Finding slots for newbuild freight ships currently means accepting a lag time to delivery of several years. Many of the yards worldwide are working near or at full capacity, not only building or repairing vessels, but also on lucrative conversion work. The booming business of converting a generation of single hull tankers to floating production, storage and offloading vessels (FPSO) vessels is a key factor in generating these lead times to delivery, as experienced shipyards are spreading their workload between build and conversion work.
When oil is discovered offshore, in locations far removed from existing infrastructure, FPSO vessels frequently provide the best way to handle the crude. With sustained increases in the oil price, production from smaller, more isolated fields, has become an economically viable prospect.
Setting up permanent infrastructure for these fields, where production may be short lived, is not always an option, so FPSOs are used to retrieve, process and store the crude before collection by tanker, thus minimising the environmental footprint and cost of the operation.
These conditions in the exploration and production side have helped to generate huge demand for FPSOs around the world and are starting to have an impact on how field development is being planned, as well as adding to the work of shipyards.
Demand, coupled with the fact that several vessels under construction are not contracted, is marking a change in the FPSO market. Robert Moers, product manager - Floating Production, for ODS Petrodata, an independent research company, believes the industry is seeing unprecedented demand for FPSOs. The evidence is in the number of vessels being deployed on contract.
"The highest number of FPSO deployments in a single year is 15 - from 2005," says Moers. "In 2007, unless any already under construction slip, it will be 18 and all are contracted. In 2008 it will likely be 25, with 21 contracted, shattering the previous record mark for deployments in a single year. We're at the last possible phase where, if an operator moves quickly, it could still get a redeployment or one of the speculative builds to work in 2008."
These are significant numbers, given the scale of the world fleet. There are currently 120 FPSO vessels in the active fleet, seven of which are not under contract. A further 53 are under construction and Moers points out that 11 of those are speculative builds, not yet under contract.
"This is a new occurrence in terms of the FPSO market, where traditionally vessels were ordered by operators for specific fields, with the topsides tailored for that assignment," says Moers.
"What contractors are doing with speculative builds is taking a more generic approach and marketing a vessel in meantime; if they get a contract prior to delivery they can make field-specific modifications.
"Basically, any time you have speculative construction of vessels that easily cost in excess of US $100 million, it's a strong indication that there's a lot of demand. No operators have been frozen out yet, demand has always been filled, but there's a lead time for that demand."
If this trend continues there could come a point in the future where operators will have to rush to get a vessel to fit their needs, which is why the speculative new builds currently under construction may be in great demand.
"Contractors know that there are lots of field development projects out there in the planning phase, with no vessel contracted - 6 projects for 2009, 19 for 2010 and 17 for 2011 - all numbers which may grow and may need FPSOs," says Moers.
Relative to the existing fleet size, there is heavy growth coming in the next few years. The 53 new vessels will likely go to work on contracts of 5 to 15 years in length, so a flood of new equipment that goes unused in unlikely. As these new vessels enter service they will trigger a shift in the balance of ownership. Currently there is a rough 50-50 split between operators owning vessels and leasing them. According to ODS-Petrodata's research 80-90% of the new builds currently under construction will go to operators on a lease basis.
"So there's been a big shift, partly driven by the speculative construction, but we're also seeing operators who favoured owning coming into market wanting to lease," adds Moers.
The cost of an FPSO has also increased substantially since 2003. Busy yards, long delivery times for key equipment and shortages of skilled manpower are all contributing to rising costs. In the existing fleet, numbers will gradually deplete because of obsolescence and the high costs involved in preparing vessels to work in other fields.
"A number of these are owned by operators themselves and in a lot of those cases I don't think they will invest the money to deploy them into another field," says Moers. "They have been on location for a long time and would need significant investment to make them suitable for redeployment. So from that standpoint I'd expect a decent amount of attrition in terms of vessels that become available. Some will end up sold out of the active fleet, because of their age. We know of a vessel that's come off contract and is idle. It was first delivered as an FPSO in the 1980s, but was based on a tanker hull from 1959."
Looking to the future, Moers isolates speculative construction and contractor consolidation as two key influences on how the market could take shape.
"A number of those vessels that have been ordered speculatively are due for delivery in 12-18 months time," says Moers. "It will be interesting to see what type of contract they pick up and if some don't pick up a contract, what that may mean both for the FPSO market and the contractors themselves. Contractor consolidation is also going to play a much greater role."
While Moers says the market has been dominated by a couple of big players, the fact that it is a young market in raw numbers means it wouldn't take long for a new entrant to quickly gain position, consolidate with other small companies and become a significant player in the market. In the near future Moers predicts that by 2010 - based on a high-end scenario with conservative estimates - the working FPSO fleet could be 170 vessels, with a total fleet of over 200.
Moers thinks threats to the market may emerge in terms of pricing, though notes that the jack-up rig market grew used to high daily rates very quickly, and that an overall slow-down will be due to the industry being stretched in terms of yard space and availability of contractors.
Shipyards around the world, particularly in Asia, are full of FPSO work. Drydocks World in Dubai also has a number of former tankers in its yard for conversion. The company has set itself the target of generating the same level of turnover from conversion work as it does from repairs and new builds.
To cope with the scale of the work and the sheer size of the tankers to be converted, the company has recently put in 650m of quay wall to service the VLCCs undergoing conversion. This reflects a global trend for yard expansion.
"Every major shipyard has expansion on its books," concludes Moers.