February 2009 Oil and Gas Journal

Oil Price Drop Unevenly Affects Floating Production Projects


James R. McCaul, President

International Maritime Associates, Inc.


The recent $100 oil price drop, closure of financing windows, and general aversion to investment risk will affect the near-term new floater projects. But as discussed in the latest International Maritime Associates study, (1) the effect likely will be uneven and short-term.

Assessing the near-term effect of the current turmoil requires viewing the market in four segments: large projects, Brazil, marginal projects, and speculative projects. Each has it's own unique outlook.

Large projects

Most large floater projects planned by major operators off West Africa, in the Gulf of Mexico, and elsewhere are insulated from the current turmoil. Floater projects such as Clov offshore Nigeria, Block 32 off Angola, and Jack-St. Malo in the Gulf of Mexico likely will move forward in the current circumstances.

These projects have a long gestation period and are part of an investment portfolio designed to provide future output to replace depleting reserves. The long-term economic outlook justifies these investments. A short-term oil price collapse will not jeopardize the projects' long-term commercial viability.

Of course, if the price collapse begins to look likely to continue long-term, then companies could delay or possibly shelve investments.

But this seems unlikely, judging from both the oil futures market and many analysts who believe that the current price collapse is short-term.


The Brazilian market segment is insulated somewhat from current short-term conditions. The present finds off Brazil are major new oil sources, and there are no indications of a slowdown for exploiting this large resource.

Order Backlog for Floating Production Systems
Has Been Declining
(excludes storage-only units and MOPUs)


Some analysts question the feasibility of developing the presalt finds in the current pricing environment. They believe development projects, such as Tupi, require $50-70/bbl oil to break even. This, of course, is less than the current spot price. But we believe Petrobras and other concession holders in Brazil will proceed aggressively with their present projects, with the longer term economics in view.

Other analysts question the financing capacity of Petroleo Brasileiro SA (Petrobras) to undertake the investment, given its free cash flow and indebtedness capacity. But we believe that external financing will flow into Brazil as necessary to support the funding for presalt development. China, for example, is said to be ready to invest $10 billion to help develop Brazil's new oil fields.

But some slowdown could occur in developing heavy oil finds in the current pricing environment and possibly delay new projects such as Royal Dutch Shell PLC's Oliva discovery on BS-4.

Also, Brazil may have to loosen local sourcing requirements that it imposed to reduce capital expenditures 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. The current situation has hammered these projects. 

A combination of oil prices that are 30-35% of the prices 4 months ago and an inability to access new capital has put the brakes on new projects.

Particularly small planned projects in the North Sea, Southeast Asia-Pacific, and West Africa are susceptible to current pricing and financing conditions.

Projects such as Huntington and Kraken in the North Sea, Ande Ande Lumut off Indonesia, Malampaya off the Philippines, and Ebok off Nigeria are in this category.

It is not surprising that tentative agreements for four floating production, storage, and offloading (FPSO) vessels recently failed to be converted to firm contracts. These were on marginal projects off Australia (Crux and Basker-Manta-Gummy), off Gabon (East Orovinyare), and in the North Sea (Athena).

Speculative units

Until mid-2006, most production floaters ordered had field contracts. Then companies placed a spurt of speculative contracts, 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. Companies recently cancelled or likely will cancel contracts on three speculatively ordered FPSOs, and we see further difficulty in this portion of the market.

The accompanying figure shows that orders for new units have decreased since reaching a high of 69 in mid-2007.

Sevan Marine ASA has two and maybe three speculative FPSOs on order and the company's ability to access financing may be limited by the current liquidity constraints.

FPSOcean AS, which cancelled its second speculative FPSO, still needs to raise at least $70 million financing to complete the first unit.

It is possible that Petrobras could soak up the speculative units still on order for use off Brazil. Petrobras may be in the market for any production unit capable of use on its presalt finds. But certainly for the foreseeable future, we see no further speculative orders for FPSOs until the market clears.

Long-term view

For the long-term view, nothing really has changed. Forecasts still expect demand for oil to grow at a strong pace during the next several decades, oil supply will become increasingly tight, and pressure for higher oil prices will grow.

The International Energy Agency (IEA) in its 2008 World Energy Outlook forecasts demand for oil will increase to 106 million b/d in 2030 from 85 million b/d now. While this is 10 million b/d less growth than IEA projected last year, it still is 21 million b/d more than current consumption.

The US Energy Information Administration, in its 2008 International Energy Outlook, forecasts world liquid fuel consumption will increase to 112.5 million boe/d by 2030, an increase of about 25 million boe/d during the next 22 years.

The Organization of Petroleum Exporting Countries in its 2008 World Oil Outlook, predicts world oil demand to grow to 113.3 million b/d by 2030, an increase of about 27 million b/d.

ExxonMobil Corp. sees world energy demand growing to 310 million boe/d in 2030 from 229 boe/d in 2005.

The world needs new oil to meet the expected growing demand and to offset decreasing production as fields deplete. As IEA points out, even if oil demand remains flat until 2030, the world would need 45 million b/d of new production to offset lower production in depleting fields. The additional production needed is four times the current production capacity of Saudi Arabia.

The average production weighted decline rate of worldwide oil fields is now about 6.7% and analysts expect this to increase to 8.6% in 2030 as production shifts to smaller oil fields.

Price pressures will result inevitably from the divergence in demand and supply. There is no question that oil prices will increase in the long-term. Finding and lifting costs will also increase with the need to tap more difficult sources of new oil.

Some evidence of this appears in the futures market. While the spot price at mid-December 2008 was $40-45/bbl, the futures market had placed a price of $74/bbl on crude for delivery 5 years out and $80/bbl for delivery 9 years out.

In the long-term, a widely held consensus is that the world will have a pressing need to find new oil sources. Another consensus is that the deepwater frontier, which requires floating production systems for projects, represents one of the best opportunities for finding new large sources of oil.


1. Floating production systems assessment of the outlook for FPSOs, Semis, TLPs, Spars and FSOs, International Maritime Associates, Washington DC, December 2008.

The author

James R. McCaul
imaassoc@msn.com is president of International Maritime Associates Inc. He established IMA in 1973. Before forming IMA, he was member of the faculty of Webb Institute of Naval Architecture. McCaul holds a PhD in economics from the University of Maryland, an MS in business administration from Pennsylvania State University, and a BS in marine science from the State University of New York.

                                                                         Volume 107  Issue 7  Feb 16, 2009