This month Europe has sweltered under a heat wave, with temperatures crossing forty degrees Celsius in many parts of Spain. So too, the heat has returned to the offshore wind market, even as turbine manufacturers and wind farm operators buckle under financial challenges.
Whilst oil and gas prices have overshadowed the wind industry since the Russian invasion, and despite the raft of profit warnings from the European wind turbine manufacturers (here and here), there is still investor money going into wind turbine installation vessels (WTIVs) in Europe.
Ziton, the Danish owner of four smaller jack up wind turbine maintenance vessels announced (here) that it has been refinanced, and is now controlled by Permira, the private equity company. The solution includes an extension of the company's loans by two years, an improvement of Ziton's equity by €37 million (US$39 million) and improvement to what it described as its "liquidity" by €13.2 million (US$13.9 million).
The improved equity comes from that classic restructuring trick of converting the company's debt into new shares. Ziton had been suffering from a negative equity problem for several years, as its liabilities of over US$200 million exceeded the value of its jackups.
This is a pretty small-scale transaction, and Ziton's fleet is not as large or impressive as Cadeler's or Fred Olsen Windcarrier's or Eneti's. Instead of installation, three of Ziton's jackups specialise in the maintenance of existing wind turbines, where it competes with Boskalis and with Harren and Partner's units.
The Ziton fleet is a mixed bag, including the WTIV Wind Enterprise (specifications here), which Ziton bought from Vroon after a bareboat charter which started in 2019 (see here). This unit is fitted with an 800-tonne crane, and can install turbines in the seven- to 10MW capacity range. The WTIV is on a long-term time charter for three years and eight months with Siemens Gamesa beginning in March 2021.
Permira will want an exit from its investment, which raises the tantalising prospect that perhaps Maersk Supply Service will buy its Danish compatriot to acquire its track record and windfarm competence ahead of the delivery of its own newbuild WTIV under construction in Singapore, just as Eneti bought Seajacks to provide it with a track record ahead of its own newbuild WTIVs in Korea being bid to clients.
Alternatively, we could see an IPO by Ziton, with the proceeds used to order a newbuild WTIV, with investor excitement maybe stoked with the notorious famous Clarkson hockey-stick graph of ever-increasing demand for WTIVs.
Despite the rather poor financial returns the wind farm players have delivered so far, investor interest is not going away, as European governments seek to continue investment in offshore wind to reduce their exposure to Russian gas. In Australia, the threat of blackouts and energy rationing on the east coast last week has led the new Albanese government to condemn the country's reliance on coal-fired power stations and to commit to more wind and more solar.
Who will be first to announce an Aussie offshore wind farm installation contract?
In the event of a sale or an IPO, we can expect Ziton's management to prosper mightily.
In December, we noted (here) that safety standby and walk-to-work vessel operator Esvagt's existing shareholder, the private equity company 3i, had bought out the other shareholder, private equity company AMP Capital. UK-based 3i agreed to pay AMP £268 million (US$355 million at the time, considerably less now), so that 3i could own Esvagt outright, netting AMP a profit of US$50 million over the six years in which it had held its half of the company.
Earlier this month, the Danish shipping industry press was reporting here that Esvagt's CEO Peter Lytzen and Deputy CEO Kristian Ole Jakobsen would each receive DKK17.4 million (US$2.5 million) as bonuses on top of their basic salaries. If they get that when 3i buys out AMP, think what lucre awaits if they can take the business public in an IPO, and 3i can exit. Shipping Watch reported that the bonuses were a "reward for creating value," according to 3i.
It is also a reminder that rising profits in the offshore sector this year will have very little to do with the genius of the management teams involved, and everything to do with the market. However, those lucky enough to be in the right place at the right time can pick up massive rewards when the market conditions are right.
In 2019, we observed here how the CEOs who had led their companies into bankruptcy were often lavishly rewarded even when they were fired, and we considered the example of Tidewater's Jeff Platt, who received over US$2 million as severance payment and for various vested benefits, even as the company plunged into Chapter Eleven and its ships were being transported on heavy-lift vessels to India to be scrapped amid massive write-downs.
Now just as the anchor handler Loke Viking has earned a fortune for being the right ship in the right place in the Aberdeen spot market, as we reported last week (here), so too senior managers in companies like UOS, North Star and Esvagt, which are owned by private equity funds, will make out like bandits for being in the right place at the right time if current market conditions persist.
One fly in the ointment is that many windfarm service operation vessels (SOVs) have been fixed into long-term, fixed-price contracts, just as cost inflation is surging across the offshore industry. Expect those companies that fixed their ships for five or ten years or fifteen at 2020 or 2021 prices to be facing significant cost pressures, unless they have inflation adjustment clauses in their contracts. If the current ten per cent inflation in the UK and elsewhere continues, expect there to be some pain at the tail end of the contracts where operating costs will have risen on a compounded basis, whilst charter revenue remains flat.
Oil companies can cope with higher costs when oil prices are high, because when oil prices are high, their revenues rise too. To some extent it is win/win. With Saudi Aramco making US$39.5 billion in the first three months of the year, paying a few thousand dollars per day more on even a hundred or more anchor handlers barely dents the oil giant's costs in a US$120 per barrel environment.
However, wind farm operators are locked into long-term, fixed-price contracts to sell their electricity into national markets. This creates a zero-sum game when contractors need to charge higher prices to reflect high crew wages or supply chain costs – the electricity price doesn't budge, their revenues are fixed, so a dollar more to North Star or Edda Wind is a dollar less for the wind farm operator. Indeed, offshore wind has been premised on costs falling and falling over time, which was possible when oil and gas demand was weak and owners were desperate to fix their tonnage.
It is less likely today. The surge in demand for oil and gas support vessels will have adverse consequences for the windfarm sector, mark my word, as both operators and vessel owners with very long term charters find costs rising uncomfortably quickly.
But it seems churlish to query the economics when Norwegian operator Norwind took delivery of the newly converted SOV Norwind Breeze (the former PSV MMA Responder) from Vard's Brattvaag yard in Norway, just over a fortnight ago. Norwind also announced in April that it was exercising two more options on commissioning SOVs at Vard Vung Tau in Vietnam to bring its newbuild orderbook to four such vessels.
Norwind Breeze has been equipped with a larger and modernised accommodation for 60 passengers and crew, and a large battery power system to reduce emissions (of course). An advanced but temporary gangway has also been installed, and it will be replaced this autumn with a new, larger gangway system. You can see photos of the naming here.
And on Friday, June 17, Edda Wind held the naming ceremony for its newbuild commissioning SOV Edda Brint. The traditional ceremony where a bottle of champagne was smashed on the bow took place at Astilleros Balenciaga Shipyard in Zumaia in Spain. The naming came only two weeks after the SOV Edda Breeze was delivered from Gondan shipyard just over two weeks ago, and a sister SOV newbuild was launched at that same yard in March for delivery in the first quarter of 2023.
Balenciaga will launch the hull of the sister CSOV to Edda Brint in July, for delivery in the first quarter of 2023. Edda Brint and its sister are 82.85 metres in length and can accommodate up to 60 persons in total.
The ship's name comes from the Danish word for hydrogen ("brint"). The vessel will be ready for running emission-free on a hydrogen-based propulsion system, Edda claims, hence its name.
However, where this fuel will come from and when it will be commercially available is not clear at all, so at the moment, the ship will run on standard marine diesel. But that hasn't stopped Edda Wind claiming that Edda Brint "will be the first SOV operating without carbon emissions, truly enabling a green future."
Edda Brint is now being readied for sea trials and will be delivered from Balenciaga in August. Then, following the installation of an active heave compensated gangway system, the vessel will commence a term charter with MHI Vestas at the Seagreen Offshore Wind farm, Edda reported. The vessel's contract on the Seagreen project off Scotland has a firm period of fifteen years and will run until 2037, Edda Wind stated.
It's not clear what inflation protection Edda has in its Seagreen contract for Edda Brint, or what the future holds for beleagured charterer MHI Vestas after Vestas issued a warning of deeper expected losses this year on May 1 (here).
However, Edda Wind, together with DNB Markets, ABG Sundal Collier, and Clarksons Platou Securities, won Marine Money's award for "2021 Deal of The Year Offshore," so what could possibly go wrong?
The Norwind decision to exercise its options at Vard came a month after Integrated Wind Solutions (the company formerly known as Awind) announced that it had entered into shipbuilding contracts for the construction of two more walk-to-work commissioning SOVs. The vessels are scheduled for delivery in 2024 from the China Merchants Group. Currently, IWS also has two identical vessels on order for delivery in 2023, plus option agreements for up to two additional newbuild vessels for potential delivery later in 2024.
These "Skywalker class" CSOVs are DP2, walk-to-work vessels with each having a length of 90 metres and a total capacity of 120 personnel on board. Equipped with 3D compensated gangway and crane, IWS' CSOVs are also fitted with battery hybrid propulsion to reduce CO2 emissions and to operate with zero emissions "in certain periods," as the company's press release put it.
IWS said that the firm yard price for vessels is about €48 million (US$50.5 million) per ship. Approximately 50 per cent of the vessel value is related to Norwegian export companies providing advanced technology "ensuring safe and efficient operations during operations of the vessel", which suggests that the Norwegian taxpayer might be on the hook for export guarantee loans. Lucky them!
IWS then followed up last week by announcing a deal (here) with Bourbon to work together to market and operate IWS' SOVs in the French wind farm market, where French crew and a French presence will be as important as Norwegian crew and a Norwegian presence will be in Norwegian wind farm contracts.
France is currently planning installation of more than seven GW of offshore wind capacity by 2030. The ship management under the deal will be performed by French company Bourbon Offshore Surf, and Bourbon says it currently employs about 500 French seafarers with relevant offshore experience for the Skywalker class.
Finally, Acta Marine announced a new challenge to the Skywalker class (here), adding to the wind industry's new build orderbook by signing a contract for the construction of two DP2 CSOVs at Turkish shipyard Tersan, with two optional vessels for delivery at a later date. The vessels are primarily aimed at the offshore wind construction market, and carry the new SX-216 TWIN-X Stern design from Ulstein Design and Solutions.
Acta claims that these are next generation, dual-fuel, Methanol and MDO/HVO powered vessels. For the uninitiated, HVO is hydrotreated vegetable oil, a type of diesel produced from waste, primarily residue oils and fats, such as used cooking oil from fish and chip shops (See, I look this stuff up so that you don't have to.). HVO can also use slaughterhouse waste. Nice!
What this means in practice is that the vessels can and probably will run on standard marine diesel in the beginning, as methanol is not widely available yet, and HVO remains very much a niche form of diesel, more used in press releases than real life.
The Acta CSOVs measure 89 metres in length, 19 metres in beam, and can accommodate up to 135 people in 85 cabins. The units will be equipped with an SMST-provided motion compensated gangway system mounted on an integrated tower with height adjustment and a personnel/cargo lift. Additionally, the Acta vessels feature an SMST 3D-motion compensated crane with six-tonne lifting capacity. The cargo area is 500 square metres indoors and 500 square metres outdoors. The vessels provide for efficient and safe walk-to-work transfer of personnel and cargo in significant wave heights up to three metres, Acta claims. The first two vessels are scheduled for delivery in the second and third quarters of 2024.
Acta has far more experience than IWS. It began walk-to-work operations with Acta Orion in late 2015, and this vessel was followed by Acta Auriga and Acta Centaurus. Acta says it has transferred over 150,000 workers to and from wind turbines and offshore structures in sometimes challenging weather conditions.
None of the newbuilds from Tersan have contracts, at least not that that Acta has announced yet. But if oil and gas is still going strong, they could always be employed there, just as Dutch compatriot Wagenborg has done with several of its fleet of walk-to-work vessels this summer. We are reminded that we once coined the adage (here) that SOV can stand for "speculative optional vessels."
For now, offshore wind is a trend with staying power. Putin and climate change have made sure of that. But let's see whether these shiny new vessels will deliver good returns for their owners, as well as for the environment.
Background Reading
We covered Maersk's sensational decision to order a high specification WTIV from Sembcorp Marine here.
We warned on the perils of Edda Wind's Kim Kardashian John Fredriksen backed IPO in Oslo last year here. The shares are down ten per cent since the IPO, at the time of writing.
Neste Oil's information sheet on HVO is here.