Slow ahead

The floating production systems market remains challenging. Will cost-cutting measures made over the past two years help projects reach final investment decision in 2017? Infield’s Catarina Podevyn assesses the market.

Johan Castberg, Image from Aker Solutions.

Over the last two years the offshore sector experienced an overwhelmingly challenging period and the floating production systems (FPS) market has been no exception to this.

Throughout 2016, delays and re-tenders have been seen, as operators look to bring project break-evens in line with the new “lower for longer” price consensus. With the release of Infield’s latest Floating Production Systems Report to 2021, here we look at the key regions and projects expected to drive expenditure demand over the medium term and the continuing challenges faced across the sector.

Europe

The European region has been significantly affected by the collapse in world oil prices, with depressed market conditions impacting the most on those marginal fields with already borderline project economics. Indeed, even before the current market downturn, areas of the North Sea were seen as challenging in terms of project viability.

The delay of Chevron’s deepwater Rosebank project, at the end of 2013, can be seen as a tide-turning moment in the FPS market, with the following two years witnessing a raft of projects being taken back to the drawing board. Now, with break-even costs lowered across the sector, project sanction of key developments, such as the Johan Castberg FPSO (floating production, storage and offloading), are expected soon.

Indeed, the first phase of Johan Castberg is expected to be the standout investment project for the northwest Europe Continental Shelf and operator Statoil over the next five years. With investment projected at between US$5.85-7 billion (NOK 50-60 billion), the project is expected to generate much needed activity within the northern Norwegian supply-chain in particular. In early 2016, Aker Solutions was selected for the concept design study for the FPSO, which will be equipped to withstand the harsh environment of the Barents Sea.

Offshore UK, both the Premier-operated Catcher FPSO, to be a leased unit provided by BW Offshore, and Dana Petroleum’s Western Isles FPSO, are expected to come onstream during 2017. In 1H 2017, EnQuest’s Kraken development, which will use a Bumi Armada-leased FPSO, converted at Keppel’s Singapore shipyard, is also expected to enter production on the heavy oil field in East Shetland. As a result of delays in completing the FPSO conversion, Bumi Armada has agreed to pay a compensatory sum to the operator.

Although 2017 is expected to see a number of FPS developments within the UK North Sea enter production, with no project sanctions taking place during 2016, a considerable drop-off in development spend could be seen if market conditions fail to improve. In 2015, Alpha Petroleum, operator of the Cheviot development, decided to re-evaluate the original field development plan. The field could see investment from 2017 onward.

Petronas’ PFLNG Satu. Photo from Petronas.

Asia Pacific

FPS development within the Asia Pacific region has centered on the liquefied natural gas (LNG) export ambitions of Australia, with a boom in offshore construction taking place in recent years. Shell’s Prelude floating LNG (FLNG) facility is expected to enter production during 2017/18, although the Petronas’ FLNG Satu has now beaten the development, and won the accolade of the first FLNG to come onstream.

Source: Infield

However, as a result of the prevailing market conditions, operators active within the Asia Pacific have continued to be faced with difficult cost reduction decisions during 2016. The Hess-operated Equus development is the latest casualty; despite being brought back on the development agenda at the beginning of 2016. November 2016 saw Hess confirm that the project is being put back on hold, with the operator also closing its Perth office. Hess has undergone significant losses during the year, with the future of its activity within the region now uncertain.

Within Southeast Asia, Petronas has led the way in terms investment into new FPS technologies; the Petronas Satu FLNG facility can now hold the title as the first vessel of its type to enter production, with first gas achieved on the Kanowit field, Malaysia, in November 2016. Clocking some 18 million man hours in development and construction effort, the Satu FLNG facility will support the Malaysian government’s aims of unlocking more of its marginal and stranded gas fields.

However, while the success of Satu is without doubt a major milestone for the FPS sector, particularly in light of the backdrop of unprecedented market challenges, Petronas, like all major oil and gas companies, has also experienced significant challenges over the last two years. The second of Petronas’ FLNG facilities has now been delayed until 2020, which also comes as a blow to shipyard Samsung Heavy Industries (SHI) as South Korean shipbuilders continue to struggle with mounting debt burdens amid the low commodity price environment.

Africa

Africa’s FPS sector has traditionally been driven by West African developments, with international oil company Total commanding over 40% of total capex spend within the sector over the previous five-year period (2012-2016).

Large-scale projects continue offshore Angola, Nigeria and, to a lesser extent, Ghana – where Tullow’s TEN deepwater FPSO entered production in August 2016. However, industry attention has turned towards the prospective developments offshore East Africa, in particular Mozambique.

After government approval earlier in 2016, Eni has, as of November 2016, been given the green light to go ahead with the Coral South LNG project, with a final investment decision expected in 1H 2017. The project’s $5.5 billion FLNG facility is to be built by SHI, while BP recent signed an agreement to purchase the entire volume from Coral South over a 20-year period. Infield expects for the Coral South FLNG facility to hold the largest FPS capex demand offshore Africa during the next five years.

Elsewhere, Nigeria is expected to remain the second largest market for FPS development across the region, predominately driven by the completion of the Egina project and the next two potential FPSOs: Eni/Shell’s Zabazaba, which is mired in ownership issues, and the Bonga Southwest project, with the operator, Shell, expected to re-start the front-end engineering and design process on the project soon.

Offshore Angola, uncertainty remains surrounding Cobalt’s sale of its stakes in Blocks 20 and 21, which hold prospective projects including the pre-salt Cameia, Cameia Mound and Orca (GOLD) fields, where FPSO installations are the most likely development options, but their timing and ultimate operators are still in flux.

North America

Offshore North America, FPS development prospects are mixed. Within the Gulf of Mexico, BP’s Mad Dog Phase 2 development is now back on the table with a new semisubmersible concept favored over the originally planned Technip-designed spar. In March 2016, the project’s EPCI (engineering, procurement, construction and installation) re-tender was issued and is expected to benefit from the now lower cost environment.

In early December, BP sanctioned Mad Dog Phase 2, with first production expected in late 2021. The $9 billion project will include a new floating production platform with the capacity to produce up to 140,000 b/d from 14 production wells. Phase 2’s platform will be moored about 6mi to the southwest of the existing Mad Dog platform, in 4500ft water depth, some 190mi south of New Orleans. As OE went to press, BP’s partners in the project have yet to give their final investment decision, but are expected to do so.

Shell’s Appomattox is expected to be another key FPS project driving expenditure demand within the Gulf of Mexico over the period towards the end of the decade.

Kraken. Image from Bumi Armada.

Latin America and the Caribbean

Elsewhere, Petrobras continues to press ahead with its development ambitions, with some notable alterations; the standout project for the forthcoming timeframe, Libra, is now expected to utilize a leased FPSO facility, with the operator reissuing tenders for both the Libra and Sepia fields in August of 2016.

Outside of Brazil, ExxonMobil’s Liza discovery within the Stabroek Block offshore Guyana is expected to lead FPS demand, with contract awards expected to take place during 2017. Last year (2016) also saw further success for operator ExxonMobil with a second well confirming this highly prospective area and rewarding the operator for its counter-cyclical exploration strategy. Infield currently forecasts for expenditure demand on the two FPSO facilities originally slated for the development; an early production system, forecast to be installed in 2018, followed by a permanent FPSO installation in 2020 - to be now concentrated solely on the latter.

A key and highly anticipated development within the Latin America and Caribbean region had been Exmar’s Caribbean FLNG project, Colombia, which saw termination in March 2016. The facility’s construction at the Wison Heavy Industry shipyard in Nantong, China, has continued however, with commissioning taking place in July 2016. A number of possible destinations are rumored for the vessel, including Kitsault, Canada, and the possible development of Iran’s Kharg Island area, where it has been suggested up to two FLNG units may be installed relatively quickly, pending much needed foreign investment.

This year [2017] is expected to continue to see market-driven challenges across the global FPS sector. However, with breakeven costs across many prospective developments lowered over the previous two years, operators are now looking to take previously delayed projects forward. A number of final investment decisions are expected during the year, including Coral South, ExxonMobil’s Liza and the Statoil-operated Johan Castberg project.

Catarina Podevyn is a senior analyst at Infield Systems, part of Wood Mackenzie. She has managed all published content produced by Infield Systems and is a regular contributor to leading industry publications. Since joining Infield Systems in 2008, Catarina has been involved in numerous bespoke projects and has authored several publications within Infield Systems’ Global and Regional Perspectives series, including the Floating Production Systems Market Report, the Deep and Ultra-Deepwater Market Report and latest Subsea Market Report.