Which Chinese Offshore Engineering Equipment are in European Shipowners’Mind?

Peng Chenyang

European shipowners have long occupied a large global market share of offshore engineering equipment and orders placed by European shipowners have accounted for 42% of global total contract value in the new century.Meanwhile, European shipowners are also important clients of Chinese shipyards and their orders in Chinese shipyards stand at 461 units, or 24% of their total orders. However, the number of drilling platforms and production platforms constructed with European shipowner orders in Chinese shipyards is far less than orders they placed in Korea and Singapore. The current global offshore engineering equipment operation market is bottoming out,but equipment construction market situations are not eased, surplus equipment supply leads to severe insufficient momentum of European shipowner orders, with very limited new equipment construction requirement lying ahead.

Placing Orders in China

European shipowner orders for offshore engineering equipment in Chinese shipyards have substantially fluctuated since 2000, roughly divided into two phases.

Phase 1: Before oil price slump in 2000-2014, rapid rise in international crude oil prices stimulated gradual release of new construction demand for offshore engineering equipment. Affected by robust oil demand growth of China,India and other emerging economies and regional situation turbulence including Iraq War, Brent crude oil prices rocketed from USD28.66/bbl in 2000 to USD140/bbl in July 2008, a historical high.During the period, European shipowner orders in Chinese shipyards increased from 6 offshore engineering equipment in 2000 to 79 units in 2007, higher than the 25 units on average in 2000-2007 by far. The 2008 global financial crisis led to international crude price slump,European shipowner orders in China in 2008 stood at 26 units, less than 1/3 of the 2007 transactions. However, with gradual recovery of global economy and especially Chinese economy, the average transaction in 2008-2014 stood at 34 units, and hit the stage high of 57 units in 2011.

Phase 2: Since 2014, international oil prices have fallen precipitously and global offshore engineering market has started a new round of corrections. With the rise of shale oil in the United States,crude oil production has risen rapidly,OPEC has applied itself to grabbing market share, American dollar has become stronger and US and Russia game playing has intensified, international crude oil prices started drastic decline since June 2014, giving rise to weak new construction demand growth of the offshore engineering market. European shipowner orders in China stood at 27 units in 2014, compared to 2 units in 2017. Since 2018, international oil prices have continued the rise momentum in H2 2017, European shipowner orders for offshore engineering equipment in Chinese shipyards hit 5 units in January-July of 2018.

European shipowners place orders for ocean engineering vehicles mainly in Chinese shipyards, orders for drilling platforms and production platforms are relatively few, big gaps with orders in Korea and Singapore. From 2000 till now, European shipowners have placed orders in Chinese shipyards for 434 ocean engineering vehicles, or 24% of their total ocean engineering vehicle orders, only ordered 17 drilling platforms and 10 production platforms in Chinese shipyards during that period, accounting for 13% of their total drilling platform orders and 9% of total production platform orders. European shipowners ordered 39 drilling platforms and 33 production platforms in Singapore during that period, figures in Singapore reached 63 and 40 respectively, higher than their orders in Chinese shipyards by far.

However, from historical development, the European shipowner drilling platform and floating production platform field has paid increasing attention to China. In 2000-2007,European shipowners orders for highend drilling platforms and production platforms were mainly undertaken by Singapore and Korea; subsequently,affected by the 2008 global economic crisis, the shipbuilding market entered severe winter, Chinese shipbuilding companies intended to walk out of their dilemma with help of offshore engineering equipment, they started to build some medium- and low-end offshore engineering products, such as jack-up drilling unit. Amidst the sluggish shipbuilding market, China fully entered the market for construction of offshore engineering equipment, with obvious effects on production platform orders.China has since 2011 received orders for 10 production platforms by European shipowners, slightly higher than the 8 units and 7 units of European shipowner orders in Korea and Singapore during the same period.

Potential Order Demand

In 2018, international crude oil prices continued the upward momentum since 2017, offshore oil and gas development costs drastically declined in the tough market environment, global offshore oil and gas development activity enthusiasm gradually rose and the offshore engineering equipment operation market bottomed out and stabilized.However, the present equipment construction market situations remain tough, surplus equipment supply gives rise to weak power of shipowner orders,and overall construction demand of the market is extremely limited. Some shipowners are planning for development with help of low prices, European shipowners long immersed in the operational field of offshore engineering equipment and highly sensitive to market will still grasp current market opportunity.

In the production platform sector,shipowners are primarily lessors and oil/gas companies. European production platform lessors include large-scale BW and SBM as well as relatively small Hoegh LNG, Bluewater and others. Norwegian national oil company Equinor production platform sheet scale is relatively large.For main cooperation partners, BW and SBM mainly cooperate with Petrobras,Shell, Exxonmobil. According to EMA statistics, Petrobras and Shell have many future planned projects, BW and SBM will very likely obtain the lease,hence some production platform order demand in future. Hoegh LNG is mainly engaged in FSRU lease, with fragmented cooperation subjects such as EGAS,CNOOC, PGN, etc. Despite some handheld orders, considering broad natural gas consumption market outlook in future,global natural gas trading situations are optimistic. Bluewater chief collaborator is Shell, Shell has many future planned projects, containing large proportion of self-owned equipment proportion, hence small new growth demand for Bluewater,but Shell itself can act as Chines offshore engineering construction company.

In the drilling platform sector,European top five drilling platform shipowners vary with fleet utilization,Ocean Rig is in the phase of being acquired by Transocean, fleet utilization rate is only 45.5%, with 2 hand-held orders and thus minimal possibility of new ship orders. Fleet utilization rate of Borr Drilling, Maersk Drilling, CNOOC Europe Drilling Branch and Saipem hits above 75%, with certain order placing possibility.

Specifically, as an emerging drilling platform shipowner, Borr Drilling realized the rapid growth of its fleet scale by acquiring Transocean jack-up drilling fleet, Paragon Offshore and inventory drilling platforms Keppel resold, but considering re-operation cost, safety criteria and drilling efficiency factors,Borr Drilling disposed the acquired fleet by scrapping most aging drilling platforms. Therefore, although the company hand-held orders reaches 10,it is predicted that Borr Drilling will still acquire second-hand or inventory drilling rigs. Fleet utilization rate of Maersk Drilling reaches 100%, average vessel age is 9 years, Maersk Drilling suffered losses in 2016 and 2017, on the wake of sell plan falling through,Maersk Group plans to seek Maersk Drilling listing on Nasdaq Copenhagen Stock Exchange in 2019; Maersk Drilling claims not to intend to expand the fleet or change the fleet, hence small possibility of the company fleet expansion. The current fleet utilization rate of CNOOC Europe Drilling Branch is 75%, average vessel age is 9 years, its parent company CNOOC as a domestic enterprise may release some drilling platform orders to domestic enterprises in future on the backdrop of the government's strong support for the domestic offshore engineering equipment industry,worthy of attention by Chinese offshore engineering equipment manufacturers.The current fleet utilization rate of Saipem is 83.3%, average vessel age is 9 years, the company has been in the red since 2017, also considering the current operation market is still at the bottom,hence slight possibility of of ordering new vessels in the future.

For offshore engineering vessels,four shipowners -- Solstad Farstad,Maersk Supply, Vroon Offshore and DOF Management -- have fairly high fleet utilization rates, roughly between 60%and 80%, with young fleet vessel age,averaging 7-9 years, hence insufficient fleet updating demand. Solstad Farstad has since the beginning of the year reduced the fleet scale by selling 3 offshore engineering vessels, entered into agreement to sell another four, with predicted very limited fleet new demand.Maersk Supply and Maersk Drilling pooled respective offshore engineering vessel and drilling platform resources to launch a joint venture Maersk Decom concentrated in the decommissioning and dismantling market of offshore oil and gas facilities. Affected by infrastructure integrity, level approval and re-certification, and limited export infrastructure among other driver factors, decommissioning and dismantling projects are increasing.Maersk Decom has since founding obtained attention of the North Sea and global market. In view of this, Maersk Supply has the possibility of expanding its fleet in the future. French Bourbon Offshore is expediting its transformation as it has developed “BOURBON INMOTION” Intelligent Shipping Action Plan. Under the plan, the company will invest 75 million euros over the next three years to continuously reduce ship operating expenses and will not carry out the investment plan for selling 41 aging offshore engineering support vessels (OSV) at the current market price at current market prices. In addition,the current fleet utilization ratio of the company is only 57.4%, so the possibility of expanding the fleet in the future is slight.

To sum up, the situation of the operating market glut for drilling platforms is still grim, but due to the extremely low price of new construction and the broad prospects for oil and gas development in some regions, such as the South China Sea region, focus can be placed on CNOOC European Drilling needs. For production platforms,continuing oil prices and drastic decline of oil and gas development costs will drive successive release of production platform orders, emphasis can be put on SBM,BW and other European large production platform leaseholders with many client resources. For oil and gas companies,Statoil and and Shell planned projects contain a large proportion of selfowned equipment, offshore engineering manufacturers should pay due attention.The offshore engineering vessel operation market remains low, the oversupply of equipment has not yet improved, hence with very slight possibility of order placing, and most shipowners have been operating in the red over recent years,second-hand deals and resales are increasing in number, with very limited new offshore engineering construction demand in future.