GROUNDBREAKINGFPSOs, ON thE VERGE OF SOmEthINGBIG

Shockwaves after shockwaves have hit the global oil & gas industry lately after a series of game-changing events took place in different parts of the world. In just a span of a few years, a lot have happened. the world has witnessed an unprecedented confluence of events that is now known as the Arab Spring, which underscored the importance of keeping strategic reserves in cases of unexpected and significant supply disruptions.

the earthquake and tsunami that hit Japan was one of the worst humanitarian disaster in history and one that created serious concerns in energy production in Japan and the rest of the world as it is one of the major producers of nuclear power and other fuels. Oil prices hit an all-time record high. meanwhile in the US, the shale gas revolution drove the natural gas prices lower, resulting in record discounts to oil. EU is backing this revolution and seeks further energy integration with the US.

And yet, all of these didnt stop global energy consumption from growing. According to the latest BP Statistical Review of World Energy (June 2012), global energy consumption grew by 2.5% in 2011. the report further added that once again, the emerging economies accounted for all of the net growth in energy consumption.

As the emerging economies continue to grow at such breakneck speed, demand for energy, and therefore oil, is expected to follow. China alone accounts for 71% of global energy consumption growth and by 2030, its foreign oil dependence is expected to rise to as much as 10 times its current level. Oil demand has resulted in the rapid depletion of easily available (or accessible) oil and major operators are now beefing up their investments in cost-effective, mature solutions that can serve the needs of the present and foreseeable future. And all roads lead to FPSO.

GROUNDBREAKINGFPSOS, ON thE VERGE OF SOmEthING BIG

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As the emerging economies continue to grow at such breakneck speed, demand for energy, and therefore oil, is expected to follow. China alone accounts for 71% of global energy consumption growth and by 2030, its foreign oil dependence is expected to rise to as much as 10 times its current level.

Despite the economic uncertainty in capital markets, the massive growth in the FPSO sector is set to continue. this not only points to an immense amount of growth in the sector but possibly potential competition as well. to further understand the market, the FPSO Network organised a study with 158 companies in the FPSO sector who are willing to share their thoughts on the trends in the floating, production, storage and offloading sector.

Of the 158 people who took part in the survey, 55.8 % believe that the massive growth in oil FPSOs is set to continue. however, a significant number of respondents believe FLNG will somehow steal the limelight due to the emergence of natural gas power generation and with many countries attempting to diversify their energy supply.

the country that seems to be driving LNG demand is Japan. Since the massive earthquake and ensuing tsunami that rocked the country in march 2011, Japan has turned away from nuclear and focused its power generation efforts on natural gas. A bold move, since the countrys electric, power and gas companies have been criticized in Japan for allegedly buying the most expensive LNG in the world, especially after increases of imports in 2011 and wider public awareness of less expensive gas in other regions of the world, especially in North America.

When asked what part of the FPSO chain poses the biggest bottleneck, respondents felt that the two biggest issues were subcontractor management and understanding field specifications accurately. With 32.5% and 29.1% of the respective votes, many in the sector think that these are the pressing issues that need to be overcome.

FPSOS ROBUSt FUtURE

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to further understand the market, the FPSO Network organised a study with 158 companies in the FPSO sector who are willing to share their thoughts on the trends in the floating, production, storage and offloading sector.

the massive growth in oil FPSOsis set to continue

FLNG will steal the limelight given that natural gas is the next big thing

It is time for unconventional resources to usurp the conventional ones

Others

55.8%35.2%

4.5%4.5%

A significant number of respondents believe that oil operators prefer to lease FPSOs rather than own and operate one. With 69% of the respondents believing that this is the case.

the rationale for using a leased versus owned FPSO is relatively simple, explains Dr. Roger Knight, from Infield Systems.

the most important rationale driving the decision to buy as oppose to lease, comes from the particular nature of the field itself, how this relates to solutions and associated charges presented within the leased market, and whether the operator is able to fund the capital required to own an FPSO. to use a home buying analogy, should an individual have a specific wish list for their new property, for example wanting 10 bedrooms and a revolving roof, this is unlikely to be found on the rental market. however, if the individual has enough access to capital, then they will be a then they will be able to fund this ambitious project themselves, he said.

Although many FPSO vendors may prefer the leased model instead of the own and operate model, financing would seem to be the major stumbling block that prevents this from happening. the leased model is attractive when there is plenty of liquidity in the market, simply because operators will be able to access a lot of debt and be able to leverage the project and the pricing on the debt was very low.

With a high leverage and low cost of finance the return of investment would be very high, the tables have turned however and banks tend to extend less financing and with leverage being lower the cost of debt has increased, making it difficult to get a high return. therefore in this environment, oil majors look at the cost involved when it comes to the rate over a specific period of time and realize that it may perhaps be better to own the asset.

Ultimately determining whether to lease or own an FPSO boils down to the timescale of the field and how long the asset will be operating in the field. If the field is only going to last 5 years, and investment of $100 million is not required, and using something that is readily available would probably be better than building something from scratch.

LEASED VS OwNED

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Although many FPSO vendors may prefer the leased model instead of the own and operate model, financing would seem to be the major stumbling block that prevents this from happening.

the massive growth in oil FPSOs is set to continue

LNG FPSOs will steal the limelight given that natural gas is the next big thing

32.1%

67.9%

Our research also revealed that the industry is continuing to actively invest in mooring and riser systems. In fact, 45% of our respondents will be actively investing in mooring and riser systems, only 27% of the respondents are investing in turbines, compressors and engines. While 13.9% and 11.3% of the respondents have claimed that they will be spending on water treatment and Injection as well as power automation respectively.

For deep-water fields, the percentage of the total development costs is below the water line, an FPSO is a large investment but the installation costs, the risers, the pipelines and the sub-sea trees is now more than the actual FPSO. When placing pipelines into deep-water, the equipment that will go onto the seabed will cost more and the expertise is rarer so ultimately the deeper you go the more expensive the project will cost.

INVEStmENt ALLOcAtION

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%

50

11.5%

Power/automation

turbines, compressors and engines

mooring and riser systems

Water treatment /

injection

Coating

26.3%

45.1%

14.1%

3.0%

40

30

20

10

0

So how will this supposed FPSO growth materialise? Jerry Joynson, Director, Proposals & technology Development at SBm Offshore, explains the evolving dynamics in the FPSO industry. Onshore oil production is in slow decline yet world oil demand is increasing. the numbers are significant, with an increase in offshore production from 21 to 27 million b/d between 2008 and 2013. this trend is continuing, which adds up to a lot of new facilities required. the major growth opportunity is in deeper water which guarantees a healthy demand for floating production solutions for quite some time. And around 60% of those are predicted to be FPSO projects, both new-build and conversions,he said.

this can only mean an upturn in fortunes for the FPSO sector as Jason Waldie, Associate Director for Douglas Westwood, explains that FPSO projects are returning to pre-2008 level and a turn of fortunes for the sector is imminent.

there was a material decrease in orders since 2009, but it seems that market has bottomed last year and there is an increasing share of the market which is being leased to FPSO s. the deep water horizon disaster is unlikely to impact the FPSO sector as the Gulf of mexico accounts for a small part of the market and in the long term it seems as though growth will return as the FPSO market is set to reach US$16 billion by 2014, explained Waldie who is responsible for the firms activities throughout the Asia Pacific region.

Joynson shares Waldies sentiment, by outlining the growth of the SBm over the past decade. twelve years ago SBm only had two large FPSOs in operation, Kuito and Espadarte. today we have 15 leased facilities in operation, with another four close to delivery. Our competitors have seen smaller but significant growth as well. tOtAL now has at least six large new-build FPSO s in operation, and Petrobras has a dozen, with many more planned. And there are other companies with valuable experience too, Joynson explains.

Douglas-Westwood (DW) forecasts that between 2013 and 2017, $91bn will be spent on floating production systems (FPS) an increase of 100% over the preceding five-year period.

the current global energy outlook juxtaposed with the groundbreaking developments in the FPSO sector only proves the major players in this industry are on the verge of a game-changing moment. the next few years could prove to be a pivotal moment in all of this. Recent maybank IB Research on the FPSO market described the sector as Lively and Vibrant. According to the report:

FPSO utilisation is high, and idle units are scant. Orders are on the rise as the number of projects requiring FPSO solutions pick up. these positive indicators reflect stronger global E&P spending as the search for hydrocarbon resources continues, sustained by robust oil prices and energy security needs.

IS GROwth FOR REAL?

FPSOS, ON thE VERGE OF SOmEthING BIG

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A similar research by IhS Petrodata outlines the latest near term opportunities within the FPSO sector:

NEAR tERm OPPORtUNItIES

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No. of FPSOs

25

20

15

10

5

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

4

6

11 16

12

11

2

2

8

3

1

5

4

6

10

7

8

24 3

9

1

3

3

3

5

3

2

2

1

No. of FPSOs

25

20

15

10

5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YtD

2013 YtD

0

7

14 17

2

11

4

6

6

8

1

11

4

8

13

1

7

6

3

3

6

5

2

3

FPSO cONtRAct AwARDS (AS OF mAy 15, 2013):

LEASE VS. OwNED (AS OF mAy 15, 2013):

Conversions

Lease

Newbuilds

Own

Relocations

Eight Petrobras-owned newbuilds

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THE 14TH ANNUAL

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No. of FPSOs

25

20

15

10

5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YtD0

4

10

1

1

6

5

6

1

12

2

14

5

18

2

6

5

3

1

1 1 1

1

1

1 32

6

31

1

4 4 24

2

5

5

1

4

4

2

3

2

FPSO cONtRAct AwARDS (AS OF mAy 15, 2013):

Africa

Asia-Pacific

Central America

Europe

med. & middle East

North America

Russia & Caspian

South America

typically the banks and the project finance teams, have been deeply involved in FPSO financing, and these assets have been typically financed under asset based financing schemes. When it comes to FPSO financing there are typically very large transactions where there will be 5 15 banks involved in the financing of an FPSO. What is very well known is that financial institutions have been weakened by the recent financial crisis which has spilt over to Europe and is deeply affecting long-term financing capacity.

In the past, European banks have relied on the money markets in the United States, to refinance themselves in U.S dollars, but after 2008, this market disappeared. So the trend in Europe today is for banks to reduce their activities in U.S dollars especially for long term financing. For FPSO players, there will be a constraint on financing because banks are extending their project finance in Euros but for the players who are involved in U.S dollars, the banks are exiting the market creating a gap that will need to be filled by alternate financing schemes. the most recent trend to address this gap is the bond markets; there is also an opportunity for the export credit agencies (ECAs) in terms of funding, which we have noticed with large scale projects in Australia.

FPSO FINANcING

Charting the future of the FPSO community, leading vessel owners, oil operators, EPCs, subcontractors and financiers will gather at the 14th Annual FPSO Congress 2013 to be held on 16-19 September 2013 at mAX Atria in Singapore. Important figures including maarten Van Aller, COO, Petrofac Floating Production, Jon Dunstan, COO, Emas Production, thyl Kint, CtO, Bw Offshore, Jose Luis Rodrigues Da Cunha, P55 Construction manager, Petrobras, martijn Dekker, Field Development manager, Shell and hassan Basma, CEO, Bumi Armada will come together in this rare and important gathering.

the FPSO Congress provides an excellent opportunity to discuss current issues and challenges that the industry faces, and importantly potential solutions. the Congress also gives a valuable update on industry dynamics, says David mcLean, COO, mAERSK FPSOs.

As the world turns a page in its quest for global energy sustainability, the FPSO community needs to step up to the plate as it is bound to play a significant role in all of these. With big changes come big rewards.

FPSO cONGRESS: thE LARGESt GAthERING OF FPSO cOmmUNIty

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Disclaimer Please note that we do all we can to ensure accuracy and timeliness of the information presented herein but errors may still understandably occur in some cases. If you believe that a serious inaccuracy has been made, please email darwin.mariano@iqpc.com.sg. this article is provided for information purposes only. IQPC accepts no responsibility whatsoever for any direct or indirect losses arising from the use of this report or its contents.

Sources of Information: the World Floating Production market Forecast 2013-2017 by Douglas Westwood maybank IB Research Sector Update

FPSO data by IhS Petrodata FPSO Industry trends by FPSO Network

Sources of Image:Copyrighted by Prosafe

CRItICAL KEYNOtE INSIGhtS FROm LEADING VESSEL OWNERS, OIL OPERAtORS, EPCS, SUBCONtRACtORS AND FINANCIERS

hASSAN BASmA, CEO,

BUmI ARmADA

mAARtEN VAN ALLER, COO, PEtROFAc FLOAtING PRODUctION

thyL KINt, CtO, Bw OFFShORE

JON DUNStAN, COO, EmAS OFFShORE

JOSE LUIS RODRIGUES DA cUNhA, P55 CONStRUCtION mANAGER, PEtROBRAS

mARtIJN DEKKER, FIELD DEVELOPmENt mANAGER, ShELL