry's deepwater momentum continues to grow, while the offshore sector as a whole is increasing its overall share of global oil and gas production levels.

There is a virtual conveyor belt of FPSs getting the go ahead, coming onstream, or being identified as an operator's favoured solution. Already in 2013 the industry has seen major projects progress including the sta Hansteen spar project offshore Norway, for which operator Statoil submitted its plan for development and operation in January; BP's PSVM project offshore Angola, which began flowing first oil to its FPSO earlier this year; Petrobras' Sapinho field FPSO Cidade de Sao Paulo in Brazil's deep waters, which began flowing in January; and Inpex's Abadi floating LNG (FLNG) development, which moved into the Feed stage.

Statoil also unveiled its semisubmersible platform solution for its Skrugard development in the Barents Sea. Borders & Southern outlined its conceptual plans for an FPSO on the Darwin discovery offshore the Falkland Islands. Shell confirmed its conceptual plans for an FPSO on the Stones discovery in the US Gulf of Mexico (GoM) and a floating deepwater production hub on Appomattox.

ROBUST PROSPECTS When it comes to floating platforms, it is predominantly FPSOs that are taking the lion's share of the active market. In terms of total projects the FPSO is by far the favoured solution of offshore operators, making up 60 per cent of all current developments compared to the rival designs of semisubmersibles (19 per cent), tension-leg platforms (TLPs, 10 per cent), spars (7 per cent), and others.

The global floating production, storage and offloading (FPSO) market is replete with opportunities, with most projects viable at current oil price levels, says a FPSO sector update by Maybank Research.

The count for potential FPSO projects in the planning stage has risen to 154 now vs 124 in 2011 and 86 in 2008. Five FPSO contracts have been awarded in 2013 to date; the market anticipates the award of 16-26 new FPSO contracts in 2013 (2012: 14 units). Of the new FPSO orders, 60 per cent are for newbuilds, driven largely by Petrobras; 40 per cent are on a conversion basis. The split between leased vs owned FPSOs is about equal, says the research conducted by Maybank Research.

Based on existing demand only, the FPSO sector is primed for solid growth in the coming years with a compound annual growth rate in the 5 per cent to 7 per cent range, according to SBM Offshore. Over the next three years it has forecast that more than 60 FPSO project awards for both lease and sale units will be made for field developments globally. SBM itself is targeting around 20 of those, the company says in its latest strategic presentation.

UNPREDICTABLE BUSINESS The FPSO business is an unpredictable beast. Norwegian floater specialist BW Offshore has suffered sharply rising costs on its challenging conversion project on the FPSO P-63 facility destined for the deepwater Papa Terra heavy oil field offshore Brazil. It is currently forecasting $450 million to complete the engineering, procurement, and construction project, representing a substantial hike from the previous figure of $375 million.

The problems are well known and have mainly been linked to increased engineering and steel replacement; completion of boiler systems; increased construction, procurement, and commissioning costs; and higher yard costs associated with the extended schedule. BW says the project had been delayed "as a consequence of increased work scope compared with initial plans."

Final integration work on topsides modules on the converted FPSO is expected to be completed soon, however, before the facility is installed on the field to start operations for Petrobras by July.

Despite the company's experiences, optimism still reigns. The outlook for the energy market in general and the FPSO business in particular remains good, BW says in its recent results presentation, with the number of FPSOs expected to grow significantly. There is a large number of prospects and flat or slightly increasing demand in terms of contracts expected in the near term. The number of active competitors is still decreasing, and yard capacity also is very good due to lower ship building activity, the company adds.

POSITIVE FUNDAMENTALS Another market player, Fred Olsen Production, also flagged the positive FPSO market fundamentals as a result of high global energy demand, sustainable oil prices, and a more consolidated supply side in its latest results presentation.

However, new projects continue to be delayed. The company says that 2012 had the lowest number of FPSO lease contract awards since 2004, with only four new ones awarded and none awarded in 4Q 2012. Projects in West Africa remain very limited, but improved inquiry flow in the region and new mid-size discoveries by "bankable oil companies" toward year-end 2012 indicate a long-awaited recovery of this market. Brazil is still dominated by megaprojects, with high local content requirements, while Asia has a steady level of activity with medium and small projects.

The overall macro perspective remains the same, the company says:

* The FPSO lease market is solid with growth predicted;

* The number of contracts actually awarded continues to fall short of prognoses due to delays in awards; and

* Excluding the "giga-projects" of Brazil and West Africa, the market is slow but steady.

According to the latest data from analyst International Maritime Associates, there are 235 FPS projects in the planning stage around the world. More than a quarter (27 per cent) are in ultra-deep water of 1,500 m (4,921 ft) and beyond, with 15 per cent in water depths of 1,000 m to 1,500 m (3,281 ft to 4,921 ft) and 58 per cent in less than 1,000 m (3,281 ft). About 25 per cent of the projects are in the bidding or final design stage, with a further 171 in the planning or study phase. The company forecast up to 192 floater orders over the next five years, averaging between 26 and 38 annually.

A total of 73 floating production units are on order, with the backlog consisting of 44 FPSOs, seven production semisubmersibles, four TLPs, four spars, four FLNG units, and 10 floating storage and regasification units. In the backlog are 43 units using purpose-built hulls and 30 units based on converted tanker hulls.

The number of planned projects also is growing. The amount in the planning stage is 12 per cent higher than a year ago and 64 per cent higher than five years ago. In November 2011 there were 210 floating production projects in the planning stage, while a year earlier the figure was 194.

$91 BILLION FLOATER CAPEX The forecast expenditure figures for the FPS sector as a whole are huge. According to analyst Douglas-Westwood's latest report, between 2013 and 2017 a total of $91 billion in capex will be spent on these systems, representing an increase of 100 per cent over the preceding five-year period.

This growth is being driven by factors such as a larger proportion of newbuilds and conversions compared to redeployments, a greater degree of local content resulting in increased costs, and general offshore industry cost inflation.

Floating production is a versatile solution that is firmly established as a cost-effective method for developing oil and gas fields, and in water depths beyond 500 m (1,640 ft) it is one of the few options available to operators -- an increasingly important factor as production moves into deeper waters. Douglas-Westwood forecast that 63 per cent ($58 billion) of FPS market spend will be on deepwater projects.

FPSOs easily represent the largest segment of the market both in terms of numbers (94 installations) and forecast capex (80 per cent) over the 2013 to 2017 period. Semisubmersible production facilities account for the second largest capex segment of 10 per cent, followed by TLPs and then spars.

Driven by the industry's need to access more offshore reserves to meet energy demand, FPSs remain a key enabler to access these resources. Despite the shorter term issues, the long-term outlook for this dynamic sector is buoyant.

PRESSURE GROWING The pressure is growing on the relatively small number of floating production specialists to meet the challenges presented by the ever-more advanced technological demands of deepwater and ultra-deepwater projects and heightened environmental considerations.

There also are very real increased financial risks and challenging financing constraints for both leasing contractors and smaller E&P companies as a result of the global financial situation and the larger, more expensive, more complex facilities being required.

According to Maybank Research, while prospects for the global FPSO industry are healthy, costs are steadily creeping up. This is a growing concern, impacted by: (i) inflation and (ii) the requirement for local content (eg labour, equipment). Inflation is expected to rise by 5 per cent annually. At the same time, domestic regulations for local labour, products and services, which will single-handedly drive costs up fast, could affect the investment returns of an FPSO charter if not handled properly.

Credit spreads are at their lowest since 2011, implying that it is a good time to raise financing. Project financing is largely concentrated in Asia and financiers prefer to fund tier-1 shipyard and FPSO operators with sound balance sheets and experience. The industry acknowledges that the pool of competent, experienced staff is shrinking, and there is thus an urgent need to address the imbalances.

CONSOLIDATION The FPSO market has not fully recovered from 2008, when several companies went bust and were bought over; the industry anticipates further consolidation. Norwegian companies in particular are looking at exit strategies. A handful of Norwegian FPSO operators like BW Offshore are more cautious in accepting new orders due to financial constrains and tighter internal controls. Prospective buyers with sound balance sheets will likely capitalise on these opportunities. Pricing will dictate the pace of these M&As, research says.

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Publication:Oil & Gas News
Date:Jul 29, 2013
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