Daewoo Shipbuilding & Marine Engineering fights for a large FPSO order

According to South Korean media outlet Insight Korea, Daewoo Shipbuilding & Marine Engineering (DSME) recently stated that it will "bet its life" on winning the bid for the floating production, storage, and offloading (FPSO) unit for Chevron's Rose Bank project in the United States, vowing to secure the approximately US$2 billion (approximately 2.2 trillion won) order. The final decision between DSME and Sembcorp Marine from Singapore will be revealed in the bid results to be released at the end of September.

Failure to secure new orders will lead to a halt in operations.

The FPSO for the Rose Bank project is being built to develop an offshore oil field 175 kilometers northwest of the Shetland Islands in the North Sea, at a water depth of 1100 meters. While two other major South Korean shipbuilders, Hyundai Heavy Industries and Samsung Heavy Industries, also participated in the bidding, they were eliminated in the first stage, leaving only DSME and Sembcorp Marine to compete.

The construction process of an FPSO is complex, with a price more than 10 times higher than the average price of US$100 million to US$200 million for ordinary merchant ships. Therefore, to win the approximately US$2 billion FPSO order for the Rose Bank project, DSME has decided to "bet its fate," expressing its determination to win.

As of August 2018, DSME's order intake for the year totaled approximately US$3.49 billion, representing 48% of its annual target of US$7.3 billion. Most of these orders were for liquefied natural gas (LNG) carriers and tankers, with zero orders for offshore engineering equipment. In fact, since 2014, DSME has rarely received new high-value-added offshore engineering equipment orders, causing considerable concern. Securing this order would significantly reduce the gap to its annual target.

But what if it fails? DSME stated that it will "bet its life" on this bid because the company is on the brink and cannot afford to retreat. As of August this year, DSME has seven ongoing offshore engineering projects, six of which are drilling ships. Although these drilling ships are completed, delivery has been delayed due to the recent economic downturn of the ordering companies. Another project is a fixed platform for the 2014 Kazakhstan TCO project, scheduled for delivery in July 2020. Therefore, without new offshore engineering equipment orders, DSME's offshore engineering business will face labor shortages in the first half of next year, potentially leading to restructuring of business units and personnel. This is the most important reason why DSME must "do its utmost" in this order competition.

DSME's concerns are not unfounded. In fact, Hyundai Heavy Industries, another South Korean offshore giant, has not received an offshore engineering equipment order for 45 months, resulting in the suspension of its offshore engineering business headquarters and the closure of its dedicated shipbuilding dock on August 20 this year.

The winner remains to be seen.

The South Korean industry believes that DSME's bid for the Rose Bank order will not be easy. Its biggest competitor, Sembcorp Marine, defeated the three major South Korean shipbuilders, including DSME, in the Johan Castberg oil field FPSO project for Statoil ASA in Norway last year.

It is analyzed that Sembcorp Marine's success in winning the Johan Castberg oil field FPSO project was driven by its lower labor costs. Similarly, Chinese shipbuilders have also successfully won orders in the offshore engineering equipment market with their low labor costs. Following the Johan Castberg oil field FPSO project, Hyundai Heavy Industries and Samsung Heavy Industries lost to China's COSCO Shipping Heavy Industry in the bid for the FPSO order for BP's Tortue gas field development project this year due to their lack of price competitiveness.

On September 7, Kang Hwan-koo, president of Hyundai Heavy Industries, publicly stated that the decline in its offshore engineering equipment business was significantly affected by labor costs. He pointed out that "the labor costs of Chinese shipyards are only one-third of those of Hyundai Heavy Industries' shipyards."

DSME officials expressed similar views, pointing out that after the bid results for the Johan Castberg oil field FPSO project were announced, the ship owner did not provide feedback on the reasons for the unsuccessful bid. It is speculated that Sembcorp Marine's labor costs were significantly lower than DSME's, ensuring a price advantage.

Under these circumstances, DSME has made unprecedented preparations for the bid for the FPSO order for the Rose Bank project. A company official said, "We've put everything on the line; there's no turning back."

The South Korean industry says the intensity of this bidding war is hard to describe. While Sembcorp Marine has a price advantage, DSME also has its own unique competitive advantages. It has collaborated with Chevron multiple times in the past and has received high recognition for its financial reliability.

On the other hand, some in the South Korean industry believe that DSME absolutely cannot lose this bidding war. This view holds that the three major South Korean shipbuilders once dominated the global shipbuilding market, particularly in the offshore engineering equipment construction sector, where South Korean companies held a unique position for a long time. Offshore engineering equipment order competitions were often "internal wars" among South Korean companies. However, starting in 2017, the landscape of the offshore engineering equipment construction market began to change dramatically, with Singaporean and Chinese companies steadily encroaching on South Korea's traditional territory. Therefore, this time, DSME, and indeed the South Korean shipbuilding industry, cannot afford to lose.

South Korean industry insiders particularly point out that the FPSO order for the Rose Bank project is a turnkey order, making it even more crucial to secure. Failure would leave South Korean shipbuilders with no foothold in the offshore engineering equipment construction market.

Currently, international oil prices are slowly recovering, and the offshore engineering equipment construction market is showing signs of a glimmer of hope. Will DSME regain the pride of the South Korean shipbuilding industry with the Rose Bank order, or will the South Korean shipbuilding industry continue its decline? The answer will soon be revealed.