COLUMN | Quick updates: Singapore DOT, Philippines MARINA and Teras Lyza; KrisEnergy and Keppel; Shell accepts climate change target change; McDermott changes management [Offshore Accounts]
As the end of the quarter nears, we give you a cool quartet of updates on stories and companies in the offshore sector. We begin with a wait of over three years.
Teras Lyza – Singapore was silent
On June 5, 2018, the Ezion-owned liftboat Teras Lyza turned over whilst under tow by an Ezion-owned tug. Fortunately, the liftboat was unmanned when the accident occurred, and so nobody was killed or injured. The stricken jackup was later towed away, scuttled and sunk in deep water off the Philippines by Resolve, its salvors, in August 2018. Since then, no investigation into the accident has been published.
Noting that the capsize of a modern lift-boat was a high potential incident that could result in the loss of life if it occurred again, we published a column in December 2019 (here) querying why the Singapore Department of Transport (MOT), as flag state, had not published an investigation to help the industry learn from this unfortunate event.
“Consider this a ‘near miss’ which the Singapore flag state should be treating very seriously and investigating stringently,” we wrote. Our pleas fell on deaf in ears.
Seacor Power sinks
Then in April of this year, the liftboat Seacor Power capsized in the Gulf of Mexico in a squall, with the tragic loss of thirteen lives among the seafarers onboard.
Again, we highlighted (here) that it was a disappointment that Singapore had not published an accident investigation report into Teras Lyza’s sinking, so that Seacor Marine, the owners and managers of Seacor Power, and other liftboat operators, could have learnt from the findings.
Philippines taking the lead, it transpires
This time, however, we did receive a reply from a spokesperson for the Singaporean authorities, complaining that our articles were “inaccurate,” and explaining why the MOT had not published an investigation report:
“MOT wishes to clarify that MOT’s Transport Safety Investigation Bureau (TSIB) received notification in 2018 that the Philippines Maritime Industry Authority (MARINA) would conduct the marine safety investigation, being the Coastal State of Occurrence. In accordance with internationally accepted protocols, MARINA subsequently accepted TSIB’s interest as a Substantially Interested State (in TSIB’s capacity as the flag state’s safety investigation authority) to participate in MARINA’s investigation.”
It would have been helpful if this clarification could have been given to us back in 2019.
When we requested a link to the report, the MOT could not provide it. We emailed MARINA, and one of their staff confirmed that the report was under process, but had not yet been issued.
We hope that MARINA will make the report available for the entire industry in a transparent and open manner. Three years is too long to be waiting for a marine accident investigation report that could potentially save lives and help prevent other accidents. In the meantime, we wait and watch.
KrisEnergy sinks into bankruptcy, files for liquidation
In April, we warned that Singapore’s KrisEnergy faced what we described as “an uncertain future” (here), as production from its offshore Cambodian oilfield proved lower than expected.
And so it proved. An uncertain future quickly become no future at all. On June 4, KrisEnergy filed a winding up petition as it simply could not service its debts and support its operations from the revenues from oil production from the Apsara field. Receivers from Borelli Walsh were appointed, and the company’s winding up petition will be heard on July 12 in Grand Cayman (here). Game over.
Singaporean bank DBS, a significant lender to such fallen stars as Emas Offshore, Pacific Radiance, Ezion Holdings and MEO, was the provider of a US$200 million revolving credit facility to KrisEnergy, which will not be extended “as the stipulated conditions have not been fulfilled.”
First losers: Keppel
Two losers emerge from this sad tale of a gamble in a marginal Gulf of Thailand field, which ultimately did not pay off.
The first is easy to identify: Keppel Corporation.
Keppel immediately announced (here) that it would be completely writing off US$240 million of its exposure to KrisEnergy in its first half results, and hinted that perhaps it might take ownership of Apsara field.
Keppel stated that it would offset its credit losses against “recoverable amounts of various assets” of KrisEnergy, as Keppel benefits from a “comprehensive first ranking security package.”
The key question here is what is included in the security package and whether what appear to be assets are actually liabilities, when the downsides associated with their ownership are considered. We suspect at this stage that Keppel probably doesn’t have firm figures on this.
As with other cases involving Keppel, immediately regional analysts rallied to the cause of the troubled local conglomerate and offshore giant, with CGS-CIMB saying here that the KrisEnergy debacle was “the last vestige of ‘legacy’ issue[s] that had plagued Keppel for years since the oil price crash in 2015.”
Our long coverage of Keppel’s various fiascos over the last five years can be read here. I wish I shared CGS-CIMB’s optimism that Keppel’s travails were behind it. But I don’t.
Bigger losers: Cambodia?
What nobody seems to have addressed is who is responsible for the decommissioning of the Apsara field infrastructure. Who pays given that Cambodia’s first offshore oilfield has barely been in production for more than six months, and is now likely to be closed down and the equipment removed from site, or to require extensive workover drilling to try to revive the pitifully disappointing production?
Aussie experience with Laminaria-Corallina was painful
We have seen in Australia and New Zealand how decommissioning old oil fields is both expensive and contentious, as we reported here, where Woodside’s cunning plan to sell the FPSO Northern Endeavour and oilfield approaching the end of its production life to an unproven and undercapitalised company allowed Woodside to walk away from its decommissioning liabilities. Peter Milne has shown here on his BoilingCold blog that the actual cost of decommissioning Northern Endeavour and the Laminaria-Corallina oilfields may now be up to US$770 million.
Australia has learnt from the bitter experience of Northern Endeavour. New Zealand has been busy handing out contracts to the powerful Siem Offshore AHTS Siem Amethyst to unmoor the BW Offshore FPSO Umuroa from Tui oilfield, which was abandoned by Tamarind. The field is now being decommissioned at the cost of the Kiwi taxpayer.
The Umuroa FPSO has now left location after fourteen years. The manning on the Siem Offshore AHTS for the voyage back to Asia is also the cause of a row between the vessel owners, its manning agent and the maritime union (here).
Tug of war in Thailand
In Thailand, Chevron and the government are going to arbitration over the decommissioning costs of the Erawan gas field, which the American oil major will hand over to state oil and gas player PTTEP in 2022. Upstream has reported here that recent Thai legislation “directly contradicts the terms of Chevron’s decades-old concession agreements,” and that Thailand’s Energy Ministry has now “retroactively enforced a new regulation, M22, requiring operators to pay decommissioning costs of all infrastructure they installed, even if they no longer operate the equipment.”
The Norwegian publication reported that its sources had estimated that the cost would be “up to US$2.5 billion on the full cost of decommissioning all the Erawan facilities.” Obviously, the tiny Apsara field in Cambodia is much smaller and has much lower liabilities than Chevron’s nearly fifty years of field development in Thailand, but there will be a cost associated with the decommissioning of the assets of ill-fated KrisEnergy assets.
Somebody is going to have to pay.
What’s happening in Cambodia?
In November, KrisEnergy had announced that it would be using the FSO Rubicon Vantage as storage for Apsara’s production, but later reports (here) suggested that the Bahamas-registered tanker Strovolos was performing that role. Rubicon Vantage is reported to be safely in Laem Chabang in Thailand, according to AIS data (here). Industry reports suggested that Rubicon Offshore International has been put up for sale on May 1 after it sold its Philippines FPSO to none other than Tamarind Energy of Tui fame, in 2020.
That leaves the Apsara platform to remove, five production wells to plug and abandon, and the production barge Ingenium II to take offsite. Ingenium II was converted at Keppel’s Singapore yard and sailed to field in 2020. My guess is that Keppel will seek to claim the production barge and bring it back to Singapore in the hope that it can be sold to another operator or deployed on another field. Ingenium II has the capacity to process up to 30,000 barrels of fluids a day.
No doubt the skilled and experienced liquidators at Borelli Walsh will be looking at the best options for the creditors of KrisEnergy.
Unfortunately, this is the first offshore development in Cambodia and it is unclear (to us at least) on whom the responsibility for decommissioning falls. Unlike Thailand and Australia, Cambodia doesn’t have a track record as an offshore producer or any precedents.
It would be a shame if KrisEnergy’s disastrous foray in Cambodia not only means that the country won’t receive any oil royalties, but is also left with a big bill to clean out KrisEnergy’s infrastructure.
Shell accelerates carbon reduction
We reported here that Shell had a lost a court case in the district court in The Hague regarding the company’s efforts to reduce its carbon emissions. Shell must reduce its carbon emissions by nearly half of 2019 levels by 2030, the judge ruled.
The Netherlands branch of Friends of the Earth were ecstatic at their win. Shell has said that it will appeal.
Consequences are limited, for now
We pointed out that this simply means that the company would likely sell its most carbon intensive assets to other players, which were likely to be less scrupulous. We highlighted that China burns around four billion tonnes of coal per year, is the largest carbon emitter on the planet, and produces more than half of its electricity from coal-fired power stations, so any efforts by Shell would be marginal. China has said that it will continue to accelerate its greenhouse gas emissions until 2030.
Now Shell’s CEO has confirmed that it will abide by the court ruling, even as it appeals against it, the Financial Times has reported here.
Shell will “rise to the challenge,” boss Ben van Beurden, said last week. He stated that the Dutch court’s decision “applies immediately and should not be suspended pending an appeal”, and that the company would fast-track its plan for the energy transition.
“For Shell, this ruling does not mean a change, but rather an acceleration of our strategy,” Mr van Beurden commented. “We will seek ways to reduce emissions even further.”
Nigeria onshore exit announced
So, let’s see which assets Shell divests, and which companies take the plunge to buy them.
In late May, Shell announced that it would be ending its controversial and extremely high profile onshore activities in Nigeria in the Niger River Delta. The company blamed the endemic criminality and violence of the region for the decision, saying that:
“We cannot solve community problems in the Niger Delta — that’s for the Nigerian government perhaps to solve,” Shell said. “We can do our best, but at some point in time, we also have to conclude that this is an exposure that doesn’t fit with our risk appetite anymore.”
At the same time, however, Shell has been pressing ahead with the evaluation of contractors for the US$10 billion Bonga South West-Aparo deepwater project offshore Nigeria. Security in the deepwater fields has proven much easier to manage than in the swamps of the Niger Delta.
Philippines exit on the cards too
Reuters reported here that Shell has also struck a deal with local conglomerate Udenna Group in late May to sell its 45 per cent stake and operatorship of the aging Malampaya gas field offshore of the Philippines for US$460 million. That takes Udenna’s interest in the development up to 90 per cent, as the company previously acquired its first 45 per cent stake from Chevron in 2019 for US$565 million. State energy company Philippine National Oil Company (PNOC) holds the remaining ten per cent.
Malampaya running dry, decommissioning awaits
This was an incredible deal for Shell, as Malampaya’s output is already declining, and the Philippines’ energy department has said that it expects the field to run dry by 2027. Udenna is run by local tycoon Dennis Uy. Reuters has reported that Uy has close ties with Philippine President Rodrigo Duterte.
Once again, the bigger issue is whether Udenna is prepared to honour the decommissioning obligations at Malampaya, which includes a massive platform with a concrete gravity substructure and a 504-kilometre pipeline back to the province of Batangas, none of which will be cheap or easy to remove.
It is clear from Thailand, Australia, and New Zealand that decommissioning is going to emerge as the single biggest point of contention in the offshore industry. Passing the buck is going to be increasingly difficult, as governments wake up to the risks. So Shell’s exit is most timely. Every asset it sells reduces its carbon footprint.
Will Friends of the Earth be suing Mr Uy to force him to reduce his company’s carbon output? We thought not.
As an aside, Udenna was once believed to be the white knights that would rescue Lionel Lee’s Emas Offshore, as we reported here. That deal didn’t close.
McDermott management ouster
One of our biggest disappointments of 2020 was when international construction player McDermott finally went bust, and ceased to make public disclosures following its Chapter Eleven restructuring and de-listing as a public company.
McDermott was the company where one of the subsidiaries it acquired had been accused of spending US$16 million on prostitutes for clients in Colombia (here), and where CEO David Dickson and his top team were awarded seemingly ever larger bonuses and rewards, the worse the company’s financial position became (here and here). Every piece of news seemed to highlight all that is wrong with American executive compensation and leadership, and how dysfunctional McDermott’s senior management had become.
It’s over: The fat lady (finally) sings
Last week, Mr Dickson finally resigned as CEO of the company.
“Lee McIntire, an independent director on the McDermott board of directors, will assume the responsibilities of interim CEO effective immediately,” according to the company release here. No reason for Mr Dickson’s departure was given.
We do observe that McDermott’s competitors in offshore construction and installation, Subsea7 and Saipem, both reported operating losses in their first quarter results (here and here), which suggests that the much-awaited recovery in the sector may be taking longer than hoped. McDermott is partner with Saipem in the Mozambique LNG project, on which Total recently declared force majeure following a bloody massacre in Palma (which we reported here).
However, the new CEO, Mr McIntire, told staff that he had “tremendous confidence in the people of McDermott, and my sleeves are rolled up.” I am sure that information will be welcome to his tailor.
Things then took a slightly strange turn. Brian McLaughlin, the company’s chief commercial officer, also resigned on June 7, the same day that Mr Dickson left as chief executive.
And this provoked us to look into who else had left the company recently. In April, it turned out that McDermott’s Executive Vice President, Chief Legal Officer and Corporate Secretary, John Freeman, also resigned.
I’m not sure that the CEO, CCO and Corporate Secretary all leaving McDermott in the space of three months is entirely positive, whatever the state of Mr McIntire’s shirt-sleeves.
Farewell, Mr Dickson
We just wonder what severance bonuses the departed pocketed on their way out, and how much the great survivor, Samik Mukherjee, group senior vice president of projects, was paid to stay. Mr Mukherjee has taken over Mr McLaughlin’s commercial responsibilities and direct reports. Of course, since the company is private, the pay-offs have not been disclosed.
In McDermott, it is all about the money; go or stay, succeed or fail, the management always seems to win. Let’s wish Mr Dickson and Mr McLaughlin all the best for the future, and hope for the sake of McDermott’s shareholders that they have taken their final bonuses from the company.
The latest boardroom coup suggests that the McDermott drama has plenty more acts.
All Singapore MOT Transport Safety Investigation Bureau reports for marine incidents are here.
The website for the Philippines MARINA is here.
Singapore’s Business Timescoverage of the KrisEnergy/Keppel story is here.
Our coverage of the Nigerian corruption case involving Shell and ENI and disgraced former energy minister Dan Etete is here and our overview of some of the problems of the Nigerian offshore industry from 2019 is here.
McDermott’s new CEO was previously the CEO of the nuclear power company Terrapower from 2015 to 2018. Terrapower was founded by Bill Gates and stands to benefit from up to US$4 billion of US government subsidies over the next five to seven years to assist in the cost of building a demonstration reactor of its “Natrium” design, which uses liquid sodium as a core coolant. Read more here.