Floating Production: Rates, Prospects Surge

The energy sector’s robust Merger and Acquisition (M&A) activity of 2023 has continued in 2024, with a number of high-profile deals impacting the offshore oil and gas sector. But many of the reported transactions have seen oil companies bolstering their stakes onshore, notably in the Permian Basin (a trend labeled as “Shale 4.0” by analysts at Rystad Energy) following the announcement earlier this year that ConocoPhillips would acquire Marathon Oil for roughly $22.5 billion.

But offshore oil and gas still looms large.

In a late 2023 deal that was labelled as a “blockbuster”, Chevron (NYSE: CVX) announced an agreement to acquire Hess (NYSE: HES) in shares-for-shares deal valued at $53 billion. In late May, Hess shareholders approved the deal. But an imbroglio regarding Hess’s assets in the Stabroek Block offshore Guyana has delayed the transaction’s closing, which was originally set for first half 2024. In the dispute, which is currently being arbitrated, Exxon Corporation (NYSE: XOM), with a 45% stake in Stabroek, has claimed a right of first refusal (“preemptive rights”) to purchase Hess’s Guyana holdings under an operating agreement that also includes China National Oil Company (CNOOC, with a 25% holding, filed separately for arbitration).

After the end May vote, Hess said: “Completion of the merger remains subject to other closing conditions… and the satisfactory resolution of ongoing arbitration proceedings regarding preemptive rights in the Stabroek Block joint operating agreement. Chevron and Hess are working to complete the merger as soon as practicable.” Exxon, however, suggested that the arbitration, filed with the International Chamber of Commerce (in Paris), might continue into 2025.

Geopolitics further complicates things, as Guyana is engaged in a dispute regarding Venezuela’s possible rights to ownership, stemming from a treaty signed in the late 1800s. Though the International Court of Justice (a United Nations agency) asked Venezuela to refrain from asserting sovereignty over a large swath of Guyana (intersecting with Stabroek), the issue remains unresolved.

Economics of Exploration

Amidst these uncertainties, which followed on surges in exploration and discoveries in 2022-2023, chartering activity for exploratory drilling in the region had been muted. As exploration continues; March, 2024 saw the year’s first discovery, at the Bluefin well (XOM’s sixth sanctioned project in Staboek). First half 2024 saw XOM taking two ultra-deepwater drillships, Stena Carron (Gen 6 DP3, already stationed in Guyana) and Stena DrillMAX (completing a brief stint off Newfoundland & Labrador for ExxonMobil, following earlier work in Guyana, including the successful Bluefin discovery), for work starting in late 2024 at undisclosed day-rates. Activity is again picking up. Analysts Evercore ISI noted in its May edition of “Offshore Oracle” that: “Dayrates for Ultra DeepWater <drillships and semi-submersibles> are looking robust, averaging in the high 400s YTD. Four rigs announced this year so far exceeded $500 kpd, including the Deepwater Asgard (Transocean $505 kpd), the Deepwater Atlas (Transocean $505 kpd), the West Capella (Seadrill $545 kpd), and the Deepsea Aberdeen (Odfjell Drilling $504 kpd)”

How might these escalating day rates impact the economics of exploration; could projects be cancelled? At the 2024 Marine Money event held in late June in New York, Rystad Energy consultant Mike McCormick’s wide-ranging presentation addressed this question, saying: “We are in the early innings of an offshore up-cycle,” noting that global offshore capital expenditures in 2023 had reached $205 billion (with 13% tied to exploration). For 2028, Rystad forecast growth up to $242 billion of offshore capex. In his remarks, McCormick opined that the advent of $500k day rates would have minimal impact on decisions to move ahead; indeed, he said “Upcoming deepwater Final Investment Decisions (FIDs) are highly profitable at current price and cost levels.” In explaining the economics at play, he noted that oil majors would look for a 15% - 20% return threshold for moving ahead on projects. The Rystad analysis suggested that, with $500k/day hires on rigs, a proportion of around 15% of deepwater projects awaiting FID would see internal rates of return below 20%. Reminding the Marine Money audience that the previous upcycle saw day rates nearing $800K/day, he suggested that around 50% of contemplated projects could still go ahead if hires on drilling assets approached such levels again.

Fleet Developments

The exploration sector’s onshore merger mania (which saw XOM complete its $60 billion purchase of Pioneer Resources in Spring, 2024) has been complemented with an offshore component. In June, 2024, Noble Drilling announced terms of its acquisition of Diamond Offshore, in a transaction expected to close in early 2025. Noble wrote that: “Noble will own and operate a fleet of 41 rigs including 28 floaters and 13 jackups. Additionally, backlog for the combined company would be approximately $6.5 billion as of today.” After the deal, with a closing anticipated in Q1 2025, Diamond shareholders will own approximately 14.5% of Noble's shares. According to Evercore ISI, the merger would create the fourth largest rig owner (following COSL, ADES and Valaris).

Enhanced technologies, tied to optimizing operations, are playing a role throughout maritime sectors, including in offshore. The drillship Stena Drillmax, bound for Guyana following its deployment offshore Newfoundland & Labrador, also achieved a first, receiving the ABATE (P) notation from Class society DNV. As explained by DNV, “Stena Drilling has implemented several technical and operational measures to enable Stena Drillmax to substantially reduce Greenhouse Gas Emissions.” DNV adds that “this notation (reflecting best practices for emissions reduction, and monitoring) follows on to Stena Drilling gaining the ISO 50001 certification for energy management.”

Offshore production, typically accomplished through consortia of large oil companies, is seeing continued technical advances, buttressed by the project finance structures behind the deployment of FPSOs. Liza Unity, one of two FPSO’s working for XOM at its Liza field (the oil giant’s first sanctioned project at Guyana) recently attained the first REMOTE-CON notation for an FPSO from American Bureau of Shipping (ABS). According to ABS’s President and Chief Operating Officer, John McDonald, ““Safety and quality are at the heart of our mission, and we join SBM Offshore and ExxonMobil Guyana in the commitment to exploring new innovations for the betterment of offshore energy production.”

In early 2024, XOM paid more than $1.25 billion to SBM Offshore, which had built the FPSO Liza Unity in Singapore at the Keppel yard (now Seatrium), to attain ownership of the FPSO. Under a “project finance” structure, initial financing (of $1.14 million at Libor plus 1.50%) agreed in 2019 was sourced by SBM Offshore from a consortium of nine international banks. The payment from XOM was then used to pay off the original project finance facility (following a standard two year post “post completion” period in the initial loan, when the ownership of the unit is transferred to the new owner).

Liza Unity, along with a second unit, Liza Destiny (deployed in 2019), were the first to be constructed using SBM’s innovative Fast4Ward program which combines the multi-purpose hull and several standardized topsides modules. SBM has plans in place for construction of eight hulls with the uniform designs. In late 2023, SBM announced that it had booked a $210 million “revolver” with an 18-month tenor (option of an additional six month) for hull financing. When the hulls are sold, or project finance loans are drawn down, then a portion of that revolving credit will be repaid (along with senior loans that might also be in place). The FPSO Prosperity is also working for XOM in the region. XOM explains that these units use produced gas to help power the FPSOs- reducing emissions compared to flaring of the gas.

In Spring, 2024, XOM announced that it was forging ahead on “Whiptail”, a new project offshore Guyana which is slated to come online in late 2027. In advance of the FID, the oil giant had previously set in motion a contract for engineering/design of the fifth FPSO, to be named Jaguar, in the Fast4Ward program. According to SBM Offshore, the new Fast4Ward FPSO, which will be moored in waters with a depth of 1,630 meters, will be able to produce around 250,000 bbl/day of oil; storage capacity is 2 million bbl/day. In June 2024, the hull (designated as MPF5 and now set for topside work in Singapore) was launched from a drydock of the Shanghai Waigaoqiao Shipbuilding (SWS), a subsidiary of China State Shipbuilding Corporation Limited (CSSC). In a new business model for SBM Offshore, it will operate the FPSO for the oil company owner. Øivind Tangen, the CEO of SBM Offshore (assuming the role in April, 2024), commented in a Q1 financial report, “…It will be our first based on a sale and operate model, adding an accelerated cashflow profile for the project to our backlog. Following transfer of ownership to the client at the end of the construction period, we expect to operate the FPSO under our 10-year Operations and Maintenance Enabling Agreement.” SBM Offshore also announced that it had sourced $250 million in a 12-month bridge loan (optional six month extension), to be repaid when a construction finance package kicks in.

To the east of Guyana, Suriname is also seeing oil exploration, and production. Total Energies, the operator of “Block 58” in waters approximately 150 miles offshore Suriname, is expected to make a FID in late 2024 regarding an FPSO project, following successful exploration using the drillship Noble Valiant. If plans move ahead, production would start sometime in 2028. In preparation, SBM Offshore, partnering with Technip Energies, and in line with the Front End Engineering and Design (FEED) studies, has reserved another a Fast4Ward hull.

Still father to the east, Petrobras has been ramping up its activity in the Santos Basin offshore Brazil. Late April saw the arrival of the newly constructed FPSO Marechal Duque de Caxias, owned by MISC Berhad, at the Mero field, following a voyage from Yantai, China. This FPSO had been converted from a VLCC at the CIMC Raffles yard, which also handled construction and integration of topside modules.

In May 2024, after FID was taken on new projects, Petrobras announced that it had awarded Seatrium with construction contracts for two FPSOs (to be named P-84 and P-85), with an aggregate pricing in excess of the equivalent of $8 billion. According to Seatrium, each FPSO will each have a production capacity of 225,000 barrels of oil/day and gas processing capacity of 10 million m3/day. Delivery of the two FPSO’s is slated for 2029; they will operate in the Atapu and Sépia fields (also in the Santos Basin); where Petrobras has majority stakes (but consortia members also include Total and Petrogas). Petrobras’s Strategic Plan for 2024 – 2028+, unveiled in late 2023, pointed to deployment of 14 new FPSOs, of which 10 had already been contracted. According to the company, “A new generation of more modern, more technological, more efficient platforms, with lower emissions, is being built.”

Shell (with a 16.7% holding in the Atapu consortium), elaborated on the advanced technologies, saying: “The new unit <P-84> will feature all-electric capability, aimed at lowering carbon intensity for production processes.” Seatrium goes into additional detail, saying that: “Both FPSOs will incorporate advanced technologies such as zero routine flaring and venting, variable speed drives and measures to control emissions and capture CO2, including an all-electric concept, which focuses on efficient power generation and increased energy efficiency to achieve a 30% reduction in greenhouse gas emissions intensity.”