COLUMN | Quick updates: Shell’s Prelude fiasco, The Metals Company’s Siberian challenge, Chevron’s CCS problems, whilst BP and Socar face corruption claims in Azerbaijan! [Offshore Accounts]

Two weeks ago we looked at some surprises that were perhaps quite predictable (here); time for an update on developments in Australia at Prelude and Gorgon, two of the most expensive and disappointing LNG plants in the world; a shocking claim against BP in Azerbaijan (Readers of a sensitive disposition may need to be seated.), and a quick look in Siberia where Russian oil giant Rosneft is not alone in planning billions of dollars of investment in new commodities, a move that can upend global copper supplies, with consequences for subsea mining.

Prelude FLNG still out of service

Shell is now warning that its fiasco with the Prelude FLNG offshore Australia will continue, with the vessel out of service and not producing any LNG until March at the earliest. Shell must satisfy the Australian offshore safety regulator that the unit can demonstrate a functioning back-up system for power and essential utilities on board before it can restart.

Not a high bar you would think, given that every DP2 vessel in the world has to show similar capabilities, albeit on a smaller scale. But reliability has never been Prelude’s strong point, despite its US$17 billion price tag.

Big profits for Shell, big problems at Prelude

Announcing profits of US$19 billion for full calendar year 2021, including fourth quarter profits of over US$6 billion, Shell CEO Ben van Beurden described 2021 as a “momentous year” for the company, but said, “Prelude is going through teething troubles, quite a few teething troubles, of course, but bear in mind this is a unique asset, with, of course, quite unique challenges, as you can imagine.”

We disagree. Prelude is not a unique asset: Petronas manages two similar FLNG assets and seems not to have experienced the same calamities as Shell – if it has, Petronas has managed to contain them much better. ENI is shortly commissioning its Coral Sul FLNG off Mozambique.

Let’s see if ENI can do a better job of operating an FLNG. If it can, then we can identify the problematic variable as being either Shell as operator, or Australia as the operating location and provider of most of the workforce.

Western Australia in a state of emergency

Mr van Beurden then went on to explain how Western Australia’s stringent “hermit kingdom” quarantine policies were making it hard for technicians and service personnel needed for the work on the FLNG to physically get on board the ship.

His comments came as Western Australia maintained its State of Emergency for Covid, and continues to insist that even triple vaccinated travellers must self-isolate for seven days and take multiple tests (here).

We completely agree with Mr van Beurden on this front. “WA” is increasingly coming to stand for “Worst Australia” in its implementation of dogmatic Covid policies, long ago abandoned by the other states. Could the virus really be worse than the terrifying axe attack on sleeping men in a caravan park, reported in the Perth press here?

Siberia’s copper plans add big capacity

When we mentioned that Rosneft had an aggressive plan to develop the US$111 million Vostok oil project in Siberia, which would bring online around 1.8 million barrels a day of oil production later this decade (here), we were thinking about Russia’s potential to disrupt the oil markets with this swing capacity.

Russia plans to be an electrical metals powerhouse

Further research revealed it’s not just oil where Russia has Siberian ambitions to grow capacity, and these ambitions could impact on one of the most prized offshore ventures of our time: subsea mining. In 2021, copper hit a record price of over US$10,500, spurring Russian producers to rush to the market with new onshore mining schemes.

The Financial Times reported here that Alisher Usmanov is pushing forward with the Udokan mine, 400 kilometres north of the border with China. His USM Holdings will invest US$7 billion to develop the copper resources, which the now-dissolved Soviet Union once considered as one of its largest, but hardest to develop, mineral deposits since its discovery in 1965.

Udokan is due to start production later this year and annual production will be ramped up to 400,000 tonnes by 2026, around two per cent of global production.

New player hits the top ten

The chairman of USM Holdings, Valery Kazikayev, told the newspaper that upon completion of the project, “By output, we will be among the top 10 copper producers globally,” behind mines in Chile and Peru, the world’s two largest copper producers.

Moreover, Kaz Minerals is also planning to invest US$8.5 billion at its Baimskaya copper project in an even more remote project in Siberia, in the Chukotka region of the Arctic. It is building a new port on the Arctic Ocean some 700 kilometres away. This port will provide power to the mine from floating nuclear plants, and an export terminal will be kept open by its own fleet of icebreakers.

The Baimskaya mine is scheduled to open in 2027, and Kaz Minerals says it will produce around 300,000 tonnes of copper per year and nearly 500,000 ounces (15,551 kilograms) of gold annually. Norilsk Nickel also has expansion plans in both copper production and nickel, as Russia seeks to increase its exports of green energy metals to provide a handy hedge to its traditional oil and gas exports, as electric vehicles command an increasing market share.

Subsea miner The Metals Company was then on social media reposting the article and saying that these Siberian projects were even harder technically than its challenge of mining the seabed over four thousand metres beneath the Clarion-Clipperton Zone of the Pacific Ocean.

We disagree.

Funding secured in Siberia

What’s key is that these projects have the backing of the Russian state, which has foreign currency reserves of US$640 billion and access to funds from state banks. The full might of the Russian state and its nuclear enterprise Rosatom stands behind these projects.

“Funding secured,” as Elon Musk might tweet.

Whom do you trust?

Whom do you trust to deliver copper to the market first, in large volumes, and most reliably?

Gerard Barron of The Metals Company (market capitalisation of US$347 million as of close last Friday) and his merry band of subsea speculators, or Vladimir Putin’s loyal team of oligarchs, with their billions of dollars in investment plans in new Siberian copper and nickel mines?

The fact that The Metals Company’s shares have now fallen 85 per cent in less than six months may give you some idea about what the market thinks, although Mr Barron has cleverly switched to resource nationalism, emphasising that the United States cannot and should not be dependent on foreign-sourced battery metals, when the country could be using the deep-water polymetallic nodules his company plans to harvest in the Pacific (See his comments in the third quarter presentation slides here with transcript here).

Wrap yourselves in the stars and stripes!

Go woke, go broke?

The slogan “Go woke, go broke” is a popular and often unfair criticism of progressive corporate policies.

We were not surprised that The Metals Company, after having played the resource nationalism card, has now chosen to emphasise the appointment of Kathleen McAllister as a new female director as evidence of its commitment to gender equality (here), stating on social media that “Kathleen’s arrival brings 50-50 gender parity to TMC’s board, at a time when just three per cent of S&P 500 companies’ boards are comprised of 50 percent or more women. TMC is delighted to be joining a small but rapidly growing group of companies delivering on gender parity goals.”

Ms McAllister may be eminently suitable for the role – her previous experience at Hoegh LNG suggests she has experience of the type of aggrieved shareholder lawsuits that The Metals Company now faces (See here and here.), which is great, but her time at Transocean Partners was distinctly unimpressive – the three-rig company was spun off from Transocean, but then quickly re-absorbed when the drilling market tipped into crisis in 2016 (here) and the board was dissolved.

Scott Leonard leaves – why?

What’s more important is why the director of an electricity and gas utility company in the American West needed to be appointed to the board of The Metals Company in the first place. It’s because her predecessor resigned on December 24, Christmas Eve. If there was ever a flag that a company has problems, it is an announcement made on Christmas Eve, as we have seen with Borr Drilling (here).

Ms McAllister’s predecessor was Scott Leonard, the former CEO of the special purpose acquisition vehicle SOAC, which merged with Mr Barron’s DeepGreen to create The Metals Company. SOAC provides the vehicle for a public listing and cash for The Metals Company’s 2021 and 2022 operations.

I cannot emphasise how unusual it is for a director of a newly listed company to resign within four months of the listing. And nothing raises our suspicion more than a Christmas Eve announcement of a resignation, especially after the share price plummeted from over US$10 to less than US$1.60.

Question marks remain – but Barron’s fortune depends on success

Maybe Mr Barron will pull off his visionary plan for subsea mining. He owns 18.4 million shares in The Metals Company – over 8.7 per cent – according to filings here. His holding is slightly more than Allseas, the owner of the company’s mining vessel Hidden Gem, which is under conversion in the Netherlands, but slightly less than that of Maersk Supply Service, the Danish anchor handler owner, which has provided the vessel performing the surveys of the future “mineral harvesting” area in the Pacific Ocean.

When The Metals Company listed, Maersk Supply seemed to have made a wise decision to take shares in the venture rather than cash for the charter of its vessel. Now it seems not so wise.

In September at the IPO, Mr Barron’s stake in The Metals Company was worth over US$150 million. Now it is worth around a mere US$30 million. Somehow, we don’t think he faces penury just yet, and the really exciting moves for The Metals Company are when it finally starts to mine the polymetallic nodules,  which is likely in 2024.

When the company publishes its 2021 annual report, we look forward to seeing the executive compensation for Mr Barron and his top team, along with some clear statements on cash flow and future capital spending.

Chevron’s Gorgon – off target but on subsidy

In September, we covered the problem of carbon capture and storage (here). CCS has been touted by the oil and gas industry as a solution for the emissions from fossil fuels. All the oil majors are exploring CCS schemes, especially around the North Sea basin, in Australia, and in the industrial zone along the Houston Ship Canal.

Simply lock away all the nasty carbon dioxide deep in empty reservoirs and it won’t contribute to global warming! That sounds simple enough, and technically feasible.

Government capture and storage

Unfortunately, CCS has become corporate welfare, as huge companies seek subsidies from governments to fund CCS projects. As we highlighted, Australian satirist Giordano Nani has written, “CCS entails two key stages: capture and storage. In the capture stage, also known as state capture, fossil fuel interests infiltrate your government at every level, so that we’ll ignore scientists and keep approving new coal and gas projects. In the storage phase, we pay those fossil fuel companies billions of dollars to bury their emissions underground… Those companies store the billions of dollars deep, deep down in their bank accounts.”

Freedom of information shows freedom to fail

A freedom of information release from the Australian Department of Industry, Science, Energy and Resources (here) shows that the Australian taxpayer shelled AU$60 million (US$43 million at current exchange rates) in subsidies to Chevron for the project. However, the same document shows that in the year up to June 30, 2021, the Gorgon CCS scheme had only managed to inject around 2.26 million tonnes of CO2. This is well below the project target to sequester four million tonnes of CO2 per year.

Rather like FLNG, CCS is a technology that needs to work as part of a strategy to reduce emissions. A company like Chevron should have the technical expertise to resolve the pressure management issues that have plagued the project.

Unfortunately, despite the Australian taxpayers’ generous assistance, Chevron’s performance has been poor.

BP’s Azerbaijan “issues”

We have seen how BP’s vision for the future is decarbonised and green. CEO Bernard Looney has been at pains to argue that a windfall tax on the company’s US$12.8 billion profits by the British government would jeopardise its investment in the North Sea and threaten its wind energy projects.

The furore neatly covered up an alarming investigation into corruption in one of the countries that has been a major driver of BP’s multi-billion profits: Azerbaijan. This is where BP operates the ACG oil field, which has produced close to four billion barrels of oil since 1997, and the Shah Deniz gas field, which holds over 40 trillion cubic feet (1.13 trillion cubic metres) of gas reserves. The company also operates a pipeline to export the crude oil and the gas to Turkey from the Caspian Sea.

I know many readers will find it hard to believe that a country like Azerbaijan, which has been ruled by the Aliyev family for thirty years, could possibly be a den of corruption, or that one of the world’s largest and most successful oil and gas companies might be accused of turning a blind eye to malfeasance. But this is exactly what has happened!

Organised crime and corruption reporting project finds… crime and corruption

You will be surprised that The Organised Crime and Corruption Reporting Project, a non-governmental investigative body, found evidence of systemic corruption involving BP in Azerbaijan. You can read the full report here.

Investigators found that two companies owned by Azerbaijan’s state oil company, Socar, overbilled BP for the Shah Deniz Phase Two project to expand BP’s gas output in the Caspian Sea. Socar subsidiaries Bos Shelf and Star Gulf allegedly used fake charges and padded contracts to charge more than US$1.7 billion in corporate overhead and profit across three contracts with BP from 2014-2021. Sources indicate that the total capital expenditure on the Shah Deniz Phase Two project, excluding the export pipeline, was around US$20 billion (here).

The journalists found that BP “was repeatedly alerted to accusations of corruption on the project, but took no action”, as multiple sources told OCCRP. Around the same time, OCCRP’s investigators found that the director of one of the Socar-owned companies and his wife bought lavish properties worth over US$10 million in Miami.

What a strange coincidence.

Whistleblowers claim Socar subsidiaries inflated their invoices to BP

Whilst these hundreds of millions of dollars disappeared into offshore accounts belonging to Bos Shelf and Star Gulf, Azerbaijan carried out a broad clampdown on political opponents of the Aliyev family, non-governmental organisations, and independent journalists.

Whistleblowers who were fired from Bos Shelf have alleged in court in Baku that the company’s director withheld pay and holiday from many of Bos Shelf’s workers whilst “employing his family on inflated salaries”. At the same time, two former employees of Bos Shelf have testified that the Socar-owned company “inflated the price of goods and services it charged BP, including repainting old machinery and invoicing for it as if it were new.”

Is this the tip of the iceberg?

What’s even more alarming is that the US$1.7 billion represents the tip of a potential iceberg of corruption for BP in Azerbaijan. The company also spent an estimated US$10 billion on the first phase of the Shah Deniz project in the early 2000s. In 2017, the Vice-Speaker of the Azerbaijani Parliament, Valeh Alasgarov, stated that the total costs for the ACG project amounted to about US$43.5 billion (here). These additional projects all used the same Socar state-owned contractors indicted in the OCCRP report for Shah Deniz Two, and other Socar-owned contracting entities.

Additionally, other contractors in Azerbaijan, including P&O Maritime Logistics (formerly Topaz Energy and Marine), Saipem, and McDermott are believed to have close connections with Socar-owned entities. Neither the former CEO of Topaz, Rene Kofod Olsen, nor his successor, Martin Helweg, has ever discussed the corruption problems in Azerbaijan, which OCCRP’s report has so graphically illustrated.

However, the company did issue a press release in 2017 (here) announcing a contract award by Socar, stating that “the Republic of Azerbaijan has been an important market for Topaz over several decades, with its commitment to the Azerbaijani market being demonstrated through the company’s continued investment in the region and its high levels of localisation… ‘This is a significant contract for Topaz and we are humbled that Total and Socar have trusted us to support them in such an important development,’ remarked René Kofod-Olsen, the CEO of Topaz Energy and Marine.”

Next time you see BP’s CEO Bernard Looney grinning all over the press about his company’s ethics and integrity, revisit the OCCRP report.

You’ll probably feel humbled by the involvement of Socar in the billion dollar scandal, too.

Background Reading

Our initial coverage of Prelude’s first shutdown, and how floating LNG is critical to the development of new offshore gas supplies, was back in October 2020 (here).

More coverage of Rosatom’s existing nuclear power barges is here.

Reddit’s online question and answer session with Scott Leonard of SOAC ahead of the creation of The Metals Company is here.

Revisit our coverage of the how SOAC’s sponsors actually provided much less cash to The Metals Company than was expected at the listing in September (here).

Upstream’s excellent coverage of Gorgon’s technical problems with its CCS systems is here.

More details on BP’s operations in Azerbaijan are here.