Clouds gather over FPS marketBy Karen Boman
5/25/2009 1:58:19 PM GMT

HOUSTON, TEXAS: The global economic recession and decline in oil and natural gas prices have started to cast a shadow over offshore field development projects that involve floating production systems (FPSs).

Companies involved in the floating production, storage and offloading vessel (FPSO) market are reporting a slowdown in leasing activity for FPSOs. Meanwhile, Washington-based International Maritime Associates (IMA) reported in a recent study that the market for new floating production systems has frozen as a result of the abrupt downturn in the global economy.

While the near-term outlook looks cloudy for the FPS market, the forecast for increasing energy demand in the long term means that deepwater exploration and development will remain a major focus for exploration and production companies and provide an ongoing impetus for FPS development.

Discoveries

While only 38 discoveries made in water depths greater than 1,500 feet (457 m) have been reported this year according to data compiled by ODS-Petrodata, 81 discoveries made in greater than 1,500 feet (457 m) of water were announced in 2008. The 81 discoveries will provide ample development opportunities for operators in the future.

The majority of discoveries in greater than 1,500 feet (457 m) of water continue to be made in the U.S. Gulf of Mexico and offshore Brazil, and both remain significant hubs of FPS development activity. In 2008, 17 deepwater discoveries made in over 1,500 feet (457 m) in the U.S. Gulf were announced, while 18 made offshore Brazil in the same water depths were reported.

In 2009, six deepwater discoveries have been reported for both the U.S. Gulf and South America. These deepwater discoveries will mean continued demand and utilization of FPS systems in these regions. Deepwater activity in other regions also will generate more discoveries, and while an increasing number of projects will be developed subsea, FPS deployments will still grow in the long-term. Southeast Asia appears poised for continued growth as an area of interest for FPS deployments in the coming years, as do the Northwest Europe and Australia/New Zealand markets.

Market slowdown

This month, floating production specialist SBM Offshore reported that no new major FPSO project awards in the sector have been awarded over the last five months, which is a distinct slowdown in activity compared to the recent past.

The last major FPSO contract awarded was the Okha FPSO, a project for Woodside Energy Ltd. and the Cossack Wanaea Lambert Hermes (CWLH) joint venture that the company signed in December of last year.

Since then, BP has advised SBM that it will postpone the first FPSO award under the call off frame contract signed by BP Angola and SBM in August 2008.

“Despite this slow down in new contract awards, the level of sales and bidding activity for prospects remains high, with the company's main areas of focus being Brazil and West Africa,” SBM said.

SBM reports that the Frade FPSO has been hooked up offshore Brazil, and the Thunder Hawk platform has been hooked up in the U.S. Gulf . Production service operations at Thunder Hawk are expected to begin next month.

The first phase of the Sonangol/ SBM JV FPSO integrated yard investment in Angola will be completed by mid-year 2009. As a result of the postponement of the award of the first FPSO from BP Angola, the second phase has been delayed and will resume after the signature of an FPSO modules construction and integration contract. In the meantime, the yard will be busy with construction work for third party projects.

Newer projects under execution in the company's order backlog, including the Petrobras P-5 FPSO, EnCana MOPU, BP Skarv turret, Woodside CWLH FPSO and Petrobras' Cachalote FPSO, are proceeding according to plan.

Fred. Olsen Production ASA described the market for leased FPSO vessels following the global financial crisis as “very slow.” The first quarter of 2009 was the first time in several years that no contracts were awarded in the FPSO industry.

“The main reason was the lack of corporate and project financing opportunities in combination with project deferments as oil companies are re-evaluating development economics based on current oil price outlook and cost structures,” Fred. Olsen said earlier this year in its first quarter 2009 report.

The company noted that some of the contracts already awarded had been resurfacing or were being re-bid or reallocated as contractors failed to source necessary financing.

“There should still be some contract opportunities this year backed by more robust developments and sponsored by oil companies with relatively stronger balance sheets,” Fred. Olsen noted.

While Aker Floating Production ASA maintains a long-term positive outlook for the FPSO industry, low oil prices and the worldwide recession have had a negative effect on the industry, and the company expects the number of projects coming to the market will be few in 2009 and possibly in 2010 as well.

“There is continued interest from oil companies in FPSOs based upon conversion of the Aker Smart 2 and Smart 3 hulls. We continue having active dialogues with several of these companies,” the company reported.

Nexus Floating Production's Nexus 1 FPSO is scheduled to be delivered on June 20, but due to the delays and cancellations of several field development projects, the company will lay up the FPSO on delivery.

Nexus CEO Anders Holm said, “In its capacity as a new built vessel with harsh environment capabilities and flexible topside, the Nexus 1 FPSO should be well positioned in the market place. However, the short term prospects are limited and the current market is challenging.”

A letter of intent for Nexus 1 with Burgundy Global Exploration Corp. has not resulted in a contract, and will not do so unless funding for the Camago Malampaya Oil Leg project offshore the Philippines is secured.

The Nexus 2 FPSO project has been deferred, with delivery scheduled in November 2012. There is an option for the contract to be restarted at any point in the deferral period, or the contract may be terminated instead.

Nexus ordered the two FPSOs from Samsung Heavy Industries in South Korea. The topside and hull of FPSO No. 1 have been integrated and commissioning begins this month.

BW Offshore reports that the ongoing conversion of the FPSO BW Pioneer for Petrobras' Cascade & Chinook fields is continuing in line with expectations. The FPSO is expected to begin operations in 2010 in the U.S. Gulf. All other major FPS projects, including Total's Pazflor, Maersk's Peregrino and Neptune for Suez, are progressing according to plan.

Although affected by the short-term reduction in E&P activity, BW expects positive results in the short-term due to its current backlog of orders.

FPS demand to decline through 2011

While shipyards, engineering firms and other contractors should remain busy this year working on floating production projects, demand for new units is forecast to decrease through 2011, thanks to the decline oil and gas prices and the global credit crisis. However, demand is expected to begin climbing again after 2011, according to data compiled by ODS-Petrodata.

At present, 26 FPSs are under construction that have estimated installation dates in 2009, according to ODS-Petrodata's FPSbase online market intelligence tool. Sixteen FPSs are under construction for installation in 2010.