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Sun 20 Sep 2009 04:00 AM

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Deepwater drillers

The drive to develop marginal fields has seen floating production boom, and substantial growth is expected to 2013.

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Figure 1: Regional Shares of Identified FPS Prospects 2009-2013.
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Asia is set for exceptionally strong growth in the FPS deployment sector.
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Western Europe is set for a resurgence in deployments in 2009-2013.
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Figure 2: Global FPS Capex by Vessel Type 2009-2013.
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Figure 3: Regional Forecast Shares of FPS Capex 2009-13.
Deepwater drillers
Alex Pearce.
Deepwater drillers
Steve Robertson.


The drive to develop marginal fields has seen floating production boom, and substantial growth is expected to 2013.

This decade has seen the FPS sector face numerous challenges manifested in a variety of forms. At the turn of the decade the sector was hit by low oil prices, political and taxation changes and some high profile losses for the EPIC contractors.

The industry subsequently boomed in the years leading to 2008 as a result of several factors including high oil prices, the continuing move to deep waters, a drive to develop marginal fields and the desire by operators to ‘fast-track' developments.

Lead times for projects became extended as available capacity was consumed in the shipbuilding sector. Newbuild costs increased as a function of this scarcity and increased steel prices and labour rates, particularly at the project management level.

The turbulent nature of energy and financial markets that developed in the second half of 2008 has persisted into 2009 and has had a dramatic impact on the capital expenditure plans of all exploration and production companies.

After a sustained period of growth, the spending patterns of major oil companies are contracting as they respond to lower commodity prices, constrained cash flows and to challenges faced in the global credit market. The current economic climate is extremely difficult and E&P companies are having to constantly review and adjust their budget forecasts for offshore projects, with some delayed or even cancelled.

The oilfield equipment and services sector is inherently a capital and asset-intensive industry and its reliance on debt markets to fuel expansion has meant that a number of large companies are feeling the effects of global financial constraints.

Project financing for FPS projects has become more difficult and more expensive. Banks are increasingly working together on deals and taking smaller ticket sizes to minimise risk.

It is our view that the long-term prospects for the offshore and FPS sectors are good; we believe that despite reported falls in consumption of oil and refined products there is still the underlying likelihood of a major supply and demand imbalance when the economy recovers. Inadequate investment in the industry, coupled with a reduction in the number of the smaller supporting players providing equipment and services will only exacerbate the problem. A higher oil price environment seems inevitable.

Background

Recent years have seen a rapid expansion of the world's FPSO fleet, prompted in part by an increased demand for drilling units which has reduced the number of semi-submersible rigs available for conversion to production platforms.

International legislation (introduced largely in response to the Exxon Valdez disaster) which phases in requirements that tankers be fitted with double hulls offers further stimulus, since conversion of otherwise obsolete single-hull tankers into FPSOs enables profitable re-utilisation of depreciated assets.

FPSOs also have the advantages of allowing more flexible oil distribution and providing storage capacity for produced oil which can eliminate the need to install pipeline export networks. This factor is relevant off West Africa, for example, where offshore pipeline infrastructure is very limited and restricted to shallow waters.

Off Brazil, the existing offshore infrastructure is working close to capacity and the extreme water depths of new fields mean that costs of shuttle tanker offtake from FPSOs compare very favourably with the costs of installing additional export pipelines.

Turning to the prospects for individual regions, despite the drop in oil prices, the data indicate that growth is in store for the majority of the regional FPS fleets. Western Europe and Latin America have seen the most FPS deployments to date.

Western Europe is set for a period of resurgence 2009-2013, with 19 deployments in prospect, compared to four during the 2004-2008. Although many of its producing areas are now considered mature and significant new finds are becoming less frequent, the higher oil prices in recent years coupled with a longer term view of constrained supply has given a significant boost the region. Africa accounts for 22% of deployments and, totalling 30.

The identified prospects for North America indicate a slight increase in installations, with 16 compared to 15 completed during the 2004-2008 period. However, many projects in the US GoM have relatively short lead times and levels of activity could well exceed the prospects identified here. Asia is also set for strong growth, from 19 units 2004-2008, to 25 during 2009-2013.

The regional share of the 133 identified FPS prospects planned and possible for the 2009-2013 period is shown in figure 1. Combined, Africa and Asia account for almost 41% of these prospective installations, with North America and Latin America together accounting for another 31%.

Capex Forecast

It is important to note that in presenting our market forecasts, we have followed the convention whereby the date associated with each floater project relates to the platform's year of installation. In practice, of course, the contractual payments relating to the FPS units identified will often be made in a number of instalments, and will in most cases be spread over a number of years. For the sake of clarity and transparency, our forecasts do not attempt to reflect this situation; instead they focus on indicating the value of the FPS installations that have occurred or will occur in any particular year.

As can be seen in figure 2, FPSOs represent by far the largest segment of the market and account for 82% of the forecast Capex. FPSSs account for a further 8%, whilst the remaining 10% of expenditure is attributed to TLPs and Spars. The long-term trend to the end of the period is relatively flat at around $9 billion per year.

When looking at the value of orders (the ‘order year' parameter, shown in figure 2 as a yellow line) it is apparent that the peak in installations in 2013 will be preceded by a peak in orders between 2009 and 2010. Total FPS Capex forecast for the 2009-2013 period is expected to total almost $46 billion.

Within the FPSO segment, the exact mix of newbuilds, conversions and upgrades/redeployments that will be required to meet demand is impossible to determine precisely, though this will obviously have a strong effect on the Capex levels within the segment. Of the prospective units in the survey, just over half are expected to be conversions, and another third newbuilds, with the remaining units likely to be redeployments or without a particular defined development type as yet.

In our analysis we have identified four main drivers behind the growth within the FPS sector:

1. Continuing expansion in the use of subsea production technologies;

2. The industry's move into deep water areas;

3. The exploitation of more marginal fields;

4. Growing emphasis on ‘fast-track' and/or some phased developments

On the supply side, the influence of globalisation is already apparent but is likely to be somewhat offset by national insistence on local content in the delivery of floating production systems and the other components of offshore developments generally.

An active leasing market has emerged in the FPSO segment in particular - some 44% of the world's FPSO fleet, and over half of the North Sea fleet, is owned by leasing contractors. In recent years, contractors have picked up a number of significant project awards based on the deployment of converted vessels - predominantly tankers and semi-submersible drilling rigs. The redeployment of modified/upgraded vessels, especially in the leased FPSO segment, is set to remain important in meeting the growth in market demand.

Regional Markets

Together Africa and Latin America account for 49% of the 121 vessels forecast for installation over the 2009-2013 period with both forecast to have 23 installations. Asia is forecast for 24 installations, but only accounts for 17% of the expenditure. Other regions' installations are Western Europe (19), North America (15), Australasia (13), Eastern Europe & FSU (3) and Middle East (1).

In terms of market value, the world's three major deepwater regions - Africa, North America and Latin America - account for 59% of forecast global Capex. The relatively benign environments and shallow waters in which most of the FPS prospects in Asia are located enable cheaper FPS solutions to be adopted. Thus, although the region has 24 FPS units forecast for the period, its Capex ($7.7 billion) is on average lower per unit than other regions.

We believe that our market forecasts are conservative and that activity within the FPS sector over the period to 2013 could well exceed the levels presented here. There are two main reasons for this.

The first of these relates to the potential for new floater projects to emerge as a result of ongoing exploration activities, while the second relates to the lack of a defined development strategy for some known prospects due to the economic environment delaying some final investment decisions.

Further information is available at
www.dw-1.com

. The authors can be contacted via
publications@dw-1.com

or +44 1227 780999.

The Authors:

Alex Pearce

Alex is lead author of the "World Floating Production Report" and an analyst for Douglas-Westwood, contributing to the firm's commissioned research, commercial due diligence and published market studies in the energy sectors. Alex previously worked with various industries in the engineering sector, with clients ranging from Saudi Aramco to Bechtel.

Steve Robertson

Heading DWL's oil & gas research, Steve is editor of DWL's current range of market reports including ‘The World Deepwater Market Forecast', ‘The World LNG Market Report' and ‘The World Floating Production Market Report'. His market modelling activities include work on all facets of field development, the subsea production sector, floating production, LNG & GTL, etc.

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