Understanding the Shipbuilding and Offshore Engineering Value Chain

Stage 1: Project Origination – Who Decides Whether to Build?

Every vessel or offshore facility begins with a commercial or operational requirement.

In shipping, newbuilding demand usually originates with shipowners, shipping companies, financial lessors or major cargo interests. Based on expected cargo volumes, trade routes, fleet renewal requirements and the market outlook, they decide whether additional tonnage is needed and, if so, what type of vessel should be ordered.

Offshore projects are generally initiated by oil and gas companies, licence holders or project sponsors. Following an offshore discovery, they must first assess whether the resources can be developed commercially. They then consider when development should begin and whether production should rely on fixed platforms, an FPSO or another development concept.

The decision to proceed therefore rests with the party that controls the transport requirement, resource rights or investment approval – not with the shipyard. By the time a shipbuilding or construction contract is awarded, the project may already have gone through several years of evaluation and preparation.

Stage 2: Front-End Development and Design – Deciding How the Project Will Be Delivered

Once a requirement has been identified, the initial commercial idea must be developed into a technically feasible and economically viable solution.

For a merchant vessel, this involves defining the vessel type, cargo capacity, speed, range, propulsion arrangement, fuel choice and major equipment specifications. Construction cost, operating expenditure and expected investment returns must also be assessed. Shipowners, naval architecture firms, classification societies, consultants and financial institutions may all contribute to this process.

Front-end development for an offshore project is generally more complex. The oil company may need to compare subsea wells, wellhead platforms, fixed production facilities, floating production units or combinations of these systems. It must also determine whether existing infrastructure can be used and how much production, processing, storage and export capacity the new facilities will require.

Concept selection studies, field development planning, pre-FEED and front-end engineering design, or FEED, are mainly undertaken during this stage. Their purpose is not to complete every construction drawing, but to define the development concept, principal technical requirements, estimated investment and overall execution strategy.

This work provides the technical and commercial basis for the final investment decision, commonly referred to as FID, as well as for subsequent tendering and contract awards.

Stage 3: EPC Contracting and Project Integration – Coordinating the Full Scope

Once the development concept has been selected and the investment decision made, the project moves into execution.

Offshore projects are frequently delivered under EPC, EPCI or EPCIC contracts. E generally stands for engineering, P for procurement, C for construction, I for installation and, in EPCIC, the final C for commissioning. The precise meaning and scope of these terms can vary between projects, so the contract remains the definitive reference.

The EPC, EPCI or EPCIC contractor is responsible for coordinating the different elements of the project into a complete delivery. It may subcontract substantial portions of the work to shipyards, module fabrication yards, specialist engineering firms, equipment suppliers and offshore installation contractors.

The contractor does not necessarily perform every activity itself. Its central role is to manage the overall project, including technical interfaces, schedule, cost, quality, risk and contractual delivery obligations.

Merchant shipbuilding generally follows a different contractual structure. A shipyard normally enters into a shipbuilding contract directly with the shipowner and acts as the principal contractor for the newbuilding. Depending on the contract, its scope may include detailed and production design, equipment procurement, hull construction, outfitting, testing, commissioning and delivery.

Although this scope overlaps with many EPC activities, conventional shipbuilding contracts are not normally described as EPC contracts. Offshore engineering contractors and shipyards may both carry overall delivery responsibility, but they operate under different contractual and project-management arrangements.

Stage 4: Fabrication and Construction – Turning Designs into Physical Assets

Fabrication and construction are the most visible parts of the shipbuilding and offshore engineering value chain.

Shipbuilding typically involves steel preparation, panel fabrication, block assembly and erection, hull launching or float-out, outfitting, coating and equipment installation. The shipyard is the principal construction party, supported by block fabricators, outfitting subcontractors and specialist installation teams.

Offshore projects may involve not only a hull or platform structure, but also large process modules, accommodation modules, mooring components and other functional units. In an FPSO project, for example, the hull and topsides modules may be fabricated at several different yards before being brought together for lifting, integration and commissioning.

Engineering also continues throughout the construction stage. Equipment-interface changes, fabrication constraints, site queries and design modifications inevitably arise as the work progresses. Engineering contractors, design houses, shipyards and equipment suppliers must work together to resolve these issues without compromising safety, quality or schedule.

Stage 5: Equipment and Supply Chain – Providing the Systems That Make the Asset Work

A vessel or offshore facility consists of far more than its steel structure. Its ability to perform its intended function depends on a large number of specialised systems and equipment packages.

Major equipment on a merchant vessel may include the main engine, generators, propulsion equipment, boilers, pumps, deck machinery, navigation and communication systems, and automation and control systems.

Specialised vessels require additional systems. LNG carriers, for example, need cargo-containment, cargo-handling and cryogenic systems, while vehicle carriers require purpose-designed vehicle decks, ramps and internal access arrangements.

Offshore production facilities contain even more complex process equipment. An FPSO typically incorporates oil and gas separation, gas compression, water injection, power generation, flare, metering, safety and control systems. A subsea development may also require subsea trees, manifolds, flowlines, pipelines, risers and umbilicals.

Equipment suppliers do more than manufacture and deliver individual products. They may also undertake package engineering, participate in equipment selection, conduct factory testing, supervise installation, support commissioning and provide maintenance or lifecycle services.

Procurement begins well before construction is complete. Some long-lead equipment must be ordered while detailed engineering is still in progress. Equipment and supply-chain management therefore run through the engineering, construction and commissioning stages rather than forming a completely separate step.

Stage 6: Testing, Installation and Delivery – Moving from Construction to Operation

After construction of a vessel has been completed, it must undergo quayside testing and sea trials. The propulsion plant, manoeuvring performance, navigation and communication equipment, safety systems and other onboard systems are tested against contractual, classification and statutory requirements.

Before delivery, the vessel must complete the applicable class and statutory surveys and certification processes, as well as the acceptance procedures agreed between the shipowner and shipyard. The International Maritime Organization’s ship design and construction framework covers matters including construction, machinery and electrical installations, testing and approval of materials, and survey and certification.

The delivery of an offshore facility is usually a longer and more complex process. Once an FPSO has completed yard-based construction, integration and testing, it must sail or be towed to the field. Offshore work may then include mooring, hook-up to risers and umbilicals, system completion, offshore commissioning, start-up and preparation for first production.

Fixed platforms, subsea production systems and offshore wind facilities similarly require transportation, lifting, installation, cable or pipeline connection, testing and offshore commissioning.

This stage may involve the engineering contractor, offshore installation contractors, construction-vessel operators, shipyards, equipment suppliers and the future operations team. Weather conditions, sea states, vessel availability and interfaces between different systems can all affect the offshore schedule.

Stage 7: Operations and Maintenance – Who Manages the Asset after Delivery?

Delivery marks the end of construction, but not the end of the asset lifecycle.

Once a merchant vessel enters service, it must be crewed and commercially deployed. It also requires planned maintenance, spare-parts support, repairs, dry-docking, statutory inspections and classification surveys throughout its operating life.

Shipowners may manage these activities internally or appoint a professional ship-management company to take responsibility for technical management, crewing, procurement and day-to-day vessel operations.

FPSOs, FLNG facilities and offshore platforms are generally expected to operate for well over a decade and often for 20 years or longer. Their operations teams must manage personnel rotations, maintenance, asset integrity and marine systems while keeping the production, processing, storage and export facilities operating safely and reliably.

Some FPSOs are owned and operated directly by oil companies. Others are supplied under lease-and-operate arrangements by specialist FPSO companies such as SBM Offshore and MODEC.

SBM Offshore, for example, describes its principal FPSO activities as covering design, supply, installation, operation and life extension. It offers both FPSO leasing and turnkey-sale models, with operations and maintenance options. This illustrates how an FPSO contractor may remain involved throughout much of the asset lifecycle rather than leaving the project once construction is complete.

One Value Chain, Many Different Responsibilities

Across the lifecycle of a shipbuilding or offshore project, shipowners and oil and gas companies define the requirement and approve the investment. Design houses and engineering contractors convert that requirement into a workable technical solution. Shipyards and fabrication yards build the physical asset, equipment suppliers provide the critical systems, offshore contractors complete installation and hook-up, and operators manage the asset after it enters service.

The boundaries between these roles are not always clear-cut. A large shipyard may undertake engineering, procurement and construction. An engineering contractor may own fabrication facilities. An equipment supplier may extend its services into installation and maintenance. An FPSO company may simultaneously act as an engineering contractor, asset owner and operator.

Understanding the value chain is therefore not simply a matter of memorising seven stages. Three questions provide a clearer picture: Who makes the investment decision? Who carries overall contractual responsibility for delivery? And who owns or operates the asset once it enters service?

Answering these questions makes it much easier to understand the respective roles of shipyards, design houses, engineering contractors, equipment suppliers, installation contractors and operators.