FPSO Lease Versus Ownership: Decision Factors, Contracting Strategies, Future Trends
Authors: Bloemen A. 
Published: October 2008

Description

Floating, Production, Storage and Offloading Systems (FPSO's) are used more and more in gentle as well as in more hostile environments. An issue on which oilcompanies need to decide when they intend to develop oil fields by means of FPSO's is not only the specific technical solution but also whether to lease or own such FPSO. This paper will discuss the criteria determining the decision within the oil company, addresses the. contractstrategy consequences of opting for leased or owned facilities and tries to arrive at certain conclusions as to how this market will develop.

Introduction

In order to examine the decision making process whether to lease or buy an FPSO, we need to look at whatmotivates the parties in the market and at developments in the market in general. We investigate what drives theoil company, the contractor, and the market. We seek to arrive at conclusions as to how the market may develop.

What drives the Oil Company?

Economic motivations. Primarily, factors are of an economic nature. The advantage of an FPSO lease versus a purchase is that the oil company's exposure is limited to the lease period multiplied by the lease rate. This brings down the economic hurdle for marginal fields. Leasing assets can make fields economic which withtraditional contractual arrangements would not be. Traditional oil field developments analyse whether the reservoir will pay back the investment. FPSO developments are based on analysing whether the reservoir will pay back the contractor's investment to an acceptable residual value - which determines the dayrates. Hence FPSO's translate reservoir risk to residual value risks.

However economic factors are not the only criteria; other factors may be equally important.

Other motivater.

Oil companies wish to limit balance sheet exposure. A contractor lease allows that. Offbalance sheet finance arrangements can allow purchase of FPSO's without balance sheet effects. Financial analysts, however, are sufficiently educated to ensure that off balance sheet risks, which appear in the notes to the balance sheet, are taken into account when analysingthe oil company's credit rating and share price prospects.

The tail-end issue, where governments seek maximum production from a given reservoir by stimulating continued production at uneconomical levels, is ofimportance. Having to pay a lease rate may help the oil company's argument.

Control over local content and political issues may favour purchase. However by leasing the FPSO and surrendering part of that control, it is - political -possible that the oil company may come under less pressure.

Control over cost promotes leasing. Technical problems that may arise in the construction of the FPSO are the contractor's problem, he is being paid based on performance only.

Technical and operation expertise, safety and QA from design to operation within a specialised FPSO contractor favours leasing. He is more knowledgeable about FPSOconstruction and operation than most oil companies. If a field comes to an end, ownership of assets by a partner group may be cumbersome; leasing avoids this.