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Keeping the FPSO market afloat

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Oilfield Technology,

2017 might just turn out to be a positive year for floating production, storage and offloading (FPSO) operators. They suffered along with the rest of the upstream oil and gas industry since the downturn. Pre-downturn, the number of new vessels built or converted each year usually reached double digits. In 2016, the count stood at zero. However, there is reason for the FPSO industry to be optimistic.

Predictions of an upturn for the oil and gas industry are building momentum, and in a world of $60 oil the FPSO market might just find itself in a sweet spot. But it will be up to the FPSO operators to take advantage of that opportunity by running as tight a ship as possible – crucially with respect to manufacturing equipment.

A sinking feeling

Globally, upstream capex hit an all-time high of ~US$520 billion before the price crash in 2014, before tumbling to an estimated ~ US$200 billion in 2016 (according to McKinsey Energy Insights). FPSO orders dried up in 2015 and that drought extended into 2016, with no new FPSO contracts awarded.

As the oil price hovered around US$40-50/bbl, many deepwater projects were postponed or even scrapped. The FPSO market has felt the crunch along with everyone else.

Causes for optimism?

Yet there is building momentum in the industry that an upturn is around the corner.

OPEC has finally agreed on a production cut – and crucially key non-OPEC producing countries have too. It is hoped that this will ease the flood of supply that is suppressing prices, potentially even eating away at the stored surplus until the market balances again.

Though a return to the days of US$110-120/bbl oil seems like fantasy, something like US$60-70/bbl looks tantalisingly close to reality.

The entire upstream sector looks forward to that, but there are reasons to think it good news for the FPSO market in particular.

Firstly, FPSOs are ideal for producing marginal deep or ultra-deep fields where the economics of a fixed production platform simply don’t stack up. FPSOs don’t require pipelines or existing infrastructure to transfer output to shore, and they can be unmoored and redeployed elsewhere once a field has reached the end of its life. With most large economic fields already exploited, many of the industry’s new projects will be just such marginal fields.

Secondly, FPSOs typically require less capex and can be brought online far quicker than their fixed platform counterparts – meaning they’ll generate revenue and thus ROI sooner. Upgrading a vessel for redeployment to a similar area can take between seven and 12 months, and even a full FPSO conversion can be finished in 24. The possibility of future redeployment also boosts the potential ROI on initial project capex.

Some FPSO projects can achieve opex in the low $30s /bbl range or even the high US$20s /bbl, but the sweet spot seems to be an oil price of around US$60/bbl – an entirely feasible prospect in the very near future. Add these factors together, and it’s possible to see why Global Market Insights recently projected the FPSO market to be worth US$117 billion by 2024.

How to take advantage

To take full advantage of these conditions FPSO operators need to be mindful of both opex and capex costs. This isn’t a surprise – many are already making cost cuts, staffing reductions and maintenance deferrals.

One more benign place to look for savings though – that doesn’t impact on safety or livelihoods – is the initial manufacturing stage of equipment and elements. Capex can be reduced by an intelligent approach to the initial building or conversion of FPSO vessels.

To take just one aspect of the manufacturing process, look at valves. Cumulatively, valves can represent a major outlay and therefore are fertile ground for savings. However, valves are safety-critical elements of any upstream offshore project and, as a result, diligent operators often spare little expense ensuring they get the best valves for the job. As they should.

However, this same diligence often results in projects being over-engineered, requiring specifications far in excess of the actual demands of the application. Inevitably, this entails additional cost.

One way to avoid this unnecessary overspend is to eschew the traditional customer-supplier relationship in favour of one based on partnership. Specifications are often drawn up by generalist engineering teams, while specialist manufacturers can bring to bear decades of experience on similar projects to suggest places where, actually, the demands of the project in real-life are less than those set out on paper. Such a partner can help an intermediary contractor negotiate and redesign specifications with the final customer to great savings and no compromise on quality or safety.

Secondly, a more nuanced approach to origin of materials can deliver savings too. Often a certain country attains a superior or inferior reputation for particular materials. For example, some specifications for valves mandate that no materials may be used from India or China. This can lead to both overpaying for materials from places where prices have been inflated by reputation, and missing out on high quality materials at a lower price from elsewhere.

Once again, a partnership arrangement is key. An experienced supplier knows where proven quality materials can be found regardless of regional reputation, and can often demonstrate significant savings. For example, PJV recently supplied valves to the OCTP FPSO project in Ghana, generating significant savings of 20 per cent of the contract value by sourcing materials and manufacturing the valves from its own facilities in India.

Of course, this is an attitude that FPSO builders and operators should take beyond valves to all aspects of manufacturing. There is a place for commoditised order-fulfilment scenarios, but by and large maximum value will come from a partnership relationship with suppliers, allowing them to bring the benefit of their expertise to the table. In this way, FPSO operators look poised to not just stay afloat, but to thrive as we move into 2017 and the oil price outlook improves.

Written by James Moir, PJ Valves.

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