A Sevan 650 drilling rig, built by COSCO (Nantong) at a cost of $600 million, has a storage capacity of 150,000 barrels of oil. [Provided to China Daily]

Surging demand for offshore engineering vessels keeps shipyards afloat as traditional orders decline

With the global shipbuilding industry adrift in choppy waters and demand waning, Chinese shipbuilders are looking to stay afloat by building more and more offshore engineering vessels.

Last year, global orders for new ships fell nearly 13 percent over the previous year to 146.28 million compensated gross tons (CGT). New orders at Chinese shipyards fell 3 percent to 57.58 million CGT during the same period, according to data released by British shipping and offshore market intelligence provider Clarkson Research Studies.

The turmoil in the global shipping industry could not have come at a worst time for Chinese shipbuilders as they are heavily reliant on foreign orders for profits.

According to information provided by the National Development and Reform Commission, China's ship export growth slowed from January to November. Over the same period, the cumulative value of ships delivered by Chinese shipyards was about 291.3 billion yuan ($46 billion, 35 billion euros), up 14.1 percent year-on-year, but with a slower growth rate of 3.1 percentage points over the same period in 2010.

Though offshore engineering vessels are more expensive and complex to build, the burgeoning global demand for energy resources is expected to keep orders flowing. While the global shipping industry is unlikely to see an upturn in the near future, demand for offshore energy vessels has steadily increased in recent times.

COSCO (Nantong) Shipyards Co Ltd, a unit of China Ocean Shipping (Group) Co (COSCO), is one of the Chinese shipbuilders that is shifting focus from its core business of shipbuilding and ship maintenance to offshore engineering products.

"The expertise and technology gained from building and maintaining ships provide a strong platform for us to move into offshore engineering," says Ni Tao, managing director of COSCO (Nantong).

Offshore engineering products are essentially functional vessels and oil drilling platforms that can float in deep water. Offshore gas and oil companies use these vessels to process the natural gas and crude pumped up from the ocean floor. In some cases they are also used in the extraction process.

Shipbuilding and maintenance now account for just 10 percent of the annual sales at COSCO (Nantong). In contrast, the company has invested a significant part of its financial resources to attract foreign professionals and boost technological and innovation expertise in offshore engineering.

Recently it set up a large-scale offshore engineering research and development center to further improve and upgrade its technologies in offshore engineering, including the design and construction of various types of oil drilling platforms, rotating machinery, condition assessment and life extension programs.

"If you look at the global market for ships, you can see signs of decline everywhere," Ni says. "We want to shift our core business to offshore engineering as, apart from higher profits, there is less competition as not too many shipyards are capable of making offshore engineering vessels."

Last year COSCO (Nantong) delivered four shuttle tanks and two wind turbine installation vessels to clients in Britain, the Netherlands, Denmark and Norway. The company also won offshore engineering product orders worth $2.1 billion (1.6 billion euros) from international buyers last year.

The company is expected to deliver five offshore drilling platforms to buyers in the United States and Europe this year, and is confident of a 20 percent rise in sales this year.

Part of the reason why companies like COSCO (Nantong) are betting big on offshore engineering products stems from high energy prices and the insatiable global appetite for natural resources. This in turn has triggered demand for offshore engineering products such as drilling platforms and offshore pipe-laying vessels. Big energy companies like Exxon Mobil Corp, British Petroleum Plc and Royal Dutch Shell Plc have also placed more orders for offshore engineering products.

International Maritime Associates Inc (IMA), a Washington-based consultancy that specializes in strategic planning for companies in the offshore industry, estimates that the world's ocean oil reserves are between 140 billion tons and 200 billion tons. About 109 offshore oil and gas projects are being planned at an investment of about $189 billion over the next five years.

China's biggest heavy machinery maker, Shanghai Zhenhua Heavy Industry Co Ltd (ZPMC) is another Chinese shipbuilder that is cashing in on the growing demand for offshore engineering products.

Dai Wenkai, executive vice-president of ZPMC, says demand for offshore engineering products has been steadily growing in the US and Europe. Offshore engineering products are expected to account for nearly half of ZPMC's business in this year.

In 2009 offshore engineering accounted for just 10 percent of ZPMC's total revenue, far behind shipbuilding, heavy cranes and large steel structures. Riding on global orders, last year's sales attributable to offshore engineering products amounted to $1.5 billion, accounting for 30 percent of total sales .

"Offshore engineering is unlikely to see a slowdown in the near future. Deep-water fields are expected to be the main sources of conventional energy yet to be discovered and developed," says Zhao Fangfang, general manager of sales, marketing and management of ZPMC's offshore and steel structure management department.

"While no one is aware of the exact deep-water potential, the magnitude remains fairly high."

She says deepwater pre-salt resources in South America alone are estimated at 70 billion barrels of oil equivalent, a figure that is likely to grow as more finds are confirmed.

To strengthen its offshore engineering capacity and technology, in 2010, ZPMC's parent company, China Communication Construction Co, paid $125 million for the US-based Friede Goldman United, one of the world's leading providers of design services and equipment for offshore drilling rigs.

"The acquisition gives us an opportunity to build new equipment and vessels with more complex technical edges," Dai says. Last year ZPMC invested $63 million in offshore engineering research and development projects managed by more than 700 designers and experts.

This year ZPMC expects to achieve more technical breakthroughs in developing derrick pipe-laying vessels, which can also be used in cold water such as the North Sea or the Arctic. The available water depth of ZPMC made derrick pipe-laying vessels now is from shallow water to 3,000-meter deep water.

"With technologies gradually improving, China is in a better position to catch up with rivals in South Korea or Singapore, because large-scale Chinese shipyards still have better manufacturing facilities and other advantages like lower labor costs and effective material supply chains," Dai says.

DaoDa Heavy Industry Group Co Ltd (DDHI), a Nantong-based privately-owned shipyard, began producing offshore engineering vessels on a large scale five years ago, after receiving orders from several State-owned energy firms.

"China is keen on tapping the various natural resources in its vast ocean territory to ensure energy security," said Li Aidong, president of DDHI. "The outlook for the offshore engineering industry certainly looks promising."

Rather than building cheap bulk carriers, the 8,000-worker shipyard is producing offshore wind power equipment, maritime crane ships and dredgers for big domestic buyers such as China Huaneng Group, China Guangdong Nuclear Power Group, China Datang Corporation Renewable Power Co and Guangzhou Shipyard International Co.

"Though some European ship owners have scrapped orders for new ships due to lack of funds, we are not too perturbed as domestic buyers are more than capable of keeping the cash flow going and our workers busy at the dry docks," Li says.