Speculative capital is now investing in high specification, purpose-built ships to support wind farms that have not even yet been installed. We have previously covered how the frantic dash to invest in offshore wind farms has spurred a massive increase in the cost of leasing the seabed where wind turbines can be deployed, generating a windfall for the Queen of England (here and here).
And we have covered the race to order new wind turbine installation vessels, which has seen a horde of ship owners rushing to order newbuild jackups to commission the foundations, nacelles and blades offshore (here, here and here).
The “must see” graph on the future of the offshore wind industry, which is driving all this investment, remains this one prepared by Clarksons Platou for Eneti (ex-Scorpio Bulkers), one of the many new entrants:
Step aside, Helen of Troy; this is literally the graph that will launch dozens of vessels.
SOVs: speculative optional vessels?
Now, the investment frenzy is moving to the service operation vessel (SOV) segment. These are the dynamically positioned vessels that repair and maintain the wind turbines once they are in service. The ships, typically up to 100 metres long, provide high-standard accommodation to cosseted wind farm technicians. They are fitted with walk-to-work gangways for them to access the turbines and substation platforms, they have three-axis, motion-compensated 3D cranes installed (excellent Macgregor explanation here), and they transport spare parts and equipment offshore.
Ulstein Ship Design has some excellent examples of the SOVs in its portfolio gallery here.
Build to contract was the old model
Traditionally, this has now been a very niche and fragmented segment, with individual vessel owners winning long-term contracts and building ships to order for specific wind farm operators. Edda Wind, for instance, as we reported here, ordered two vessels in Spain against term charters with Ocean Breeze and MHI Vestas last year. Esvagt has also followed the “build to contract” model here, as has Edison Chuest. Chouest ventured into the segment in 2020 with a newbuilding at its own ship yard, after it won a long-term charter with Ørsted for the first Jones Act-compliant SOV in the US, as we reported here.
Now, the flood of speculative capital has hit the sector, and competition is ramping up. Some big guns are moving in to stake a claim in the gold rush. Instead of building against firm requirements from customers, tailored to specific requirements, owners are building speculatively.
The old rule book is being thrown out of the window.
Awind – Awilco – Awilhelmsen Group
The Awilhelmsen Group is the master of riding speculative waves, sometimes successfully, and sometimes less successfully. The group was founded by Arne Wilhelmsen, the Norwegian billionaire businessman, who passed away last year (here), and who was the co-founder of Royal Caribbean Cruises.
In 2005, Mr Wilhelmsen set up Awilco Offshore, floated it in Norway, merged with Offshore Rig Services and then cleanly sold it to China Oilfield Services in July 2008 in a US$2.5 billion deal. Kerching!
Awilco Drilling’s failed speculation
Unfortunately, subsequent adventures in the offshore sector have been less happy for the Awilhelmsen Group. Its Awilco Drilling affiliate, in which it is the largest shareholder controlling 37 per-cent of the shares, has had an awful run. It is battling the Singapore yard Keppel in arbitration for tens of millions of dollars over the cancellation of two speculatively-ordered, newbuilding, harsh-environment, semi-submersible drilling rigs, Nordic Winter and Nordic Spring.
Awilco Drilling has only one existing rig, WilPhoenix, in service, working on patchy spot utilisation in the North Sea, and due off-hire shortly. In February its CEO resigned “to pursue other opportunities,” and the company reported an operating loss (here).
Awind is blowing
However, undaunted, this month Awilhelmsen Group announced a bold bet on the future of wind. It has set up a subsidiary called Awind and is preparing to float it on the Oslo Stock Exchange later this week. Book building by potential investors closed last Friday.
Awind has signed two newbuild construction contracts with the China Merchants Industry Holdings for a pair of UT5519DE design SOVs, as well as four additional optional vessels. The confirmed newbuildings are scheduled for delivery in 2023.
Green power, yoga room and saunas
Awind plans to raise NOK750 million (around US$89 million) in gross proceeds through the share placement. It has stated that it will use the funds from the IPO to finance the construction installments for the two SOVs.
Peculiarly, the UT5519 design is not shown on the Kongsberg website (here) but specifications are available on the Awind website here. The vessels include a yoga room, gamer room and gym, and both male and female saunas. They will be able to accommodate up to 120 persons, mostly in single cabins.
As befits the windfarm industry, the vessels will be built as plug-in hybrids with batteries, equipped for all-electric operation using supercharging, solar cells and battery. The owners claim the units will be “capable of operating zero emission up to six hours” but that “conversion to a zero-emission vessel can be done at competitive cost,” with either battery operation with offshore charging directly from the wind farm, biofuel compatible combustion engines, and the potential to use hydrogen-based fuels (such as fuel cells, ammonia, and methanol).
Charging offshore at a buoy straight from source
You may recall (here) that Maersk Supply Service and Ørsted are testing a charging buoy that can bring green electricity to offshore wind farm service vessels. The prototype buoy will be trialled this year, and can be used to charge the smaller battery- or hybrid-electrical vessels with power from the windfarm grid itself. This will enable SOVs to turn off their engines when laying idle, and power up their batteries without needing shore power or to run their diesel electric generators.
More listings in Oslo
With turbine installation vessel owner Cadeler (ex-Swire Blue Ocean) listing in Oslo last year, Awind listing there this week, and BW Offshore also IPO-ing its floating wind venture BW Ideol in Norway last Thursday (here), Edda Wind has now decided to join the fray.
Edda Wind goes public, citing “tremendous growth”
Edda Wind announced that, like Awind, it would be listing its shares in Oslo and would be ordering two more speculative SOVS. The press release is here. The two vessels have no contracts at the time of announcement.
“Ordering two more purpose-built CSOVs will further strengthen Edda Wind’s leading position within offshore wind,” company CEO Kenneth Walland said in the statement. “Tremendous growth is expected in the offshore wind market over the next decades, and Edda Wind intends to be a world-leading provider in this segment.”
The tremendous growth story is the same one used to justify every offshore wind investment. Yes, there will be tremendous growth, but it is not clear that investing speculatively in boutique assets is the best way to profit from it.
Rather, the travails of the specialised niche 600-person accommodation vessel Edda Fides (here) show that the mix of long-lived assets with debt financing and no contracts in place can be very risky.
Hydrogen fuel and government support
The Edda Wind newbuilds will be built at Astilleros Gondan in Spain, with delivery scheduled for 2023 and 2024. The vessels will be 89.3 metres in length and will accommodate up to 97 technicians and 23 marine crew onboard.
There will be a motion-compensated gangway system with an adjustable pedestal and the vessels will also be prepared for zero-emission operation, just like Awind’s.
Edda Wind says that the technology is based on Liquid Organic Hydrogen Carrier, which will ensure safe and efficient use of hydrogen as an energy source. The company observed though that this was not without risk, as nobody knows which fuel will actually win in the energy transition. Hydrogen as a marine fuel is at an early stage, but this is a bold validation of the concept.
“We are, however, dependent on support to green shipping projects by the Norwegian government to be able to develop, build and optimise these solutions”, Edda’s statement noted.
North Star wins US$374 million
What’s most bizarre is that whilst Edda and Awind are now investing speculatively in new SOVs, the most recent round of contract awards for SOVs went to a completely different player, UK-based North Star Renewables.
Last week, Equinor announced (here) that it would be awarding North Star three ten-year firm charter contracts, plus three years of options on each contract for newbuild SOVs. The three contracts have a total value of £270 million (US$374 million), including the options, with the vessels deployed to work on the Dogger Bank wind farm in the North Sea off the UK.
“North Star will deliver one SOV to be used for scheduled maintenance at Dogger Bank A and B,” said North Star. “The vessel is due to be delivered in January 2024 and will also serve Dogger Bank C when this phase of the wind farm is operational.
“A further two SOVs will be delivered by North Star to be used for corrective maintenance, at Dogger Bank A and Dogger Bank B. Delivery of these vessels is scheduled for July 2023 and July 2024 respectively. A further contract for an SOV to be used for corrective maintenance at Dogger Bank C will be tendered at a later stage.”
North Star has historically been an emergency response and rescue vessel operator in the North Sea. It has not announced the yard where the ships will be built, or the exact specifications, only saying that they are innovative and state-of-the-art.
The company was bought by private equity interests in 2017 and currently owns and manages around 30 standby vessels, with a large number of fast rescue craft and daughter craft installed. North Star says it has one of the youngest British fleets in the market.
Its entry into the market highlights how the barriers to entry for SOV operatorship are really not that high. If you can operate a North Sea standby boat, or a DP PSV, AHTS or subsea vessel, or an accommodation vessel, you can operate an SOV.
No spot market in wind yet
The Equinor contract award to North Star follows the standard procurement model of the wind farm operators – they can tender long-term requirements for SOVs against their specific requirements since the development of the wind farms takes many years and is known well in advance. This enables them to drive down prices by booking vessels ahead against attractive term contracts.
Unlike the well-developed North Sea spot market for PSVs and anchor handlers in the oil and gas industry, at this stage of the wind industry’s development, there is only a limited spot market for SOVs. Walk-to-work chartering for the few spot campaigns that exist can be readily performed by standard subsea vessels. Siem Offshore, Wagenborg and Vroon in particular have done this very successfully in the past (here).
Swire quits the SOV market
Perhaps the one company bucking the SOV trend has been Swire Pacific Offshore. Rather than entering the new and growing segment, it has decided to give up on the SOV market before it has even started. As part of its “sale of the century,” (here) the company is reported to have sold its final subsea vessel Pacific Constructor to a Taiwanese player for work as an SOV in East Asia.
Even though its recently spun off affiliate Cadeler boasts an office in Taiwan, and even though Swire has years of experience operating DP vessels in oil and gas, Pacific Constructor has been sold from warm stack in the UK following its release from Ocean Infinity, and is reported by brokers to be shortly mobilising to East Asia for SOV work for its new owner.
This is probably due to the fact that, once again, Swire Pacific Offshore suffered a net cash outflow in 2020, this time of just under US$7 million, at a time when the group’s flagship airline, Cathay Pacific, is also burning through money faster than a Boeing 777 at max thrust (see the recently announced results here).
Conclusion – good news and good news
More and more money is flowing into offshore wind investments. This is great news for the future of low-carbon electricity generation. It is great news for ship designers and shipyards, which have suffered a dearth of orders since the collapse of the offshore industry in 2015. It is excellent news for the finance houses that make money selling shares in the newly listed companies in Oslo. Even Queen Elizabeth benefits from the growth of the offshore wind farm industry, and after the controversial Meghan-Harry interview with Oprah, she needs all the good news she can get.
What’s not clear is how investors in these speculative vessels will fare. Building on speculation in offshore has been a recipe for financial disaster in offshore in the past. This year, we reach the tenth anniversary of the IPO of Pacific Drilling on the New York Stock Exchange, which marked the beginning of the final stages of an epic over-investment in deep-water rigs (prospectus here). Pacific Drilling has been through Chapter Eleven restructuring twice since then. Investors in speculative offshore assets have been burnt when the inevitable bust came, including the shareholders in Awilco Drilling.
A few speculative SOVs from well capitalised Norwegian groups won’t do any harm, but the evidence of the industry is that a trickle soon becomes a flood, as investors chase the hottest new trend.
By all means, enjoy the wind bubble as it grows and grows. Long may it last. The exponential growth of the sector will undoubtedly make some fortunes. But this is a cyclical industry.
The history of Awilco Group is here.
The excellent Edda in=house magazine Sjofartstidene has the company’s full fleet list, vessel reviews in English and Norwegian, and some great photos here.
More information on Basalt Infrastructure Partners, the owners of North Star Renewables, can be found here.
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.