South Korea has become an international shipbuilding power-house – a name-plate for dozens of global mega-projects stretching from New Foundland to Australia.
What is described as “the largest fabrication facility in the world” is in fact a relatively small country that has risen to punch way above its weight. By population, Korea is the 24th largest country in the world. By GDP it is the 15th, and, according to Eugene Seo, from Kotra, a Korean inward investment organization, it is the 10th biggest trading country in the world. Korea’s Samsung sits at 14 in the Fortune Global 500 rankings, which also lists a further 13 Korean firms.
Image: Allseas Pieter Schelte mega-heavy lift vessel at DSME's yard in Korea. Image from Allseas.
The country has a sizeable chunk of the global offshore construction market, according to speakers at a Korean investment seminar, organized by NOF Energy, KOSHIPA, and UK Trade and Investment, held in Aberdeen 15 September. According to Joong-Nam Lee of Samsung Heavy Industries (SHI), who also spoke at the event, this was worth about US$21.85 billion to Korea in 2012, accounting for a 31% market share. Of this, about 31% was mobile production units and 61% mobile drilling units.
Projects under construction in Korea include many of the largest in the industry at the moment, from the Ichthys central processing facility and Shell’s Prelude FLNG unit, being built by Samsung Heavy Industries (SHI), to the Ichthys FPSO, being built by Daewoo Shipbuilding and Marine Engineering (DSME) and the Moho Nord floating production unit, being built by Hyundai Heavy Industries (HHI). The topsides for the Clair Ridge and Mariner field developments, two large projects in the UK North Sea, are also being built in Korea, at HHI and DSME respectively.
But, the Koreans are not a boastful nation and they’re conscious that they need to increase their engineering capabilities to keep ahead. While Korea’s existing order book tops China’s in the offshore sector, China is leading when it comes to market share of new orders, at 37.2%, with Korea holding 29.1%, followed by Singapore in third place with 14%, said SHI’s Lee.
Lee said Korea set out to build a shipbuilding industry in the 1960s, which, by the 2000s, led to the country holding a leading global position in the sector, over taking Japan. In between, the country went through a financial crisis, rated B+ by Fitch in 1997, with GDP per capita at $7300. It is now $33,187 (in 2013) and Fitch rates the country at AA-.
But, the industry, which had produced mostly bulk, gas and other carriers, has suffered since the financial down turn, including the top three yards, says Dong-Joon Kim, a professor at Pukyong National University, speaking at the event in Aberdeen. This, in addition to China becoming more competitive in shipbuilding, has led Korean firms to focus on the offshore sector.
Image: The Arkutun-Dagi platform, now installed off Sakhalin, built at DMSE.
While the country has developed significant expertise in construction – focusing on procurement and construction - it is behind when it comes to engineering skills for EPC work and in-country equipment suppliers, says SHI’s Lee. Because it is reliant on sourcing engineering and equipment overseas, this can lead to project delays, sometimes simply because of communication and logistics difficulties, he says.
What is more, says Professor Kim, projects are becoming more complex, as requirements for deeper water units, and inevitably bigger structures increase. “These companies have little experience with recent new style offshore projects,” says Kim. The inexperience has resulted in project delays, causing costs, he says. By having local engineering expertise, and local equipment manufacturing, those delays could be avoided, says Kim.
“We have difficulty in this area,” admits Korea Offshore and Shipbuilding Association (KOSHIPA) Vice Chairman Young-Jo Suh said, “because of a lack of engineering experience and offshore equipment.”
“We want people to invest in Korea because our development engineering and equipment is not so high (level),” says SHI’s Lee. “We want engineering and vendor companies to come to Korea. For a second tier engineering company, this could be an opportunity to move up to be a first tier company.”
Kim says topside engineering skills, particularly at the front end engineering and design phase, are those most required, with partnerships and joint ventures possible routes to filling the gaps. HHI, for example, is working with Technip on the Aasta Hansteen spar development, destined for offshore Norway.
Encouraging foreign firms to Korea, to work with local companies, would have three big benefits, says Kim: reducing engineering cost, which is becoming a larger proportion of project costs; improving communication between contractors and shipyards; and helping to speed up projects, thanks to better closer working between shipyards and engineering departments. “Because of these three reasons, Korean shipyards are willing to have international co-operation in the design process,” says Kim.
Other partnerships already set up include AMEC Samsung Oil & Gas, a joint venture between the UK’s AMEC, SHI and Samsung Engineering, set up in 2012, and based in Houston. It now has 100 engineers, focusing on fixed and floating offshore platform design engineering, with an aim to have 500 by 2018, says Kim. In July, Aker Solutions announced a joint venture with Korean firm Kolon Water & Energy. CloughCoens, is another joint venture, focusing on commissioning and completions. It was formed between Australia’s Clough and Korean firm COENS.
Image: The Aasta Hansteen spar development.
Korean firms have also been opening engineering centers overseas. DSME opened a Houston engineer center in 2013, SHI opened its India Noida Engineering Center in 2007, and DSME opened an Indonesia engineering center in 2012.
International firms have also set up shop in Korea, including GE and fire and blast proof products specialist MTE (Mech Tech Engineering) from Darlington, England. Ian Shoulder, sales manager at MTE, said it wasn’t easy, with cultural and language difficulties. But, it was worth it he says. The country lacked experience, which created an opportunity for MTE. It took two years’ work, a lot of time travelling, setting up local banking facilities, overcoming other hurdles, including understanding a culture when it comes to agreeing and negotiating contracts, and finding a partner before the firm got going. Even then, trying to get Korean firms to do things differently – fabricating using 1.5mm-thick steel (instead of 6mm) for example – isn’t easy, he says. But, it’s worth it, he says. MTE has a manufacturing facility and has worked on projects including the DSME-built Arkutun-Dagi platform, installed off Sakhalin earlier this year. “They are masters of commercial projects terms,” says Shoulder. “There is a focus on cost reduction, but they will be fair with you. Be firm but flexible.”
There are concerns about high wages in Korea, says Seo, from Kotra. But, he says, Koreans work a 60-hour week and focus on productivity and efficiency – “the Korean way.” Some 80% of high school graduates go to college, he says, and investment in research and development as a percentage of GDP is high, at 3.74%, ranking it third in the world, according to OECD figures, he says. The government also works to keep utility bills low, he adds.
A particular focus, backed by Korean government policy, is to acquire subsea engineering expertise and skills through merger and acquisitions, says Kim – a target set out by DSME, SHI, and HHI.
Korean firms have also been working together to activity assess and then address where there gaps are. This resulted in an offshore valve equipment cluster agreement and a project to address topside engineering capabilities, which resulted in an invitation to international firms to set up bases in Korea, with a long term expectation that technical expertise would be transferred to the Korean workforce.
Korean firms are also actively going out to areas with known expertise, such as Aberdeen, in the UK, to develop trade links. Vice Chairman Suh says Korea and the UK had a long-standing relationship. Last year the two countries marked the 130th anniversary of diplomatic relations. The UK’s strength in the offshore sector, due to skills developed in the North Sea since the 1970s, is of particular interest to the Koreans.
Image: KOSHIPA vice chairman Joung-Jo Suh and NOF Energy deputy chief executive Joanne Leng sign an offshore engineering-supply chain exchange memorandum of understanding in Aberdeen, 15 September.
In fact, KOSHIPA and NOF Energy, a UK-based business development and support organization, this week signed an offshore engineering and supply chain exchange MOU to mutually benefit both country’s offshore-related activities.
George Rafferty, NOF Energy’s chief executive, said: “There are opportunities, there are challenges, but there is support. The MOU is aimed at forming a relationship with like-minded organizations. We are looking to achieve a long term relationship and we are looking to take companies out the Korea.”
SHI’s Lee concludes: “Our construction skills are so high, the best in the world. If we can add engineering, it is win win.”