![COLUMN | What could possibly go wrong? Local content in Nigeria, Brazil, Saudi Arabia and Qatar [Offshore Accounts]](http://media.assettype.com/bairdmaritime%2Fimport%2Fwp-content%2Fuploads%2F240520-Offshore-Accounts.jpg?w=480&auto=format%2Ccompress&fit=max)
"They come over here, taking our jobs and stealing our women," is a familiar refrain against foreigners all around the world, as likely to be uttered from Dublin to Durban, from Dusseldorf to Des Moines, and from Denpasar to Dubai (well, probably not the second part in the UAE, but we won't dwell on that).
And it is not just people who live in cities starting with "D" who can be xenophobic.
Worse, in the eyes of many local businesspeople, are foreigners coming into a country and displacing local companies from lucrative contracts in the oil and gas sector, with outsiders providing foreign equipment and staff for offshore contracts. Locals see US$500,000 day rates for deepwater rigs and US$30,000 for platform supply vessels (PSVs) and think, "Get me a piece of that."
As a result, lots of countries have enacted local content laws so that local businesses benefit from the provision of goods and services within the oil and gas sector. In some countries, these have been devastatingly successful – Norway being the usual poster child of beneficial fossil fuel technology transfer and indigenous offshore entrepreneurship; although interestingly, most of the country's harsh-environment rigs are still owned and operated by foreign companies, including Transocean, Seadrill, CNOOC, and Valaris, whilst Odfjell flies the national flag.
Others have been less successful – both the Jones Act in the USA and Australia's powerful offshore unions have led to higher costs and fewer services in the domestic shipping trade there, even as Washington and Canberra remain generally open to foreign investment in oil and gas.
At the other end of the spectrum, Iran, Venezuela, and Mexico have asserted their sovereign rights to run corrupt and dangerous national oil companies, as well as woefully outdated and unsafe oilfield service sectors. Some countries like Malaysia and South Africa even go to the extent of mandating that it must be the "right" sort of local who receives preference, in laws that can only be described as racist affirmative action in the interests compensating for perceived historical inequality.
This week, we look at some new national champions and new local content initiatives. What could possibly go wrong?
We have bashed the crooked Nigerian Navy, as well as the incompetent national marine regulator NIMASA, many times in these pages – for detaining foreign ships and seafarers seemingly to extort "fines", for sitting idly by whilst floating offshore production units explode and ferries sink, and for complicity in oil smuggling.
The general rule is that the Nigerian authorities are fond of hammering foreigners for alleged violations of their laws, but allow domestic malefactors to evade justice. If you haven't seen the video of a wrong-doer fake fainting in the Nigerian senate, this amusing footage is here.
The anti-corruption watchdog in Nigeria was even sued for defamation to the tune of US$215 million by the former oil minister Diezani Alison-Madueke in May 2023, who claimed she had been wronged by the agency, just a few months before she herself actually appeared in court in London accused of bribery in October 2023.
Now, another foreign contractor has learnt the hard way that Nigeria is difficult. Last week, the Federal High Court in Lagos announced it would appoint an arbitrator to settle the dispute between Norway's Dolphin Drilling and Lagos-based oil company General Hydrocarbons (GHL), regarding the charter of the semi-sub Blackford Dolphin.
Dolphin had alleged that GHL had not paid its charter hire. GLH alleged that the rig's blow-out preventer system was defective and failed a test; therefore, it claims it did not need to pay Dolphin and that the rig's contract should remain in force.
GHL is Nigeria's first locally-owned offshore field operator. It managed to achieve the "discretionary" award of two offshore blocks in 2020 – "discretionary" being a term describing that there was no competitive bidding process on the acreage, which contained Oyo field, where the Dolphin rig has been re-entering previous wells.
Dolphin sought to terminate its drilling contract with GHL and remove the rig from Nigerian waters due to the non-payment, and take it to a new contract in India. The Lagos court appointed a mutually acceptable sole arbitrator and will hear arguments on the discharge of the status quo orders earlier granted by the Nigerian lower courts on Monday, May 20, 2024, which is when this article should go to print.
Even a mutually appointed sole arbitrator is a risky proposition. It puts a lot of, er, discretionary responsibility on the shoulders of that one person.
We're not saying that we don't trust the Nigerian courts to be fair in a case where a foreign contractor is not being paid. However, we would recommend the board of Dolphin to queue up this banger from Bananarama as a contingency. Amazingly, this 1984 song is still a decade younger than Blackford Dolphin, which was built in 1974.
With the oil price hovering at US$80 per barrel, there is simply no reason for oil and gas companies not to be paying their subcontractors in a timely manner. There's a special place in Hell for those who deny payment to rig and boat owners after they have performed the services.
In April, we reported on Brazilian state oil company Petrobras' plans to award long-term contracts for twelve newly constructed PSVs built at local shipyards.
Last week, Petrobras's wonderfully named Chief Logistics Officer, Claudio Romeo Schlosser, announced that the company also planned to issue new tenders for two more categories of Brazilian-flag, Brazilian-built ships. These bid processes would see up to 26 new vessels constructed in domestic shipyards and chartered by local owners to the oil company.
Writing in Upstream, Fabio Palmigiani reported that Petrobras plans to contract ten oil spill response vessels (OSRVs) and 16 subsea remotely operated vehicle (ROV) support vessels.
Brazilian yards have built such complex subsea vessels in the past – joint venture yard co-founded by local builder Wilson Sons delivered Fugro Aquarius in 2016. However, since 2016, yards have struggled to attract new orders, as Petrobras' fleet of offshore support vessels (OSVs) declined from its peak of over 500 ships in 2014, and owners have struggled with charter terminations and low rates.
Mr Schlosser confirmed to Mr Palmigiani what we have been arguing for some time:
"Supply boats have low liquidity. We have been going to the market and in some situations we were not able to contract the required vessels to continue supporting oil production. This led Petrobras to carry out an assessment, and we find out that construction is a very interesting alternative to face this large demand for chartered vessels."
Petrobras' logistics chief described the programme as a huge opportunity for Brazilian shipyards. If this sounds familiar, it is.
In 2008, Petrobras under the PT Workers Party government of President Luiz Inácio Lula da Silva launched the Renewal Plan for Offshore Support Vessels (known as Prorefam in Portuguese). Now, in 2024, Petrobras, under the PT Worker's Party government of the same President Luiz Inácio Lula da Silva, plans to contract 38 newbuild vessels at Brazilian shipyards.
Then, the Prorefam programme ran into the institutionalised bribery and corruption of the Lava Jato scandal, which showed that contracts were being awarded by Petrobras managers for their personal gain, as well as feeding kickbacks to politicians, including lawmakers from (wait for it) the PT Workers Party. State-owned start-up rig company Sete went bust amid lurid claims of Swiss bank accounts, rucksacks of money, and some serious jail time for many of those involved.
This time, Petrobras has assured everyone that it has a stringent compliance process in place and that there will be no Sete- and Odebrecht-style corruption.
With US$2 billion of estimated spend, what could possibly go wrong?
In 2021, we ran an overview of two of the biggest local players in the Brazilian offshore space – veteran Grupo CBO (founded in 1978) and newcomer Oceanpact, which embarked on an initial public offering and a massive fleet expansion programme, with not necessarily great results. The company's shares are half what they were when it first listed in 2021, but have tripled since their lows two years ago.
Grupo CBO was taken private with disastrous timing in 2013 by private equity interests but then swooped on Italian owner Finarge's fleet of five large anchor handlers that it purchased with great timing in 2021 for just US$94 million. Finarge Armamento Genovese remains a 5.6 per cent shareholder in CBO.
CBO's highly informative, but rather lack-lustre financially, first quarter 2024 results presentation is here. The company still harbours aspirations for a public stock offering, but has not yet achieved this. A few long-term, newbuild Petrobras contracts might be just the tipping point the floatation needs.
Now a new force has emerged to disrupt the Brazilian offshore market. The implausibly named Compagnie Maritime Monegasque (CMM) was for a long time a small player in the market with just a few Dutch-designed fast intervention vessels repurposed for oil spill response activities for Petrobras. Earlier this month, CMM announced it had secured US$94 million in financing from the private equity firm Summit Ridge Capital Partners, which it said will help the company construct an ethanol-powered fleet of PSVs to be built in Brazil, exactly in line with Petrobras specifications.
What is it with Brazilian companies and the sum of US$94 million?
The financing will enable CMM to recompose its shareholder structure and to expand its fleet, the company said. CMM is also believed to be able to access the Brazilian Merchant Marine Fund (FMM), which provides state-backed loans is to promote the renewal, expansion, and replacement of the Brazilian merchant marine fleet, and to support the development of the naval industry in the country.
Summit Partners provides the equity, the FMM provides the debt, and CMM provides the platform to operate the ships against long-term Petrobras charters.
There's a new national player in the making, clearly.
Whereas the Brazilian state has mercifully drawn the line at not owning shipyards and shipping companies in recent years, instead leaving Petrobras to charter vessels from private owners, such is not the case in Saudi Arabia.
We have already seen how the Public Investment Fund (PIF) has invested billions in Saudi Arabian rig owner ADES, and then listed a minority stake in the owner of over fifty jackup rigs on the Riyadh stock exchange last year, just a few months before Saudi Aramco announced the suspension of over twenty rigs, a quarter of its drilling fleet.
Surely that timing was a coincidence? The company still has a market value of US$5 billion and a fleet of over fifty rigs, however.
In March, PIF extended the reach of the Saudi Arabian state in the marine services sector when it bought 40 per cent of Zamil Offshore, one of the oldest Saudi offshore support vessel operators.
Zamil Offshore was founded in 1977 and is second only to Rawabi in Saudi Arabia in terms of market share and fleet size. Zamil operates more than 90 vessels in the Arabian Gulf, and it has formed the Zamil Mermaid joint venture with Mermaid Maritime of Thailand, which provides diving and inspection services to Saudi Aramco.
Zamil Offshore has operated Zamil Shipyards inside Dammam port in Saudi Arabia since 1999, and it has built seven UT733 design anchor handlers there over a decade ago.
With the Crown Prince's drive to diversify the Saudi Arabian economy away from oil, what are the odds that Saudi Aramco, like Petrobras, will soon be demanding locally built offshore support vessels?
Wait! That already happens in rigs, where Saudi Aramco has set up International Maritime Industries (IMI), which it says is the largest shipyard in the Middle East.
IMI is a joint venture with Saudi Arabian state-owned tanker owner Bahri, UAE rig-builder Lamprell and Korea's Hyundai Heavy Industries. Saudi Aramco's jackup drilling rig joint venture with Valaris, ARO Drilling, has already taken delivery of the first Saudi Arabian built offshore drilling rig, Kingdom 1, built at IMI. Aramco has guaranteed additional contracts to ARO for Saudi-built rigs.
Now, IMI has formed a joint venture with Zamil, imaginatively named National Shipbuilding Industries Company, which has a "temporary office" at the Zamil shipyard in Dammam.
In Saudi Arabia, local content increasingly seems to mean state-owned content, as the incestuous circle of government control over the economy only grows tighter with state-owned companies doing yet more deals with other state-owned companies. What could possibly go wrong?
So, too, in Qatar, where our Christmas prediction regarding Seadrill was proved correct. At the time, Seadrill had announced that it was looking to sell its three jackups West Castor, West Telesto, and West Tucana, all three of which were bareboat chartered by Seadrill to Gulfdrill, and, additionally, Seadrill's 50 per cent equity interest in the Gulfdrill joint venture. I wrote:
"At the risk of making a fool of myself later, which doesn't really concern me as I am both anonymous and humble, there can likely only be one buyer for these four Seadrill assets: Gulf Drilling International itself…
"With Seadrill already warning of 'heavy maintenance requirements' and 'idle time' in 2024, the sale of the three jackups and the Gulfdrill shares to the Qatari partners for, say, US$350 million would be a nice one-time gain for the company."
Guess what?
On Thursday, Seadrill announced that it has entered into "a definitive agreement to sell three jackup rigs—West Castor, West Telesto,and West Tucana (the "Qatar Jackup Fleet")—and its 50 per cent equity interest in the joint venture that operates these rigs offshore Qatar to Seadrill's joint venture partner Gulf Drilling International for cash proceeds of US$338 million."
So now we have a clean exit, a correct prediction, and a pile of cash for Seadrill. Well done to Seadrill CEO Simon Johnson.
Seadrill immediately announced its board of directors had decided to allow the company to repurchase up to an additional US$500 million of its outstanding common shares over a two-year period commencing after the current US$250 million share repurchase program is completed.
Our next anonymous and humble prediction? There is logic to Seadrill, now almost a pureplay deepwater rig owner – with 12 owned deepwater floaters, two harsh-environment semi-subs, and two remaining jackups – merging with another player.
My money would be on Diamond Offshore, which also exited the jackup sector in the last downturn and is also somewhat subscale, with just nine working floaters and two stacked semi-subs rigs in its own fleet, following its decision earlier this month to sell its laid-up, 50-year-old semisub rig Ocean Monarch for US$7.5 million for scrap.
The two companies even have the Seadrill owned drillship Vela (soon to be West Vela again) in common. The drillship is currently managed by Diamond until August when it returns to Seadrill management.
Buying back shares is nice, but kicking off the next round of industry consolidation… nicer!
And congratulations to what was Siem Offshore, which is now Sea1 Offshore after the exit of founder Kristian Siem, along with nine of the company's ships. Is Sea1's controlling shareholder – and self-professed collector of contemporary art and sculptures, wine connoisseur, and philanthropist – Christen Sveaas really so unimaginative with names?
And do these shipping magnates get their assistants to edit their Wikipedia pages, or does it only look that way? Evangelos Marinakis's page suffers from the same seeming sycophancy.
Background reading
More aggressive law enforcement in Nigeria involved the detention of ten Pacific Basin seafarers from the bulker Cooper Island who were arrested and detained when drugs were found in the ship's cargo of sugar upon arrival in Lagos from South America last year. It is not clear whether they have been released eight months on, but public comments from the Pacific Basin CEO recently suggest that they have not. The Nigerian authorities have never released given evidence to show how the seafarers were complicit in the smuggling and no conviction has yet been secured against them.
Perhaps someone in the industry press could investigate the fate of these ten men, now that the injustice of alleged sexism in the shipbroking industry has been exposed?
Another great overview of the entire Brazilian offshore scene comes from Wilson Sons investor presentation from March, which has a summary of the company's offshore PSV joint venture, Wilson Sons Ultratug, its towage unit, shipyards and supply bases. In 2023, the Wilson Sons Ultratug fleet of 23 PSVs earned almost exactly the same EBIDTA per ship as Tidewater, being US$1.6 million per vessel.
Unfortunately, since the Brazilian vessels originally cost an average of over US$40 million to construct or buy, the return on capital is, er, less impressive. CBO's equivalent return was around US$1 million of EBITDA per ship across its 44 vessels in 2023.
