Deepwater Oil Finds Spur NYK to Invest in New Vessels

TOKYO (Dow Jones Newswires), Sept. 10, 2009

A raft of giant oil strikes in global deepwaters is prompting Japanese shipping company NYK Line to invest more in floating production vessels that it can offer for lease, a senior executive said.

NYK Line says Petroleo Brasileiro SA (PBR) will be its biggest customer in the near term, as Brazil's state-owned oil company targets first production from large oil finds in the subsalt region.

Good news flowing from drilling campaigns in Brazil's deep water continued Tuesday when Petrobras said its Guara prospect in the Santos Basin holds between 1.1 billion and 2 billion barrels of oil equivalent.

Other big discoveries in the area include Tupi, which was the Western Hemisphere's largest discovery in more than 30 years. The oil lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

In addition, BP PLC (BP) said Sept. 3 that its deepwater Tiber discovery in the U.S. Gulf of Mexico could hold more than 3 billion barrels of oil equivalent.

Crude oil output from deepwater fields is expected to account for more than 10% of global production by 2012, up from 6% in 2007, according to U.K.-based offshore energy business consultancy Douglas-Westwood.

"Other research suggests it will rise to 30% in the longer term," said Hitoshi Nagasawa, managing officer of NYK.

"Even if global crude oil demand remains flat, existing reserves will fall. Deepwater reserves must therefore be developed unless crude oil prices fall below $60 a barrel," Nagasawa said.

Fewer Rivals

In June, NYK and three Japanese partners invested in Etesco Drilling Services LLC, which will lease drill ships to Petrobras. A drill ship is already on order and due for delivery in January 2012. It will be leased to Petrobras for a maximum 20 years for drilling in Brazil's subsalt region.

Nagasawa said NYK isn't involved in operating the drill ship in this project, and is merely an investor.

"However, we'll learn from our experience partnering companies, as our ultimate goal is to operate (floating vessels) on our own," he said.

NYK, trading firm Mitsui & Co., another Japanese shipping company Kawasaki Kisen and unlisted Japan Drilling Co. invested $820 million to take a 76.48% stake in Etesco. NYK is the largest shareholder, with a 33.7% interest.

The remaining interests are held by Etesco Construcoes e Comercio Ltda in Brazil and Mike Mullen Energy Equipment Resource Inc., with 11.76% each.

NYK is one of Japan's two major crude oil and liquefied natural gas carrier companies, and has a track record in loading and offloading these products. It is also joint operator of a drilling vessel owned by the Japanese government.

NYK aims to make operating and leasing floating vessels the third pillar of its business after LNG shipping and very large crude carriers, or VLCCs.

At present, Petrobras's ambitious drilling plans in deepwater will ensure the Brazilian company remains its largest customer in the near term, Nagasawa said.

But the company is studying several more projects involving floating vessels, said Nagasawa. He declined to give specifics, but said: "We would partner with and invest in other companies if we think the project is good. But we won't do a project alone, because the investment is too large for one company."

NYK is also seeking other projects than drill ships. These include floating production, storage and offloading vessels, or FPSOs, floating storage and offloading vessels, or FSOs, and floating storage and regasification units, or FSRUs.

NYK posted a net profit of Y56 billion for the fiscal year ended March 2009, roughly down by half from a year earlier. The earnings decline was due in part to weakening demand for shipping in the second half and higher costs due to a strong yen.

The container shipping sector was among the most attractive to new entrants until the global economy started to turn down in fall 2008, with the intensifying competition contributing to weaker margins.

But the business of leasing and operating floating vessels for use in deep-water areas has more barriers to entry because it requires deeper technological knowledge and higher investment, Nagasawa said.

In Japan, Modec Inc. designs, produces, operates and leases FPSOs and FSOs. The company is the world's second-largest FPSO company by number of vessels.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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