Brazil Shipbuilding: A Forecast
The rise and fall of the Brazilian shipbuilding market is well-known, having plummeted from the top of the world list in the early 1980s to the bottom by 1999. Today, Brazil is storming back, an amazing revival of the nearly defunct shipbuilding industry driven by the sudden influx of orders from major offshore oil & gas players, namely Petrobras.
Today the shipbuilding market in Brazil has in excess of 100 firm orders for ships in a variety of shapes and sizes, in addition to a large number of drill rigs and production unit orders. In addition, companies from around the globe are flocking to Brazil to set-up shop and engage in the industry’s renaissance. The national shipyard workforce has hit 50,000, impressive considering its rise from a low of around 2,000 just a decade and 25,000 just three years ago.
“The Brazilian shipyards are prepared for the challenge of producing drillships, production platforms, support vessels, tankers and all the equipment necessary for Brazil´s new phase of oil production in the deep layers of the marine seabed, known as pre-salt.” said Ariovaldo Rocha, President of SINAVAL (National Syndicate for Naval Construction and Repair Industry and Offshore).
While maritime and offshore O&G industries are notoriously cyclical, the demand from Brazil is forecast to be steady for a generation, as the amount of potential new reservoirs is projected to continue driving demand for ships and rigs for the coming two decades.
Unique is that positive signs are coming from many different market sectors, a variety of organizations and companies, such as Brazil´s SINAVAL, but also including majors such as Transocean (RIG), Pride, Noble (NE), Seadrill, Sevan, Modec, BW Offshore (XY8.F) and Teekay (TK). In addition, a number of leading shipbuilders are setting up shop in Brazil including market leaders such as Samsung Heavy Industries (010140.KS), Hyundai Heavy Industries, Daewoo, Jurong, STX and the Chinese shipbuilding giant Cosco (CSSC), which is in discrete talks with potential local partners. Many are busy forming partnerships with Brazilian shipbuilders or investors, in order to fulfill national content policies to be eligible to compete for the shipbuilding contracts.
These shipbuilders are lining up to invest billions in local infrastructure and allow technology transfer, made all the more interesting by the status of global shipbuilding today due to last year’s economic meltdown. The conclusion can be drawn that the high level of investment speaks to the market’s potential for many years to come.
This level of investment points to a long-term commitment and, consequently a belief that there will be continued demand for shipbuilding services in the long-term. The growth of the Brazilian shipbuilding market is a reality and Brazil is already considered the sixth biggest shipbuilding nation in the world and is growing.
The pre-salt development alone will be responsible for a major amount of the short and mid-term demand, as the orders for pre-salt production rigs, FPSOs, MODU´s and support vessels have only just begun to be placed and are expected to be massive.
BNDES (Banco de Desenvolvimento Social), or Brazil´s development bank and major financing institution will award around $70b to the Brazilian shipbuilding industry in 2010 alone. Part of this financing is done through the FMM “Fundo da Marinha Mercante” or Merchant Marine Fund.
All of this is driven by the projection that the world oil demand is pegged to grow from the present 85 million b/d to around 107 million b/d by 2030.
Local shipbuilders are eyeing the opportunity to modernize production lines and methods. EAS (Atlantico Sul Shipyard) – which has the most modern and highly automated production line in the Brazilian shipbuilding industry – has planned a 20% increase in IT investments for its production plants and hope to be in position to compete in equal terms with the major players in the future, targeting the highly competitive cruise ship construction industry as an objective to diversity its operations when demand from O&G slips.
The Demand for Drillships
Petrobras announced its drillship construction program, which will be through direct acquisition or leasing. Twelve drillships will be or are being built in shipyards outside Brazil (three units of this first batch will be built by Brazilian Odebrecht in a new shipyard in the state of Bahia). Twenty-eight drillships will be built in Brazilian shipyards. The local tender process will start with nine drillships, with deliveries set from 2013 to 2018 and local content increasing between 55% and 65%.
The modern deepwater drillships are being leased from specialized companies such as Seadrill, which has recently delivered a third deepwater drill rig to Petrobras. At press time the rig was sailing to Brazil from Singapore´s Jurong Shipyard and is expected to start operations in July. Alf C Thorkildsen, CEO of Seadrill Management AS, said, "We are pleased to report the third consecutive on-time, on-budget delivery of a semi-submersible drilling rig to Seadrill from the Jurong shipyard. This is the third deepwater newbuild delivered to Seadrill that starts a long-term contract with Petrobras.” The West Orion is a sixth generation, high specification, ultra-deepwater, state-of-the-art semi-submersible drilling unit. The rig has a high load carrying capacity, an efficient drilling floor layout with improved safety and working environment measures. West Orion is designed with a dynamic positioning system and a water depth capacity up to 3,000 m. It has one of the highest day-rates going: $615,000 p/d, losing out only to the West Taurus, which runs at $647,000 p/d.
A new deepwater drillship concept will soon be introduced with the recent arrival in Brazil of Sevan Marine´s Deepwater Driller, which is a circular design MODU operated by eight thrusters and is designed to be more stable, safer and also more cost effective than traditional ship hulled or platform deepwater drilling units. The Sevan Driller will be working on a six-year fixed contract with Petrobras. As a new, one of a kind, proprietary model by Sevan Marine, it will have to be tested through time, but Petrobras´ E&P executives are excited by the preliminary drilling tests and according to William Glover, Operations Manager for Sevan Drilling Units, “The drilling tests have gone very well, with no major issues and the core crew on the rig has been handpicked by me from the best in the market. I consider them to be the best in the business. We work under a very strict safety policy, where safety always comes first, even if that affects our up time.” Petrobras is so enthusiastic that it has already ordered another Sevan drilling unit (Sevan Driller II), which is currently being built in China, with delivery forecast for 2012, and also awarded a six year fixed contract.
Transocean is building nine drillships, of which one is the Petrobras-10000 drillship, at the Samsung yard in Korea. Upon commissioning it will go on a 10-year service contract with Petrobras. Transocean is presently the biggest drilling structure supplier in Brazil.
Noble has three drillships and two semi-submersible drill rigs which will be starting 5 to 6 year contracts with Petrobras. The three drillships will be modernized in Brazilian shipyard with investments of $175 million per ship. Another drillship is being built in the STX Dalian yard in China and will then sail to Holland on its own power, where Huisman drilling equipment will be installed, before sailing on to Brazil. Noble is also building a fixed drilling rig for another Petrobras contract.
Pride is building five drillships at the Samsung yard in Korea, with one already contracted to Petrobras and two contracted to BP (BP). Pride presently has seven semi-submersible drilling rigs operating in Brazil.
Other orders will follow until the demand for drilling ships and equipment for the pre-salt and recent post-salt discoveries are met. The priority will be given to drillships and rigs built in Brazilian shipyards, with emphasis on modern deepwater drillers that are efficient and safe. Massive investments will be made by the shipyards that are awarded the drillship building contracts, the greatest challenges these local shipyards will face will be in terms of acquiring the latest building technology and also experienced know-how (experienced engineers and technicians) in order to build safe and efficient drillers and deliver them on time.
The Brazilian government has created the FGCN “Fundo de Garantia da Construção Naval” (Naval Construction Guarantee Fund) specifically to reduce the risks to the pioneer local drillship construction projects. Petrobras is also negotiating a special credit program with national banks, exclusively for financing the supply chain for pre-salt drillship construction in national shipyards.
Although executives from the companies that lease drilling units are skeptical about the capacity of local shipyards to build these latest generation units, primarily because the local shipyards lack the experience, a problem being circumvented via strategic partnerships with experienced drillship builders.
Despite the recent tragic deepwater loss and resultant oil spill in the Gulf of Mexico, there are no plans to halt or even decrease deepwater drilling operations in Brazil. Petrobras was quick to state it will review its present safety measures, drilling specialists consulted were unanimous to point out that the drilling industry in Brazil learned important lessons from the P-36 accident in 2001 and that safety measures are very stringent, to the point that they consider it to be highly unlikely for a spill of that magnitude to occur here, but they are still worried since the equipment used on deepwater rigs in the GOM is the same used in Brazil. They also expect that the safety standards will be increased in Brazil.
The Demand for Production Platforms
The demand for production rigs, of varied models, is estimated to be around 150 units up to 2020. The estimate for Petrobras demands alone is for 95 units. The contract for eight FPSO hulls went through a tender process and was awarded to Brazilian Engevix in a partnership with GVA for construction at Estaleiro Rio Grande (Rio Grande Shipyard), the yard, which is part of a complex to be composed of three areas and already has an operational dry dock for rig construction, it is located in the city of Rio Grande, in Rio Grande do Sul State, South Brazil. This shipyard will be making what Petrobras executives call the Hybrid FPSOs slated to work the deepwater pre-salt plays. The intention in to emulate a proven design and build a production line based on this model, thus standardizing the pre-salt production platforms design. Petrobras has recently signed a letter of intent valued at $3.75b with Engevix Engenharia SA, authorizing it to initiate the construction process, including hiring new employees. The workforce in the Rio Grande naval complex is forecast to reach a high of 7,000 during five years.
Private O&G operators are expected to have a demand for 55 production rigs, including 48 units for OGX Petroleo alone. The OGX rigs are to be built at the OSX shipyard, which will start being built in mid 2010 and is expected to be operational by mid 2011. The yard will be built in Santa Catarina, also in South Brazil. The OSX shipyard went public in early 2010 and brought in around $1.4 billion to invest in the yard´s construction and infrastructure. Although the work on the shipyard construction is presently halted due to local environmental concerns, negotiations are underway and the problem should be resolved by mid 2010. If worse comes to worse, OSX could potentially be forced to find a new location, which is not a major problem in view of the huge Brazilian coastline, with numerous locations offering incentives for shipyard construction. Both OGX Petroleo and the OSX shipyard are owned or have as major partner the EBX Group, owned by Brazilian businessman and mega-investor Eike Batista, who is currently slated as the eighth richest man in the world and is known as the “Midas of money making” in Brazil. Mr. Batista is also considered a visionary by many and is deeply committed to the development of Brazil.
To meet this demand for ships, there are priority finance projects approved by the FMM for the construction of 17 shipyards along the Brazilian coast and the expansion and modernization of another five shipyards.
From 2007 to 2010, investments by Petrobras and private O&G players has financed the contracting of 23 production platforms of varied models, of these, only four will be fully built in Brazil. These are:
• P-51 - built by the BrasFels /Technip partnership.
• Mexilhão gas field fixed platform – Built by Mauá shipyard.
• P-55 – In construction at the EAS shipyard (Atlântico Sul Shipyard), through a EAS/Quip partnership.
• P-56 – In construction at the BrasFels shipyard, though a BrasFels/Technip partnership.
Of these 23 platforms, seven have modules built and integrated in Brazil. Twelve rigs were fully built in international shipyards outside Brazil and are leased to Petrobras and other players, being six units from Modec, two units from SBM (Single Buoy Mooring) and one each from BW Offshore, Prosafe, Teekay and Floatec.
FPSOs make up the majority of the production rigs, with 15 units. Semi-sub rigs come next with four units and one unit is a TLP (Tension Leg Platform). One is a FSO (Floating, Storage, Offloading), which does not process the oil, only stores and pumps it. One is a FPU (Floating Production Unit), which does not store the oil, only processes and distributes it and one is a fixed platform. Presently, there are 258 FSO in operation worldwide, of which 50 belong or are contracted to Petrobras, which is the player with the highest activity rate when it comes to offshore O&G production.
The tendency and forecast is for this high rate of Petrobras activity to actually increase as the success rate in the pre-salt is at a very impressive 82%, considering that a 50% success rate is already considered excellent. Many new discoveries in pre-salt and post-salt and in both deepwater and shallow water are expected to be announced in the near future (up to 5 years) and mid future (from 5 to 10 years).
Forecast for Brazilian Ship and Rig Orders
With a current workforce of around 50,000 people, the Brazilian shipbuilding industry is on a growth curve. Considering the indirect jobs from the supply and service industry, this number grows to around 230,000 jobs.
The Brazilian shipyards finished 2009 with an estimated income of $2.9 billion. The portfolio of orders registers 132 units presently under construction;
• 52 tankers of various models for Transpetro (Promef phases 1 and 2).
• 10 tankers for Venezuelan state company PDVSA.
• 19 offshore support vessels of various models including multipurpose vessels.
• 18 port support tugs.
• 27 vessels for river and lake navigation.
• 4 container ships for Log-in (Vale do Rio Doce).
• 2 grain carriers also for Log-in.
In 2010 tenders for another 17 ships will take place along with 20 river barges and tugs;
• 8 LNG carriers for Transpetro.
• 9 Tankers for Petrobras – to be leased from the EBN program “Empresa Brasileira de Navegação” and built in local shipyards.
• 20 river convoys (20 tugs and 80 barges) for ethanol transport through rivers, the tendering process for these has been announced by Transpetro.
On May 5, Petrobras signed the leasing contracts for the seven tankers from the BSC (Brazilian Shipping Company) program, completing the 19 ships planned for this phase of the program. These tankers must be built by Brazilian companies in Brazilian shipyards and the ships will be required to be Brazilian flagged during the duration of the contract.
Kingfish do Brasil Navegação Ltda., will build three vessels of 45,000 dwt for dark products (oil, fuel oil, etc.), while Pancoast Navegação Ltda., will build four 30,000 dwt vessels, two for light products (naphtha, diesel, kerosene, gasoline) and two for dark products. The BSC program is an inseparable part of a set of initiatives Petrobras has undertaken to drive shipbuilding in Brazil, while using international cost and quality parameters as references.
Financing priorities established by the FMM include the construction of 253 ships and construction or modernizing of 17 shipyards:
• 147 Offshore support vessels of various kinds, including large multipurpose vessels
• 33 Port support vessels
• 13 Vessels for inland waterways
• 48 Ships for coastal trade-transport “cabotagem”
• 04 Ships for international trade-transport
• 08 Large fishing vessels
A total of around $5.2 million in FMM financing was awarded for ship construction and around $1.4 million for shipyard modernizing and expansion.
Currently there are 78 ships being built and three shipyards being modernized using FMM financing funds.
Brazil is building its first VLCCs, Suezmax and Panamax Tankers and the revival of the national shipbuilding industry starts with the EAS shipyard, which launched the first tanker (Suezmax) built in Brazil after 13 years, on Friday May 7, at the EAS Suape yard with the presence of Brazilian President Luiz Inácio “Lula” da Silva.
“This launch is a milestone. They used to say it was impossible for Brazil to start building ships again. Not only did we resume building them, but we are also establishing a modern, competitive shipping industry, creating jobs and changing the lives of Brazilians,” said the CEO of Transpetro, Sergio Machado during the launching ceremony.
Brazilian President Luiz Inácio “Lula” da Silva also spoke during the ceremony. "All of us have to take the construction of this ship seriously. It is the self-affirmation of a people which had long been forgotten," said the president. President Lula's determination that the construction of vessels and oil production platforms be resumed in Brazil was the foundation of the Promef, a program created in 2004 to revitalize the shipbuilding industry on globally competitive bases, based on the placement of orders for the first 49 vessels.
In the first phase of the Fleet Modernization and Expansion Program, the bidding-winner companies are constructing the following ships:
• Atlântico Sul (PE) Shipyard: 10 Suezmax ships; Lump-sum price: $1.2 billion
• Atlântico Sul Shipyard (PE): 5 Aframax ships; Lump-sum price: $693 million
• Ilha S.A. Eisa Shipyard (RJ): 4 Panamax ships; Lump-sum price: $468 million
• Mauá Shipyard (RJ): 4 Product transport ships; Lump-sum price: $277 million
• Three gas tankers of 7.000 cu. m. in bidding process
The second phase of the Fleet Modernization and Expansion Program was released on May 26, 2008. The 23 ships provided will have capacity to transport 1.3 million tons of gross deadweight and shall demand about 250 thousand tons of steel during the construction period. Four Suezmax DP, three Aframax DP, eight Product ships, five Gas (LPG) tankers and three Bunker ships will be constructed.
Ten ships are already ordered, of which seven, built for the first time in Brazil, are state of the art dynamic positioning shuttle tankers and have loading system by the bow. Their purpose is to store and transport the oil from the production platforms. Three other oil tankers are for bunker transport.
• Atlântico Sul S.A. Shipyard (PE) - 4 Suezmax DP (dynamic positioning) ships; Lump-sum price: $746 million;
• Atlântico Sul S.A. Shipyard (PE) - 3 Aframax DP (dynamic positioning) ships; Lump-sum price: $477 million;
• Superpesa Industrial Ltda. (RJ) - 3 Bunker transport ships; Lump-sum price: $46.5 million;
• Rio Nave Shipyard (RJ) - 5 Product transport ships; Lump-sum price: $268.5 million;
11 ships are in final phase of bidding, of which 8 are from the 2nd phase of Promef and 3 Gas tankers of 7,000 cu. m. from the 1st phase.
The Shipyard Building Boom
The shipyards being modernized or expanded are Aliança shipyard, STX Brasil shipyard and Mauá Shipyard, all in Rio de Janeiro. The total steel processing capacity and infrastructure of all 27 shipyards currently operational in Brazil is;
• 562 million tons year of steel processing
• 4,311 thousand sq. m. of yard area
• 19 dry docks
• 21 carrier cranes
• 42 service quays
Rio de Janeiro continues leading the market in terms of shipyards, as it concentrates 51.25% of the country´s steel processing capacity and 41.73% of the shipyard acreage in terms of square meters. The Northeast region of Brazil is growing in shipyard construction and catching up with two states (Ceará and Pernambuco) accounting for 31.14% of the country´s steel processing capacity and 38.97% of the shipyard acreage in terms of square meters. Soon, the State of Bahia will help improve the Northeast statistics, with at least one new shipyard planned for the near future in Bahia (of a total of three shipyards originally planned for Bahia) and there are also other possibilities of shipyard construction in the Northeast that are being discussed, such as the EISA Alagoas project, in the Northeast state of Alagoas, planned by the Sinergy Group, owned by mega investor German Eframovich.
On Monday, May 10, Petrobras and the Government of the state of Rio de Janeiro reached an agreement for the lease by Petrobras of the area of the old Ishibras shipyard, which is located in the port zone in Rio. Presently two companies operate in this area, Sermetal, which processes steel for neighboring shipyards and fixes ships and Bric-log, which does logistics services for the offshore industry. According to the government of Rio de Janeiro, the Sermetal works will be transferred to the Bric-log area.
The new shipyard will go back to having the original name it was given upon foundation in 1954, Inhaúma shipyard. The area which includes the second biggest dry-dock in South America will be modernized to build rigs and drillships for Petrobras.
According to the Governor of Rio de Janeiro, Sergio Cabral, Petrobras and the state government reached an agreement on ISS tax decreases, where Petrobras asked for a decrease from 5% to 2%. A financial agreement with the owner of the area, CBD has also been reached.
Although Petrobras has declined to comment on the final agreement, the Governor of Rio de Janeiro has officially announced the conclusion of the deal. The modernizing of the installations has been calculated cost between $50 and $100 million. Petrobras plans to have an as yet undisclosed third party run the shipyard.
New Shipyards to be built;
• Paraguaçu shipyard in Bahia.
• Bahia shipyard in Bahia.
• Alusa shipyard in Pernambuco.
• STX-Promar (Suape) shipyard in Pernambuco.
• Construcap (Suape) shipyard in Pernambuco.
• Schhin-Tomé (Suape) shipyard in Pernambuco.
• MPG shipyard (Suape) in Pernambuco.
• WTorre (Rio Grande Shipyard – Phase 2) in Rio Grande, Rio Grande do Sul.
• Wilson, Sons in Rio Grande, Rio Grande do Sul.
• Quip in Rio Grande, Rio Grande do Sul.
• São Miguel in São Gonçalo, Rio de Janeiro.
• Aliança in São Gonçalo, Rio de Janeiro.
• OSX in Santa Catarina.
• Jurong in Espirito Santo.
• Wilson, Sons in Guaruja, São Paulo.
• EISA in Alagoas.
The Maritime Machinery Market
The local marine machinery industry (MMI), is striving to join this growth in shipbuilding, “With no local content policy for marine machinery or industrial machinery in general and tax exemptions for machinery import, the industry faces an unfair battle,” said Cesar Prata, President of CSEN (Sector Board for Naval and Offshore Equipment), the marine machinery department of ABIMAQ (Brazilian Machinery Builders Association). The high interest rates and low dollar exchange rate compound their problems.
In early 2009, with the dollar at a higher exchange rate, shipyards were buying much more machinery from local manufacturers, mainly medium to small scale machinery but also some large machinery, and these manufacturers were hiring more employees. For the marine machinery industry in Brazil, 2010 started with a serious decrease in demand and job positions being lost, almost the exact opposite to what was happening to the shipbuilding industry, which was and still is facing a massive demand for services and strong growth. Considering the exchange rate fluctuations alone, from January to May 2010 it can be seen that it has been maintaining a relatively stable rate, so there was no major currency rate increase to help the industry and up to now there has been no major policy change towards benefiting the local MMI. The situation the MMI faces is still very uncomfortable, even with the increase in shipbuilding. According to Cesar Prata, of the 70% local content demand for the shipbuilding industry, 40% goes to manpower and 30% to steel planks, leaving nothing obliging foreign and local investors to buy local machinery in large quantities. The marine machinery is an aggregated value industry, which invests in technology and higher education, employing many different engineering specialties, IT managers and technicians, along with an ever growing number of automation technicians.