COLUMN | Lowered expectations: Saudi Arabia’s oil production; Nigeria’s currency; SBM’s whistleblower; Falkland Islands’ FPSO [Offshore Accounts]

The novelist Jodi Picoult once said that, “there are two ways to be happy: improve your reality, or lower your expectations.”

Changing the world for the better is hard, but there have been a lot of expectations lowered in the offshore industry this week. Unfortunately, these reduced expectations seem to have produced little joy in Saudi Arabia, Nigeria, or the Netherlands, but some in Port Stanley.

Saudi Arabia’s production target: lower

Photo: ADES

Saudi Arabia has about eighty jackup rigs on charter with another dozen or so to follow, in preparation for contract, mainly by ADES, the state-owned rig owner, which has been on one of the offshore industry’s biggest ever acquisition booms since 2020, buying 26 rigs. As recently as 2020 in the depths of Covid, Esgian had reported that there were only 40 offshore rigs working in country.

The centrality of Saudi Arabia to the jackup market cannot be overstated. These 91 or so rigs on contract to Saudi Aramco, the state oil company, represent about 20 per cent of the global jackup fleet – in late 2023 Shelf Drilling had estimated the global jackup fleet excluding newbuilds and cold-stacked rigs was 441 rigs.

Jackups have been in a sweet spot with marketed utilisation in the fourth quarter of around 94 per cent. Rates had soared to over US$150,000 per day as the Middle East in general, and Saudi Aramco in particular, hoovered up rigs.

Government sets the capacity, prince controls the purse-strings

Underlying Saudi Arabia’s drive to drill was a government mandate issued in March 2020 under the country’s 2017 Hydrocarbon Law. This edict demanded the country achieve Maximum Sustainable Capacity for crude oil production of 13 million barrels per day (bpd). This meant that Saudi Aramco had to develop another one million bpd of oil production capacity (nearly the entire capacity of the UK, or twice that of Malaysia), as the previous target had been 12 million bpd.

Last week, the government in Riyadh reversed the target back to 12 million bpd. This calls into question several high-value, high-volume oil projects offshore, including the US$7 billion Manifa project and a reported US$10 billion investment by Saudi Aramco in the Safaniyah field. Saudi Aramco has said that it will update its capital spending plans when it reports its full-year 2023 results in March. It is likely those projects will be cancelled and the company will reduce its capital spending this year and until 2030 in its plans.

NEOM wins, Saudi Aramco loses?

Oil prices stand around US$77 per barrel at the time of writing, much lower than the US$100 average for most of 2022; with massive spending on the futuristic one hundred-kilometre long, glass city of NEOM beside the Red Sea, the government of Crown Prince Mohammed bin Salman Al Saud is perhaps prioritising capital spending on its high-profile civil engineering projects rather than oil and gas investment.

Raising production capacity matters less when Saudi Arabia is producing only 10 million bpd as it exercises restraint to support the oil price in the face of record American shale oil production. Saudi Aramco remains a cash cow – it paid out dividends of US$19.5 billion (with a “b”) in each of the final two quarters of 2023, and the Saudi state owns over 98 per cent of the company.

We highlighted how opponents of NEOM had been sentenced to death in 2023, so we won’t be criticising this US$500 billion (both a “b”) white elephant royal masterplan that features a planned ski resort and facilities for 700,000 annual winter and adventure sports visitors by 2030.

Ooh-ooh-ooh-ooh-ooh-ooh (It’s goin’ down)

Unfortunately, it is not just potential future skiers in the mountain of NEOM who find themselves accelerating downhill fast on an icy slope.

Shares in pureplay jackup rig owners Borr Drilling and Shelf Drilling were both down 20 per cent over the course of last week when the news of the new capacity plan broke. Investors sold as they attempted to digest whether Saudi Aramco would be releasing rigs early, and whether rates and utilisation might soften. Saipem, which operates a couple of jackups for Saudi Aramco and performs offshore construction there, was also hammered 13 per cent on the week.

Tidewater, which reported it had 45 vessels in the region in its third quarter results, was down 10 per cent on the week. However, since we had highlighted in November that the Middle East is Tidewater’s only loss-making region, less exposure to the region might be beneficial to the company.

In that piece, we wrote “when you think of Tidewater’s Gulf operations, think of a fifth of the company’s fleet as locked into an abusive relationship with a cruel and powerful Arab sheikh who has metaphorically chained the company (and its competitors) to a drainpipe in a dark, dank, and very unprofitable basement.”

Freeing up ships for service elsewhere might be beneficial for the company, albeit painful in the short term.

Uncertainty is part of the deal in an autocracy

At this stage, it is hard to know how the Saudi story is going to play out. Borr has only three rigs on contract to Saudi Arabia from its fleet of 24, and Shelf nine from its fleet of 36. Neither faces an existential crisis from Saudi pausing some of its projects, especially as Qatar simultaneously announced a new US$6 billion project to further develop its Al Shaheen oilfield. Doha now has a plan to increase production by 550,000 bpd, with big engineering and construction contract awards to Larsen and Toubro and McDermott. Perhaps Qatar’s Gulf Drilling International will finally have its moment in the sun with more work for its jackup in the Al Shaheen drilling, as we speculated in December.

The biggest exposure to Saudi Arabia lies with ADES and other domestic contractors. The surprise generated by the announcement highlights how capricious rule by a single prince can be.

Saudi Arabia is a dynastic monarchy. The clue is in the name – this is the only country in the world named after its ruling family. There’s no nation named “Albanese Australia” or “Windsor Britain,” but there is a Saudi Arabia.

Investors and contractors working there should not expect the usual checks and balances in a country where the Crown Prince’s courts can jail a woman for 34 years for criticising him on Twitter.

Lower your expectations, please!

Nigerian currency: lower

When we last covered Nigeria only three weeks ago, the economic outlook there was dire. We noted that the Nigerian naira had plunged in value from NGN451 to the dollar in January 2023 to NGN959 in early January this year.

Now dire has become direr. Fans of Pitbull and Kesha will recall the lyrics to their 2012 hit Timber:

“It’s going down, I’m yelling timber.”

Last week, the naira tumbled again in yet another devaluation. Timber!

The currency dropped nearly 40 per cent to around 1,500 to the US dollar. Local media in Lagos received a circular from the Central Bank slamming foreign exchange dealers for giving “inaccurate and misleading information” on their US dollar transaction rates.

“This behaviour is not compliant with the ethical standards associated with a sound financial market,” the central bank said, “and deliberate attempts to create price distortions by reporting false transaction details amounts to market manipulation, which will not be tolerated and will henceforth face sanctions.”

Given that the previous governor of the same central bank, Godwin Emefiele, has just been charged with multiple unethical actions and for abusing distortions in the previous fixed exchange rate system that he controlled, this is ironic, to say the least.

A collapsing exchange rate leads to higher inflation by raising the cost of imported goods, and lowering the standard of living of Nigerian households.

Lower growth, higher inflation

Blackford Dolphin (Photo: Dolphin Drilling)

Nigeria is struggling as its reputation for bureaucracy and corruption stymie foreign investment into the country. Last year, we reported on the travesty of the detention of the large crude carrier Heroic Idun, whose crew were vilified and treated abysmally by the Nigerian Navy before a very large payment led to the release of the vessel.

Nigeria is the archetypal petro-state. It earns around 90 per cent of its export income from oil and gas sales, yet it has struggled to come close to meeting its 1.8 million barrels per day OPEC quota.

The Financial Times reported that central bank data shows Nigeria has over US$32 billion in foreign exchange reserves, but almost US$20 billion of this is “committed to paying off a series of derivatives deals.” It looks like Abuja will need to seek assistance from the International Monetary Fund.

We would respectfully suggest that the country might need to work on its law and order problem, and become more attractive to foreign investors by making it easier for oil companies to drill and for foreign rigs and supply boats to work there. We would propose ending the charade of approvals, permits, cabotage exemptions, customs rorts, and bogus tax claims that have scared away nearly all major international vessel operators and compelled them to receive up to 40 per cent of payments in rapidly worthless naira.

Shelf Drilling successfully won drilling contracts for the jackups Shelf Drilling Scepter and Trident VIII in 2023 with Chevron in Nigeria, but the new activity in the country is too little too late, with Dolphin Drilling threatening to pull the semi-sub Blackford Dolphin from local oil company Peak Petroleum for non-payment late last year, although the rig remains off Warri for now.

Nigeria desperately needs new drilling and new investment in oil and gas projects. The country’s oil and gas infrastructure is dilapidated. An aged floating production storage and offloading vessel (FPSO) exploded in 2022. No investigation has been published by the hopeless Nigerian Maritime Administration and Safety Agency (NIMASA) on how this happened, at least not that we have seen anyway. In 2022, ExxonMobil sold its shallow water affiliate in the Delta region, and Shell sold all its onshore acreage last month after endless kidnappings, thefts, and ecological lawsuits.

Denial on the Niger

The country is in denial about the depths of its problems. We were shocked to read in the local press a police spokesman stating that crime there was being blown up out of all proportion.

Muyiwa Adejobi said, following the killing of two tribal kings, “the Ekiti State killing of monarchs and the abduction of schoolchildren and teachers do not reflect the true picture of the security situation in the state.” Bizarrely, he blamed the landscape and topography of the region for the recent kidnappings, as the area is “surrounded by rocks.”

He also blamed kidnapping in Lagos on the city’s waterways, too, which does raise the question of what topography is safest.

Emirates flies away, dollars don’t

One bellwether for the country is Emirates Airlines, which suspended all its flights to and from Nigeria in 2022 after it could not repatriate the revenue from its hard currency ticket sales in the country to Dubai. Nigeria reported last week that had it released another US$64 million of airline funds to other carriers, but the International Air Transport Association has said there is still US$700 million remaining trapped in the Nigerian banking system. Emirates continues not to fly to the country.

When we see modern foreign supply boats calling freely in Nigerian ports, being paid on time in dollars, and Emirates flying to and from Lagos, then we can say that Nigeria has clawed its way back to normality. In the meantime, we wish those with clean hands every success in tackling the country’s problems and would advise them to stay away from rocky states and waterways for their own safety.

Unfortunately, we do have low expectations of recovery happening quickly.

SBM’s lowered expectation of a settlement

We covered some important court battles in offshore last month, with the travails of Angolan nepo-baby Isabel dos Santos, and the expensive legal delays to Santos’ Barossa gas project in the Timor Sea caused by claims of cultural damage by certain Indigenous People on the Tiwi Islands off the Australian coast.

Now we have an update on one of the longest-running legal sagas in offshore – floating production player SBM Offshore’s battle with its former in-house counsel turned anti-corruption whistleblower, Jonathan Taylor.

We have covered the case extensively over the last decade – see here and here for background, and how these cases fit into a pattern of pervasive corruption in many state oil companies. Mr Taylor reported the existence of extensive bribery by his employers in 2012, which resulted in SBM paying more than US$840 million in fines in the United States, the Netherlands, and Brazil, and in him being fired from the company. He was then detained in Croatia under an Interpol Red Notice for over a year in 2020 and 2021, based on unproven allegations of extortion in Monaco, where SBM was based. This investigation was eventually dropped by the Monegasque authorities.

Mr Taylor has always denied any wrongdoing.

Two SBM CEOs convicted criminally

Anthony Mace, SBM Offshore’s former CEO (Photo: SBM Offshore)

Unprecedently, two of SBM’s former chief executives have been convicted in criminal cases for their role in the corruption. In 2018, Anthony Mace, SBM Offshore’s former chief executive, was sentenced to three years in jail and fined US$150,000 fine by a Texas court for his role in the company’s bribery. SBM’s former sales and marketing executive in its US subsidiary, Robert Zubiate, was jailed for two-and-a-half years and fined US$50,000 at the same time.

In 2020, Mace’s predecessor as CEO, Didier Keller, was fined €430,000 (now US$464,000) and given a two-year suspended prison sentence by a Swiss court in Bellinzona for US$6.8 million in corrupt payments made 15 years previously to Angolan officials at the state oil company Sonangol to win contracts for five FPSOs there.

Last month, the current SBM CEO, Bruno Chabas, announced that he would be stepping down ahead of an important law suit, in which he is named as a co-respondent. Mr Chabas has led the company since 2012.

The latest case in the story: a counter-claim

Mr Taylor has counter-sued the company in the Dutch courts for damages resulting from his whistleblowing, and last week, the date for the first court hearing in Amsterdam was set.

“I look forward to exposing more unreported incidents of SBM’s corrupt past in the lead up to the Court hearing in Amsterdam on 3rd July, in which I am suing Bruno [Chabas], Sietze Hepkema [SBM’s former Compliance Officer], and the company for damages,” Mr Taylor told us in a statement.

Mr Taylor has been vocal in his criticism of SBM’s leadership and what he describes as “its corrupt past.” In 2021, he made a series of high-profile allegations regarding another US$35 million payment to Angolan kleptocrats officials, following the termination of an FPSO deal with BP in Angola. These cases were reported by both the Dutch newspaper de Telegraaf and the British Sunday Telegraph.

Mr Taylor says that he has passed documents on the matter to the Serious Fraud Office in the United Kingdom, and that he has evidence that SBM’s top management made statements to investors and analysts in 2014, which, he alleges, they knew were misleading.

Expectations of a quick settlement are low.

Falkland Islands: Lower production plans go for green light

Photo: Navitas Petroleum

We genuinely thought in 2021 that the Sea Lion oil field off the Falkland Islands was doomed to become a stranded asset when Harbour Energy walked away from the project to develop the field. The field had languished for almost a decade then, after the small UK-listed oil company Rockhopper Exploration made the initial Sea Lion oil discovery in 2010.

In 2012, Premier Oil farmed into the block. The field looked a good fit for Premier’s track record in the North Sea developing harsh environment fields with FPSOs, but the collapse in the oil price in late 2014 meant that Premier found the project economics extremely difficult, especially given its own strained balance sheet and Rockhopper’s lack of money.

In 2020, Premier Oil was renamed Harbour Energy after a reverse takeover by private equity-backed Chrysaor, which declared it would focus on the North Sea.

“While the Sea Lion discovery has significant resource potential, development of the project is not deemed a strategic fit for Harbour,” the company said in its release. “Therefore, the group has decided to explore the options to exit the project and its other license interests in the Falkland Islands.”

Prospects looked bleak for the first FPSO in the Falklands. Then Israeli player Navitas Petroleum stepped into the Sea Lion joint venture partnership as 65 per cent operator alongside Rockhopper in 2022.

Sea Lion plans moving quickly forward

In an update last month, Rockhopper announced that the long-stalled project was being fast-tracked for final investment approval this year, and first oil is targeted for the end of 2026. Navitas has identified suitable and available FPSO vessels that could be deployed to the field (Is that a phone ringing at the Bluewater offices?) and said it was “actively working with leading industry vendors to secure all long lead equipment.”

In excellent news for harsh environment semi-sub owners, the Sea Lion Field Development Plan calls for 23 wells to be drilled in two phases, probably four years of work in total for one rig. The total field development cost has been reduced from US$1.3 billion to US$1.2 billion, with a capex of approximately US$8 per barrel, and operational costs across the life of the field have been materially reduced to under US$17 per barrel, Rockhopper reported.

Peak production from the first FPSO is now estimated at 55,000 bpd, lower than the original field development plan. This news shows how the oil and gas industry can change in a matter of years.

Rockhopper continues to believe that “the long-term potential for the North Falkland basin could see up to three FPSOs with a total production of approximately 200,000 bpd of oil.”

Lower expectations in this case would still permit the first stage of this remote and harsh-environment project to proceed. For Sea Lion, we are happy to be proved wrong.

A smaller project is better than a stranded asset.

Background reading

You can watch Jonathan Taylor’s Whistleblowing Tale here on Youtube, which provides his account first hand.

Dutch magazine VN ran an in-depth account of the background to SBM’s problems and Mr Taylor’s role in exposing the case here.

The US Justice Department account of criminal prosecution of the SBM CEO is here – it remains one of the biggest bribery and corruption cases in the offshore industry, and is well worth reading.

Offshore magazine has a succinct summary of the recent FPSO redeployments.

Hieronymus Bosch

This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.