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[THE BOARDROOM] Big Contracts, Big Projects, And No Room For Elephants

Posted: 11/22/2015
Tim Haidar
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Oil price woes are bringing some parts of the oil and gas industry to heel in a downturn unrivalled for a generation.

In a follow up to our interview with Duncan Peace, we speak with the now President and former VP of Legal for Teekay Petrojarl, about the state of the "floater" industry and why the elephant in the room just has to go.


SPEAKER KEY

TH Tim Haðdar, Editor In Chief, Oil & Gas IQ
CB Chris Brett, President, Teekay Petrojarl


TH Now we are at a time when oil prices are hovering at $50 a barrel, how has the vessel contractor market been dealing with the low price of oil?

CB Well, for us it takes a little bit longer to have an impact than in other parts of the off shore industry. You will notice, for instance, that with drilling rigs they come off much more quickly, the more discretionary type of spending you have in the oil industry with early expiration costs, they will disappear very quickly. When it comes to FPSO contracts which are much longer term, that equals revenue for oil companies, so the impact is a little bit further down the line. The sorts of things that you will see are some older assets that were expected to go on for another couple of years maybe come off a little bit early.


TH With regards to what you just said and kind of there being a tightening of the supply chain, is now when you will see a slew of operators piling in to renegotiate their contracts?

CB You’ll certainly see that in other parts of the industry. You don’t see that for long-term lease and operate contracts with FPSO contractors like ourselves because they are all financed on a basis up front and based on a certain capex cost that is expected, so they don’t get renegotiated but they might try and push vessel contractors to squeeze their our own supply train so to try and reduce the operating costs. Things like supply boat costs, logistics costs and the like. That’s the sort of pressure that you see, so it’s an oblique prodding of the supply chain through us rather than pinching us directly.


TH Now are President of Teekay but also a legal eagle, do you see from the contracting side of things a move towards more collaboration in a time of softened oil prices.

CB This is where it gets quite difficult. There are some things that you can do as vessel contractors coming together and talking about issues in the industry and there are some things that you can’t do and there are areas where you can’t cooperate becauseof the regulatory requirements and obligations that are on us. Certainly, I think there is a better dialogue between the larger FPSO contractors as we have seen more consolidation, there are fewer players in the industry and there is a genuine respect amongst the larger FPSO contractors.


TH How you would rather see oil operators and contractors work together. What is the ideal mix?


CB
These are big contracts, big projects, there’s a lot of money at stake so vessel contractors and oil companies have to work together and we have to get better at cooperating and finding the most cost-effective way to do a billion dollar project. So, for instance, we can’t just load up our projects with a large project management team on behalf of the FPSO contractor and then the oil company feels they’ve got to have a similarly-sized project management team in place to look over our shoulders. We have to find ways to trust each other to work cooperatively together to bring down the costs in tandem.


TH Let’s talk about Petrobras and the resulting chaos after Operation CarWash. The corruption scandal has really shaken things in the sector, especially as Petrobras’s success is based on its FPSOs. How much of a jolt has this been for the industry?


CB Corruption issues in Brazil are absolutely on the radar of all vessel contractors, you have to be on the lookout for these types of issues also happening in other parts of the world. We are seeing a slowing down of tenders coming out form Brazil as they have a lot to work through. It is a very political issue and there is a multitude of different stakeholders involved. It will impact some vessel contractors more than others and it will all take time to sort out. Ultimately, the oil is still in the ground, the oil still needs to be developed, the government in Brazil and the stakeholders in Brazil will find ways of doing that but they need to work through these corruption issues first.

Companies like ours welcome the attention that has been brought to this issue. We pride ourselves on doing our business to the highest standards and we it is excellent that a much greater spotlight is shined on this.


TH Let’s talk about that old chestnut of standardisation. Is it the elephant in the room?


CB
Standardisation is always the elephant in the room, it is always part of the discussion isn’t it? And it

is the elusive goal, whether it be on the technical side, the legal side, the contractual side. But why is it always discussed? Because there is very little standardisation within the FPSO industry compared to some of the other parts of the off shore sector. I think one of the reasons for that is that FPSO projects they really do take on a life of their own.

A drilling operation can be replicated a number of different times, a rig is maybe moved several times each year to drill on different fields. There is this sense of more transactions taking place so they have been forced to look at standardised ways of doing things. With an FPSO project, it may well be a 20 year development, it is a massive investment and because of that people feel like they should get a bespoke product that comes out of it. That is always going to make this push for standardisation much harder. When something is unique it is very hard to then make it run-of-the-mill.