1. 60 } MALAYSIAN BUSINESS z JULY 16, 2011
Into the Deep
The new frontiers in oil and gas exploration and production is deepwater or ultra deepwater.
Towards this end, Floating Production Storage and Offloading or FPSO vessels come in
handy. In this first of a two-part series, we take a look.
INDUSTRY
BY PRIMILA EDWARD
T
HE new frontiers in oil
and gas exploration and
production is deepwater
(1,000 meters) or ultra
deepwater, where there has
been an increase of 59.2% in
five years from 103 in 2004
to 164 in 2009 of offshore discoveries.
This trend is driven by lack of new large
onshore discoveries and restricted access
to new business opportunities in major oil
and gas producing countries globally (see
Diagram 1).
As Floating Production Storage and
Offloading (FPSO) vessels can be easily
moored in shallow, deep and ultra-deep
waters, they are ideal for deepwater
exploration and production. Further,
they can operate in calm waters or can
be designed to withstand harsh natural
conditions in the sea like typhoons and
hurricanes.
US$m
25,000
20,000
15,000
10,000
5,000
0
Australasia
Mid East and Casp
Asia
Latin America
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Actual year of spend
SOURCE: GLOBAL PERSPECTIVES FLOATING PRODUCTION MARKET UPDATE 2009/13
DIAGRAM 1: GIANT FLOATING PRODUCTION CAPEX (US)
SPEND BY REGION 2004-2013
FLOATING PRODUCTION CAPEX TO EXCEED $85 BILLION 2009-2013
Africa
Europe
North America

2. { 61MALAYSIAN BUSINESS z JULY 16, 2011
FPSOs are easily disconnected in
case of imminent danger due to storms,
typhoons or iceberg threats, and sailed
to safe locations. They are also said to be
economical for producing deepwater and/
or stranded fields and fields with relatively
low reserves. Once production from a
well is over, the FPSO can be moved to
a different location. Both the set-up time
and cost of an FPSO is generally less than
a fixed platform.
However, as FPSO projects are long-
term projects, making investment decisions
based on short-term prices of oil and gas
may be difficult. Moreover, whenever there is
a financial crisis, there is a tightening of rules
and lending structure which can lead to an
investment crunch for the FPSO market
However, over the last few years, the
upwards projection of the global economy
has been so assured that the offshore
industry has been running at fever pitch
to ensure supply meets demand. With
the price of oil soaring above previous
highs, all aspects of the petroleum sector
became attractive from an investor’s point
of view, and funding for the most ambitious
of projects was achievable. (Dr Roger
Knight, Julian Callanan, Catarina Podevyn
- Infield Systems Ltd.)
BUMI ARMADA BHD IPO FOR RM2.8
BILLION
An indication of market sentiment for
the FPSO industry can be seen by the
ambitious IPO of FPSO provider Bumi
Armada Bhd to raise RM2.8 billion. This,
no doubt, will help in funding their present
and future projects.
MANAGING THE CONTRACTUAL
HURDLES OF AN FPSO PROJECT
The FPSO project contracts are
complicated with a Pyramid of contracts
(see Diagram 2).
An FPSO project, from contractual
commitment to first oil, will take from 15
to 30 months. The contractor will normally
finance the assets and the conversion
work, and receive payment at a day rate
starting at the commencement of field
operations. The contractor, consequently,
makes substantial investments according
to field-specific requirements before the
commencement of revenues, and the
financial exposure and risk profile means
that the contractor is vulnerable at the
beginning of the project.
The start of an FPSO project is normally
with a submission of a tender. The field
operator might begin the FPSO project
with official pre-qualifications, whereby
DIAGRAM 2
u Operator
(Production Licence or PSA)
v Acquisition of vessel
w Conversion of vessel of new build
x Conversion/shipbuilding contract
with shipyard
y Procurement of contractor – equipment
z Design engineering
{ Consultancy for delivery and managing towing,
installation and hook-up
| Commissioning of FPSO
} Operation and maintenance contract
The credit risk for FPSO clients and the need for parent bank guarantees are often underestimated;
the contract must clarify whether the oil company is acting on its own account or on behalf of
a licensed group with pro rata liability between the participants (if so, the contract must identify
the participants);
Liquidated damages and the penalty structure for late delivery must be specified; the procedure
for acceptance of the FPSO vessel under the FPSO contract often involves integration risks that
should be placed with the FPSO client;
The owner should not suffer financially if undersea installation is delayed or the FPSO client is
not ready;
Performance-based hire structure may be complicated and may depend on integration and
interfacing with other parties or on reservoir management that is out of the control of the
owner;
Subjective termination rights should be avoided;
The early termination fee should cover the net present value of the contract;
Exceptions from the 'knock-for-knock' principle in liability provisions must be identified and
preferably clarified with the insurers;
Net earnings after deduction of local and central taxes (including withholding taxes) must be
stated; it may be an advantage (and often a requirement) to operate through a company located
in the jurisdiction of operation;
Local content requirements may be difficult to satisfy due to the unavailability of competitive
and qualified local resources;
Risks of political or legal changes should be borne by the FPSO clients;
Indemnities is normally in the terms of a 'knock for knock' where operator and contractor indemnify
each other against property damage, personal injury, death sustained by member of own group
and employees in performance of project 'irrespective of cause' and regardless of whether the
damage has been inflicted negligently or in breach of duty;
Limit indemnity to damage or injury, definition of operator, broadly or narrowly, does it include
personnel in the filed;
Alternative; 'stand-alone' field mutual hold harmless agreement, where each contractor assumes
risk for his own property and personnel indemnifies;
Post Delivery Defects, there is a need to harmonise various project contracts as defects can
affect production, day rates;
Down time; who is willing take responsibility for this; and
Loss of Hire Insurance. This is one of the largest exposure faced by the head contractor.
KEY CONTRACT ISSUES TO BE CONSIDERED WHEN
NEGOTIATING A CONTRACT
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