- There were 10 FPSO awards in 2019 compared with eight in 2018 with Brazilian and Guyanese awards driving the rebound in demand. We expect a sharp year-on-year drop for FPSO awards during 2020 because of lower oil prices, but proposed Brazilian projects with favorable break-even oil prices will lead to a few awards.
- SBM and MODEC should win market share in this downturn with operators focusing on their largest fields. Both leasers have the most experience in delivering large FPSOs while their standardized FPSOs such as Fast4Ward® and M350™ promise cost savings of up to 20% and lower execution risk.
- South Korea’s production is largely unaffected by COVID-19. Chinese yards have largely recovered from the COVID-19 ordeal by mid-April. Singaporean yards are still battling COVID-19. Reclaiming lost time would be more difficult for Singapore compared with China because of the preexisting tightness in manpower as a result of tighter foreign worker policies since 2016.
- Conditions of foreign worker dormitories will need to improve, and this will increase the yards’ manpower costs. This will hurt Singapore’s FPSO conversion market more than other markets as conversions especially those by leasers are more cost sensitive. Singapore’s cost differential with China will narrow in its disfavor.
- The yards’ bargaining power will fall in 2020, but they are unlikely to reduce their prices significantly. If this low market were to last into 2021, we can expect price competition increasing and greater fall in prices.
Key demand trends
There were 10 FPSO awards in 2019 compared with 8 in 2018 with Brazilian and Guyanese awards driving increased demand. Petrobras was the largest FPSO buyer in 2019 after ordering four FPSOs from SBM Offshore, MODEC, and Yinson. This recovery in Petrobras activity was supported by the return of SBM Offshore to the Brazilian market with SBM finalizing a leniency agreement with Brazilian regulators during 2018.
Low oil prices will reduce demand significantly for 2020. Firstly, proposed projects may be affected by capital budget cuts and tighter financing, even where underlying economics remain robust. History suggests that oil price volatility will hurt awards. Most operators will prefer to wait and see before awarding contracts. However, FPSO award activity in 2020–21 should be slightly higher than the last 2015–16 downturn because break-even costs are lower today compared with 2014 while Petrobras, the biggest buyer for FPSOs, is in a much better financial and political situation than in 2014.
We expect lower FPSO award activity in 2020 with proposed Brazilian and Guyanese FPSOs driving demand. The final investment decisions for planned Brazilian and Guyanese FPSOs will be the most closely watched demand milestones in 2020. Brazilian FPSO awards will be a key source of demand with Equinor and Petrobras eyeing big Brazilian FPSO projects, which should be less sensitive to short-term changes in oil prices.
Petrobras will maintain its role as the world’s largest FPSO buyer during the forecast period with the national oil company planning to buy or lease at least five more FPSOs for Brazilian fields over the 2020–21 period. Equinor will also be a key buyer during the forecast period with the operator planning for several FPSOs in Brazil (Bacalhau and Pão de Açucar), Canada (Bay du Nord), and Europe (Rosebank and Wisting).
Most of the proposed FPSO awards involve midsize projects, so conversion/relocation awards will make up 50–60% of the total FPSO awards over the next five years. In an era of volatile oil prices, lease awards should make up 60–70% of FPSO awards over the next five years as leasing an FPSO allows operators to reduce capital spending before first oil.
Key supply trends
COVID-19 has resulted in project delays as it did for the other offshore market segments. China’s yard production has mostly recovered by mid-April, while yards in Singapore are currently still battling with the COVID-19 outbreak among their foreign worker dormitories. It could take up to two months (until mid-June) before the Singaporean yards can resume full production.
Overall, newbuild capacity is set to increase over the next five years, mainly owing to new capacity from China. This results chiefly from the Chinese yards focusing more on offshore using their existing facilities as well as gaining competencies, which allows them to do more than before. The Chinese rise in the newbuild hull market is real, although most of the newbuild hulls ordered from China will mainly be used for leased or turnkey projects ordered by a turnkey contractor and not directly from an operator. The rise of China in hull newbuilding will inevitably benefit Singapore in the near term as end buyers will still prefer at least topsides integration work to be done in the more experienced yards in Singapore. In the longer term, China will gain the trust of buyers to undertake even more complex work like integration.
Despite overcapacity, capacity in the FPSO conversion market will continue to expand in the forecast period. Overcapacity will affect Singapore more than China; this is because buyers’ preferences are clear in the conversion market. South American projects will dominate FPSO demand in the near term. Consequently, Chinese yards’ utilization have benefited more than Singapore’s. Most of the Chinese yards are working close to capacity now. In Singapore, yard mergers in South Korea and China may reignite the possibility of a merger between Keppel O&M and Sembcorp Marine. Sembcorp Marine is likely to take the lead if it were to merge with Keppel O&M. The merger of the two companies are not without its obstacles, most of which are financial in nature; unlike the mergers in South Korea and China, which are strategic in nature, and may take longer to materialize.
MODEC should maintain or even grow project management capacity in 2020–21 because of their strong balance sheet, large backlog, and recurring cash flow from existing leases.
Supply chain implications
Capacity is generally available in South Korea, China, and Singapore. As a result of weak market conditions, the continuous recovery of the offshore market has been derailed. Demand will only begin to return more sustainably from 2021. Unchanged from previous cycles, we believe that buyers will rush to “secure capacity” and “secure good prices” once oil prices recover to a comfortable level. This will result in a spike in pent-up demand in 2022. Despite the rush for capacity that will begin in 2021/22, capacity will not be as tight as the previous rush for capacity in 2012 because this recovery will be weaker and capacity has increased in the last five years.
The yards’ bargaining power will fall in 2020, but they are unlikely to reduce their prices significantly. If this low market were to last into 2021, we can expect price competition increasing and a greater fall in prices. However, we need to stress that the yards are already making very thin margins and input unit costs have not increased enough since the crash of 2014 for buyers to extract significant price reductions from them. We again stress the importance of managing quantities (i.e., structural costs) to achieve the cost reductions needed for the entire project. This will give the buyer more mileage in terms of cost savings as well as contribute to building a sustainable supply chain. We also do not expect any major yards to close in the next five years as a result of the losses they have been making, but prolonged losses are unsustainable. Quality will suffer and eventually we might lose capacity and capability. This is a situation with no winners.
Conditions of foreign worker dormitories in Singapore will need to improve and this will increase the yards’ manpower costs. Singapore’s cost differential with China will narrow in its disfavor. This will hurt Singapore’s FPSO conversion market more than other markets as conversions especially those by leasers are more cost sensitive. A higher level of automation and the continued use of foreign labor while focusing on providing higher-value services (i.e., EPC) in its niche markets seem to be the way for Singapore to continue its eminence in the offshore market.
For leasers, a large backlog of FPSOs under construction will help major leasers such as SBM and MODEC to manage a demand slowdown during 2020. SBM and MODEC should also win market share in this downturn with operators focusing on their largest fields. Both leasers have the most experience in delivering large FPSOs while their standardized FPSOs such as Fast4Ward and M350 promise cost savings of up to 20% and lower execution risk. FPSO day rates should fall, but this will take some time and will not be as sharp as for oil prices. Leaser net margins have averaged below 5% over the last 10 years, so squeezing day rates is unlikely to yield material savings.
A weak global economy, low commodity prices, and an appreciating US dollar will lead to a drop in the cost of an FPSO newbuild project during 2020. Falling steel and other commodity prices will reduce equipment and material costs while an appreciating US dollar will reduce non-US-dollar salaries when measured in the US dollar.