Are Cost Components Driving FPSO Construction Towards the East?

Are Cost Components Driving FPSO Construction Towards the East?

March 03, 2020 | CAPEX Blogs

The development of deepwater oil and gas fields requires floating infrastructure such as FPSO (Floating Production Storage and Offloading) units, semi-submersible platforms and spars. Procuring these floating platforms involves long lead times and heavy capital expenditure. Procurement teams are seeking a low-cost solution for the development of their projects under the volatile crude oil price environment. FPSO construction offer a cost-effective solution, especially for marginal fields as it is flexible enough to redeploy to other areas when the current field declines and has lower abandonment costs.

Lower Steel Prices and Cheaper Labor Costs Shift Manufacturing to the East

Fabricating an FPSO unit’s hull requires around 3 to 4 million man-hours, depending on the size and capacity of the hull. This process is responsible for, on an average, around 15 to 20% of the total hull fabrication cost. Labor cost is dependent on the location of fabrication yard. In 2018, shipbuilding labor rates in China ranged between $10 to $15 an hour, while in Germany and Japan, labor costs are more than $30 an hour. Furthermore, steel prices are comparatively higher in Europe than in Asian countries. For example, the hull of the Karish-Tanin FPSO unit was constructed in China, while its topside was fabricated in Singapore. As a result, fabricating a hull and topside in countries with low labor costs, such as China, can result in significant reductions in capital expenditure towards FPSO.

Large shipyards generally ally with domestic steel mills to secure their supply of steel through a fixed price agreement. Traditionally, the ship equipment sector has been dominated by European countries. However, labor costs and steel prices are lower in Asia-Pacific countries compared to Europe and the U.S., which is helping the development of the shipbuilding industry in countries such as China. This shift has encouraged equipment manufacturers to authorize Asian enterprises to use their licenses and manufacture locally.

The Impact of Hull Conversions on Final Cost

Hull conversion is one of the popular methods used for FPSO construction, primarily by using Very Large Crude Carriers (VLCCs). Conversion is dependent upon the availability of tankers of sufficient size to meet storage requirements, topside weight, weather at location and regulatory constraints. It is estimated that single-hull conversions cost around 10% of a newbuild and, depending on the extent of required conversion, can be available for service within a two-year time frame, which is around 20% less time than for construction of a newbuild FPSO.

To go for a hull conversion or a newbuild is an important question for the procurement of an FPSO unit. Important cost drivers include steel, equipment and labor costs. These cost drivers are subject to geographic location. Though countries like China offer lower labor cost compared to its competitors such as Japan and South Korea, it lags behind these countries in terms of shipbuilding productivity. The selection of the fabrication yard and the source of equipment plays an important role in the final cost of an FPSO unit and hence, in turn, the cost of development in offshore deepwater projects.

shipping, steel
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