One More Reason Prices Are Falling

Floating oil factories allow tankers to load at sea, avoiding political instability and saving billions

Slide Show >>

Nigeria is a rough place to do business. In the past year, rebels seeking a greater share of the country's energy wealth have bombed Royal Dutch Shell's pipelines and kidnapped its workers. The oil giant was forced to shut down half of its production there, most of which is situated in the Niger River Delta, a steamy swampland populated by farmers, fishermen, and angry militias.

Far out at sea, the situation is much safer. Since late last year, Shell has been extracting oil from its massive Bonga field, a $3.6 billion project located in 3,200 feet of water. The field now yields more than 200,000 barrels a day, thanks to a high-tech facility called a floating production, storage, and offloading vessel, or FPSO. It looks like an oil tanker and can hold up to 2 million barrels in its belly, but its primary purpose is to load up tankers out at sea, rather than piping the crude to an onshore terminal. The oil streaming in from Bonga and other deepwater sites like it helps explain why oil prices have settled down to under $60 from a July high of $78.

For the oil companies, benefits abound. FPSOs spare them billions of dollars in infrastructure costs, years of construction time, and in the case of Nigeria, the significant costs and setbacks associated with political instability. "The FPSO gives you a great deal of flexibility," says John Stubbs, the Shell executive who got the Bonga project up and running.

FPSOs are now pumping away off the coasts of Brazil, West Africa, and Southeast Asia, extracting more than 5million barrels per day, up from 1.5million barrels five years ago, according to oil industry researcher Wood Mackenzie.

Handling millions of barrels of crude far out at sea does open up the risk of oil spills and other types of contamination. But that's not likely to slow the proliferation of FPSOs. As more production has moved farther offshore in the past five years, the number of these immense vessels in uses has doubled to 113 worldwide, according to industry consultant Douglas-Westwood Ltd. An additional 83 will be launched by 2011, worth an anticipated $26billion in revenues to shipbuilders, most of them based in Korea and Japan.

Costing hundreds of millions of dollars apiece and measuring as much as three football fields in length, the platforms are towed from the manufacturer' shipyards and anchored at the richest oil fields. At sea, they're typically tended by some 100 crewmen who work a month on, a month off. "We call them superboats," says Michael Flynn, head of deepwater developments for Exxon Mobil Corp. XOM . "They're really like small cities."

ExxonMobil sometimes sends smaller FPSOs to jump-start production at fields until serious infrastructure can be built. Under a program it calls "design one, build three," the company ordered up three FPSOs for use at a series of fields in West Africa. It cost $10 billion to bring the fields online, but they produce a combined 700,000 barrels per day, nearly 1% of worldwide oil demand.

The one part of the world where the floating factories have yet to make an appearance is the Gulf of Mexico, since there is already an extensive pipeline infrastructure. But things may change. Devon Energy Corp. DVN , which announced a big discovery in the deepwater Gulf in late summer with Chevron Corp. CVX , is looking at FPSOs.

What about hurricanes? FPSOs operated by Conoco-Phillips off the coast of China and Vietnam are designed to turn in place, minimizing the impact of waves during typhoon season. They can also detach from the undersea wells and get towed away if conditions turn ominous. Built this way, facilities in the Gulf could endure foul weather better than the ones dependent on the pipelines that were battered so severely by hurricanes last year.

By Cristopher Palmeri

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE