WHAT MAKES FPSO

REDEPLOYMENTS
SO DIFFICULT?
and how to fix them
FPSO redeployments are one of the key features that make FPSOs cost-
effective solutions for field developments, however this strength has been
undermined by a growth in inefficiency. Now, the real barriers to successful
vessel redeployment lay not so much in the expected technological challenges
but instead, in the inflexibility regarding specifications, the lack of shared
risks between stakeholders and the distrust present in the operator-contract-
or relationship.

Now, more than ever, the field developments that will succeed are not the
ones whose operators just evaluate residual risk and cut margins, but rather
the ones where the operators partner wisely and work collaboratively. With
between 15–20 vessels coming off contract in the next few years, the market
for redeployable FPSOs will be huge. Whether its potential will be optimized,
however, remains in question.

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 INEFFICIENCIES EXPOSED

With current low oil prices, the market for floating production systems
is at its lowest point in decades. At time of writing, zero floating
production systems have been awarded since July 2015, with between
2–4 awards predicted for 2016. Currently, 24 FPSOs are idle and
awaiting redeployment, although the Energy Maritime Associates (EMA)
reveals that most will end up in the scrapyard. This has the industry
fearing that the glory days lived out by vessels such as FPSO II and
Petrojarl I, which have been redeployed numerous times since 1981 and
1986, respectively, are a less attainable reality.

When the oil price hovered at $100, operators and contractors had the
luxury to accommodate bloated processes and solutions. Now with the
$30–$50 oil price, inefficiencies are exposed at all levels of the FPSO
hierarchy and industry players realize they can no longer afford them.
As a result, much overdue practical change is needed to revive the role
of redeployed FPSOs.

GROWING SPECIFICATIONS
The holdup in redeploying FPSOs is in a large part due to mounting
vessel specifications. With oil companies contractual terms often in
conflict with the expectations of contractors, the fall out between the
two players results in time-wasting deliberation and an inconsistency in
expectations. In the end, the divide boils down to the lack of flexibility
between stakeholders.

The complications begin as early as the bidding stage. When oil

companies put a project to tender, they do not always fully disclose the
long list of requirements they have for said project. This leaves FPSO
contractors who are bidding on the project in the dark, unsure whether
they will be able to utilize the equipment they have experience with in
order to fulfill the operator’s specifications, raising costs as a result.

Another issue is that once projects do go ahead, oil companies have

dramatically increased their list of specifications, with over
documentation becoming a rule of habit, rather than necessity. In 2012,
a redeployed FPSO constituted 15,000 work hours and 10,000 pages of
documentation. By 2015, these values increased to 120,000 and
40,000, respectively. A tender request for a project value of a mere
$4,600 can translate to nearly 400 pages of documentation, a stark
representation of the excessive documentation and wasted time
incurred even for small projects.

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 2012 2015
10,000 40,000
15,000 120,000
pages of pages of
work hours work hours
documentation documentation

ALIGNING CLIENT-CONTRACTOR EXPECTATIONS

FOR THE FIELD DEVELOPMENT
To oil companies, detailed specifications and documentation are a way of protecting their interests, as
they’ve invested significant amounts of capital into their field developments. The key to a successful
redeployment thus lies in managing expectations across both parties. Oil companies must understand
that a commercially viable redeployment may not reflect the bespoke field development that was initially
envisioned. However, by modifying and working with what assets are available, a robust and cost-
effective solution can most definitely lie with a redeployed FPSO.

Oil companies must first understand in which situations redeployment works, and assess their field and
project risk to conclude if a redeployment makes sense. This includes identifying critical FPSO design
modifications and upgrades needed to suit field properties, as well as considering life extensions and
eliminating vessel vulnerabilities in relation to the field development plans. In turn, suppliers and FPSO
contractors should listen to oil companies and help encourage redeployment as a commercially attractive
solution for their clients.

The bottom line is aligning client expectations for a redeployed FPSO solution and working forward from
this point. According to one CXO of an FPSO contractor, “The redeployability conversation must happen.
Oil companies are moving away from thinking, ‘I can afford my own FPSO with no compromise’ at $100/
bbl oil to a not always bespoke, but still radical and effective FPSO.”

FLEXIBILITY AT THE FOREFRONT

Instilling a culture of flexibility and risk sharing among operators, contractors and sub-contractors is an
essential step forward. Distrusting of contractors, operators want refitted FPSOs to meet their
specifications to the tee, offering little to no room for flexibility. Instead a cheaper, more efficient way
to redeploy an FPSO would involve gathering input from contractors early in the project, to understand
what could work better, instead of operators being recalcitrant about their own terms and paying for
it later.

Solutions such as standardized specifications can potentially open the door to flexibility, but will require
an active effort on the part of both operators and contractors to make a sustainable shift from the
current model. Oil companies must actively nurture a partnership culture in which both sides collaborate
to help improve project economics from the outset.

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 RISK SHARING

Incentivizing commercial terms also plays an important role in reconciling a long-term contractor-
operator relationship. The standard commercial model for FPSOs is a flat day rate for contractors,
in which there is no upside during a boom and no downside during a bust. When the oil
environment is good, oil companies benefit far more from their fields than the contractors working
on them who do not share the rewards of the upswing. On the other hand, when the oil price is
low, the day rate is too expensive for oil companies to see valuable returns.

The day-rate scheme is outdated and does not reflect a proper balance between operators and
contractors’ sharing of risks. More risk-sharing payment strategies are imperative to support the
sustainability of the industry. But this would not just be a positive change for contractors–oil
companies should also be able to get a better deal on the day rate if contractors want to share in
the upswing when a higher oil price comes back around.

In 2010, Teekay and operator Britoil amended their Foinhaven FPSO to include operating
performance incentives that increase inline with revenue generated. At the same time, Foinhaven’s
lease rate is linked to average annual oil prices. A similar practice can be seen in the case of the
Bleo Holm FPSO, located in the North Sea, which is chartered on a lease rate that depends on oil
output. These agreements reflect both players’ interest in maximizing profits through flexibility in
sharing project risks.

In a similar vein, BW Offshore and Ithaca Energy revised a contract in 2015 concerning the BW
Athena FPSO in the North Sea to continue production on the Athena field on a revised
compensation scheme. This gave both parties the right to end the new lease after 60-days notice.
The revised FPSO contract signifies a step in the right direction during trying times, with both
companies realigning their cost structures, doing away with the vessel day rate and sharing the
new cash flow generated from the field.

During the contracting stage, oil companies are accustomed to demanding their preferred terms,
often at the expense of contractors. Instead, it is beneficial to the success of a field development
to provide more favorable terms to FPSO contractors in order to not only bolster trust and a solid
partnership but also keep FPSO contractors in business.

SUPPORTING FPSO REDEPLOYMENTS

Redeployment can be a viable solution in the FPSO market, but only if reforms around project
specifications and risk sharing are introduced. This will require of a threshold of standards–the
absolute minimum to meet the requirements for a development–which all parties respect, allowing
for more cost efficient bids and redeployments. Meanwhile, oil companies must become more
flexible with their contracts and develop a shared risks strategy the will benefit both themselves
and their contractors. Crucially, these changes must happen now, whilst the oil price remains low
and the inefficiencies in FPSO project development are exposed. Failing to do so will see inflexible
companies exit the market and undermine sustainable industry progress.

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