What it means
Offshore oil fields often lie in deep water far from land, where it is very expensive to build a fixed platform or run pipelines to shore. An FPSO solves the problem by bringing the processing plant to the field.
Oil flows up from the seabed wells into the vessel, which separates oil, gas and water, stores the oil in its hull tanks and loads it onto shuttle tankers every few days. The financial attraction is flexibility.
An FPSO can be built in a shipyard, towed to the field and, when the field is exhausted, moved to a new location, which gives it a resale or redeployment value that a fixed platform does not have. It also tends to be quicker to bring into production, which pulls forward the date on which revenue begins.
Ownership and financing are often separate from the oil company. Specialist contractors build or convert the vessel and lease it to the field operator on a long-term charter, usually for 15 to 25 years, at a daily rate.
The oil company then treats the charter as an operating cost or a lease liability, depending on the accounting rules, and avoids a very large upfront capital outlay. The numbers involved are large.
A vessel can cost a billion dollars or more to build and equip, and delays or cost overruns in the shipyard can damage a project's return. Because the contract is long and the fixed daily rate is paid whether or not the field performs, both lenders and the oil company pay close attention to reserves, production forecasts and the oil price.
Key risks include construction delay, technical downtime, the field producing less than forecast and the vessel's value if the field ends early. The main safeguards are well-drafted charter terms, performance guarantees and insurance.
For a non-specialist, the useful way to think about an FPSO is as heavy equipment on a long lease, with its cost spread over the barrels it handles.
In practice
Real-world examples.
Example
An oil company discovers a field 200 kilometres offshore in deep water. Building a pipeline to shore would cost several times more than leasing an FPSO, so it signs a 20-year charter with a specialist contractor. The finance team models the daily charter rate as a fixed operating cost per barrel.
Example
A bank is asked to lend to the owner of an FPSO. The credit team checks the length and terms of the charter, the credit strength of the oil company paying the daily rate and the technical performance record of the vessel. It lends only after confirming that the revenue is largely contracted.
Example
A field operator decides to close a small field and redeploy its FPSO to a new discovery. The finance director estimates the cost of upgrading and moving the vessel at $200,000,000. This is far less than building a new one, and the project is approved.
Formula
Calculation
FPSO cost per barrel = Annual charter cost / Annual barrels processed
Suppose an FPSO is chartered at an illustrative $350,000 per day. The annual charter cost is 350,000 x 365 = $127,750,000.
If the vessel processes 100,000 barrels per day, annual throughput is 100,000 x 365 = 36,500,000 barrels. The FPSO cost per barrel is 127,750,000 / 36,500,000 = $3.50. If production fell to 80,000 barrels per day, throughput would be 29,200,000 barrels and the cost per barrel would rise to 127,750,000 / 29,200,000 = about $4.38.Case study
Seen in the real world.
Southern Cross Offshore is a fictional exploration company that has found a field holding an estimated 150,000,000 barrels of recoverable oil. The board had to choose between a fixed platform costing $1,400,000,000 and a leased FPSO at $300,000 a day.
Over a 15-year field life, the FPSO would cost 300,000 x 365 x 15 = $1,642,500,000 in charter payments, which is more than the platform's capital cost. However, the FPSO could be in place two years sooner and production would start earlier, and the company could hand the vessel back at the end of the charter without paying for removal.
In this illustrative case the finance team discounted the cash flows and found that the earlier revenue and lower upfront cash made the FPSO the better option. The board chose the lease, but required performance guarantees so that the daily payments would reduce if the vessel were not available.
Watch out
Common mistakes.
- Treating an FPSO as just a storage tank, when it also contains the processing plant that separates oil, gas and water.
- Ignoring the fixed daily charter payments in the project model, which continue even when production is below forecast.
- Assuming an FPSO is always cheaper than a platform, when the answer depends on water depth, distance, field size and project timing.
Questions
People also ask.
What does FPSO stand for?
It stands for Floating Production, Storage and Offloading, describing the three jobs the vessel performs.
Who owns an FPSO?
It may be owned by the oil company, but it is often owned by a specialist contractor that leases it to the operator on a long-term daily-rate contract.
What happens to the vessel when the field runs dry?
It can be refitted and redeployed at another field, or decommissioned and recycled, depending on its condition and market demand.
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