South Korea may have the reputation as the world’s largest manufacturer of offshore engineering equipment, but its earning ability is no longer as strong as it used to be.
Supported by accumulated technical know-how, lower production costs and the government’s strong desire to secure more offshore oil, Chinese shipbuilders are launching a strong challenge to their next-door rivals.
Zhang Guangqin, president of the China Association of the National Shipbuilding Industry, said even though offshore engineering equipment such as drilling platforms, wind power devices, maritime crane ships and dredgers are more expensive and complex to build, the burgeoning global demand for energy resources is expected to keep orders flowing.
Offshore engineering products are essentially functional vessels and oil drilling platforms that can operate 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.
“While the global shipping industry is unlikely to see an upturn within a short period, demand for offshore energy vessels has surged in recent years,” Zhang said.
COSCO (Nantong) Shipyards Co, a unit of COSCO Shipyard Group Co Ltd, which is a subsidiary of China Ocean Shipping (Group) Co, is one of the Chinese shipbuilders that has shifted from its core business of shipbuilding and ship maintenance to offshore engineering products.
Shipbuilding and maintenance now account for just 5 percent of the annual sales at COSCO (Nantong) Shipyards.
In contrast, the company has invested more than 200 million yuan ($32.5 million) a year to attract foreign professionals and boost technological and innovative expertise in offshore engineering.
Ni Tao, managing director of COSCO (Nantong) Shipyards, said China will take over the crown from South Korea in the next five years with this dramatic change occurring faster than the global leader expected.
“As China and many nations’ energy future will depend on deep water oil and gas, this industry won’t face a slowdown in the next several decades. Deep water fields yet to be discovered and developed are expected to be the main sources of conventional energy,” Ni said.
International Maritime Associates Inc, a Washington DC-based consultancy that specializes in strategic planning for companies in the offshore industry, estimated the world’s ocean oil reserves are between 140 billion and 200 billion metric tons. About 109 offshore oil and gas projects are being planned at an investment of $189 billion in the next five years.
COSCO (Nantong) Shipyards will deliver eight offshore engineering products, including wind turbine installation vessels, jack-up and floating oil drilling platforms to Norway, Britain, the Netherlands and Denmark this year.
The company’s sales revenue reached 8 billion yuan in 2013, increasing 25 percent from a year earlier.
To further diversify its business scale, Ni said the company will cooperate with the China Export and Credit Insurance Corp to build a semi-submersible oil drilling platform for hire at a daily rental fee of $500,000. Certain energy companies are still having trouble gaining the funding to own such a vessel outright.
China’s offshore engineering products amounted to $18 billion in 2013, up 16 percent year-on-year and accounting for 29.5 percent of the global market, according to data from the Ministry of Industry and Information Technology.
With Singapore’s global market share dropping to 23 percent last year, it was the first time China surpassed its Southeast Asian competitor. South Korea was still on top with 42 percent of the global market.
According to CANSI, more than 55 Chinese shipyards have begun to produce different types of maritime engineering vessels or equipment, from low-end offshore support vessels to $600 million oil rigs for both domestic and international buyers, including China National Offshore Oil Corp, China Huaneng Group, Exxon Mobil Corp and Royal Dutch Shell Plc.
Sinopacific Offshore and Engineering Co, another Qidong-based maritime product manufacturer, secured two orders in the past three months to build liquefied ethylene gas carriers for two Norwegian companies—Ocean Yield ASA and Odfjell Gas Shipowning AS. Three of the ships have a capacity of 36,000 cubic meters and four have a capacity of 22,000 cu m. They are scheduled for delivery between 2016 and 2017, respectively.
Sinopacific also signed a subcontract with South Korea’s Hyundai Heavy Industries Co earlier this year to manufacture modules for the Moho Nord field project developed by Total SA, a French oil and gas company, in the Republic of Congo.
Liang Xiaolei, chairman of Sinopacific, said as China has abundant offshore oil reserves, the orders from the domestic market will rise and Chinese energy companies will be more inclined to place orders from domestic players as their product price, maintenance costs and other after-sales services are all cheaper than South Korean and other foreign companies.
Chinese shipyards ask 12 percent of the total cost to secure an order for jack-up oil rigs or large-scale crane vessels. The best South Korea and Singapore can offer is between 30 and 35 percent. Chinese companies also offer a better price between 25 and 30 percent cheaper than both of these rivals.
“Though many global oil companies still favor South Korea or Singapore, the biggest challenge is that they don’t have enough coastal land, manufacturing facilities and workers, as well as working schedules for new orders to hold back China’s expansion,” said Liang.
In comparison with South Korea and Singapore’s land constrained manufacturing facilities, their earliest available working schedules are in 2017. However, large Chinese shipyards can pick up work as early as 2015.
Dong Liwan, a professor at Shanghai Maritime University, said South Korean companies will have a hard time competing with Chinese shipyards.
“Apparently, Chinese shipyards are not focusing on short-term profit,” he said. “They are seeking to shift the market to China because most of the companies are State-owned enterprises and have flexible access to commercial and policy banks for loan.”