Aside from a few major project awards like the Johan Castberg FPSO for Statoil (which I’ll go into more detail on below), things don’t seem to have changed much in the offshore shipbuilding industry. Nobody has placed an order for a drilling rig (yet), and the primary concern for most yards is to get rid of the rigs they already have.
Behind the scenes, however, we’re in the midst of a power shift from Korea to Singapore.
Now that the Korean yards have decided to focus primarily on shipping, which stems from financial constraints and the new “Korea-unfriendly” fundamentals in the offshore drilling rig construction industry, the door is open for Singaporean yards to grow.
Korean yards may not be looking (or able) to compete on drilling rigs anymore, but they would still like to see themselves as the go-to yard for specialized offshore production (FPSO/FSO) projects. Here too, however, their position has weakened to a point beyond what they envisaged.
The offshore industry has shrunk (and will stay shrunken), and Singaporean yards now seem resolved to capture the limited opportunities in the market for years to come. And they’ve started by hitting the Koreans where it hurts most: offshore production.
Korean yards get ambushed by Sembcorp in the battle for Johan Castberg
The Johan Castberg project was viewed as one of the few rays of light that could have illuminated the darkness enveloping Korean shipyards. When Statoil released the tender to four yards (the Korean Big 3 and Sembcorp from Singapore), the odds were in favor of the Koreans.
Samsung had already performed well for Statoil on FPSO/FSO projects, including the Heidrun B and Mariner units. And although Hyundai and DSME have had their share of troubled projects (Goliat for ENI and Ichthys for Inpex), they were also seen as competent, quality yards.
In the end, however, it ended up that Sembcorp snatched victory from the hands of the Koreans with a $490 million bid for Johan Castberg compared to bids from the Koreans in the $575 million range.
Sembcorp’s build-quality is at least on par with the Koreans. And although the Koreans have traditionally excelled in newbuild production rig projects, Sembcorp has also completed a range of FPSO/FSO conversions and are currently working on the Culzean FSO for Maersk Oil (now Total). They were already a strong contender on a technical basis, but they crushed the Koreans on price.
Will Sembcorp make money on this deal? Who knows. Despite that, they struck a hard, blindsided blow to their competition.
Singaporean yards are less burdened by legacy projects and working capital
Sembcorp and Keppel FELS have managed to offload 14 newbuild jackup rigs to Borr Drilling over the last few months. Flexible delivery dates, seller’s credits, and a commercial attitude have allowed them to do what Chinese and Korean yards have wanted to do for a long time: cover their losses on newbuilds.
Hyundai and Samsung have sold (or are in the process of selling) their harsh environment semisubs to new owners, but they’ve taken massive haircuts on these projects after construction delays and cost overruns. And DSME, with 8 drillships under construction, still needs to figure out what to do with the Cobalt Explorer and Sonangol drillships – all while they continue to wait for the end of deferred delivery periods for their other newbuilds.
By rough estimates, Samsung and DSME are burdened with around $5 billion in working capital on the 15 drillships they have yet to deliver. The amount of working capital that the Singaporean yards have tied up is trivial compared to the Koreans.
The Singaporean yards’ financial position allows them to take on more risk than their competitors. Because of that, more projects will go their way.
Singaporean yards are better suited for the new fundamentals in the offshore market
Korean yards, due to higher labor costs, have relied on technology to give them a competitive advantage.
But this technology also limits Korean yards’ ability to build “one-off” projects. To make a profit using their rigid assembly-line methodology (which is great for conventional shipping) they need to build series after series of cookie-cutter vessels. This is something that’s hard to deviate from and doesn’t match with the outlook for newbuild offshore construction projects in the future.
Singaporean yards don’t have this problem; they’ve already got low labor costs. But now they’re strengthening their position by streamlining their shipyard business and enhancing their technical capabilities and efficiency. As proof of this, Sembcorp has plans to consolidate its yard facilities into their new “mega-yard” which has technological advantages that rival those found in Korea and don't have the same high-volume dependency.
Singapore, who relies on the offshore drilling market for survival, can now more aggressively focus on the offshore production market too. They’ve further threatened the Koreans’ unstable foothold in the segment and could end up dislodging it entirely.
China is Singapore’s main offshore competitor now
With similar (or lower) labor costs, China is the only real competitor to the Singapore. Singapore has traditionally beaten China on quality, reliability, and offshore rig expertise, but this is changing.
Over the past 10 years, China has built (or is building) nearly 150 offshore rigs. Their strength lies primarily in jackups which, like drillships, are unlikely to see a newbuilding boom anytime soon.
But, Chinese yards are preparing for the new offshore market. They’re cleaning up their mess of stranded jackups, consolidating their large network of shipyards, establishing centers of competence at each yard, and focusing on building expertise for complex offshore projects.
In the near-term, China may still be at a disadvantage (although much less than before) for 1st tier construction projects. But they will take more market share from Singapore and are the only force – potentially a strong one – that Singapore is up against.
So what happens next?
The scarcity of offshore shipbuilding projects expected over the next few years is going to make it tough for more than a select number of yards to generate sustainable offshore-related business.
At least for now, and unless something dramatic happens in Korea, the future of offshore shipbuilding looks to be focused on Singapore, with China second in line.
As for the Koreans, it’s hard to see how they’ll have any choice other than to do as Japan did and fade away from the offshore industry. A lot depends on what happens in the next big test for Korean yards: the Rosebank FPSO tender for Chevron.
Data: Bassoe Offshore,; Image attribution: main image from sembcorpmarine.com