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“Intelligence is about being open minded”, the late, great Irish sports writer Con Houlihan once said.

The quote was made by the Chairman of the FPSO European Congress held on 15th and 16th February this year; the previous day I had my yearly check-up with our financial advisor.  He had plotted a graph showing my investments, the rate of return on my investments and my assumed death (decommissioning) aged 87.  The graph showed my investments sadly went into steep decline in my 80’s and went negative past 87 years old. There was no available cash beyond that date for my upkeep should I live beyond then and life support (my Opex) should I live beyond then.  I went back to the office and spoke to a colleague about it; he had downloaded an investment model (free of charge) which also had a scenario estimating that he too would be “decommissioned” at 87.  The investment advisors had also advised me that if money owed to me was not repaid on my retirement then the graph showed a steep decline and negative balance somewhere in my mid 70’s.

The human financial life cycle of planning, creation development and production and that of the FPSO life cycle seem to have certain similarities; COP’s for FPSO’s are in a life cycle of about 15 to 25 years where as our own human life cycle is about 70 to 87.

The presentations, workshops and side talks of the FPSO European Congress 2017 were about the FPSO life cycle; was it sustainable?

We start in the FPSO life cycle with planning integrity. The average delay in an FPSO project was 11 months from planning through to completion of mobilisation.  This was down to a lack of “planning with integrity”. Too many development projects started with an overly aggressive planning programme with the planners knowing at the outset that the planning programme was unachievable. There was some concerns that everyone involved in the build of FPSO’s and field development programmes using FPSO’s should aim for greater integrity and certainty in planning. Delay costs investors capital and operators revenue.

As part of that planning progress there was a lot of discussion on FPSO standards and operator specifications. Could there be developed a cross industry set of international standards? The answer seemed to be no; FPSO contractors have invested substantial resources into know-how, research and development into their standards. Operators wanted bespoke field developments and wanted FPSO contractors to work off of their specifications.  FPSO contractors have developed their know-how and time in their standards; they were not going to give up their standards because that may mean heavy consolidation in the industry and leave a monopoly of just one or two FPSO contractors in the world.  As operators had field specific requirements it was difficult to standardise an FPSO for every field. 

How about reducing costs by redeploying older and used FPSO’s to new fields?  While this was technically possible costs were prohibitive and it was quicker and cheaper to build a new FPSO or convert an existing tanker.

To reduce costs the operators could extend the life of the FPSO to enhance capability.  It was possible to standardise certain modules and products on FPSO’s but not the FPSO’s themselves.

There was talk of FPSO optimisation. That meant reducing the operator of personnel onboard FPSO’s, utilising big data and reducing helicopters and call  outs. Then the market conditions. Were we moving towards a band of USD $65 to USD $75 a barrel in the next two years or were we in a lower band of USD $45 to USD $55 a barrel or even lower? It seemed that shale oil and shale gas were in direct competition with FPSO’s operating in deep waters on over $50 a barrel, where there were long lead life cycles which required to plan over the life spans of 15 to 25 years or more.

Then there was the threat of other concepts. Would more infrastructures go subsea, would there be greater modulisation, would other new concepts enter the market which could be used as alternatives to FPSO’s?

There was a further workshop and debate on the field economic models used by operators.  Operators were concentrating on field NPV often by extending reserves over longer and longer life cycles in existing fields. However, the FPSO contractor was building FPSOs based on an operator’s model for 15 to 25 years.  Once an FPSO was built at the outset of a field development an operator’s field economics could not be rebuilt.  Were the operators prepared to share their long term forecasts for NPV in particular fields so the FPSO contractors could develop different solutions for FPSO’s and thereby increase developments? The answer seemed to be no. Operators’ field economics developed over time when the field characteristics after first production were better known; operators’ were to a degree secretive about the reserves they thought they could find and reserves that they could actually find.  That was a matter for long term planning in public markets.

The FPSO life cycle did not often seem to match the operator’s life cycle for the field. Were their parallels with investor’s models for human life cycles; both were required to plan long term for an unknown COP date based on historical information, most of which was lost in the mist of time. Refurbishment of human beings could only go so far and was costly, medical bills and insurance at the end of life became hugely expensive and life itself sometimes depended at the end of it on the goodwill of the State to provide services to keep a human being going. In the same way the lack of meeting of minds between FPSO contractors and operators’ sometimes could leave the FPSO contractor’s life cycles heavily dependent on the operators goodwill or other external factors before the FPSO was taken off production and COP happened.

Whichever life cycle you look at “planning integrity” was becoming more and more important. In terms of the FPSO contractors’ life cycle it would appear that unless they can move towards operators’ with more standardisation, optimisation and modulisation, new technology could come into their space from new concepts with lower production costs and provide greater flexibility for field development. Is this time to adapt?

With Houston OTC approaching again on 1st – 4th May it may be time for reflection on what operators want in terms of production installations bearing in mind costs planning integrity in delivery and life cycles and ask is there a different way to do things?

In terms of my own investment model, I have taken the personal decision to put planning integrity out of the window; I am planning for the very best return on my capital, extension of my life into my 90’s, the repayment of all loans due to me and an unsustainable lifestyle as an old age pensioner. I prefer to be unrealistically optimistic and rely on the goodwill of my friends, family and the State to see me through to the end.

Ewan Neilson, Partner

 

 

 

 

 

 

 

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