Offshore orders becoming increasingly risky for shipyards.
Cancellation risk is becoming increasingly obvious in offshore structure orders. South Korea’s Daewoo Shipbuilding & Marine Engineering (DSME) is expected to receive cancellation from Danish energy giant DONG Energy on an offshore platform. DONG Energy has cited delays in construction as reason for the contract annulment, but it is believed deterioration in profitability of its development project itself in accordance with stalled crude oil prices was also one factor for the cancellation. Construction is seen to have already reached 70-80% completion, and such a serious status in which cancellation is to be made in construction’s advanced stage is causing ripples in the industry.
DONG Energy announced on March 29 that it terminates an EPC (engineering, procurement & construction) contract for an offshore platform it previously ordered from DSME. The initial delivery date was set for April 2015, but due to delays in construction, nearly one year has elapsed since the initial delivery date. DONG Energy has stated that it will assess alternate ways for the development of its project, but the project is likely to come to a standstill for the time being due to stalled crude oil prices.
Through a consortium with French engineering giant Technip, DSME in 2012 received an order for an offshore platform for $560 million from DONG Energy. According to Korea’s local media sources, the platform has already reached 70-80% completion. DSME is also seen to have received a certain amount of order value based on completion rate, but the scale of additional losses the yard will incur in line with the contract cancellation has not been revealed.
Given the sliding crude prices since 2015, there have been increasing cases in which ordering parties unilaterally notify contract cancellation or delivery postponement for offshore structures. Alike the latest case of DSME, Hyundai Heavy Industries HHI) is also facing a serious case wherein an order for a rig, already close to completion, has been one-sidedly canceled with construction delays as a reason. In offshore-related projects, there have been not a few cases in which yards have made concessions to ordering parties in contract conditions due to fierce competition with rival bidders. Even when ordering parties have their own problems of deteriorating profitability in their projects, they resort to such means to blame yards for work delays as direct reason for contract annulment.
In offshore-related projects, shipyards are already facing profitability deterioration due to confusion in construction processes and growing costs brought by specification changes and such. This, combined with increasing contract cancellation risk, could result in massive losses for Korean shipyards dealing with offshore projects.
