As dire market conditions continue to hit the floating production system (FPS) sector, companies have delayed or cancelled projects, would-be orders have fallen by the wayside and shipyards have been forced to lower prices to lure the little business that still exists.

“Many yards had large backlogs and were struggling to work through all of the orders that they had received in the last few years, but much of this has now been worked through,” Ben Wilby, an analyst for energy consulting firm Douglas-Westwood, told SEN.

However, the firm foresees a turnaround for the FPS sector in second-half 2016 as commodity prices rebound further, having risen to about $50 per barrel this week after having sank to a low of about $27 earlier this year. Also boosting the prospects for better times ahead for the sector are cheaper shipyard and module fabrication costs as well as reengineered projects.

If all goes as expected, more orders for FPS units could come this year and in 2017, according to Douglas-Westwood. These could include a semisubmersible floating production platform for the long-awaited second phase of BP’s Mad Dog development in the U.S. Gulf of Mexico’s Green Canyon region.

Based on the forecast, there could be between five and 10 FPS units ordered this year. However, continued pricing pressure brought on by the commodity price squeeze could alter the outlook.

In the meantime, technical yards—including those based in Korea—are suffering, particularly those that positioned themselves as the go-to spot for construction of complex newbuilds and conversions.

Shipyard woes

Using the Prelude LNG FPSO unit, which is under construction by the Technip-Samsung Heavy Industries Consortium in South Korea, and FPSO Egina, also being constructed by Samsung Heavy Industries for the offshore Nigeria development, as examples, Wilby said “these kind of massive projects simply aren’t going to be ordered in the next few years.”

Perhaps, better positioned to continue weathering the downturn are Chinese yards, which are considered “a cheaper place to go for simple conversion/upgrade work, which is what the majority of new orders are likely to be,” Wilby said.

But even these yards have not been able to escape brutal market conditions.

In 2015, only four orders were placed for FPS units, and 2016 has fared worse—as no orders have been placed. Hopes for shipyards and others to land work for the Vette FPSO unit were squashed in March 2016 when Det Norske Oljeselskap canned its Vette, formerly known as Bream, oilfield development project in the North Sea.

“Despite the current lack of orders, there are still near-record backlogs to be worked through, ensuring shipyards remain active,” Wilby said. “The speed with which new orders arrive will be important, and we anticipate that the first order will likely lead to a spurt of other orders.

“With orders increasing, prices from shipyards are likely to be viewed as having bottomed out—leading to a rush to capitalize on the low prices,” he added.

Falling costs

Working with partners BHP Billiton and Chevron, BP already has chopped costs for the Mad Dog Phase 2 project to $10 billion from $20 billion in 2012, a result of “new project phasing, simpler design and by using repeat solutions instead of bespoke ones,” according to BP executives.

Speaking during an upstream investor field trip this week in Baku, Azerbaijan, BP upstream head Bernard Looney talked about how optimizing subsea equipment for the project’s 22 wells have lowered costs. BP continues to rebid key contracts associated with the project.

“You can see what it was just two years ago, what similar equipment on Atlantis was built for 10 years ago, and where we are now,” Looney said. “That’s a huge saving. And every element of the project is going through this degree of rigorous challenge.”

Partners in 2012 had planned a second spar for Mad Dog 2, but high costs prompted them to temporarily halt the project. In the years since, the companies have maintained their commitment to the project, while searching for a more economical approach.

Based on plans approved in 2015 by the U.S. Bureau of Ocean Energy Management, the project, which calls for 29 subsea wells that include 17 producers and 12 water injectors, will have five drill centers and feature a 140,000-bbl/d semisubmersible floating production platform. The facility also will be capable of providing 280,000 bw/d of low-salinity (LoSal) waterflooding.

But a final investment decision (FID) has not been reached.

“We’re not trying to catch the low here in terms of rates for activity,” BP CFO Brian Gilvary said on the company’s latest earnings call. While reengineering, re-scoping, rescheduling and recontracting some of the activity has led to projects moving sideways, the economics and ultimately, value for shareholders, ends up being better, he added.

However, BP doesn’t plan to await the “absolute low, low, low before we go to FID.” The operator originally planned to make a decision on Mad Dog 2 by early 2016. A decision could come later this year.

“Some people say that deep water is finished. … We have a very different view. Based on our current calculations Mad Dog will break even around the $40 per barrel mark,” Looney said.

Brighter outlook

The FPS outlook appears to be more positive in 2017 when more than 10 orders are expected as projects move beyond the FEED stage within reach of FID, according to Wilby.

But the orders will carry a lower value compared to previous years, mainly because the units being ordered are expected to be smaller.

“The days of $2 billion-plus FPSOs are likely over, and instead we will see more small units, with the number of newbuild FPSOs likely to be low,” Wilby said. “This will start in the second half of 2016 but will become the norm for many years to come.”

The unit price for orders this year is expected to be about $200 million. This could jump to about $300 million in 2017.

In all, Douglas-Westwood forecasts expenditure on installations in the sector to remain high. A spend of $58 billion on FPS units is predicted between 2016 and 2020, which is 31% higher than the hindcast (2011-2015).

“Much of this capex is for units ordered before the oil price collapse with sustained high oil prices leading to the sanctioning of high capex FPS units,” Wilby said.

As for where dollars will flow, Latin America and Africa remain among the high-capex regions for FPS units. The regions account for 33% and 22%, respectively, of the spending, the firm said. The North American, Asian, Australasian and West European regions could each see a more than 8% share of the total capex.

In addition, the outlook showed that FPSO units will continue to dominate, accounting for 79% of capex. FPSO units are followed by tension-leg platforms, 9%; floating production semisubmersibles, 10%; and spars, 2%.

“The next few years represent a major opportunity for operators to capitalize on lower costs, while also providing manufacturers with the opportunity to move toward standardization as the industry focuses on cutting costs,” Wilby said. “What will be vital is ensuring that the lessons learned are not forgotten should there be an unexpected increase in the oil price.”