Capital equipment, or producers' goods as they are known to economists, are characterized by their high cost and long life. They are designed for a specific primary or secondary production process or to provide some element in a service; hence they are income-producing. Being income-producing they are more readily financeable than other goods.
Decisions regarding the purchase of producers' goods are complex, usually involving forecasts of the demand for and price of the subject product, the cost of money, the expected life of the equipment (or of the project if it is likely to be shorter, as it may be in the case of a natural resource) and the evaluation of the "trade-offs" between once-and-for-all up-front sunk-cost, continuous running cost, future maintenance and repair costs and eventual closure/removal costs Where particularly large-scale or long-term projects are at issue, views have to be taken on the pace of technological change and on political stability at the subject location Taxation will certainly rear its ugly head and, nowadays, so probably will currency risks. It is not surprising, therefore, that a complex artform known as "investment appraisal" has evolved around the purchase of major capital equipment and systems With its arcane jargon of discounted cash flow, net present value, portfolio rank, profitability index and internal rate of return, nowhere does it have more devotees than in the major oil companies Since all good investment appraisers know that the investment decision is one thing and the financing decision quite another, a subsidiary artform which is perhaps well designated as "project financing appraisal" has grown up in the shadow of investment appraisal Here, brokers, contractors and charterers, but above all bankers, join the oil companies as "players". Interest rates, loan cover ratios, the finer points of taxation (its timing as much as its incidence) and international leasing arrangements will here be considered, along with on and off balance sheet collateral and security, to determine an acceptable level of exposure to a lender in a given situation.
This then is the background against which this chapter is written, its aim being to show that floating production systems have distinct characteristics which make them more than simple alternatives to fixed installations in the context of the offshore oil and gas industry.
It goes without saying that in the majority of (although perhaps not all) cases, the choice between a fixed platform and a floating production system will be dictated by technical factors, centering on the size and characteristics of the reservoir to be exploited, and the depth of the water under which it lies There are other writers who are better able to guide the reader through that decision process. This chapter does not concern itself with why "it is a floater" but simply with "because it is a floater" - certain consequences follow, which are set out below
