Sentiment among established offshore oil and gas services companies in Singapore may be improving after being pressured over the past year by intense competition from North Asia, especially China, where excess capacity has driven many shipyards to turn to the offshore market to shore up their revenue base.
In contrast to Singapore offshore companies, Malaysia oil and gas services firms were to a large extent shielded from Chinese competition as the local offshore oil and gas market provided some business opportunities for them.
SINGAPORE FIRMS FACE PRESSURE FROM CHINESE YARDS
Subsidiaries of Singapore offshore contractors Keppel Offshore & Marine (Keppel O&M) – a unit of Keppel Corporation Limited – and Sembcorp Marine Ltd. encountered intense competition from Chinese shipyards throughout the year.
Profit margins at Singapore’s two largest offshore companies fell. Keppel O&M, whose year-on-year net profit dipped 8 percent to $351 million in the first half of 2013, said in July that “mounting competition from … Chinese yards continues to suppress prices and margins for newbuild rigs.”
Sembcorp Marine’s net profit also declined in the same period, with the firm posting a gain of $192 million, 5 percent lower than the previous year. Like its local rival, Sembcorp Marine said in its Aug. 1 press release that “competition from the Chinese … yards will impact margin.”
Future prospects for the two Singapore companies looked rather bleak judging by their financial performances in the first half of 2013.
New orders, excluding contract awards from Petroleo Brasileiro S.A., for the two Singapore companies amounted to $4.78 billion, comprising $3.98 billion for jackups and $800 million for a semisub, Sept. 24 data compiled by Vincent Fernando, Research Director at Religare Capital Markets (Singapore) Pte Ltd. indicated. In the corresponding period, China yards snared jackup and semisub orders worth $5.5 billion and $1.3 billion, respectively, for a total of $6.4 billion.
Several factors were cited for helping China to make a dent in Singapore’s share of the rig construction market.
“Major Chinese yards bidding aggressively, with attractive payment terms offered to customers, helped by government support,” are factors cited by Vincent Fernando at the 12th Annual Marine Money Asia Week in September.
OPTIMISM RETURNS ON RECENT CONTRACT AWARDS
The two Singapore offshore companies headed towards year end with a flurry of contract awards, which reached almost $2.6 billion. Keppel O&M accounted for over 86 percent of new orders and the highlight was a $1.1 billion contract award to its subsidiary Keppel FELS to build five KFELS Super B Class jackups for Transocean Ltd. Besides winning another 3 KFELS Super Class B jackups orders, Keppel FELS will also construct a $265 million KFELS Super A Class jackup for Ensco plc.
Meanwhile, Keppel O&M’s other subsidiary, Keppel Shipyard, won two contracts, worth $190 million, from SBM Offshore N.V. and M3nergy Offshore – a unit of Malaysia’s emerging exploration and production firm M3nergy Bhd – for the conversion of two floating, production, storage and offloading (FPSO) vessels.
Separately, Sembcorp Marine’s Jurong Shipyard will build a semisubmersible well intervention rig for Helix Energy Solutions for $346 million.
Some industry watchers opined that exploration and production expenditure would stay robust so long as oil prices remained above $80 a barrel, a level that should support ordering and tendering activities.
Positive signs are emerging in the offshore and marine market. The optimism is underpinned by “a sharp rise in global orders for jackups at 59 units year to date [2012: 20] – the highest since 1980 – [which] demonstrates the strength of the jackup market … [and] the recent $1.1 billion mega rig order [5+5] placed by Transocean with Keppel,” Yeak Chee Keong, Maybank Kim Eng Research Analyst said in a Nov. 22 note to investors.
To stay ahead of the competition in the offshore sector, Keppel O&M and Sembcorp Marine have invested in quality and efficiency.
Keppel FELS seeks to offer products higher up the technological ladder like drillships and an ice-class jackup, while Sembcorp Marine is boosting efficiency with the commencement of operations at its Sembmarine Integrated Yard @ Tuas in August. The new yard allows Sembcorp Marine to undertake FPSO conversions as well as servicing a wide range of vessels, including very large crude carriers (VLCC), new generation of mega containerships, liquefied natural gas (LNG) carriers, cruise ships, semisubmersibles, offshore vessels and fixed platforms.
“Invest in research and development (R&D), intellectual property, and move up the value chain away from simply building rigs to designing and owning offshore technology,” Fernando commented on the means which the two Singapore yards could employ to stave off the challenges of their Chinese counterparts.
The ability to deliver their projects on schedule, if not earlier than planned, is a distinct advantage enjoyed by the Singapore yards over their Chinese rivals. This is especially significant in the rig industry as any delay in delivery can cost rig and drillship operators as much as $500,000 a day.
“Over the past five years, rigs ordered from Keppel and SembCorp were, on average, delivered ahead of schedule, whereas Chinese yards delivered 50-250 days late” according to The Economist, which quoted a research firm in its Nov. 23 edition.
PETRONAS PROVIDES CHEERS FOR MALAYSIA’S OFFSHORE SECTOR
Malaysia’s national oil and gas firm Petroliam Nasional Berhad (Petronas) brought some year-end cheer to the domestic offshore industry by awarding a major 13-package, five-year offshore hook-up, commissioning and maintenance services contract with a total value of around $3.1 billion (MYR 10 billion) to six local service providers.
The Pan Malaysia Integrated Hook-Up & Commissioning (HUC) and Topside Major Maintenance (TMM) Contract was awarded to Kencana HL Sdn Bhd, Dayang Enterprise Sdn Bhd, Petra Resources Sdn Bhd, PBJV Sdn Bhd, Carimin Engineering Services Sdn Bhd and Sigur Ros Sdn Bhd.
These six firms will provide HUC and TMM services to nine Petronas’ Production Sharing Contractors, namely Petronas Carigali Sdn Bhd, Sarawak Shell Berhad & Sabah Shell Petroleum Co. Ltd., ExxonMobil Exploration and Production Malaysia Inc., Murphy Sarawak Oil Co. Ltd., Hess Oil and Gas Sdn Bhd, Talisman (Malaysia) Ltd., Newfield Peninsula Malaysia Inc. and JX Nippon Oil & Gas Exploration (Malaysia) Ltd.
These companies will supply hook-up & commissioning and maintenance services for offshore facilities and includes all the necessary services, such as manpower services, marine spread services, and tools as well as equipment, which are required to carry out the respective workscopes.
“Petronas is committed to providing business opportunities to such companies, and this Pan Malaysia initiative … is one such example of our continuous efforts towards this in Malaysia’s upstream services industry,” Petronas’ vice president of Petroleum Management Ramlan A. Malek said Nov. 14 at the launch of the contract.
With an eye towards the future, Petronas acknowledged that while the long-term provided the company better economies of scale and lower the company’s overheads, the contract is intended to provide local offshore companies with an opportunity to grow their businesses.
The deal is expected to “encourage the respective service contractors to invest in additional assets and allow for better retention and development of experienced workforce,” Petronas said in a Nov. 15 company announcement.
In the case of SapuraKencana Petroleum Bhd’s subsidiary Kencana HL, CIMB Research said in its Nov. 18 note that “the two packages [it won under the Petronas 5-year contract] are keeping company’s yard and offshore support vessels busy.”
The importance of Petronas contracts will certainly provide some scope for growth among Malaysia offshore services companies. Dayang Enterprise, which focuses on the provision of maintenance services, fabrication operations, HUC and charter of marine vessels is one such firm.
With many offshore platforms in Malaysia over 20 years old, there is an urgent need to upgrade these facilities. Dayang will have the opportunity to grow its business as the company “is emerging as a power house offshore HUC player in a region of aging oil and gas infrastructure,” Jason Tan Yat Teng, an analyst with Hong Leong Investment Bank Research said in a Nov. 27 note.
The trickle-down effect of Petronas’ support for Malaysia’s oil and gas industry was further illustrated when the firm appointed three more companies –Petroclamp Sdn Bhd, Omni Oil Technologies (M) Sdn Bhd and Eastern Energy Services Sdn Bhd – to its Vendor Development Program (VDP). The objective of the VDP was to create “resilient and competitive Bumiputera [indigenous] entrepreneurs in oil and gas-related manufacturing and technical services of medium and high technology with an import-substitution end-goal,” Petronas said in Nov. 20 press release.
Singapore offshore firms, especially the island’s two largest players – Keppel O&M and Sembcorp Marine – ended the year with a little more optimism as more contract awards rolled in than they did in mid-2013, when profitability came under pressure from Chinese yards. While they have made investments to improve product offerings and services, it remains to be seen whether these measures are sufficient. Meanwhile in neighboring Malaysia, offshore services providers continue to benefit from Petronas’ support for the local petroleum industry. Even so, more work lies ahead for offshore services providers in both countries in 2014.