COLUMN | Tension: Chevron in Cyprus; Ørsted’s woes; Maersk Supply Service restructures; Borr’s Mexican receivables [Offshore Accounts]
Kylie Minogue has a new pop single out this week, called Tension, which is most appropriate. There’s tension in the Eastern Mediterranean, tension across the offshore wind industry, as another major operator takes a big write off, and tension in Maersk Supply Service, where 130 British staff face redundancy, the COO has been let go, and the company is apparently closing operations in Australia. And finally, tension in Mexico, where Borr Drilling is still burning cash and piling up invoices, which are not being paid in a timely manner.
Oh, but just before you get too stressed, breathe deeply, and recall that deepwater drilling rigs have now reached a day rate of US$470,000. Noble Corporation received a letter of award from LLOG for a six-month contract for its seventh generation deepwater drillship Noble Valiant to work in the US Gulf of Mexico at that rate, closing in on the half million-dollar mark. The LLOG well is expected to start between November 2023 and March 2024, in direct continuation of the rig’s current contract with Kosmos Energy in the same area.
Cyprus and Chevron, Tension over Aphrodite
Three years ago, we wrote a sizzling overview of the Eastern Mediterranean, the latest exploration hotspot for deepwater gas. In 2020, Chevron had just bought Noble Energy for a bargain price, and was looking at ways to develop Noble’s five trillion cubic feet (141.5 billion cubic metres) Aphrodite gas discovery offshore Cyprus.
Aphrodite is located in around 1,700 metres of water approximately 160 kilometres south of Limassol. Chevon operates it with Israel’s NewMed (former Delek Energy) and Shell as partners. TotalEnergies and ExxonMobil have also discovered the large Calypso and Glaucus deep-water gas reservoirs off Cyprus. Like Aphrodite, these big discoveries remain waiting for an export solution before they can come into production.
When we wrote last, it looked as if a pipeline would be built to export gas from Chevron’s Israeli offshore fields via Cyprus, where Aphrodite’s gas would join the trunkline, after the condensate liquids were stripped out via a floating production storage and offloading (FPSO) vessel. This initial plan called for the pipeline to then run onto Greece, where energy demand was sufficient to justify the economics of the developments in both Israel and Cyprus.
Plan A fails, Plan B submitted this year
Unfortunately, that didn’t happen. Chevron decided to export its surplus Israeli gas production to Jordan and Egypt, and doubt existed about the recoverable reserves within Aphrodite’s reservoirs, as well as technical challenges over the pipeline route. In July of this year, Chevron drilled an appraisal well using the drillship Stena Forth supported by a trio of Tidewater platform supply vessels (PSVs), which confirmed upside in the geology.
In May, Chevron had submitted a proposal to the Cypriot government to develop Aphrodite through exporting its production via subsea wells and a new pipeline to partner Shell’s existing gas infrastructure in Egypt. Egypt’s liquefied natural gas (LNG) plants are currently running below capacity and in the sizzling summer heat, the country has experienced black-outs and brown-outs due to power shortages. Chevron’s plan would be very well received in Cairo.
Shot down by Nicosia
Unfortunately, last week, the Cypriot government inexplicably rejected this plan and has summoned Chevron for meetings to resolve the situation. It has now been twelve years since drilling started on the Aphrodite exploration well with the now-scrapped Noble Homer Ferrington semi-sub. So, what’s a few more months of delay?
Oil and gas is a long cycle business, but with Europe still dangerously dependent on foreign gas supplies, you would have thought the authorities in Nicosia would welcome the project to give the island its first deepwater field, and the EU more supply, liquefied from existing LNG facilities that require no additional construction.
Lebanese dream lives on
Meanwhile, TotalEnergies has confirmed that its new exploration well offshore Lebanon in Block 9 is underway, drilled by the semi-sub Transocean Barents supported by a trio of Tidewater PSVs, and that the rig and boats will then go on to drill another well for the company off Cyprus. Transocean achieved a day-rate of US$365,000 for the rigs, whilst Tidewater’s PSVs are believed to be contracted at around US$30,000 per day per vessel.
Given Lebanon’s multiple problems and near bankruptcy, one imagines that a Total plan to fast-track development if there is a discovery will not be a decade in the waiting.
Ørsted write down raises tension
Ørsted briefed analysts last week and it was not a pleasant chat. The Danish offshore wind energy developer announced a write off of around US$2.3 billion on its projects in the Atlantic off the New England coast of the USA due to deteriorating economics.
Costs are rising, suppliers are behind schedule, and interest rates are higher than expected. Ouch! The company explained:
“The Ocean Wind 1, Sunrise Wind, and Revolution Wind projects are adversely impacted by a handful of supplier delays. Ørsted has concluded that there is a continuously increasing risk in these suppliers’ ability to deliver on their commitments and contracted schedules. This could create knock-on effects requiring future remobilisations to finish installation, as well as potentially delayed revenue, extra costs, and other business case implications. These impacts will lead to impairments of up to DKK5 billion (US$723 million), assuming no further adverse developments in the supply chains on these projects.
“In addition, our continued discussions with senior federal stakeholders about additional Investment Tax Credit (ITC) qualifications for Ocean Wind 1 and Sunrise Wind are not progressing as we previously expected. We continue to engage in discussions with federal stakeholders to qualify for additional tax credits beyond 30 per cent. If these efforts prove unsuccessful, it could lead to impairments of up to DKK6 billion (US$867 million). The level of a possible impairment will be decided based on a probability weighted assessment of the likelihood of obtaining the additional ITCs.
“Furthermore, US long-dated interest rates have increased, which affect our US offshore projects and certain onshore projects. If the interest rates remain at the current level by the end of third quarter, it will cause impairments of approximately DKK5 billion (US$723 million).”
While Ørsted’s near-term US offshore wind development portfolio does not meet its return on capital targets, the company said that it was convinced that it would only a be a few percentage points off target returns, and that, even adjusted for the anticipated impairments, it expected to maintain a return on equity target of approximately 14 per cent over the next decade. It shares are down 40 per cent over the last year, back at 2018 levels.
We had already reported last month that Sweden’s Vattenfall had taken an impairment of US$537 million on its 1.4GW Norfolk Boreas offshore wind farm project in the British sector of the North Sea last month and was suspending work. Vattenfall said that it would not go ahead and install the 140 turbines required for the project, as Norfolk Boreas was no longer profitable.
Partisan strife does not craft good policy
The announcement from Ørsted predictably divided American opinion on partisan lines, with Republicans calling for the entire offshore wind industry to be scrapped as uneconomic. New Jersey’s Governor Phil Murphy had controversially signed a law allowing the Danish player to keep federal tax credits it otherwise would have been required to pass along to its customers when it sold the electricity, which has proved remarkably contentious. Mr Murphy said he acted to protect the jobs that the offshore wind industry will create in this state.
His political opponents disagreed vociferously, according to AP wire reports:
“It was a travesty when Governor Murphy bailed out Ørsted at the expense of New Jersey taxpayers the first time they threatened to walk away,” AP reported Republican state senator Michael Testa as saying. “I’m calling on the Murphy administration to state unequivocally that our residents will not be sold out for Ørsted a second time. Supply chain issues and rising inflation prove that these projects are unsustainable and the cost of continuing these projects will be too much of a burden for our state to bear.”
This coming from a state where the law mandates that petrol pumps have to be manned to keep gas station employees in work. Such a polarised landscape is not conducive to a rational economical or environmental debate, however. Social media is replete with people who love to post photos of wind farm turbine blades dumped in landfills. These people never post photos of miners with black lung, smog over New Delhi or Jakarta, or the 100 million tonnes of coal ash and other waste products produced by coal-fired power plants in the United States every year.
Offshore wind has a part to play in the development of America’s future energy requirements. How much wind, where, and at what price should be open to debate, but ideological and irrational opposition to power supplies can be disastrous. Just ask Germany’s Green Party what their anti-nuclear stance has done for the country’s carbon footprint.
Maersk Supply Service: Fire the foreigners
Maersk Supply Service is a privately-held Danish company headquartered in Denmark. So, if it wants to lay off a chunk of its foreign employees and employ more Danish managers, that is the Danish owner’s prerogative. However, despite all the talk of fresh beginning and a new focus, it is hard to see the latest restructuring (press release here) as anything other than a retreat to its Danish roots, and a kick in the teeth for any foreign nationals working there.
Three AHTS vessels to be sold, one to be reactivated
The company says it will be closing down its integrated services business, which focused on decommissioning projects, and sell three of the four laid-up anchor handling tug supply vessels (AHTS) it has idle in Frederica, Denmark, reactivating only the one it keeps. These vessels are the 169-tonne bollard pull, 2009-built Maersk Tracer, 219-tonne bollard pull sisters 2005-built Maersk Detector and 2006-built Maersk Dispatcher, and 269-tonne bollard pull 2010-built Maersk Laser.
After these sales, the company’s remaining fleet will be 21 AHTS, nine subsea vessels, two PSVs, and one wind turbine installation vessel (WTIV) under construction. The company is considering investing in a second WTIV based on a turbine transshipment design methodology that it says can revolutionise the installation business in Northern Europe.
Brits and Aussies get fired
Maersk Supply says it wants to “focus its geographical footprint and position its fleet around the Atlantic Basin and the North Sea,” hence it will be relocating its two vessels in Australia after completion of their current contracts. Its Australian team seem to have already been laid off. Maersk Supply will scale down the organisation accordingly, with approximately 130 people being impacted onshore and offshore over the next two years, depending on the consultation process in the UK.
Strange that the Brits get the boot but the Danes don’t.
Two key business areas, one key nationality
The management team will be restructured around the two new core business areas, and yet more Danes.
After hiring a Danish HR head in May for the company, Danish CEO Christian Ingerslev decided that fellow Dane, Jonas Munch Agerskov, currently Chief Commercial Officer, will take on the newly created role of Executive Vice President for Offshore Wind. For the OSV business, Dane Michael Reimer Mortensen will join Maersk Supply Service as the new Chief Commercial Officer for the OSV business, after leaving Maersk Drilling in November 2022, when that company was bought by Noble Corporation.
Meanwhile, the two foreigners in the management, the only senior leaders with significant experience outside the Maersk Group, American Chief Operational Officer Mark Handin and French Head of Integrated Solutions Olivier Trouvé, will leave the company by end of September 2023.
Maersk Supply says it will search for a new Chief Technical Officer to join the management team, but I would suggest non-Danish nationals probably shouldn’t waste much time applying.
“Sorry to those to whom we have to say goodbye”
The announcement was accompanied by all the usual cant that large companies make when they fire people.
“Maersk Supply Service has been on a transformational journey since 2016 to explore new business opportunities after the downturn in the OSV market,” said CEO Christian Ingerslev. “The company has added many different areas to its business, all relevant at the time. Now it is time to select the areas with the highest potential for Maersk Supply Service. The organisation has built up valuable knowledge along this journey, and I would like to give my sincere thank you for huge effort and commitment to all that has taken part of this journey and especially to the colleagues that we now have to say goodbye to.”
Pass the sick bucket, please. This “transformational journey” has left me a little queasy.
Borr Drilling’s Mexican Tension
Last month, we promised we’d look at Borr Drilling’s results in Mexico after Tidewater reported losing money on some Pemex bonds it had taken as payment for some supply vessel charters there. Mexico’s state oil company Pemex is a notorious sinkhole of corruption (Yes, we will say that.), low operating standards, and abominably poor payment terms. And this is all set in a country where the political, judicial, and regulatory institutions are stressed by years of violence, arguably going back to the Mexican Revolution of 1910-1920 (or even the Reform War of 1858-1861, take your pick).
“Poor Mexico, so far from God and so close to the United States!” as president Porfirio Diaz put it.
E-NAV grows in Mexico
There are rumours that one of the major American boat-owners is struggling with compliance with the recently tightened cabotage laws there. Meanwhile, Mexican private equity owned E-NAV recently took delivery of its fifth large PSV for operation in the Americas, the DP2, MMC 887 design ENAV Jacaranda.
ENAV says that ENAV Jacaranda is “the most modern large PSV in the world,” and it joins its sister ships ENAV Peregrina and ENAV Saguaro. ENAV has done well to fix its vessels largely away from Pemex, chartering to the international oil companies that Mexico has grudgingly allowed to explore in its waters, headed by Italy’s ENI.
Borr exposed to Pemex’s poor payments
Borr unfortunately has exposure for Pemex as its main Mexican client and end user of five of its rigs. Whilst the stock market loves the fact that the company finally achieved break even in the quarter to June 30, making a net profit after tax of US$0.8 million on the back of rising utilisation and rising day rates, I am less confident. All 22 of the company’s jackups were on-hire or have future contracts, Borr reported. Its shares are up 60 per cent year on year.
Great, but Mexico remains an area of concern for the company. At the end of this last quarter, Borr’s Mexican joint ventures owed Borr US$81.8 million up from US$65.6 million at the end of last year and up from US$72.2 million at the end of March.
Borr reported that it received “US$9.8 million proceeds from the return of previous shareholder funding to [its] Mexico JVs” but it curiously neglected to mention that the joint ventures still managed to owe Borr US$9.2 million more at the end of June than they had at the end of March, and US$16.2 million more than they did at the end of December. Note 19 in the company’s filing refers.
Despite billing revenues of US$187.5 million in the second quarter, Borr was only able to generate US$2.4 million cash from its operations, for a sickly cash generation margin of just over one per cent.
Borr is on a roll, but collecting cash from its clients will determine how much the company’s shareholders benefit from the rising market.
“Poor Borr, so far from God and so close to Pemex!”
There is also tension as the sale of Dutch offshore support vessel operator Vroon Offshore Services appears to be about to reach a close, and tension as private equity companies attempt to sell their stakes in at least two other significant offshore companies.
We’d like to X-press to the readership the name of the winning bidder for Vroon, but of course we can’t – at least not until it is formally announced later this month by the consortium of Dutch banks that owns Vroon.
Breathe deeply and calm your beating heart. Padam Padam.
Note that ENAV is not consistent in how it spells is own name even in the same document or vessel names (both with and without a hyphen), but see the company’s website.
See the MarketScreener coverage of BP and Equinor’s efforts to charge over 50 per cent more for electricity from their American offshore wind farms.
Esgian’s excellent weekly rig round-up has news of Borr’s latest jack-up fixtures.