Offshore & Marine
Keppel Offshore & Marine expects yet another exceptional year in 2007 as it meets its commitments to deliver 33 major projects, including nine jackups, one semisubmersible and six offshore support vessels.

Major developments in 2006 Delivered 26 major projects on or ahead of time and within budget Clinched $7.3 billion of orders, with deliveries into 2010 Secured 10 jackups, nine semi newbuild and upgrade projects, 14 OSVs and seven FPSO conversions   Focus for 2007/2008 Invest in R&D and create alliances with trend-setting customers, designers and vendors to develop new products and solutions Deliver value through excellent project management and execution Focus on Health, Safety and the Environment Vision Net order book

Keppel O&M delivered six jackup rigs in 2006, including Deep Driller 3, which is of the KFELS Super B Class design.

Earnings review Offshore & Marine Division secured a record $7.3 billion of new orders in 2006, bringing the net order book at the end of the year to $10.5 billion. The Division’s profit before tax of $624 million was $274 million or 78% higher than in 2005, and $377 million or 1.5 times more than that of 2004. Revenue and operating margins improved with higher prices and efficient project execution. PATMI increased from $191 million in 2004 to $239 million in 2005, and increased by a further $209 million, or 87%, to reach $448 million in 2006.

Market review
2006 was marked by fluctuations of spot oil prices with the price per barrel of oil moving within a wide range between US$50 and near US$80. Oil prices started the year at around US$60 per barrel and rose to a record price of US$78.40 per barrel on 13 July 2006. It ended the year at around US$60 per barrel. The volatility of oil prices was set against a backdrop of strong global demand for energy. Global oil demand was estimated to be around 85 million barrels per day in 2006.

Despite the volatile oil price, offshore exploration and production (E&P) activities remained very active in 2006. Utilisation trends remained extremely healthy for all categories of rigs and offshore vessels throughout the year. For jackups, average utilisation was near 87% during the first quarter, climbing to 89% in July before easing to 87% in November. For the floating rig fleet consisting of semisubmersibles (semis) and drillships, utilisation was near 85% at the start of the year. It declined to 83% in June and July before rising back up to 85% by the end of the year.

Day rates for rigs and offshore vessels continued to climb higher throughout the year. The number of rigs earning at least US$300,000 per day rose from four in January to 29 in December. Similarly, the number of rigs earning at least US$200,000 per day increased from 25 in January to 71 in December. During 2006, a total of nine new jackups joined the global rig fleet, while another 27 jackups, 27 semis and 10 drillships were ordered.

Operating review
Keppel Offshore & Marine (Keppel O&M) had an outstanding year in 2006. It delivered all of its 26 major projects in a timely manner and within budget. All the group segment operations of offshore, marine and specialised shipbuilding posted excellent performances during the year.

The Division secured a record $7.3 billion worth of new orders for the whole of 2006, which was 12% higher than in 2005. This contributed to its net order book of $10.5 billion at the end of the year, with deliveries stretching into 2010. Among the significant projects secured were 10 jackups, nine semi newbuilds/upgrades, 11 Anchor Handling Tug/Supply (AHTS) vessels and seven Floating Production Storage and Offloading (FPSO) conversions. Offshore Keppel FELS achieved a sterling performance in 2006. The Singapore yard secured a total of 13 newbuilding contracts, of which eight were jackups and five were semis. Seven of the newbuilding jackup contracts were of the proprietary KFELS B Class design. The company secured three contracts for its Keppel FELS proprietary deepwater semi designs: a DSS™ 51 from GlobalSantaFe Corporation, a DSS™ 21 from A.P. Møller–Mærsk and a DSS™ 38 from Brazilian drilling contractor Queiroz Galvão Perfurações. The other two semi projects are being built for ENSCO.

In the upgrade market Keppel FELS retained its lead, commencing work on four new semi projects clinched
during the year.

Keppel Shipyard completed the installation of the P-53’s turret, one of the largest worldwide.

Its reputation of delivering on its promise was significantly enhanced by all seven newbuild projects completed on time or ahead of time during the year amid an extremely busy schedule of executing 30 major projects concurrently. Safety figured strongly in the year, with seven projects attaining two million manhours each without any lost time incidents and seven more projects achieving one million manhours with the same clean record. Its Accident Frequency Rate of 1.1 and severity rate of 28 per million manhours worked were significantly lower than industry rates of 2.8 and 175 respectively. In anticipation of its present and future workload, Keppel FELS expanded its yard and fabrication facilities to increase capacity for fabrication works and wharfage for mooring of rigs. It set up Bintan Offshore Fabricators, a majority-owned venture, on Bintan Island, Indonesia and leased a 9-hectare site at Shipyard Crescent in Singapore. The Philippine yards also upgraded their facilities to support Keppel FELS.

In the US, Keppel AmFELS achieved a strong performance on the back of more newbuilding projects and strong contributions from repair and upgrade work.

The company successfully delivered 12 projects in 2006, with the completion of two newbuild accommodation platforms for PEMEX and 10 repair and upgrade projects.

Current newbuilding projects in Keppel AmFELS include seven newbuild jackup drilling rigs for Scorpion Drilling, Diamond Offshore and Atwood Oceanics, and a sludge vessel for New York City.

Keppel FELS Brasil achieved significant milestones in 2006 with the challenging and complex mating operations for the P-52 project and the joining of the ‘C’ sections of the lower hull pontoon of the P-51 project in the BrasFELS Yard.

Ocean Monarch is the fourth upgrade that Keppel FELS is carrying out for Diamond Offshore.

The yard has also delivered two platform support vessels to Maersk Brasil Ltda during the year. In the Netherlands, Keppel Verolme achieved record revenue in 2006. Its excellent execution of the world’s first circular FPSO, the SSP Piranema, reflected the European yard’s ability to offer real value for its customers compared to low-cost yards. The yard also demonstrated its synergy with sister yards in the conversion of the Blackford Dolphin for Fred Olsen Energy by undertaking the overall integration of the structure and modules as well as carrying out repair and maintenance work on the semi.

Another first for Keppel Verolme was winning a project to build the world’s first concrete heavy lifter for Norway’s MPU Offshore Lift AS for the decommissioning market.

Major projects completed by Caspian Shipyard Company (CSC) in 2006 included the supply of labour for the BP Shah Deniz project and the fabrication of 1,600 tonnes of foundation steel for Agip Kazakhstan North Caspian Operating Company (Agip KCO). Work in progress is the fabrication of pipe racks for Agip KCO, and this will keep the yard busy till 2008.

Keppel Kazakhstan marked a significant milestone in 2006 with the launch of the transportation barge AKKU1, built for Agip KCO. The launch of the first offshore vessel ever built in Kazakhstan was graced by His Excellency Nursultan A Nazarbayev, President of the Republic of Kazakhstan. This vessel is part of the contract for pipe racks and four barges to support the first-phase development of the Kashagan oil field.

Polvo and Umuroa are two of the eight FPSO/FSO conversions that Keppel Shipyard has carried out for Prosafe Production.

Ideally located in the Caspian Kazakh Sector, Keppel Kazakhstan works with CSC to realise the full benefits of the group’s “Near Market, Near Customer” strategy in the region. In Norway, Keppel O&M acquired an additional 50% of the shares in Offshore & Marine ASA in March 2006 to make it a wholly-owned subsidiary. Additional capital was injected into the company. The firm was subsequently re-branded and is now Keppel Norway AS. In the United Arab Emirates, Arab Heavy Industries achieved yet another record performance in 2006. It repaired 222 vessels and converted the barge GTO 202 into a floating mobile jetty.

Marine
Keppel Shipyard achieved record revenue in 2006, boosted by higher-value repairs and more conversion work.

Tankers and container ships remain the main revenue contributors. The yard completed nine LNG carrier repairs and maintained its market-leading position in the conversion market, having undertaken 10 FPSO/FSO conversion, upgrading and repair projects.

Keppel Shipyard received significant bonuses which included $1,500,000 from SBM for FPSO Capixaba, and $500,000 from Marathon Petroleum Company (Norway) in recognition of achieving the safety performance targets for the Alvheim FPSO project.

The offshore production market has seen strong orders for floating production units (FPUs) in the last two years. Demand for FPSO/FSO conversion is expected to be sustained in 2007. Keppel Shipyard’s track record of FPSO/FSO conversion, upgrading, and repair increased from 54 to 64. By the end of 2006, 10 projects were completed while six FPSO/FPU conversion projects and one FSO refurbishment were in progress. One FPSO and one FSRU conversion project are also on order for 2007. This is a considerable leap from four FPSO/FSOs completed and four in progress in 2005.

During the year, Keppel Shipyard signed a Letter of Intent with Qatar Gas Transport Company (Nakilat) to establish a large shiprepair yard in Qatar. The agreement was finalised in March 2007. This will extend Keppel O&M’s “Near Market, Near Customer” reach to yet another major oil and gas producing market.

Keppel Philippines Marine Inc (KPMI) achieved higher profitability on the back of higher workloads in its shipyards. In 2006, Keppel Batangas Shipyard repaired 80 vessels and completed two 45-tonne bollard pull Azimuth Stern Drive (ASD) harbour tugs for a Singapore customer and the lower pontoon of a semi drilling rig for Keppel FELS. It also commenced construction on another tugboat and the lower pontoon sections of two semis, all of which are for export.

Wholly-owned subsidiary, Keppel Cebu Shipyard, repaired 92 vessels in 2006, up from 76 vessels in 2005. Foreign vessels accounted for 61% of the total revenue, with 42 foreign vessels repaired during the year compared to 30 in 2005. Work started on a 45-tonne bollard pull ASD tug and two 50-tonne bollard pull ASD tugs during the year.

Subic Shipyard & Engineering Inc, an associated company, registered higher revenue. All 38 vessels repaired in the yard were foreign vessels compared to the 50 serviced in 2005. The decrease in number was attributed to longer docking durations required by the vessels under repair. The shipyard was also contracted by Keppel FELS for the construction of pontoon sections for two semis.

Specialised shipbuilding
Keppel Singmarine had a boom year in 2006, with improved revenue due largely to the high-value projects and contributions from Keppel Nantong Shipyard in China.

A total of 14 offshore support vessels (OSVs) and tugs were delivered to a worldwide clientele including new customers LUKOIL-Kaliningradmorneft and Seaways International.

It secured six units of OSV and two jackup hulls for Keppel FELS during the year. It also acquired new capabilities in Ice-Class vessels with the award of two units of ice-breaking vessels for the Barents and Arctic Seas and an FSO for the Caspian Sea.

The specialised shipbuilding yard has an order book of 22 vessels slated for delivery from the beginning of 2007 till mid-2009. Of this, 11 are being built in Keppel Nantong.

Keppel Nantong in China launched full-scale operations in 2006 to complement Keppel Singmarine in the construction of OSVs and tugs.

Business outlook
The outlook for the offshore and marine industry remains strong, underpinned by sound market fundamentals.

With oil and gas demand growing at a strong pace to support global economic development, worldwide offshore E&P spending is expected to grow, albeit at a moderate level in 2007.

Offshore
Demand for offshore rigs remains bullish with an ageing global rig fleet and record high fixture rates. The offshore rig fleet is currently operating at an effective utilisation rate of nearly 100% in every sector. Worldwide jackup demand is expected to increase to 390 units in 2007 and 410 in 2008. Demand for semis is expected to increase from an average of 160 units globally in 2007 to nearly 180 in 2008.

The order backlog for new FPUs is at a record 30-year high, with over 60 units due for delivery over the next two years. This includes nearly 50 units of FPSOs and nine production semis. There are also close to 110 projects currently in the bidding, design or planning stages that potentially require a significant number of additional floating production and storage units.

Deepwater activity will continue to grow significantly, with almost 25% of E&P projects in the planning pipeline slated for ultra-deepwaters exceeding 1,500 metres. Another 30% of the planned projects are in water depths of between 1,000 m and 1,500 m.

In the North Sea, a resurgence in exploration and appraisal (E&A) drilling in the last two years saw the highest levels of E&A investment since the late 1980s. The increased activity in the Arctic environment and other harsh environment looks likely to continue. The deepwater “Golden Triangle” of West Africa, Gulf of Mexico and Brazil will continue to account for over 80% of global deepwater expenditure. Prospecting in the Caspian Sea looks positive in the Russian, Azerbaijani and Kazakh sectors and this is expected to result in additional requirements for offshore-related infrastructure and OSVs.

In Brazil, Petrobras’ new five-year strategy to reduce its dependency on gas, light oil and oil product imports has pushed up overall investments in deep and ultra-deepwater E&P. Together with the capital expenditure budgeted by other oil companies in the region, a total order for 11 FPUs is planned for the period between 2007 and 2011.

West Africa remains an important region for the international oil community, as oil companies seek to diversify long-term oil and gas supply from the Middle East and parts of Latin America. There is also strong interest in African acreage, particularly from Asian national oil companies seeking to fuel their burgeoning economies. The emerging Asian and Australian regions will also see strong growth in offshore oil and gas activities.

The high level of E&P activities will continue to drive demand for production facilities, particularly FPSOs and FSOs. About 30 potential FPSO and FSO projects are coming on stream, including upgrading projects.

Keppel O&M has been able to co-invest in FPSOs and rigs with long-time customers. It believes that the market is right for shipyards and owners to collaborate and leverage one another’s capabilities to offer additional value to end customers. Keppel O&M will explore different alliances with trendsetters to capture greater value.

Keppel AmFELS completes two accommodation platforms for PEMEX.

Marine The rise in FPSO and FSO projects is taking up capacity traditionally used for shiprepair and upgrading work, while the continuing good shipping market is asserting pressure on owners and ship managers to push for faster turnaround times for shiprepair. The confluence of these factors has held up prices for shiprepair services despite expansion of existing and new shiprepair facilities within Asia. This augurs well for Keppel Shipyard’s shiprepair business. Servicing tankers and container ships remains core to the shipyard.

Specialised shipbuilding
The OSV market will continue to thrive on the current high utilisation and charter rates, providing favourable conditions for further investment in vessels by operators. Demand for icebreaking OSVs is expected to rise as Russia intensifies her hydrocarbon exploration in the Russian Arctic territory.

However, competition is expected to remain keen as Norwegian yards are lowering production cost by outsourcing their hull construction work to East European countries and offering liberal payment terms. Chinese and Indian yards are now also in the fray for OSV construction.

Prospects for tugboats remain robust with growing global shipping, underpinned by the industrial expansion of China’s and India’s booming trade. There is a greater need for harbour tugs of bigger horsepower and better manoeuvrability.

Keppel Singmarine and Keppel Nantong Shipyard are ready to grow beyond the good track records achieved in recent years to attain new heights as they serve the needs of their customers in the buoyant shipbuilding market.