The boys from Brazil

As far as cultures go, Singapore and Brazil couldn’t be further apart. But when it comes to business, Singapore’s offshore and marine companies are putting on their samba shoes and learning to tango like it’s Carnivale. And the reason is oil and gas off the coast of Brazil - and lots of it, all of which requires the kind of drill rigs that companies like Keppel and Sembcorp are famous for.

Strong oil price is key
The waters are getting choppier for Singaporean firms in the Brazilian market for a number of reasons including the potential halting of deepwater drilling following the BP incident in America which has governments twitchy, a shift towards drill ships and most worryingly competition from Chinese shipyards who are now getting in on the game. But a strong oil price will keep the good times rolling for a while longer, and Brazil’s national oil company Petrobas is throwing out orders for oil rigs and Floating Production Storage and Offloading (FSPO’s) units like confetti at a wedding. Analysts at Credit Suisse estimate as many as 170 orders for these FSPO’s could be placed in the next decade and expect Keppel and Sembcorp Marine to have more than half their orders coming from these and other conversion projects.
Right now Petrobas is tendering for the production of 28 deepwater rigs, which the Singaporean firms are reckoned to be in with a good chance for. Credit Suisse has crunched the numbers and thinks that, based on probabilities, Keppel will probably pick up $6 billion worth of rig orders and Sembcorp may get as much as $3.5 billion of rig orders.

But what about the threat from China?
To be sure, the last couple of years has seen the Singapore yards full with a long back order, and given they have little capacity the Chinese yards have been getting more bids.
There are now 28 Chinese shipyards bidding on contracts for jackups and semisubmersibles, and over the next three years analysts estimate Chinese yards could have around a 36% of the jackup market, 27% of the semisubmersible market and 4% of the drill ship market. But questions remain about the ability of Chinese firms to undertake high quality engineering works. Just look at the disaster with the now closed Battlestar Gallactica ride at Singapore’s Universal Studios which was shut down reportedly due to poor construction work by a mainland China contractor.
Oil producers have the same fears, and given the BP incident which shows just how vulnerable these rigs are to blowing up. Analysts now reckon that the Chinese ship yards will have a lot tougher time of convincing buyers even if their price is cheaper, which should be great for Keppel and Sembcorp. “With technology and execution skills coming back to the fore, we believe the Chinese yards could lose out,” noted Credit Suisse, adding that there is limited articulation by these yards in the big Petrobas orders. Apart from Korean shipyards, Chinese shipyards are the only ones which have won orders for drillships.
The three drillship orders are with China State Shipbuilding Corp (two units ordered by Frontier Drilling) and STX Dalian (one unit ordered by Noble Corp). All in it should remain a good next few years for Keppel and Sembcorp and the economy that relies on them.