101713 fpso market outlook

Memo

Strategic Horizons

17 October 2013

Susan Farrell | Vice President | PFC Energy acquired by IHS | [email protected]

Direct (1 202) 721 0337 | Switchboard (1 202) 782 1199

Strategic Advisors in Global Energy

Beijing Houston Kuala Lumpur Moscow Paris Singapore Washington www.pfcenergy.com

FPSO Demand Dip is Temporary Executive Summary New FPSO awards have been running at 12-13 per year in 2011 to 2013, and that number is expected to drop to 10 in 2014. We expect an increase back to trend in 2015 then an increase to 14-15 new FPSOs per year going forward. Capital expenditure for FPSOs will reach $14 billion by 2015 and remain high.

Slight slowdown in FPSO activity with just three FPSOs ordered in the last four months compared with six in the first five months of the year.

Forecast for 2013 and 2014 awards cut due to fewer FPSO requirements from OGX and Shell risk-adverse leasers and growing local content requirements.

The 2014 dip in demand is temporary as we expect operators and contractors to gradually adjust to local content and leasing issues.

Despite tight capacity, competition is stiff among the South Korean yards. Overall, Singapore yards are working at less than half their capacity.

In the oversupplied conversion market, Chinese yards have taken market share.

Inefficiencies and regulations have hindered capacity expansions in Brazil. We can expect more projects being sourced overseas or see massive project delays.

From IHS Market Survey System (MSS) Service

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25

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

FPSO Awards Forecast

North America

Med. & Middle East

Central America

Europe

South America

Africa

Asia-Pacific

Number

IHS Market Survey System (MSS) Service FPSO/FSO Market Segment

FPSO Demand Dip is Temporary | Page 2 Strategic Horizons

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Demand for FPSOs Slows Somewhat FPSO activity is slowing slightly with operators ordering three FPSOs in the last four months compared to six in the first five months of 2013. OGX cancelled its OSX-2, OSX-4 and OSX-5 projects in Brazil and Shell has cancelled its Fram project in the North Sea after unexpected well test results.

The recent cancellations and slowdown in FPSO awards mark a turning point after three years of robust growth. We believe operators will order fewer FPSOs in the next 12 months.

Visible demand in Brazil has fallen dramatically as OGX had previously estimated that it would need 19 FPSOs as part of its 2019 production target. As OGX is facing funding difficulties, it is unlikely that the operator will order any FPSOs in the next five years.

Lessors are risk averse after incurring losses and are taking a longer time to evaluate projects. BW Offshore, one of the market leaders along with SBM and MODEC, has not signed a new order since 2010 and has been more focused on renewing its existing contracts.

Lastly, it is no longer business as usual to undertake an FPSO project. Contracting processes in many countries are slowed by higher local content requirements which entail FPSOs being built or owned by domestic companies with minimal FPSO experience. In Brazil, tight yard capacity and a shortage of skilled labor makes it difficult for operators and contractors to comply with local content requirements.

Despite the recent slowdown, the long-term outlook for FPSOs remains healthy. We expect awards to rebound in 2015 once operators and contractors adjust to new market conditions. By 2015 some projects in Brazil (Cidade de Mangaratiba MV24) and Angola (CLOV) with substantial local content requirements should have achieved first oil.




Each region has unique FPSO requirements. Africa and Brazil tend to face high local content requirements and typically involve large FPSOs which can cost more than $ 1.0 billion each. In contrast, European projects have no local content requirements and frequently involve redeployments for smaller fields. Asia-Pacific comprises a combination of newbuilds, conversions and relocations.

FPSO Supply Capacity Yards usually specialize in the markets that best meet their engineering, construction and financial capability and generally can be classified into two categories: FPSO newbuild yards and FPSO conversion yards.

The South Korean yards are the only ones capable of building high-spec FPSO newbuilds required of the West African and North Sea market.

Singapores Keppel and Sembcorp Marine are the preferred choices for FPSO conversions, although Chinese yards are increasingly gaining market share in the conversion market.

China is increasing newbuild capacity.

Brazil has no experience building hulls and Engevix is currently working on its maiden project,

Capacity for FPSO newbuilds is highly influenced by global shipbuilding demand, including VLCCs and drillships. In 200607, the high shipbuilding activity reduced shipyard capacity for FPSO newbuilds. In 201214, the still heavy shipbuilding and rigbuilding workload will keep available capacity in check.

Currently, the South Korean yards are working on a historically high number of projects, with very little spare capacity. However, the South Korean yards will still compete aggressively as they will need to replace the huge drillship deliveries going out in 201314 and the large number of FPUs deliveries in 201516.

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

FPSO Capital Spend Forecast

North America

Med. & Middle East

Central America

Europe

South America

Africa

Asia-Pacific

$ Millions

IHS Market Survey System (MSS) Service FPSO/FSO Market Segment




China and Brazil Increase Capacity

The Chinese FPSO construction industry comprises numerous newbuild and conversion yards. Many are government-controlled and focus on hull and integration work. Unlike the Singaporean or South Korean yards, the small number of docks operated by each yard severely limits the number of projects each can undertake. Internationally, Chinese yards are much stronger in the conversion than newbuild market. Chinese yards are beginning to secure higher value projects, but are unlikely to threaten the Singapore yards in the next 510 years.

Brazil has no experience building FPSO hulls, with Engevix currently working on its maiden project and struggling to build more units concurrently. Most indigenous yards focus on converting hulls and integrating topsides.

Foreign joint-venture yards like Keppel BrasFELS and Maua are the most experienced in FPSO conversions and can take on a wider range of work. Process modules are usually fabricated in a module fabrication yard, in part due to the Petrobras strategy of tendering for the hull and module separately.

101713 fpso market outlook

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