COLUMN | Do it yourself: oil companies buy rigs and boats in bargain basement (except Energean) [Offshore Accounts]

Boat and rig prices fall. Oil and gas producers buy boats and rigs because they are so cheap. Oil and gas producers own and operate the cheap boats and rigs themselves rather than chartering them from third party service providers. This seemed to be a pretty simple story to write, and simple market economics in action. Wrong!

Perenco sets the trend

So, off I went to do the research. The most obvious case study seems to be Perenco, founded by the Breton entrepreneur Hubert Perrodo, who owned boats and rigs in the 1970s and 1980s, before he set up the oil company in 1992.

Perenco specialises in buying mature and unloved oil fields from the oil majors. Perenco doesn’t do exploration or wildcatting; instead it buys older, existing fields from other oil companies, especially Total, it squeezes costs, extends reservoir life, and tries to raise production through workovers, water injection and well stimulation. Costs go down, revenue goes up, et voila! A loss-making field with a limited life suddenly becomes profitable, throwing off cash with a much longer production future ahead of it.

Since Perenco is private, there are no pesky green activists criticising its strategy either – in fact, it benefits from oil majors divesting old fields under pressure from activists.

The Perenco formula has been incredibly successful, even through the downturn, and the company has amassed a portfolio which now produces 465,000 boepd, mainly in West Africa and the North Sea, according to its chairman (here).

Perrodo family history reads like the Dynasty soap opera

Monsieur Perrodo met an untimely and tragic end in a hiking accident, falling to his death whilst descending the treacherous La Dent du Villard mountain trail near Courchevel in France in December 2006, aged just 62. His son Francois, a former Porsche racing car driver, took over as chairman of the secretive and very successful oil company, and has continued its growth trajectory, whilst bequeathing a new building to an Oxford college dedicated to his father’s memory (here).

Forbes estimated the family’s wealth at US$5.5 billion in August this year (here). As well as Perenco, the family owns some prestige vineyards and chateaux near Bordeaux (here), surely the most elite carbon offset programme ever devised. Hubert’s glamorous Singapore-born widow, Carrie, was a successful fashion model in her own right in the 1970s, and also owns a modelling agency. Forbes has an excellent profile of the company and the family here.

Back to the family roots in rigs and boats

With this very unconventional background for the owning family, it wasn’t really a surprise that in 2016, Perenco, through its Petrofor affiliate, started to acquire both in-house rigs and boats. Petrofor purchased the jackup Ben Rinnes, built in 1973, from KCA Deutag in 2016, renamed it Dadga and set it to work drilling in Gabon.

Petrofor also bought the former Ensco 83 in 2017 and renamed it Nuada. Nuada is currently drilling in off Congo. Other rig purchases followed, including the ex-Rowan Gorilla II, now Ogma, which is converted to mobile offshore production in Cameroon.

Perenco has built up quite a portfolio of jackups, usually of a vintage older than the founder’s fine wines, for use in its own projects. Northern Offshore sold the company a pair of jackup drilling rigs in 2018, the 1982-built Energy Endeavour and Energy Enhancer, which were both cold stacked in Rotterdam after coming off contracts in the North Sea. Perenco’s affiliate Dixstone then reactivated and converted both units to platform support roles, and used them to decommission some of Perenco’s UK offshore platforms which were finally at the end of their lives – the video is here.

Oil company becomes its own contractor

After buying rigs, boats were next. Perenco’s model of vertical integration saw it purchase Maersk Blazer, a 180-tonne bollard pull anchor handler built in 1998, and at least two other medium-sized anchor handlers out of long term layup from the former Deep Sea Supply fleet and the former Jaya Offshore fleet in 2018. These were all put to service in West Africa in its own fields.

Perenco then capped its move into a full-service oil company by buying MPR Marine, a Dutch company with a fleet of multicats, and the large Chinese built PSV SK Line 728 in July 2020 for conversion to a walk to work and standby vessel for the North Sea, which we covered here. Most the units appear to be classed by INSB, a privately owned, Greek, non-IACS classification society (here), presumably part of the company’s no-frills, cost reduction programme.

BW Energy buys from Borr

The second player to jump on board the do-it-yourself trend shouldn’t surprise us, either. BW Energy in Gabon announced at the end of November that it was buying two jackup drilling rigs, the 2003-built sister-units Atla and Balder, from Borr Drilling to convert for use as mobile production facilities on a satellite field in the Dussafu license.

BW Energy said it would pay a total of US$14.5 million for the two units, barely above scrap prices. There were ecological as well as economic benefits, the company explained.

“A jackup conversion will enable us to reduce capital investments by about US$100 million compared to our previous development plan,” said Carl Krogh Arnet, the CEO of BW Energy. “We are benefitting from the availability of high-quality jackup units at very attractive prices due to the current drilling market slump. By re-using facilities, we will also achieve a substantial reduction in field development-related CO2 emissions compared to a newbuild platform.”

Since the BW Group already owns a floating production company BW Offshore, which owns the FPSO which is already producing on Dussafu, the group already has significant project management and production conversion experience.

These two swallows hardly make a summer, though, even if the asset prices are cheap and economic logic strong. Most oil and gas companies haven’t used the collapse in asset prices to buy rigs and vessels.

Energean-related party madness

The most brazen and bizarre case of an oil company buying a vessel for its own use came from Energean, which is listed on the UK stock market (prospectus here) with a market capitalisation of close to US$2 billion and which is a constituent member of the FTSE250 index, so one might hope for higher standards of corporate governance than a Cajun broiled crawfish stall. Not so, it seems.

Whereas BW and Perenco have clearly pursued low-cost strategies, Energean has pursued completely the opposite course. Energean seems to have purchased a very expensive support vessel. The company is building an FPSO in Singapore called Energean Power for operations in the Karish field in the Mediterranean off Israel, in which it owns a 70 per cent interest, and it is trying to buy out its private equity partner from the other 30 per cent.

Karish is scheduled to deliver first gas in the last three months of 2021.

MMC887 PSV priced to the hilt

Energean put out a stock exchange announcement (here) in October that it was buying a ship to support the FPSO. Brokers Braemar ACM then mentioned a few days later that an MMC887 design PSV first ordered by Gulfmark (now Tidewater) at BAE Systems of Jacksonville, USA in 2012, had been sold to Prime Marine Management in Greece in a nearly-finished state.

Eight years after it was ordered in an American yard? Hmm. The London shipbrokers reported that the price was in the “low USD teens”, that “the incomplete vessel was sold with a remaining US$3 million to US$4 million of work needed,” and that the hull “will be moved to Europe where she will be completed.”

Prime will upgrade the vessel for the support contract it has with Energean including FPSO re-supply, crew changes, holdback operations for tanker offloading, emergency subsea intervention, drilling support and emergency response, the company’s press release concluded.

Curiouser and curiouser

There’s no logical reason why any rational investor would buy a nearly-finished PSV of 5,000DWT for double digit millions when literally dozens of already finished, similar vessels lie idle around the world, and would be available for sale for less than US$10 million. Just ask the banks which have lent to Stanford Marine in UAE, which operates a couple of vessels of the same design (Stanford Buzzard and sisters).

Then things became clearer. The buyers are a tanker owner who were the initial investors in Energean. A quick scan of the board of directors at Energean (here) shows… Efstathios Topouzoglou, serving as a Non-Executive Director.

“Mr. Topouzoglou, is a founding shareholder of the Energean Group and co-founder of Prime Marine Corporation (“Prime”), serving as Prime’s chief executive officer and managing director. Prime, a leading worldwide product tanker company, is a major global provider of seaborne transportation for refined petroleum products, LPG and ammonia,” the prospectus states.

No mention of Prime ever having owned offshore support vessels or PSVs, however.

Hermes really delivers for Prime

Guess what Prime will do? Yes, they will sell the vessel to Energean. Energean stated that the company had decided to purchase the vessel from Prime, “after a competitive tender process, at a price of US$33.25 million. She will be renamed Hermes.”

What is really strange is that nobody I have spoken to has mentioned receiving a competitive tender from Energean, so it is not clear against what other options Energean had on the table, or who they approached to bid. Perhaps the bitter losers are embarrassed to admit that they couldn’t sell an upgraded second-hand vessel to Energean for less than US$34 million?

Or maybe a wave of optimism temporarily swept serious industry players like Bourbon, Solstad, Tidewater and Swire Pacific Offshore, which meant they were unable to compete against a not yet delivered vessel, partially completed in one of the most expensive shipyards in the offshore world, to be taken to Europe to be finished by a company which doesn’t own any other PSVs? Was the bidding list perhaps composed of other companies specialising, like Prime, in refined petroleum products, LPG and ammonia, rather than actual FPSO support vessels?

Buying one vessel is cheaper than chartering three? Who knew?

What was even stranger in a market where prime North Sea PSVs charter out long term at barely above operating cost, was Energean’s bold assertion that “the purchase of this multi-purpose vessel will enhance operational efficiencies and economics when compared to the leasing of multiple different vessels for the various activities.”

Surely, the purchase of the vessel should be assessed against the chartering cost of a similar, single vessel, not against a supply boat, a crewboat and a tanker offtake support vessel separately? When you buy a pick-up truck you typically don’t compare the purchase against the combined cost of a small van, and a family saloon. Unless you are Mathios Rigas, CEO of Energean, maybe.

Perhaps Energean’s investor relations team were simply too busy to go into more detail on the buy versus own assessment, and the “competitive tender process” which the company went through in order to select its own director’s vessel.

I have to say that if I was an Energean shareholder (which I am not), I would be asking why the company, which has no other FPSOs and a small marine operation in Greece on Prinos Field (here) which resembles the set of the film Waterworld, is making such strange marine procurement decisions. And why the winner of a supposedly competitive tender just happened to be a director, who doesn’t actually own any offshore support vessels, let alone even own the vessel he bid at the time his company was awarded the contract?

Do it yourself, or not

Successful do-it-yourself strategies such as those of Perenco and BW are about reducing cost and choosing fit for purpose second hand assets at cheap prices to deploy on mature fields. All the oil majors have long ago abandoned owning non-core marine support and drilling assets. Even ExxonMobil, which foresees itself operating seven brand-new FPSOs off Guyana in the next decade, still tenders to charter, not own, its offtake support vessels.

This makes Energean’s decision to buy Hermes even more bizarre. If there is to be an investigation into Energean’s procurement from related parties, you can bet that Mr Rigas and Mr Topouzoglou will want to do that themselves, as well.