The oil and gas industry is a vital part of Singapore’s economy. It used to account for more than 5% of its GDP and provided employment to over 100,000 workers in Singapore but its GDP contribution had dropped to 1% last year, after the collapse of global oil prices in 2014. In 2013, Singapore was the top rig builder in the world, controlling 70% of the global jackup rig market. Since then, China has gradually taken pole postion with 60% of global market share in jackup rigs.
The collapse of global oil prices had forced major oil companies to greatly reduce their capital expenditure budgets year on year, resulting in prolonged downturn of the oil and gas industry worldwide. There had been no jackup rig orders awarded to Singapore yards in the last few years.
Owing to the recovery of oil price, drilling activities have been picking up in recent months. However, it may or may not translate into new orders for Singapore yards. A major reason is that drilling rig fabrication is a simple technology that can be replicated in yards from China, Korea, USA and the Middle East. Ultimately, the rig fabrication order is secured by the yard that provides the best financial package to the buyer. As Chinese yards are the most aggressive in this aspect and are also willing to provide the most flexible financial terms to the buyer, Singapore yards will face a very stiff competition going forward.
Faced with an increasing threat to its survival, the Singapore oil and gas industry has to consolidate its strengths and focus on new niche areas, in order to differentiate itself from its competitors and thrive in the future. Below are two viable alternatives or new products for Singapore yards.
Below are two viable alternatives or new products for Singapore yards.
1. FPSO (Floating Production Storage Offloading) Vessels
A FPSO is a site and oil field specific FPS (Floating Production System). Each oil field differs in size and oil composition. Some fields may have short depletion periods, which may require early water injection to maintain oil production. Some fields, on the other hand, may have many subsea production units which must be tied back to the FPSO. With so many variables involved in the development of an oil field, the topside modules (oil production equipments) will differ among FPSO vessels, based on the characteristics of each field.
The necessity of such customised topside modules in a FPSO translates into a clear advantage to Singapore yards. Singaporean workers and professionals are able to speak clearly in English, which is an indispensable medium of communication in running a complex FPSO project. A FPSO could cost over USD 1 billion, which is 5 times more expensive than a jackup drilling rig. After a FPSO project is awarded to a shipyard, the oil company (buyer) usually sends in over one hundred of its technical staff to the yard to supervise the project. First, the oil company checks on the fabrication procedures, safety procedures and material traceability reports. Next, it vets all the engineering calculation figures, either by themselves or via a third party authority to ensure safety or code compliance. All these activities are conducted in English, which are then reported in daily meetings and briefings. The reports are written in English for easy and rapid dissemination to all the project partners worldwide.
This may prove to be a difficult feat for Chinese or Korean yards if the FPSO project is run on a fast-track basis. In a fast-track FPSO project, every department in the yard must operate smoothly without any form of miscommunication, from the procurement, engineering, fabrication, planning to the scheduling departments. There will be a lot of changes made throughout the whole project and the yard have to be able to accommodate the changes as much as possible, whilst abiding by the project schedule. All daily activities are carried out in English, at all levels of hierarchy. At present, Singapore is the only English-speaking Asian country that is capable of doing a fast-track FPSO project on time. As such, this is one area where Singapore yards have a distinct advantage over its Chinese and Korean peers.
To prove this argument, one can take a closer look at Sembcorp Marine (SGX: S51). Currently, they have one confirmed job awarded by Norwegian oil giant Statoil for the Castberg development for USD 490 million. The job scope includes the construction of the hull of a FPSO vessel and a 140-man living quarters module. Sembcorp Marine is scheduled to complete this job in 28 months, which is shorter than the usual 36 months (fast-track). The most difficult part of this job will be the construction of the 140-man living quarters (LQ) as Norwegian customers have exceptionally high standards and they will make multiple changes in architectual details throughout the job. However, Sembcorp Marine has the capability of delivering quality fast-track projects on time because they have accumulated plenty of experience from their involvement in previous North Sea projects over the years.
At present, Sembcorp Marine is highly likely to secure two more fast-track FPSO projects this year. The first one is from a Greek independent oil and gas company, Energean Oil. This project is for a proposed small gas field, Karish, off Israel. The job is estimated to begin after their IPO on the London Stock Exchange’s main bourse this month. Sembcorp Marine’s second potential fast-track FPSO order is likely to come from Shell.
Sembcorp Marine has already secured a letter of intent from Shell for its Vito oil field development late last year. It is a very sizeable job order that covers both the hull and topsides, together with the integration. When completed, the FPSO will have a maximum production capacity of 100,000 barrels of oil per day (bpd). This job is slated to start after obtaining approval from various government authorities.
Recently, Shell has made a huge oil discovery in the US – the Whale field. It is estimated to be one of the largest oil discoveries made in the last decade in the Gulf of Mexico, with the potential production rate above 150,000 bpd. As Shell is thinking of fast tracking the Whale project based on a similar concept to the Vito FPSO, it could again award the job to Sembcorp Marine.
If all these fast-track FPSO projects are awarded to Sembcorp Marine, one can support the argument that Singapore yards have a clear advantage over its Asian peers when oil and gas projects need to be fast tracked and executed in English.
Singapore yards have ample experience in meeting project schedules and excellent project execution capabilities. They also have great synergies that complement well with one another. An example would be a grouping of national leaders: Sembcorp Marine, Dyna-Mac Holdings (SGX: NO4) and Keppel Corporation (SGX: BN4)’s Keppel Offshore & Marine.
Last but not least, they have a strong command of English, a vital ingredient in any swift and successful oil and gas project. With the expected recovery and pickup in global FPSO orders, Singapore is well placed to expand its current FPSO capabilities and become a dominant leader in this niche field.
2. Mega Luxury Cruise Ships
There is a growing demand for cruise ship vacations in the world, especially from China, India and Southeast Asian countries. Currently, the level of technical skill and coordination required to build a mega luxury cruise ship can only be found in Western Europe. But large cruise ship construction is an expensive endeavour due to high labour cost in Europe. Building a world class mega luxury cruise ship is complex and multi-faceted. It requires not only a good architectural blueprint and an efficient procurement team, but also an excellent outfitting design plan with world-class safety protocols, to say the least.
Singapore is well equipped with extensive experience and knowledge, together with a strong command in English, to undertake this kind of mega luxury cruise ship construction. In 2013, Sembcorp Marine designed and built the world’s largest living quarters for ConocoPhillips in Norway. The living quarters had an accomodation capacity of over 550 people. The complexity involved in this project is similar to that of a mega luxury cruise ship project, albeit on a smaller scale. Currently, Singapore do not possess the necessary heavy-duty cranes to handle such massive construction projects. However, with some slight adjustment in procedures and investment in appropriate cranes, Singapore can be the first in Asia to become one of the world leaders in the global mega luxury cruise ship market.
In a fast-changing harsh world where cut-throat competition is not uncommon, Singapore cannot afford to be complacent on its past achievements. As it stands, Singapore marine and offshore engineering (M&OE) industry faces the risk of becoming irrelevant if it does not innovate. However, by focusing on niche products like FPSOs and mega luxury cruise ships, it can continue to thrive and be the major engine of growth for Singapore in the decades to come. As Bill Clinton once said, the price of doing the same old thing is far higher than the price of change.
Source: Harrow Pte Ltd, Singapore