Fabrication yards use survival tactics as business dwindles

Shipyards are looking to other revenue sources as the latest wave of rig construction enters service. Success in the fabrication yard business has never been easy. During the last downturn, a number of fabricators all over the world were forced to close their doors, while more were forced to lay off experienced personnel. Once the market returned, these facilities once again began to surge with activity as a number of newbuild, high-tech rigs were ordered.

0499osyard

Moving workers around, smaller jobs, buying competitors

William Furlow
Technology Editor

Marshall DeLuca
International Editor

0499osyard
Shipyards are looking to other revenue sources as the latest wave of rig construction enters service.


Success in the fabrication yard business has never been easy. During the last downturn, a number of fabricators all over the world were forced to close their doors, while more were forced to lay off experienced personnel. Once the market returned, these facilities once again began to surge with activity as a number of newbuild, high-tech rigs were ordered.

The shipyards then faced a number of problems such as trying to regain experienced personnel lost in the last downturn. Now, the downturn has returned, much sooner than expected, and the yards are gearing up for another long recession.

Over the past few years, with high activity, contractors were given the chance to make major changes to their fleets. This has included newbuilds, upgrades, and conversions, all of which have been intended to create a more sophisticated worldwide fleet, with an emphasis on deepwater.

Over 30 deepwater units were ordered for each of these three building disciplines and the first of this new wave of vessels began coming out of the yards last year. However, by the year 2002, all currently ordered units will have been launched, and the majority will enter service by the end of next year. This equates to a gradual slowdown in the majority of the fabrication facilities, beginning at the end of this year.

Experienced personnel

To ensure that the yards do not repeat the problems faced in the last downturn, companies are making changes to their operations. The most widespread problem coming out of the last downturn was manpower. When the new wave of orders hit, the labor pool of experienced personnel was low. US companies had to import experienced workers from across the world. This added to operating costs at the yards, as this included the transportation and lodging of the workers for the duration of the job.

To compensate for this, some companies, such as LeTourneau, established specialized training programs in which they paid prospective workers in the local community to attend welding and other technical schools established in the area. Upon graduation these new workers were given employment positions at the yard. This allowed the company to attract local workers to form an experienced, readily available staff.

Another way the shipyards work to retain personnel is through acquisitions of other yards. Over the last two to three years, companies such as TDI-Halter and Ham Marine purchased and renovated a number of older yards along the US Gulf Coast. Now, with the downturn looming and work getting scarce, these companies have created a sort of fabrication yard network to manage their personnel and projects.

Due to the relative close proximity of these yards, workers can easily relocate from one yard to another, depending on where the work is. Most yards are located only a few hours from each other and workers can easily commute between these areas. When the amount of work picks up in one yard, the company can commute the workforce from one yard to another and close the other yard until work returns. This practice saves the shipyards money and helps them attract and keep experienced workers.

Despite novel programs such as these, layoffs are occurring in the shipyards as work begins to slacken. With each impending round of layoffs, companies throughout the industry, not just fabrication and upgrading facilities, will have an increasingly difficult time attracting experienced personnel back to the industry. This will result in another manpower shortage when activity picks up which translates to higher costs.

Small jobs

A popular survival technique the shipyards are using during the downturn is to take on a variety of smaller projects. The yards have reported there are many small projects still available. Dry-docking, inspections, maintenance, and surveys of stacked rigs and equipment keep shipyards busy when things slow down.

As drillers begin to stack equipment, a niche market opens up for the support and maintenance of these vessels. Even stacked rigs require crews for general upkeep and to make minor repairs. While a rig is stacked, the owner may choose to take advantage of the down time to perform major repairs and surveys of equipment to determine the vessel's operating life. These programs offer shipyards somewhat steady work during the downturn.

While profits on these jobs are small compared to a major upgrade, conversion, or newbuild, the maintenance produces a cash flow for the yard so they can survive in the short term. For the long term, however, the yards must look to an inflow of major construction work.

Production

Fabrication of production systems is another key aspect to the fabrication yard survival formula. With the mass orders of newbuild drilling rigs, it would seem that an inflow of new production systems might offer the yards some relief from the current financial squeeze.

Construction of production facilities has remained a stable business due to the fact that the number of wells being brought into production is relatively flat. The number of wells drilled fluctuates, causing a boom/bust cycle of new orders for yards. The yards say that production facilities fabrication work is a steady source of revenue, but construction of $20 million production unit does not attract the amount of profitable construction that a $300-million drillship does.

Because production system work is a key to the survival of yards, those that are diversified into drilling unit construction and production system fabrication will fare better. While production does not bring in the massive revenues of rig construction, it does offer a great deal more cash inflow than the smaller jobs, such as drydocking and maintenance, and with added stability.

Problems and the future

Cost overruns and delays have led to a number of rigs being canceled during this latest downturn. Some of the blame has been pointed in the direction of the shipyards. Some time back, Andrew Bakonyi, President of R&B Falcon International, said that newbuild deepwater rigs are experiencing an average delay of three months and cost overruns of $30 million, numbers the industry considered extremely conservative. However, a majority of these delay problems stem from the drilling contractor and not the shipyard.

When the mass rush of newbuilds occurred, contractors were given little time to prepare their bids, which may have had an effect on the accuracy of the bids. As a result, contracts were awarded based on rough estimates and with little of the detailed engineering completed. This resulted in engineering and construction being performed concurrently, an inefficient process and not the fault of the fabrication facilities.

Some yards did overextend themselves. These yards took on too much work out of fear the boom wouldn't last. This behavior resulted in major inefficiencies such as cost overruns and delays. Neither the contractor nor the shipyard can be held fully to blame. The companies were moving to take advantage of a strong market.

The future holds some promise for yards. A few new orders have trickled in over the past few months and companies say they are pricing new construction projects almost every day. They add that the new wave of drilling unit orders is not over, there are still several to come, waiting on a stronger market.

On a positive note, the contractors are being given the chance to complete the engineering on their proposed projects, allowing them to make more accurate bids and allow for a more efficient construction cycle. Therefore, when activity does pick up, the yards will see more work heading their way, hopefully before all the new construction leaves the yards. Until that time, companies that are diversified into other areas and maintain an experienced workforce will survive.

Copyright 1999 Oil & Gas Journal. All Rights Reserved.

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