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 News Release
  December 17, 2008

 

Impact of Financial Turmoil and $100 Oil Price Drop on
Floating Production Projects Likely to be Uneven and Short Term

 

The recent $100 oil price drop, closure of financing windows and general aversion to investment risk will have a near term impact on new floater projects. But the impact will be uneven and short term. This is the conclusion of a new study by IMA issued in mid-December. 

NEAR TERM IMPACT

To assess the short term impact of the current turmoil, the market really needs to be viewed in four sub-segments: large projects, Brazil, marginal projects and speculative units. Each has its own unique outlook.

Large projects — Large floater projects planned by major operators offshore West Africa, in the Gulf of Mexico and elsewhere should be fairly well insulated from the current turmoil. Floater projects such as Clov offshore Nigeria, Block 32 off Angola, Jack/St. Malo in the GOM are likely to move forward in the current enviroment. These projects have a long gestation period. They are part of an investment portfolio designed to provide future output to replace depleting reserves. Investment is justified on the basis of a long term economic outlook. It is unlikley that a short term oil price collapse is going to jeopardize the project's long term commercial viability. Of course, if the price collapse begins to look like a long term situation, the invetsment decision could be delayed or possibly shelved. But we don't see this as a realistic possibilty. We believe the current price collapse is a short term phenomenon - a belief shared by the oil futures market and many analysts.

Brazil — This market segment should also be relatively insulated from current short term conditions. Brazil pre-salt finds are a major new source of oil and we see no slowdown in efforts to exploit this major resource. Some analysts are questioning the feasibilty of developing the pre-salt finds off Brazil in the current pricing enviroment. They believe development of projects like Tupi requires $50 to $70 oil to breakeven, which of course is less than the current spot price. We believe Petrobas and other concession holders in Brazil will proceed aggresively with their pre-salt projects, with the longer term economics in view. Other analysts question the financing capacity of Petrobas to undertake the investment, given its free cash flow and indebtedness capacity. We believe that external financing will flow into Brazil as necessary to support the funding needs for pre-salt development. China, for example, is said to be ready to invest $10 billion to help develop Brazil's new oil fields. But there could be some slowdown in developing heavy oil finds in the current pricing enviroment, which might delay new projects such as Shell's Olivia discovery on BS-4. Also, local sourcing requirements that have been imposed may need to be loosened in order to reduce capex for new projects. Among other things, this could jeopardize plans to build FPSO hulls locally.

Marginal projects — Floater projects involving small reservoirs and small operators are a different matter. They are being hammered by the current situation. A combination of oil prices 30 to 35 percent of prices four months ago and inability to access new capital has put the brakes on new projects. Small planned projects in the North Sea, Southeast Asia/Pacific and West Africa are particularly susceptible to the current pricing and financing conditions. Projects such as Huntington and Kraken in the North Sea, Ande Ande Lumut in Indonesia, Malampaya in the Philippines and Ebok in Nigeria are in this category. It's not surprising that tentative agreements for three FPSOs that recently failed to convert to firm contracts have been marginal projects in SEA/Pacific (Crux and BMG) and North Sea (Athena).

Speculative units — Until mid-2006 few production floaters were ordered without already having a field contract. Then a spurt of speculative contracts was placed, quickly producing a backlog of a dozen speculative production floaters. With the price collapse and financing windows closed, some of these projects have encountered serious headwind. Contracts for three speculatively ordered FPSOs have been either recently cancelled or are likely to be cancelled. We see further difficulty in this portion of the market. Sevan has two (maybe three) speculative FPSOs on order and the company's ability to access financing may be limited by the current liquidity constraints. FPSOcean, which has had to cancel its second speculative FPSO, still needs to raise at least $70 million financing to complete the first unit. It is possible that the speculative units still on order could be soaked up by Petrobas for use offshore Brazil. Petrobas may be in the market for any production unit capable of use on its pre-salt finds. But certainly we do not see for the foreseeable future any further speculative orders for FPSOs until the market clears.

THE LONG TERM VIEW

Nothing really has changed. Demand for oil is expected to grow at a strong pace over the next several decades, supply will become increasingly tight and oil price pressures will grow.

The IEA in its 2008 World Energy Outlook forecasts demand for oil will increase from 85 mb/d now to 106 mb/d in 2030. While this is 10 mb/d less growth than IEA projected last year, it is still 21 mb/d more than what is now consumed. The U.S. Energy Department, in its 2008 International Energy Outlook, forecasts world liquid fuels consumption will increase to 112.5 million barrels oil equivalent per day by 2030, an increase of around 25 million boe/d over the next 22 years. OPEC in its 2008 World Oil Outlook, predicts world oil demand to grow to 113.3 mb/d by 2030, an increase of around 27 mb/d. ExxonMobil sees world energy demand growing to the equivalent of 310 mboe/d in 2030 vs. 229 mboe/d in 2005.

New supplies of oil are needed to meet this growing demand and offset depleting field production. As the IEA points out, even if oil demand were to remain flat to 2030, 45 mb/d of new field production would be needed to offset depleting oil fields. Just this replacement production represents four times the current capacity of Saudi Arabia. And adding this production will be in the context of an observed oil field decline rate that dates back 40+ years. The average production weighted decline rate of worldwide oil fields is now around 6.7 percent and is expected to grow to 8.6 percent in 2030 as production shifts to smaller oil fields.

Price pressures will inevitably result from the divergence in demand and supply. There is no question that the price of oil will increase in the long term. Finding and lifting costs will grow with the need to tap more difficult sources of new oil. Some evidence of this is found in the futures market. While the spot price as of mid-December is $40-45, the futures market has placed a price of $74 on crude for delivery five years out, $80 for delivery nine years out.

So in the long view, there is a widely held consensus that an increasingly pressing need exists to find new oil sources. There is also consensus that the deepwater frontier represents one of the best opportunities for finding new large sources of oil. This the big picture that should not be overlooked in the current turmoil.

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Over the past 12 years IMA has published more than 35 reports on the floating production sector. The IMA reports have become a widely used reference source for companies operating, designing, building and financing floating production systems. In each report IMA identifies upcoming floater projects, evaluates developments impacting future floater system requirements and tracks industry market share.


contact Jim McCaul

tel:  1-832-203-5622 (Houston)
      1-202-415-8501 (Washington)

email:  imaassoc@msn.com