COLUMN | The First Four Days of Christmas 2021: Cairn/Capricorn, Vantage Drilling, North Star and Vard, Shearwater and Shell [Offshore Accounts]

Photo: Cairn Energy
Photo: Cairn Energy

Last year we took an offshore take to the familiar Twelve Days of Christmas carol (here) and (here). So, now it is time to revisit the first four festive players, and catch up on what has happened to them since Father Christmas called in 2020.

Day One – Cairn/Capricorn Energy: A fat partridge after beating the Indian tax authorities

Last year we were celebrating Cairn's nifty sale of its stake in the Sangomar oil project off Senegal to Woodside for US$525 million. By the time you read this, Cairn Energy will be no more, however. From Monday, December 13, the London-listed company will have renamed itself Capricorn Energy.

It has been a rollercoaster year for Cairn, culminating in a US$1.2 billion victory over the Government of India in an international arbitration over a disputed tax claim relating to the sale of Cairn's successful Indian subsidiary to Vedanta, on which the Indian authorities had tried to levy retrospective taxes.

Cairn fought the tax man and won, six years later

Back in August 2010, Vedanta Resources reached an agreement to acquire 59 per cent of Cairn India from Cairn Energy for US$8.67 billion and, whilst government approval was pending, Vedanta acquired an additional 18.5 per cent on the open market, including a ten per cent stake from Petronas.

The sale finally went through in 2012, but the government then hit Cairn for massive back taxes on the proceeds in 2014, seizing Cairn's remaining 10 per cent stake in Cairn India, which was then worth one billion US dollars. The Scottish company sued and finally won at international arbitration a year ago, but the Indian government refused to back down. By the middle of this year, Cairn was threatening to seize Air India planes on the ground at foreign airports, and Indian state-owned property overseas (here).

Following a settlement with Delhi, Cairn can now focus on a new future – paying out yet another special dividend to its shareholders, and buying back its own stock. The company further divested non-operated stakes in the Catcher and Kraken Fields in the UK North Sea in November to privately held Waldorf Production for US$455 million.

Offshore Mexico, Israel, Mauritania and Suriname is the future for Capricorn

Given Cairn's savvy track record of discoveries and timely disposals, it seems fair to say that the player has been one of the longest lasting and most successful of the British-based independents. So, what's next for Capricorn Energy?

The company has exploration acreage in the North Sea, a 100 per cent interest in Block 61 off Suriname, the largest offshore block in this prolific new hydrocarbon nation, some new onshore acreage in Egypt, a 33 per cent stake and operatorship of two undrilled blocks off Israel, plus a 90 per cent interest in block C7 off Mauritania (here). Offshore Mexico, the company is operator of Blocks 9 and 15, and holds stakes in Blocks 7 and 10 as non-operating partner to ENI. Oil discoveries have already been made there, including one in August drilled by the Valaris 8505 semisub (here).

It's hard to avoid the conclusion that Cairn has some prime acreage in some of the most promising new exploration areas. Watch this space.

The Second Day – Vantage Drilling pivots to management, not Turtle Doves

A year ago, Vantage Drilling was celebrating contract awards for its jack-ups in Equatorial Guinea with Trident Energy, and in Montenegro with ENI in the Adriatic Sea.

Vantage, whose slogan "A perfect day, every day" would seem to be a carbon copy of Australian supply vessel operator MMA Offshore's identical safety slogan, promises that "the Vantage vision is only achieved when we have no incidents, no non-productive down-time, and a fully satisfied client."

You'll note that there's no mention of satisfied shareholders or lenders there, which is not surprising, as Vantage remains burdened with US$345 million in long-term debt, and is struggling to make money with its fleet of two ultra-deepwater drillships and five premium jackups. This year it sent a third modern drillship, Titanium Explorer, for scrap, achieving a net sale price of US$13.5 million on an asset it bought for over US$600 million less than a decade ago.

First mover disadvantage

Vantage was one of the first drillers to go into Chapter 11 and to try to restructure its debt, as early as December 2015. The debt-for-equity swap, which was finalised in February 2016, slashed more than US$1.6 billion in debt off Vantage's books, but the prolonged market downturn has left the company continuing to bleed money, even with a US$622 million arbitration victory over Petrobras for the cancellation of Titanium Explorer's contract, which was confirmed in 2020 (here).

In November, Vantage reported a loss of US$21 million for the quarter. Even with most of its fleet gainfully employed, Vantage still lost money. Cash burn over the first nine months of this year was US$9 million per month from operating activities, on average. So, CEO Ihab Toma has pivoted to a new business model. The company is now marketing and managing two deepwater semi-subs and two DP drillships for Aquadrill, the former Seadrill Partners, which is now owned by its creditors and is removing its drilling rigs from Seadrill's legacy management contract (see here).

Aquadrill win for Capella in Indonesia

In October, Aquadrill announced that Vantage had secured a contract for the drillship Capella (ex-West Capella) in Indonesia, starting next month, with one firm well for Harbour Energy in the Andaman Sea, plus two options, and one firm well for Repsol.

Whilst this pivot to vessel management for Aquadrill may help Vantage in the short term, we expect the company to be bought up by one of its rivals in 2022. We believe that neither Aquadrill nor Vantage has the scale needed to survive. Unless they were to combine, which might be a Christmas cracker of an idea. Aquadrill's new shareholders certainly have no long-term interest in owning the rigs they had initially lended money against.

Three French Hens: Outdone by North Star's quartet?

A year ago, we were celebrating Esvagt's three vessel newbuild contract for windfarm service operations vessels (SOVs) at Havyard in Norway. At the time, it was one of the biggest SOV contracts in an already fast-growing windfarm support market. Since then, Havyard has delivered all three vessels to Esvagt, and Esvagt has become completely owned by private equity house 3i after it bought out partner AMP Capital, in a deal that valued Esvagt at over US$700 million (here).

<em>Photo: Vard</em>
Photo: Vard

This year, another private equity owned safety standby vessel owner, North Star, has moved to the fore in the SOV market. Last week, North Star announced it had secured a long-term charter contract to deliver a fourth SOV to support the third phase of the Dogger Bank Wind Farm in the North Sea (here). This award came on top of the three newbuild SOV contracts it announced in April at Vard's Vung Tau yard in Vietnam to support the earlier phases of the Dogger Bank project (here).

Vard's Vietnam yard builds SOV track record

The fourth North Star vessel will also be built in Vard's Vung Tau facility, where Ocean Infinity has an order for eight supposedly unmanned survey vessels in the build pipeline ahead of North Star, along with the first-ever Taiwan-flagged SOV, TSS Pioneer, which will be chartered by Ørsted for its Greater Changhua offshore wind farms off Taiwan upon delivery to an MOL-Taiwanese joint venture next year. Vard is also building one SOV for REM Offshore there, and one SOV for Norwind, plus the conversion of the Vard-owned PSV Skandi Responder for windfarm support as well, as we reported here.

The new North Star vessel is also designed by Vard. The diesel-electric, battery-hybrid powered ship is scheduled for delivery to North Star in the final quarter of 2024, and is to be fitted with a British-built daughter craft, from Alicat of Great Yarmouth, like its three sisters. The new SOV will be 78 metres in length with a beam of 19 metres and will have an accommodation for 60 persons in single cabins, because wind farm technicians are so special that they enjoy better conditions compared to even Norwegian or Australian seafarers.

The Dogger Bank wind farm is currently under construction by joint-venture partners SSE Renewables, Equinor and Eni. When it is completed, the partners say it will be the world's largest offshore wind farm. Probably not for long, we suspect.

Four Calling Birds: Offshore seismic consolidates as Polarcus fails

In December 2020, Shearwater GeoServices had just signed new debt and guarantee facilities totalling US$437 million, as part of its refinancing. In February, one of Shearwater's largest rivals, Polarcus, was liquidated by its lenders, its entire board resigned, and all its employees were fired (our coverage here). This devastating news enabled Shearwater to continue its consolidation of the marine seismic industry.

<em>Photo: Polarcus</em>
Photo: Polarcus

Six of the seven seismic acquisition ships previously operated by Polarcus ended up being acquired by Shearwater in April. Shearwater bought Polarcus' streamers and other related seismic equipment US$50 million, and then purchased the six seismic acquisition vessels for a total consideration of US$127.5 million. The seventh vessel went to PXGEO, which is largely managed by the former management of, er, Polarcus (here).

Lenders roll over (again)

Shearwater is privately owned by Rasmussengruppen, GC Rieber Shipping, and Schlumberger, and it does not publicly disclose its results, so it is impossible to know how much Polarcus' failure has benefited the company. The purchase of the Polarcus vessels and equipment was financed through a new loan facility provided by DNB and the Norwegian export credit bank GIEK to the tune of US$107.5 million, plus a convertible loan of US$85 million from shareholder Rasmussengruppen.

Since GIEK and DNB were amongst the creditors who foreclosed on Polarcus, the credit they extended to Shearwater should be seen as rolling over the lenders' existing position on the vessels, rather as Hermitage Offshore's banks rolled over their loans on its PSVs and warehoused them in Pearl Bidco managed by Remoy Shipping in 2020.

"These investments allow us to significantly extend the commercial life of our fleet and streamer pool and to accelerate our fleet renewal program to meet regulatory and public expectations facing our industry," said Irene Waage Basili, the CEO of Shearwater, in a press release from its lawyers (here). "By extending the runway of our asset base and maintaining our scale, we are proactively strengthening Shearwater's position to invest in new technologies and the growing seabed market."

Amazon Warrior faces legal battle

In December this year, the Shearwater was all over the news for the wrong reasons, as environmentalists sought to block the company's plans to conduct a survey off the Wild Coast of South Africa. The survey, south of Durban off Eastern Cape province, is for Shell, using the Shearwater vessel Amazon Warrior, which sailed from Cape Town on November 27. It is expected to last until February.

Amazon Warrior <em>(Photo: Shearwater GeoServices)</em>
Amazon Warrior (Photo: Shearwater GeoServices)

South Africa has suddenly jumped back onto the international oil companies' radar screens after a series of massive discoveries by TotalEnergies in 2019 and 2020 (here). The South African government has suggested that gas from Total's newly found fields could eventually be used as feedstock at PetroSA's 45,000-barrel-per-day, gas-to-liquid refinery in Mossel Bay, which has unfortunately run out of feedstock, as the small, shallow-water gas fields that fed it have depleted. Now Shell wants a piece of the action, too.

Shell makes its case

Shell won in the first court hearing in early December and overcame an attempt to place an injunction on the work from environmental organisations, including Greenpeace Africa, which demanded a halt to the survey on the grounds that it would harm marine life, especially migrating humpback whales. The judge called the claims "speculative at best," and Shell claimed it was taking mitigating measures to prevent environmental harm.

You can read Shell's statement on the survey and its detailed FAQ on the impact here.

In a country that faces regular breakdowns of the electricity supply from badly-managed state monopoly Eskom, which burns coal for 80 per cent of its power, a move to domestic natural gas from offshore could offer South Africans huge greenhouse gas savings, reduced pollution, and a transition away from coal as the renewables base is built up.

What about Eskom's coal-fired base?

The activists, however, are fighting back.

"We will continue to support the nationwide resistance against Shell and pursue the legal avenue to stop Shell," said Greenpeace Africa senior campaigner Happy Khambule in a Greenpeace release here. "We must do everything we can to undo the destructive colonial legacy of extractivism, until we live in a world where people and the planet come before the profits of toxic fossil fuel companies."

Over the weekend, the South African media was reporting activists staging protests outside Shell service stations in the country here.

As we have said before (here), in a knife fight between coal and natural gas, we will always choose gas. The activists would do better to picket coal mines and Eskon's appalling coal-fired power station network, in our opinion.

South African cases remind us of the need for moral licence to operate

The wider problem for Shearwater is that whilst it has emerged as the almost unchallenged leader of the marine seismic industry, that same industry faces a crisis of legitimacy. CEO Irene Waage Basili is very keen to tout her credentials as a female leader championing diversity (here).

She would do better to ensure that Shearwater is seen to be doing everything it can to minimise any environmental harm from any of its seismic surveys anywhere in the world. Shell and Shearwater might win in court in the short term, but they risk losing in the court of public opinion, which would be a disaster for them and the entire offshore industry in the long term.

Next week we'll see who has the five gold rings – metaphorically and in real life – as we move though the fifth day of Christmas, to the eighth day ("eight maids a-milking").

Background Reading

Reminder: Parts Two and Three of our Twelve Days of Christmas 2021 are here and here.

Vox's explanation of the Twelve Days of Christmas carol is here.

To see the true character of the Capricorn Energy, consult Cosmopolitan's astrology guide here.

Cairn Energy's own account of its Indian tax travails is here.

Our recent coverage of Suriname's massive offshore exploration success is here.

You can read a summary of the torrid corruption scandal involving "well-known" Taiwanese shipping investor Nobu Su, his convicted Brazilian associate Hamylton Padilha (sic), and Vantage, in the award of the Petrobras contract for the first cancelled, then scrapped drillship Titanium Explorer here.

You can find the Tweets of Happy Khambule, who led the Greenpeace fight against Shearwater and Shell's survey off South Africa, here. Greenpeace Africa's official Twitter stream is here. Whatever you think of Greenpeace, a demonstration with giant puppets of fish on a beach does generate massive publicity, even as far afield as Malaysia (here).

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