International Conference on Ships and Offshore Structures ICSOS 2016 31 August – 2 September 2016, Hamburg, Germany
Unintentional consequences of the golden era of the Offshore Oil & Gas industry Jose Jorge Garcia Agis*,a,b, Ulrikke Brask Brandta, Per Olaf Bretta,b a Ulstein International AS, Osnesvegen 110, 6065 Ulsteinvik, Norway Department of Marine Technology, Norwegian University of Science and Technology, Otto Nielsens veg 10, 7491 Trondheim, Norway
b
Abstract The offshore oil and gas industry has experienced an outstanding evolution over the last 10-15 years in terms of a significant number of turnouts of novel, innovative and advanced vessel design solutions being build. One important enabler for this development has been the “golden era” with an average Brent oil price hovering around 90-110 USD/bbl and worldwide exploration and production (E&P) spending being historically at very high levels for almost a decade. The golden era introduced new design strategies, market understandings, break-even rates etc. and nobody or very few has actually questioned the vessel design trend and its cost level growth consequences. A new era with significant lower oil prices have commenced and the need for a more competitive vessel design development practice needs to be established in the industry. The time has come where the unintentional consequences of the golden era must be reversed and vessel design practices be adjusted accordingly.
Keywords: Offshore vessel design; design perspectives; competitiveness; design and market uncertainty
1. Introduction Since the significant Brent oil price drop through the second half of 2014, the headlines in the news have been dominated by vessel sales and lay ups, workforce reduction, company merges and bankruptcies, among others. These effects, initiated by cost cutting and investment stop of oil companies, have dived down in the value chain. The offshore oil and gas (O&G) industry is now looking to achieve a higher competitiveness level by developing more effective solutions in a difficult market situation where all the stakeholders should contribute. Today, almost two years after the significant oil price drop started, the whole oil and gas industry sees the dramatic changes in the industry. The need for new market and design trends is paramount. In order to be competitive in the current market, solutions in the value chain shall be more effective. This is both valid for specific products, but also the designer’s mentality and working procedures need to be changed. An historical review of the price development is presented. The evolution of Brent oil price over the last 30 years, together with the NOK/USD currency rate are presented in Fig. 1. As seen in the figure the oil price increased from around 30USD1/bbl between 1987 to 1999 up to 145USD1/bbl in July 2008, representing an increment of 480% in less than 10 years. The price level in July 2008 registered a new record, supported by a strong demand and a weak American dollar. First the financial crisis and then the economic crises in the world from 2008 and onwards quickly
1
Prices adjusted to 2016 values based on inflation rates
*Corresponding author. Tel.:+47.944-31-623 E-mail address:
[email protected]
Fig. 1. Historic monthly evolution of Brent oil price in USD and NOK/USD rate
led to a drop in oil price. However, the oil price was quickly recovering and between 2009-2014 the average Brent oil price have been 99 USD1/bbl. In September 2014 the oil price started to drop, due to several reasons, e.g. the shale oil supplies from USA and Iranian oil coming back to the market. In this way the golden era ended. Fig. 2 illustrates the difference between breakeven rates and the oil price for Norwegian oil fields in 2012 and 2016 (left and right figures, respectively). With the oil price of 125USD/bbl in 2012 all the Norwegian oil field represented left in Fig.2 were profitable with 54USD/bbl or more. In May 2016 the situation is changed and only five out of the 17 represented oil fields are profitable, the right figure in Fig 2. The right figure shows that the breakeven rates for the oil fields are reduced due to the lower operating cost as a consequence of the low oil price. Many fields are still not competitive in the current market situation, although many recent attempts for creative cost reductions seem to have a profound effect on the breakeven cost levels for offshore field operation. According to the OECD2 Secretariat (2015), the rise of industry costs since 2000, has made O&G projects vulnerable to oil prices below 80USD per barrel. Some of the factors mentioned in this report are: supply chain constrains, increased project complexity and lack of standardisation. This cost rise has impacted project profitability despite higher oil prices and lead to reduced cash returns, see Fig.3. The oil price directly and indirectly affects the design strategy and methodology for offshore vessel (Ulstein & Brett 2015). After the millennium, offshore construction vessels (OSV) have become more complex and with higher design requirements both from the designer himself, the shipowner, the
Fig. 2. Difference between breakeven rates and oil price for Norwegian oil fields (E24 2016). Left figure from 27th February 2012, right figure from 10th May 2016
2
The Organization for Economic Co-operation and Development
Fig. 3. Cash return on invested capital in the oil industry (OECD 2015)
classification society, etc. Vessels and platforms have been designed with a “more is better” strategy, to a large extent, neglecting commercial and operational consequences. But is a vessel with more capability, more class notations, more advanced equipment, a better vessel? This view is discussed by Ulstein and Brett (2015), where it is argued that the definition of a better vessel should be based on a holistic view of the vessel design solution and not on a single factor bases or a “Design for X” approach. The “more is better” strategy, together with stronger technical, operational and documentation requirements, have affected the cost of the vessels and thereby typically reduced vessel designs’ competitiveness. PwC (2015) has analysed and presented cost level inflation and rising inefficiency on NCS (Norwegian Continental Shelf). This study illustrates the consequences of the golden era in O&G platforms. The PwC analysis states that the cost of constructing a new platform in 2013 increased by 150% from 2000. The documentation has been increased with 900%, in a case based on two Norwegian platforms from 2003 and 2014, respectively. In a maritime debate, Moholt (2016) gives her opinion on the changes in the Norwegian work model for the oil and gas industry. Moholt compared the industry with an iceberg where only 20% is visible and illustrates the direct costs (hours and components). The remaining 80% is overconsumption of hours, accidents and production losses. Moholt refers to an internal study for Statoil that illustrates that 20-50% more engineering hours were applied per produced oil barrel in 2013 compared to 2003. As a consequence of almost two years with very low oil prices and uncertainty with regard to the future, stakeholders related to the O&G industry have focused on cost reductions, improved effectiveness and increased competitiveness. As one example, Statoil introduced the STEP (Statoil Technical Efficiency Program) program, with the aim to work more efficiently and reduce costs. Another example is the newest vessel designs launched, aiming for lower investments and operating costs; as example, the multipurpose construction vessel ULSTEIN S182 or the anchor handling vessel UT 7217, Rolls Royce. Both examples are a start on the journey to a new strategy “good enough” instead of “more is better”.
2. Offshore vessel market When studying shipping markets, one should always keep in mind that it is a business driven by the laws of supply and demand, (Stopford 2009). Today’s market has been affected in both, supply and demand sides. High dayrates, low interests and high forecasted demand originated a strong contracting activity, going from 100 vessels per year (during the 80’s and 90’s) to 500 per year in the last 15 years. The fleet of ships in operation (SiO) increased by 5000 units in just 15 years. Recently, it has turned out that the real demand for offshore vessels is much lower than initial forecasted. A demand drop of 20-30% has resulted in a significant reduction of offshore vessel opportunities and a dramatic reduction in vessel dayrates. While dayrates of offshore vessels are down about 40% from early 2014, the growth of the offshore support vessel (OSV) fleet though 2015 and 2016 will be of almost 18% (Alix Partners 2016). Unlike other shipping sectors - like bulk carriers or tankers, the tonnage of offshore vessels has low attraction by the scrap yards because each ship contain relatively little steel (1500-2500 tonnes) per unit. For this and other reasons, 15% of the global offshore vessel fleet is more than 40 years old (IHS Fairplay, 2016) and continues in operation. This is a contribution to the market oversupply and it is not beneficial from an environmental friendliness point of view.
Fig. 4. Contracting activity of PSVs by continent and average USD/DWT (IHS Fairplay 2016)
That shipping markets are cyclical is not new and offshore vessels are not an exception. A similar example to what the offshore industry is facing today did happen to the container fleet in 2008 with a 10% reduction on demand and dayrates dropped by 25% of the original levels (Kalgora & Christian 2016); the tanker fleet in the 70’ties and bulk carriers right now. Oversupply is not the only consequence of the golden era, a rise of vessel costs is clearly predicted in today’s environment, see Fig.3 and Fig. 4. With dayrates equivalent to early 2000’s values, vessels struggle to operate with profits. One clear cause for this cost rise is the high contracting activity in the 2006-2009 period, when the newbuilding price index was at its historical highest value. Yet, the increasing newbuilding activity in south Asian yards (around 50% of the total activity during the past 5 years) should have reflected a newbuilding price reduction, see Fig. 4. Regardless of the newbuilding price index and the movement towards Asian shipyards, there is a clear tendency to continue designing and building larger and more advance vessels. An example, is the size of newbuilding for platform supply vessels (PSV) measured by deadweight. It has increased from 2500 tonnes during the 2000’s to almost 4000 tonnes in the 2010’s. Another example is the Bollard Pull of anchor handling vessels, increasing from below 200 tonnes in the 90’s to the current 300 tonnes at average (IHS Fairplay 2016).
3. Cost rise in offshore vessels The offshore O&G industry has experienced a significant development of novel, innovative and advanced vessel design solutions over the last 10-15 years. Although primarily supported by a strong oil price, some other factors also have influenced this design tendency. The need for new vessels to cover more demanding operations (deeper waters, artic operations, etc.), supported by growing dayrates and the need for market differentiation, as well as the introduction of new Rules and Regulations have contributed to the introduction of higher cost vessel design solutions. One clear tendency, reflected in Table 1, is the inclusion of additional class notations. In the later years OSVs are designed with several additional class notations, even it is unsure if the notations and its functionality will be needed or beneficial for their operation. The tendency is driven by the strategy of “more is better”, which also dominate the second hand market. Typically, the charterers and brokers are to blame for some of this development, due to their lack of full understanding of what is really a better vessel.
Table 1. Class notations comparison for PSV vessels. Class Notations
Building year
DNV*1A1, SF, E0, DYNPOS-AUT
1990
DNV*1A1, SF, E0, DYNPOS-AUTR, OILREC, Fire Fighter I, CLEAN, COMF-V(3), LFL*, DK(+), HL(+), NAUT-OSV (SOC)
2009
DNV*1A1, Offshore Service Vessel, Supply, SF, E0, DYNPOSAUTR, OILREC, Fire Fighter I, CLEAN-DESIGN, COMF-V(3), LFL*, DK(+), HL(+), NAUT-OSV(A), BIS
2016
During the interviews developed for this study, it was captured a common point of view, “some years ago, the price was not an issue, the customer was looking for the best possible technical solution – a differentiation factor”. An example of this differentiation strategy within offshore vessel companies is described by Kyvik and Gjosaeter (2015). The authors describe the initiative of one Norwegian shipowner for being pioneer in operating LNG fuelled offshore vessels. The strong dependence on market differentiation may have affected the cost-effectiveness of the vessels. LNG fuelled alternatives have lower emissions and maybe fuel bills, contrary they have higher CAPEX and OPEX. Considering the business model of offshore vessels, where dayrates typically cover CAPEX and OPEX expenses, this LNG initiative has proven to compromise the competitiveness compared to conventionally fuelled vessel solutions. During the last years, and with the purpose of being prepared for further North operations, the North Sea fleet established as “design default” the Ice(1C) class or equivalent as extra steel for long lasting life. As indicated in Fig. 5, up to 40% of the PSV built in the last 5 years, operating in the North Sea are designed with Ice(1C) or equivalent. Another analysis shows that the consequences are 3% to 5 % extra steel weight, with subsequent loss of cargo carrying capacity and higher newbuilding price. The deadweight is an important revenue making factor, however, it needs to be balanced with function and safety of the vessel. By analysing a sample of Ulstein built OSVs and their weight reports, it can be concluded that the vessels have become heavier over the years, see Fig.6. However, it is important to mention that this development might be influenced by several factors. A negative reason is the consequences of new and stricter rule and regulations. Another reason could be that newer vessel designs are more compact where the space onboard the vessel is more utilised. Generalising, one could say that the more advanced and complex design solutions are, higher the CAPEX will be. Solstad Offshore’s newest contracted vessel, Normand Maximus, is a good example to illustrate the CAPEX level and the complexity level of OSVs. The vessel is the largest offshore construction vessel in Norway with a 33m beam and LOA of 177,9m and the contract value is
Fig. 5. Overview of Ice Class Notations for PSV vessels operating in the North Sea (IHS Petrodata 2016; IHS Fairplay 2016)
Fig. 6. OSV weight growth tendency over the years
approximately 2,2bnNOK. Comparing the cost of the vessel to merchant ships gives an illustrative picture of the offshore industry cost level. An equal contract value for a bulk carrier of similar size as Normand Maximus will give approximately 13 vessels (Rederiforbund, 2015). What is the reason for this cost difference between the merchant and offshore vessel solutions? Both vessel types consist of hull and machinery, however the mission equipment is a larger cost driver for offshore vessels. The design strategy is different between the two vessel types, where bulk carriers are designed with a sufficient function level and to the lowest cost. Offshore vessels are designed with multi capabilities and functions where until now the cost have been lower priority. Another question is rules and requirements. Does the rules and requirements differentiate between the vessel types? Due to the golden era new rules and requirements have more or less been accepted without a question to the unintentional consequences. Independent of the reason behind the large CAPEX differences, higher CAPEX results in less competitive vessels, especially in low oil price conditions. That newer complex offshore vessels cannot compete in the current market situation is clearly illustrated with the number of offshore vessels in layup. Fig. 7 illustrates offshore vessels in lay-up owned by Norwegian shipping companies. The figure clearly illustrates that newer OSVs dominated vessels in lay-up. This is contrary to common shipping
12
8 6 4 2
PSVs
AHTS
Deliveried year Seismic Well Intervention
Fig. 7. OSVs laid up per 24th May 2016 sorted by delivery year (Maritime, 2016)
All
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
0
1976
Laid up vessels
10
Fig. 8. WTI crude oil price (EIA 2016)
theory wisdom. In bad markets typically the charter will select the newer vessels if otherwise cost and functionality is acceptable compared to the “older” vessel in the market. 4. Cost reduction opportunities Looking at the offshore vessel market situation, characterised by an oversupplied and high cost fleet, and looking at the predictions for oil price, see Fig. 8., it is clear the need of a cost reduction view in future offshore vessel design processes. In the following subsections some of the approaches currently used at Ulstein to improve the competitiveness of vessel design solutions are described. 4.1. OSV Design Perspectives Typically, offshore vessels are designed to fulfil a specific operation or tender requirement. However, when the operational needs are interpreted into design specifications, this assertion is not so clear. Hence, the design process typically results in a long iterative process, where some initial operational needs are transformed in vessel performances. Due to the nature of the industry, the design process of offshore vessels tends to focus on technical aspects, leaving on the side, operational and commercial aspects. We argue that this common approach is one of the reasons for today’s high cost vessels. Designers must be better understanding the unclear requirements, being more active assisting the customer to define requirements and understand the market needs but also getting involved earlier in the process to discipline it.
Fig. 9. Three different performance perspectives (A, B and C) (Ulstein and Brett, 2015)
Over the years, Ulstein has developed and tested out different performance perspectives, in order to apply a holistic view and systemic approach in the early concept design phase and better support the decision-making process (Ulstein and Brett, 2009; 2012; 2015; Ebrahimi et al, 2015). Fig. 9 illustrates three different performance perspectives developed by Ulstein. Known as Design for Efficiency (Perspective A), Design for Effectiveness (Perspective B) and Design for Efficacy (Perspective C), the authors argue that they should be included in any vessel design solution performance comparison. The perspectives are introduced in more detail by Ulstein and Brett (2015). Similar to the EEDI-concept (IMO 2011), and capturing the holistic of the performance perspectives above described, Ulstein has developed its own Ulstein General Performance Index (UGPI) for OSVs (Ebrahimi et al., 2015). This way of applying performance matrices enables the designer to measure the consequences of design decisions on the final vessel design performance. It is always a matter of compromise among design variables. A multi-criteria decision making methodology, supports the development of a better design solution (Ebrahimi et al., 2015). The use of performance perspectives and multi-criteria benchmarking methodology in the early concept design phase has enabled to Ulstein to develop more competitive vessel design solutions. 4.2. Ulstein Catalogue vessels Offshore ship design is traditionally a specific client-oriented process, where almost each ship design is modified, adapted and developed for a specific customer (van Bruinessen, 2016). At the same time, ship design is characterized for involving a large variety of stakeholders. This typically leads to a wide variety of design requirements and constraints, in some cases contradictory, which have to be handled and embedded into a final vessel design solution. In order to simplify this process and develop a solution leading to lower design, building and operating costs, Ulstein has pursued the development of Catalogue Vessels. The development of catalogue vessels has its bases in the definition of predefined solutions, by developing attractive and competitive solutions to selected customer groups, market segments and specific offshore operations. The predefined vessels are designed based on performance expectations gathered through market analysis, understanding of the market needs and experience of the past. Following such an approach, Ulstein has developed a series of vessel design solutions for PSV vessels following the Artic, Storm, Gale and Breeze categorization, see Fig. 10. With this categorization, designers pursue the development of vessels designed for specific operational regions. With a common maritime platform “the hull” (PX121, PX105, etc.), the different vessel design solutions are defined based on the specific requirements of each operational region. Dynamic positioning, accommodation standard, automation level, or even cargo tanks arrangement, are developed to better perform in a given operational environment. 4.3. Uncertainty handling An effective decision-making process in ship design consists of selecting the better vessel design solution to perform a mission or set of missions over a specific lifetime (Ulstein & Brett 2012; Gaspar et al. 2015). In other words, one could say that the final goal of the ship designer is to develop “the right vessel for the right mission over time” (Gaspar et al. 2015).
Fig. 10. Ulstein Catalogue Fig. 9. Three different performance perspectives (A, BVessels and C) (Ulstein and Brett, 2015)
The process of integrating performance capability, operability and profitability over a vessel’s lifetime during the initial design stage, when the level of design knowledge is typically low and uncertainty about the mission in question is high, represents a Herculean challenge to designers. This process is carried out in an environment where innovation, flexibility and agility are key factors in order to succeed in today’s hypercompetitive market (Ulstein & Brett 2009). The most common way to handle uncertainty in ship design processes today is by adding margins and/or safety factors, in order to ensure a minimum performance level (Meyer 2002). Uncontrolled use of margins, in order to ensure the validity of the results or due to poor market assessment, could lead to uncompetitive ship design solutions. Today’s market situation reveals insufficiencies in the current design process. To sufficiently handle uncertainties in offshore vessel design enhanced design methodology, tools and work processes must be introduced. (Garcia et al. 2016) propose an approach for introducing uncertainty handling methodology in the early concept design phase of offshore vessels. By improved assessment of uncertainty in vessel design, designers’ can achieve more competitive design solutions over their operational lifecycle, as well as reduce vessel costs by proper definition of the design parameters being relevant and valued over the vessel life time.
5. Conclusion The term golden era has been utilised to describe the outstanding market situation with oil prices hovering 90-110USD/bbl. In this paper unintentional consequences of the golden era of the oil and gas industry; working processes, mentality, product requirements, market understanding etc. have been discussed. The market has changed and vessel designs developed during the golden era are not competitive any more in the current market situation. In order to increase the competitiveness of the oil and gas industry, each stakeholder in the value chain must contribute with more effective products and processes. The mentality and strategy in the industry must change, from a “more is better” to a “good enough” attitude and practice. Continued focus on offshore vessel cost reduction opportunities is given. Here, the Catalogue vessel thinking with standardised vessels is suggested as a practical mean to better adapt to current market condition. Also the vessel design perspective is important. Shall all vessels be designed for all functions or can the complexity be reduced. Further, but not less important tools and methodologies to handle uncertainty must be further enhanced and applied in the daily work of the ship designer.
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