WHAT IS THE FUTURE FOR FPSO SHIPYARDS ?

Over the years, Asia has become the leading space for FPSO constructions and conversions. The large-scale
and newbuild FPSOs are normally constructed in Korea by HHI and SHI, while the smaller scale new build proj-
ects are fabricated in China Dalian Shipbuilding Industry Offshore Company (DSIC) and Shanghai Waigaoqiao
(SWS). For FPSO conversions, almost all projects are carried out by Singapore Keppel, Jurong, Malaysian
MMHE and Dubai Drydocks with China Cosco making inroads aggressively over the years.

CURRENT SITUATION
Given the current environment of subdued demand, shipyards with high overheads will face hard times
ahead. Already, the big three South Korean shipbuilders Hyundai, Daewoo and Samsung all reported.
Hyundai reported a net loss of 2.2 trillion won ($1.8 billion) in their 2014 results, and her CEO resigned last
September. In their latest quarterly results, Daewoo and Samsung also announced losses of 2.4 ($2 billion)
and 1.1 trillion won ($920 million) respectively. After the financial crisis, all three companies expanded very
quickly into large offshore projects to tide over slumps in traditional ship-building businesses. Complex off-
shore projects resulting in delays and cost over runs were cited as the root of these problems by analysts.

The Chinese yards are faring no better if not worse than the Koreans. In order to lure orders
away from their Singapore and Korean peers, they were building vessels for down payments
as little as 1 percent when oil prices were floating above hundred dollars per barrel. Further-
more, many contracts signed were owner-speculated projects with no firm charter contracts
backed by oil companies. Risks of potential cancellations and delays are therefore also higher.

China, Rongsheng Heavy Industries who wanted to focus on ffshore construction by setting up
a business unit in Singapore late 2012, has today become a symbol of credit glut and on the
verge of disposing all its assets. Cosco Corp who has operations in China also faced prob-
lems lately. In its latest 1H15 results, Cosco reported a net loss $4 million compared to profit a
year ago.

Keppel Shipyard, Sembmarine and MMHE are yards notably stronger than their Korean and
Chinese competitors in terms of their recent results. All three companies announced profits
and award of F(P)SO contracts this year, albeit earnings also declining sharply. This month,
Keppel announced a FPSO conversion contract from Armada Madura EPC Limited, a joint
venture between Bumi Armada and Shapoorji Pallonji Group in India. In April this year, Semb
Marine was awarded a FSO conversion from Teekay worth S$56 million. MMHE also received
a contract this June from F(P)SO newcomer E.A. Technique to convert a vessel into a FSO for
the North Malay Basin Bergarding field.
Today, most shipyards still have relatively large order
backlogs to cushion them for the coming years. As As of
end 1H15, Keppel and Sembmarine still have net order
books of $11 and $10.9 billion respectively. Cosco also re-
ported an order book at US$8.1 billion with progressive
deliveries up to 2017. That said, the order books may be
subjected to revision in fears of cancellation contracts.
Most shipyards also expect customers to defer the delivery
of their ordered units especially in the jack-up and rig seg-
ment due to oversupply and lack of charter contracts.
For the big three Korean shipbuilders, analysts
predict the worst may be behind, in terms of earn-
ings but a sustained recovery is unlikely with limit-
ed order flows expected this year. Together with
labour unrest due to restructuring moves, the com-
panies will face many tougher years ahead amid
the continued oversupply.
In China, smaller shipyards with weak financials
are expected to face problems leading to possible
bankruptcy. Bigger shipyards supported by the
state, previously regarded by many as financially
safe havens are no longer the case now as the
countrys economy is facing the slowest expansion
in more than two decades. In the face of low
orders and cost overruns from complex offshore
orders and cost overruns from complex o
projects, bigger state-owned shipyards are also
facing financial and execution risks.
r Te rm
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FUTURE
Brazil, the country which accounted one of the worlds largest spendings in oil and gas in the
past years remains fraught in uncertainty. On 29 June 2015, Petrobras announced plans to
slash investment by 37% over the 2015-19 periods to $130.3 billion. This is in contrast to
$206.8 billion listed in its previous five-year plan. Owing to the plunge in investments amid
oversupply, shipyards are likely to turn their attention to repair, hookup and commissioning
works, as well as LNG and Floating Storage Regasification Unit (FSRU) conversions projects.
If the oil glut persists, some yards may also go into building naval vessels.

Moving forward, Korean yards will definitely be more prudent in accepting low margin o
Moving forward, Korean yards will definitely be more prudent in accepting low margin offshore
projects. The bright spot for them should be LNG and LPG carriers due to the discovery of
shale gas. So far, Korean shipbuilders have taken more than 70 per cent of new LNG orders
last year, although their dominance has been increasingly challenged by the Chinese and Jap-
anese yards.

On 22 July this year, Keppel also announced the contract award for the third floating liquefac-
tion facility conversion worth US$684 million for Golar LNG to perform the conversion of a
LNG carrier, into a Golar Floating Liquefaction (GoFLNG) facility. Separately during a press
release on 11 Aug 2015, Mr. Michael Chia, Managing Director (Marine & Technology), Keppel
O&M, said this:

"Despite the headwinds faced by the industry due to the current low oil price environment,
Keppel Shipyard continues to receive active enquiries for its wide range of expertise including
repair works and Liquefied Natural Gas (LNG) solutions. By leveraging our strong track record
in repair, upgrade and modification, as well as expanding on our LNG capabilities which in-
clude extensive experience in LNG carrier repairs and Floating Storage Regasification Unit
conversions, we are able to continue attracting new customers while maintaining the trust of
repeat customers to keep our yards busy."

MHB the parent company of Malaysias largest shipyard MMHE, reported in its latest 2Q15
financial presentations, that they will increase focus on onshore / modular / hook-up and com-
missioning (HUC) work. The company also hopes to generate business opportunities from the
Petronas FLNG 1 and 2 project operations.

In China, it will likely be the survival of the fittest with bigger shipyards weathering the storm,
and smaller yards shutting down.. Those who survive will need to focus on moving up the
value chain, building a strong management team and becoming more efficient when executing
projects, to build a long-term sustainable business.