Keppel Fels set to bag US$500m contract

Singapore

KEPPEL Fels, the rig-building arm of Keppel Corp, is close to clinching its first significant contract this year, having emerged as the frontrunner by a large margin for a tension leg wellhead platform (TLWP) contract.

The deal with the Repsol-operated Ca Rong Do (CRD) field development off southern Vietnam is valued at upwards of US$500 million. Sealing this deal would deliver a much needed boost to Keppel Fels amid an order book drought following a slump in rig-building demand, along with the collapse in oil prices.

The Business Times understands that Keppel Fels put in a bid of about US$500 million under its Floatec joint venture for the TLWP, which will be the first of its kind in Vietnamese waters.

The bid value could not be confirmed, but Floatec - a 50:50 joint venture between Keppel Fels and McDermott - was widely believed to have led in its price bid over that which was submitted by the second-place contender, Modec.

One source said several hundreds of million dollars separated the competing price bids, though the large margin could have arisen from differing bases of designs or execution.

The difference in the bid prices may also have stemmed from the level of compliance with the demand for local content.

PetroVietnam, as the overarching custodian of oil-and-gas resources for the country, had initially pushed for the TLWP to be built entirely locally. More specifically, the national oil company was looking to secure the TLWP job for its subsidiary, PetroVietnam Technical Services Corporation (PTSC).

If strictly enforced, the local-content demand will constrain the margin Keppel Fels can derive from executing the project, if its joint venture were to be awarded the contract.

But some project watchers suggest that Repsol, in taking into account PTSC's lack of experience in executing TLWPs, may have been motivated by scheduling and cost considerations to eventually renegotiate the local-content demand with Petro Vietnam.

IHS principal researcher Ang Ding Li said: "Experience in complex projects is important to ensure the delivery of the facility and that production (at CRD) is on schedule."

In this case, the project execution is expected to be smoother if it is carried out by parties with more experience, such as those from Singapore and South Korea.

Keppel Offshore & Marine, through the Floatec joint venture, has delivered the Papa Terra TLWP to Petrobras; the hull construction for that platform was executed by Keppel in 2009.

Keppel Fels is understood to be negotiating to buy over McDermott's half-share in Floatec, amid finalising the CRD contract with Repsol. The restructuring of Floatec may influence the economic value that the Singapore-based O&M player can derive from the CRD contract.

A Keppel spokesman would not be drawn into confirming the intended takeover, but maintained that the two parents of Floatec were continuing to adjust their businesses "to match the levels of activity in the market".

"Ongoing project support and pursuits will be supported by both parents, in line with our previous commitments, and we continue to engage actively on these opportunities."

The contract for the CRD TLWP, along with the terms, including local-content execution, are expected to be ironed out in the next few weeks, some sources said.

But for the CRD TLWP contract to be effective, the field development has to be sanctioned by Repsol and its project partners.

PetroVietnam is said to have already thrown in its support to this end, by granting Repsol the required US$7 per mmBtu (million British thermal unit) sales-gas price to ensure the economic viability of the project amid a lower-oil-price environment, sources said.

This is considered a significant milestone, given that super-majors BP and Chevron had failed to nail down gas-sales terms supporting their erstwhile field developments in Vietnam. PetroVietnam had to step in to take charge after the two super-majors exited from certain projects in the country.

But Vietnam's national oil company is now believed to be counting on CRD to take off and lend a breath of fresh air to an otherwise-lacklustre year for economic contributions from the country's oil-and-gas industry.

Low oil prices challenging the economic viability of extracting oil from CRD have also dented investments in the larger upstream sector in Vietnam.

A final investment decision (FID) on CRD is nonetheless subject to the conclusion of tenders for other project elements. An ongoing bid round for a leased floating production, storage and offloading (FPSO) vessel is especially seen as critical to the project moving to schedule.

Repsol is said to have struggled to bring bids from two contractors in the running - Yinson Floating Production and Bumi Armada - in line with the project budget for the FPSO.

A re-tender may be on the table for it if either of the bid prices cannot be brought in line with Repsol's expectation.

Hassan Basma of HBA Offshore considers this a viable option. The FPSO veteran believes that, with excess capacity in the FPSO market from a downturn in contracting activity, Repsol can attract more competitive bids for the tender for the leased FPSO if it were to be opened up to more bidders (sooner than later).

A similar reasoning supports the award of the TLWP prize to Floatec before other project elements, including the FPSO, are in place.

David Boggs, managing director of Energy Maritime Associates, said: "If Repsol were to hold on to the belief that oil prices were to stay at this level or higher, and that there will not be higher contractor prices going forward, it would justify awarding the TLWP contract."

The CRD TLWP and FPSO are two of the largest floating production-based contracts in the tender pipeline for South-east Asia's upstream oil-and-gas sector.

The overall project cost for CRD was last reported at US$1.1 billion. In addition to the TLWP and FPSO, a third contract is expected to be tendered out in the coming months for a subsea installation of the production infrastructure. Keppel O&M and Sembcorp Marine will be eyeing a contract for the modification of the leased FPSO planned for CRD. Ezra Holdings, through its subsea joint venture with Chiyoda, is seen as a likely contender for the subsea installation contract.