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Norwegian Energy Partners Annual Offshore Oil & Gas Market Report 2019-2022

Report prepared by Rystad Energy August 2018 NORWEP Annual Offshore Oil & Gas Market Report 2018

7. Shipyards in Asia

7.3.1 Shipyards in the Republic of Korea – Market Introduction The South Korean government has been heavily involved in maintaining the has only two producing fields, Donghae and Gwangyang, operated by competitiveness of the yards through financial support and a state-backed ship Korea National Oil Corporation (KNOC) and POSCO Energy, respectively. Together financing company that was established to improve the yards’ financial health. In May the two fields produced approx. 6.6 kboepd in 2017. As one of the top ten energy 2017, South Korea elected a new president, Moon Jae-In. The new administration is consumers in the world, South Korea is thus also one of the most important energy expected to follow up these initiatives to help shipbuilders overcome the crisis. Among importers globally. Due to South Korea’s dependency on imported oil and gas, the the country’s three largest yards, DSME has reportedly been in the most challenging country has, to some extent, benefited from the low oil price the previous years. South situation. The CEO of DSME reported in June 2018, through a press briefing, that the Korea is one of the largest nations in the world, with a market share of company’s goal was to make DSME attractive again so other companies would be almost 30%. The industry has suffered from the oil price drop and the following interested in potentially acquiring the yard. It has been rumored that could reduced activity in the offshore and marine sector. In 2017, the country was ranked as be a potential buyer of DSME, but nothing has been publicly communicated. number 51 on Transparency International’s Corruption Perceptions Index, down from 50 in 2016. In 2015, the country ranked as number 37. From January to June 2018, the South Korean yards experienced a 23% increase in new orders compared to the same period in 2017. The three yards have received Shipbuilding is one of the most valuable export industries in South Korea and orders worth USD 10.1 billion, compared to USD 8.2 billion in 2017. SHI, HHI and contributed with almost 8% of the country’s total exports in 2016. This mainly comes DSME have received orders of USD 2.9, 4.1 and 3.14 billion, respectively. from three big yards, often referred to as “the big three”: (HHI), Samsung Heavy Industries (SHI) and Daewoo Shipbuilding & Marine 7.3.2 Major Shipyards in the Republic of Korea (DSME). Their toughest competitors are the Singaporean and Chinese In addition to the three largest yards, Hyundai Heavy Industries (HHI), Samsung yards, both in the vessel, rig and offshore segments. The South Korean yards have Heavy Industries (SHI) and Daewoo Shipbuilding & Marine Engineering (DSME), traditionally relied on more advanced technology than their competitors to gain there are also smaller yards in the country, such as STX Offshore & Shipbuilding, advantage due to the country’s higher labor cost. South Korea has been considered Hyundai Mipo Dockyard, Hyundai Samho Heavy Industries, Heavy Industries & the number one in Asia when it comes to the construction of drillships and advanced Construction (HHIC) and Sungdong Shipbuilding & Marine Engineering. Hyundai Mipo offshore production facilities such as FPSOs and FLNGs. During the last years, Dockyard, Hyundai Samho Heavy Industries and Hyundai Heavy Industries are all however, yards in South Korea have lost market share in the offshore segment to three part of the HHI Group. their competitors in China and Singapore, which have proven capable of delivering more high-end products than earlier. Hyundai Heavy Industries (HHI) Hyundai Heavy Industries (HHI) was established in 1973 and is located in Ulsan in The past few years have been challenging in both the offshore and marine segments, South Korea. As a consequence of the decrease in the shipbuilding and offshore and the South Korean yards have also struggled. Yards have been under financial market, HHI announced a restructuring plan in 2016 with the aim to improve strain, but are seeing some recovery in terms of new orders as a result of increase in management efficiency and competitiveness. During 2017, HHI reduced its workforce oil price and market activity. On the other hand, steel prices have also increased and and spun off its non-shipbuilding and non-offshore businesses. The remaining main sales prices are low in all segments. The three yards have since 2015 announced segments are now Shipbuilding, Offshore & Engineering, Engine & Machinery, and restructuring plans which have led to a massive reduction in the workforce. According Green Energy. Electric & Electronic Systems and Construction Equipment were to the Korea Offshore and Shipbuilding Association, the workforce will be halved at business units under HHI before the restructuring. Hyundai Samho Heavy Industries the end of 2018 compared to 2015, from over 200,000 to about 100,000 employees. (HSHI) and Hyundai Mipo Dockyard (HMD), two other shipbuilding companies, are also part of the HHI group.

Source: Rystad Energy research and analysis

220 NORWEP Annual Offshore Oil & Gas Market Report 2018

7. Shipyards in Asia

In 2017, HHI ranked as the world’s largest shipbuilding company in terms of number Samsung Heavy Industries (SHI) of vessels delivered (market share of 8%). When including HSHI and HMD, the HHI Samsung Heavy Industries (SHI) is one of the largest shipbuilding yards in the world Group achieved a combined market share of 15% in terms of number of vessels in terms of revenue. It was founded in 1974 and is a subsidiary of South Korea’s delivered. largest , Samsung Group. The company’s main shipyard is located at Geoje Island outside of Busan. SHI divides its operations into three main divisions: In June 2018, it was announced that the offshore yard would temporarily shut down in Shipbuilding & Offshore, Machinery & Electric System and Technology Development. August 2018 due to lack of work, for the first time since the division began operations The original focus of the Shipbuilding and Offshore division was construction of in 1983. HHI ran out of offshore work when it completed its last order, acquired in tankers, container ships, LNG carriers, bulk carriers and passenger ships. Gradually, November 2014, an oil and gas platform for the Nasr oilfield in UAE. The platform the focus shifted towards offshore structures and facilities and the yard has for several sailed out from the yard in August 2018. HHI reports that it will be difficult to win new years taken on more offshore related projects such as drilling rigs, FLNGs, FPSOs, offshore orders at the current operating cost and that it is vital for the company to cut floating offshore structures, fixed platforms, offshore construction vessels and wind costs. According to the company, 5,600 offshore workforce and 3,000 supplier turbine installation vessels. Before the downturn, SHI captured a significant market workforce will become redundant. The company has not reported an exact duration of share in several segments, especially within drillships and FLNGs. the shutdown, but said that it will not re-open the yard until new offshore orders are secured. SHI has been through downsizing and restructuring during the last years due to the challenging market situation in both the offshore and marine sectors. In a restructuring The annual revenue from shipbuilding has declined since 2013, following the plan from 2016, the yard reported it would cut its workforce with 30-40% by the end of stagnation in the industry. In 2017, the company’s revenue from the shipbuilding 2018. By the first quarter of 2018, the yard had reduced its workforce by 26% (from segment reached KRW 4,800 billion, compared to KRW 7,500 billion in 2016. In Q4 14,000 to 10,300). 2017, shipbuilding contributed 59% of the company’s total revenue. HHI has earlier communicated that it expects a further decline in 2018. New orders increased from SHI has experienced an overall decline of almost 50% in total revenues from 2013 to USD 3.9 billion in 2016 to USD 4.7 billion in 2017, i.e. a growth of 20%. Before the 2017, with the total revenues in 2017 ending at KRW 7,900 billion. For 2018, the shut-down plans were announced, the target for 2018 was communicated to USD 6.8 company targets revenue of KRW 5,100 billion, down 35% compared to 2017. During billion, and as of June 2018, 30% of this had been secured. The main contributor to 2017, the company has decreased its debt-to-equity ratio from 170% to 140%, which new orders during 2018 (up to June) have been gas carriers and tankers (8 of each). is a continued trend from 2015. During 2017, the yard delivered 54 vessels and expects to deliver 46 in 2018. New orders increased from a low of USD 0.5 billion in 2016 to USD 6.9 billion in 2017, The offshore industry and engineering business of HHI is located in a separate yard primarily driven by the offshore sector. The most important high-impact deal was the (the one that will shut down in August 2018) 5 km away from the main shipyard for USD 2.5 billion contract for the Eni-operated Coral FLNG. During H1 2018, new commercial vessels. The main products in the business are floating units, fixed orders were approx. USD 2.9 billion, while the reported 2018 target has been platforms, pipelines & subsea facilities as well as onshore modules. In Q4 2017, the communicated to USD 8.2 billion. As of July 31, 2018, the order backlog reached segment contributed with 17% of the company’s total revenue, which is slightly more almost USD 20 billion, approximately equal to the end of 2017. than before the restructuring in 2016. In 2017, the revenue from the offshore and engineering business reached KRW 2,600 billion, compared to KRW 3,400 billion in There are several offshore projects scheduled for delivery the next years. The Egina 2016 (-24%). At the same time, new orders were reduced by around 33%. FPSO is scheduled for August 2018, and Johan Sverdrup (P1) in December 2018. An FLNG for Petronas and BP Mad Dog FPU are scheduled for delivery in 2020, while the Eni-operated Coral FLNG is planned delivered in 2022.

Source: Rystad Energy research and analysis

221 NORWEP Annual Offshore Oil & Gas Market Report 2018

7. Shipyards in Asia

Daewoo Shipbuilding & Marine Engineering (DSME) 7.3.3 Republic of Korea Shipyard Market Forecast Daewoo Shipbuilding & Marine Engineering (DSME) was founded in 1973, and the South Korea has over the years become one of the most important offshore yard was completed in 1981. It is located at Geoje Island, the same island where construction hubs of , with three of the world’s largest yards. The yards Samsung’s yard is located. DSME has over the years, before the downturn, become have successfully been shifting the focus from traditional shipbuilding towards more one of the largest shipbuilding and offshore companies in the world. The company is complex offshore units such as drillships, FPSOs and topsides, with a goal to diversify focusing on LNG carriers, Ultra Large Container Vessels, Ultra Large Crude Carriers, themselves from the more low cost yards in China. Ultra Large Ore Carriers, large LPG carriers, car carriers, fixed platforms, FPSOs/FPUs, FSOs, TLPs, fixed platforms, semi-submersible drilling rigs, drillships For this report, the market for offshore rig construction in the Republic of Korea has and pipe laying vessels. During 2017, DSME delivered the worlds largest LNG-FSRU been defined as the market addressable for Norwegian suppliers at the country’s (263,000CBM) and the world’s first Arctic LNG Carrier. yards. The rig markets considered addressable are the segments Drilling systems and Equipment, Engineering and System, Equipment, Piping and Valves. During the past years, DSME has struggled with declining revenues and limited volume of new orders. Since 2014, revenue has declined, and from 2016 to 2017, the Figure 215: Market for Offshore Rig Construction by Definition – Shipyards in revenue dropped by 13%, reaching KRW 11,100 billion. Furthermore, from 2016 to the Republic of Korea 2017, the value of new orders decreased by around 65%, from USD 4.47 billion to USD 1.54 billion. From January to the end of June 2018, DSME received 26 new 10 000 Drilling Systems and Equipment orders with a total value of USD 3.14 billion: ten LNGCs, 15 tankers, and one unit under the segment Naval & Others. This is significantly more than in the same period Systems, Equipment, Piping and Valves 8 000 in 2017, where it only had 7 new orders with at total value of USD 0.81 billion. The Engineering reported target for 2018 is USD 7.3 billion. As of June 2018, the backlog is 96 units with a total value of USD 22.44 billion. Commercial/special vessels have been the 6 000 single most important segment since 2013, accounting for around 60% of backlog volume. 4 000 DSME has struggled over the past years, both due to the market downturn, but also because of alleged accounting fraud by its two last CEOs. Also, from July 2016 to million USD 2 000 October 2017, the trading of DSME’s shares was stopped due to the company’s challenging financial status. Since 2015, DSME has released self-rescue plans yearly, 0 communicating downsizing and spin-off of non-core subsidiaries. The restructuring 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 plans have been at least partly successful, and the company could in 2017 report its first year with an operating profit since 2011. The reported value was KRW 733 billion. The market for offshore rig construction in South Korea has been in decline since 2013, driven by the collapse in rig demand. Due to a record wave of newbuilds during DSME has put several subsidiaries up for sale during the past years as a part of its the past years, the market is now significantly oversupplied. Going forward, the self-rescue plan. DSEC has successfully been sold to Yunjin – Keystone PE. In July market is not expected to recover before the beginning of the 2020s. 2018, DSME announced it had completed the sale of its 51% stake in Daewoo Mangalia Heavy Industries (DMHI), its Romanian subsidiary. It has also been reported that DSME is planning to sell Samwoo Heavy Industries, a manufacturer of ship and offshore plant equipment, and a machinery maker, Shinhan Heavy Industries.

Source: Rystad Energy research and analysis; Rystad Energy RigCube

222 NORWEP Annual Offshore Oil & Gas Market Report 2018

7. Shipyards in Asia

Table 225: Market for Offshore Rig Construction by Definition – Shipyards in the 7.3.5 Offshore Drilling Rig Projects in the Republic of Korea Republic of Korea The table below shows the floater and jack-up rigs under construction at the South Korean yards. USD million 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Engineering 1 017 828 473 273 225 147 71 13 83 137 Systems, Equipment, Piping and Valves 3 991 3 243 1 840 1 057 876 575 280 51 303 499 Table 227: Drilling Rig Projects in the Republic of Korea Drilling Systems and Equipment 2 288 1 863 1 064 614 506 331 161 30 187 308 Total 7 296 5 934 3 377 1 944 1 607 1 054 512 94 572 943 Estimated Rig yard name Rig Name Rig Owner Rig Category delivery year 7.3.4 Offshore Field Development Projects in the Republic of Korea DSME Daewoo Drillship Hull 3623 (ex West Aquila) Northern Drilling Floater 2018 DSME Daewoo Drillship TBN1 (Cobalt Explorer) Daewoo Shipbuilding & Marine Floater 2018 The market figures for the production units are covered in the respective country DSME Libongos Vantage Drilling Floater 2018 chapters, but it is important to be aware of construction site as certain contracts will DSME Daewoo Drillship Hull 3624 (ex West Libra) Northern Drilling Floater 2019 have to be negotiated directly with the yards or the engineering partner. The table DSME ENSCO DS-13 ENSCO Floater 2019 DSME Quenguela Vantage Drilling Floater 2019 below gives an overview of selected field development contracts at Korean yards. DSME ENSCO DS-14 ENSCO Floater 2020 Hyundai Heavy Industries Hyundai Semisub TBN 2 (Bollsta Dolphin) Northern Drilling Floater 2018 Table 226: Offshore Field Development Projects in the Republic of Korea Hyundai Heavy Industries HHI HE Semi 1 Northern Drilling Floater 2019 Samsung Heavy Industries Deepsea Nordkapp Odfjell Drilling Floater 2018 Samsung Heavy Industries Samsung Drillship Hull 2101 (ex West Dorado) Samsung Heavy Industries Floater 2018 Field Startup Yard Project Project country Operator Facility Detail Status Samsung Heavy Industries Samsung Heavy Industries TBN 1 (Pacific Zonda) Samsung Heavy Industries Floater 2018 (Operator) Samsung Heavy Industries Ocean Rig Crete Ocean Rig Floater 2019 Daewoo Ichthys INPEX FPSO 2018 Delivered Samsung Heavy Industries Ocean Rig Santorini Ocean Rig Floater 2019 Daewoo Mariner PDQ Equinor Fixed and floater 2018 Delivered Samsung Heavy Industries Samsung Drillship Hull 2100 (ex West Draco) Samsung Heavy Industries Floater 2019 Hyundai Baronia EOR Malaysia Petronas Steel platform 2017 Delivered Hyundai Bergading CPP Malaysia Hess Steel platform 2017 Delivered Hyundai Bergading WP Malaysia Hess Steel platform 2017 Delivered Hyundai Clair Ridge DPP United Kingdom BP Steel platform 2018 Delivered Hyundai Clair Ridge LQ United Kingdom BP Steel platform 2018 Delivered Hyundai Aasta Hansteen Norway Equinor Spar 2018 Delivered Samsung Ichthys Australia INPEX Semi 2018 Delivered Samsung Martin Linge Norway Total Steel platform 2018 Delivered Samsung Egina Nigeria Total FPSO 2018 Delivered Samsung Prelude Australia Shell FLNG 2018 Delivered Samsung Johan Sverdrup PP Norway Equinor Steel platform 2020 Ongoing Samsung Johan Sverdrup RP Norway Equinor Steel platform 2020 Ongoing Samsung Rotan Malaysia Petronas FLNG 2022 Ongoing Samsung Coral FLNG Mozambique Eni FLNG 2022 Ongoing Samsung Mad Dog Ph. 2 United States BP Semi 2022 Ongoing Samsung Flex LNG TBD TBD Flex LNG FLNG N/A Ongoing

Source: Rystad Energy research and analysis; Rystad Energy RigCube

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