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David Boggs Q&A: The Global Outlook for Floating Production Systems

David Boggs, Founder and Managing Director of Energy Maritime Associates, answers our questions regarding the FPS sector, covering topics including expected contract awards over the next five years, the outlook for currently idled assets, and the pros and cons of vessel standardisation


David Boggs will be speaking at the upcoming 3rd Annual OGFAmsterdam on 23rd & 24th March 2017 at The Marriott Hotel, Amsterdam.  Full information can be found on our website here, or you can secure your place here.



Hi David. EMA have recently released their 2017-2021 Floating Production Systems Outlook. Can you outline the report’s scope, as well as a few highlights of the report?


The FPS Outlook Report is the first issue of our annual series on Floating Production Systems, which has been in publication for 20 years.  This issue summarizes the current FPS market status, analyses the underlying market drivers, and includes 5-year forecasts for each type of unit (FPSO, FLNG, FSRU, FSO, TLP, Semi, Spar, and MOPU), with sub-forecasts by production capacity, hull type, geography and capex. The report also profiles the leading EPC and leasing companies and includes our 4th annual global FPS sentiment survey.

2015 and 2016 were challenging years for the floating production industry, but it appears the worst may be over. There were seven FPS awards in Q4 2016 - a level last seen in 2014 - before the oil price crash. Moreover, three of these awards were for FPSOs - the first FPSO orders in over 18 months.


 


























How much has the outlook for floating production changed as a result of the first signs of an oil price upturn? How long until new contracts start to become more frequent in the offshore production sector?



The rebound in oil prices has certainly had an impact, particularly to restore confidence of a more stable oil price above $45/bbl. However, equally significant to the increase in oil price has been the reduction in development and operating costs. Even before the oil price crash, a number of deepwater projects were not economic at $100+/bbl due to excessive costs. As our analysis shows, the offshore cost indexes exceeded the oil price index from mid-2015 until late 2016, during which time there were no FPSO awards. The few awards made in this period were mostly speculative orders for FSRUs which import LNG, with deliveries in 2019-2020. 

With the combination of cost decreases and rising oil prices, we believe that an upturn has begun, but it will be a gradual recovery for the FPS sector. Most oil companies still have cashflow constraints as well as a number of attractive investment opportunities, particularly onshore USA, and will pursue the best projects within their portfolios. Moreover, prices are likely to rise as the industry recovers, again threatening the viability of marginal projects.

Last year our low case forecast correctly predicted there would be three FPSO awards in 2016, and all in the latter half of the year. For 2017, our low case forecast is for six FPSO orders increasing to eight orders by 2021. Our mid and high case scenarios (if oil prices rise more quickly and costs are contained) project 6-10 FPSO awards this year, increasing over the next five years to average 10-14 FPSO awards annually. By comparison there were an average of 15.1 FPSOs ordered annually in the ten years from 2005-2014.


  
 

















What are your expectations for idled FPS units? How many are likely to see service again, and what’s the outlook for those that don’t?


There are currently 51 idle FPS units – 25 FPSOs, 10 Production Semis, 8 FSOs, 6 MOPUs, 1 Spar, and 1 FLNG. This is an increase of almost 100% from just one year ago, with 23 units coming available in 2016. However, some of these units have been idle since 2011. It is also important to note that another 38 FPSOs could come off contract in the next 2-3 years, further increasing the number of available units.

Depending on the specific FPS unit, it could be an idle asset or liability. Of these currently available units:

  • At least half will never be redeployed (particularly older and less capable production Semis, FPSOs, and FSOs). It may take some time as the book values are written down before the owners finally decide to scrap them.
  • About 20% (11 units: 8 FPSOs, 1 FLNG, 1 FPSO and 1 MOPU) are likely to receive new contracts. These units were have been built to higher specifications and have not exceeded their design life. With some modifications, they could economically operate on another field.
  • The remaining units could potentially be used again on marginal developments, depending largely on the oil price and the appetite of the FPSO owner to accept field risk.



 

You are speaking at OGFAmsterdam on the topic of FPSO standardisation. Could you outline the added value of standardisation for floating production contractors as well as E&P companies?



The goal of standardization for floating production systems is to reduce the overall cost and schedule by streamlining the design and fabrication process. A number of FPSO contractors and shipyards are promoting use of newbuilt hulls to standardize and reduce costs of offshore developments. Newbuilt FPSO hulls are prevalent for harsh environments in the North Sea, accounting for 75% of the current fleet. Outside of the North Sea, newbuildings are less prevalent, accounting for just over a quarter of the current fleet. Converting an oil tanker into an FPSO has been a preferred option for many projects mainly due to schedule, as well as cost savings in some cases.

Compared to current projects, standardization could reduce overall project schedules by at least 6-12 months. Cost savings would be achieved through repeatability and learning curve efficiencies, which would translate into less expensive floating production units in the future. In addition, standardization should reduce uncertainty during project execution, thereby improving confidence in the project’s delivery date and budget.  


 

 

 




















 

Source: SBM


 

Conversely, what are the limitations of standardisation?



Since floating production systems operate in a wide variety of locations with a large range of processing requirements, it is not possible to standardize everything. Areas that require particular customization include the mooring, as well as the topside processing equipment. The mooring must be designed to withstand the conditions at the exact site. Similarly, the topside process needs to be suitable for the specific characteristics for that field and reservoir.

During the boom years of 2005-2006, a number of contractors began building “generic” FPSOs on speculation. Some units were designed with turrets for extreme harsh environments, while most were spread moored for benign areas. In the end, none of these speculative units were successfully deployed as originally intended and most of the original owners went bankrupt. In order to meet the requirements of a specific field, extensive modifications were needed to the topsides of these “generic” FPSOs. In some cases, the mooring systems had to be completely changed. The lessons from these speculative FPSOs are a cautionary tale for the limitations of standardization.

This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.