Floater Sector Beginning to Regain Traction -- With More Than 70 Projects Awaiting the Market Upturn Signal

April 15, 2017

Jim McCaul -- Orders for production floaters have finally begun to flow.  The break came early this year when contracts for a production semi for use in the GOM and an FPSO for use off Malaysia were awarded.  These contracts ended a dry spell of orders that extended over eighteen months.  Then within the past month contracts were awarded for an FPSO and TLP for use in SE Asia.  And over the next few months an FLNG for offshore East Africa and several FPSO contracts for Brazil will be awarded.    

We believe these orders are the precursor of a takeoff in deepwater activity over the next several years.   The question is how steep the takeoff trajectory will be.   There are many deepwater projects in the planning queue awaiting a market signal to justify an investment decision.   But the industry downturn over the past two years has eroded available liquid resources for investment new projects.  And quick return shale project investment is drawing oil company capital resources from deepwater projects.    

Several recent positive and negative developments will set the future pace of turnaround in the deepwater market:  

   Positive developments

  • likelihood that the November US election results will accelerate US deepwater E&D – the new industry-friendly administration is cutting environmental barriers, opening new areas to E&D and plans tax cuts to encourage domestic energy development
  • faster pace of rebound in oil company capital spending -- ExxonMobil, BP, Hess have increased their capex budget for E&D in 2017, reflecting a more bullish near-term outlook for capital spending than apparent last October  

  Negative developments

  • downturn in expected oil prices – while spot crude prices have increased due to the OPEC cuts, the futures market in April sees Brent crude for delivery five years out trading 10% lower than the projected prices last October
  • continued inability of Petrobras to regain traction following the corruption scandal – opposition to local content flexibility has delayed procurement of new FPSOs, legal challenges have prevented the sale of assets to improve cash position
  • monetary policy tightening and portfolio divestiture by central banks -- higher cost of capital favors investment in low capex shale projects that produce oil in months from project start vs. deepwater projects that require years of major capex outlay before returns begin

Overall, the net impact of these changes is slightly negative – but the outlook for a ramp up in production floater orders remains bullish.  We now anticipate orders for 32 FPSOs and 8 FPUs over the 2017/21 time period – 2 fewer units than the WER October 2016 forecast.  The reduction is the result of several FPSO orders being pushed beyond the five year forecast window.  Similar to our October forecast, we continue to anticipate orders for 25 LNG regasification floaters and around 25 FSOs over the next five years.  

There is certainly no shortage of prospective deepwater projects.   In the March WER report we identify 73 FPSO/FPU projects that have potential to move to the development stage through end-2021.   They are all announced discoveries capable of moving to the EPC contracting stage over the next five years – i.e., a physical backlog of potential project starts.  The projects are segmented into three time periods for possible investment decision – within the next 18 months, next 18 to 36 months and 36 to 60 months out.  

But timing of the EPC contracting decision depends on the underlying business drivers – and at $50-$55 oil only a portion (~55%) are expected to proceed to a FID over the next five years.  

All of the above is described in detail in the latest WER report.

  For more information, please contact Jim McCaul at imassoc@msn.com or

Jean Vertucci at vertucci@worldenergyreports.com
November 2017 Monthly Floating Production Systems Report

November 2017 Monthly Floating Production Systems Report

As detailed in the November WER report, ordering activity for production floaters continues to accelerate. In mid-November Statoil selected Sembcorp for a $490 million contract to build the FPSO hull for the Johan Castberg field in the Barents Sea. This order brings the number of FPSO contracts to nine so far in 2017 – vs. three in 2015 and none in 2016. A second FPSO contract, for the North Sea Penguins field, is widely rumored to be near contract award, with Fluor as the EPC contractor.

Download

How Will the Shifting US Political Landscape Impact the Energy Business?

Video: How Will the Shifting US Political Landscape Impact the Energy Business?

Jim McCaul, founder of International Maritime Associates, discusses the incoming Trump administration and its potential impacts…

Floating Production News

Summit Signs Floating LNG Facility Contract

November 24, 2017

Summit LNG Terminal, a subsidiary of Summit Power International, signed a USD 100…

Liberian Registry, ICS Challenge Brazilian Court Ruling

November 24, 2017

The Liberian Registry, in cooperation with the International Chamber of Shipping (ICS)…

Trafigura to Develop Another Pakistan LNG Import Project

November 24, 2017

Swiss commodity trader Trafigura said it plans to develop its second liquefied natural…

Energy News

Argentina Wants more Gas from Bolivia

November 22, 2017

Argentina has asked neighbor Bolivia for more gas supply, Bolivia's Oil Minister said on Wednesday. Bolivia has demand for…

US Crude Stocks Fall; Big Draw at Cushing Hub

November 22, 2017

U.S. crude stocks fell last week as refineries hiked output, while gasoline stocks increased and distillate inventories rose…

Qatari Energy Minister Sees LNG Oversupply

November 22, 2017

Qatar's energy minister, Mohammed al-Sada, said on Wednesday he expects oversupply of liquefied natural gas in the coming…