"When you come to a fork in the road, take it," American baseball star Yogi Berra once said.
Maersk Drilling now admits that it stands at a crossroads, as per the title of the keynote speech given by Jørn Madsen, its CEO, at the IADC World Drilling conference on June 16, 2021, which you can read here.
But it is not clear how the world's largest shipping company will proceed, or whether Mr Madsen is, in fact, reading the map correctly.
The speech came on the back of good news for Maersk Drilling, which has seen its stock price more than double since November, as contract awards have flowed in, and a higher oil price has increased optimism across the whole drilling sector.
Indeed, Transocean has been emboldened by a six hundred per cent rise in its stock price over the same period (from 67 cents to close at US$4.04 on Friday) that it has announced it plans to raise up to US$400 million of fresh equity to reduce its leverage.
The good times are back for drillers, it seems. Give Transocean CEO Jeremy Thigpen a bonus, please. The poor man was paid "only" US$6.5million in 2020, when Transocean made a full year loss of US$567 million, down from a salary and bonus of US$10 million in 2019, when the company made a loss of US$1.2 billion (see here).
Can you imagine how much Mr Thigpen would be paid if Transocean were actually profitable?
Mr Madsen has reasons to be optimistic. Last month, Maersk Drilling announced it had agreed the sale of the laid-up Maersk Guardian jackup to LNG player New Fortress Energy, and that New Fortress had also agreed to buy a second laid-up jackup rig, Maersk Gallant, with closing anticipated this month (here).
Maersk announced that the total sales price for the two rigs is US$31 million in cash. The rigs were built in 1993 and 1986, and selling them will raise Maersk Drilling's fleet utilisation by nine per centage points (full fleet status in May is here).
Additionally, Repsol, the unlucky operator of the seemingly cursed Yme Field offshore Norway, agreed to let Maersk sell the combined drilling and production rig Maersk Inspirer for the mind-blowing sum of US$373 million, and then Repsol would bareboat it back from the new owners (here).
Yme is a field with a troubled history, having been shut in by Equinor before Talisman Energy decided to buy it and reactivate it again.
The previous Mobile Offshore Production Unit (MOPU) jackup on Yme had been built by SBM Offshore, and was the cause of a US$500 million insurance claim in 2013 (here), following engineering and construction problems, which prevented it from ever producing oil. Cracks were discovered in the legs of the unit in 2012, and the MOPU was evacuated.
Talisman cancelled the contract with SBM. SBM paid Talisman US$470 million, and Talisman then took the decision to remove and scrap the brand-new platform (here). Repsol took-over operatorship of Yme after buying Talisman in 2015. The MOPU was eventually removed by Allseas' leviathan Pioneering Spirit in August 2016.
Repsol must have breathed a sigh of relief when Maersk Inspirer was mobilised offshore in December last year for hook-up and commissioning ahead of production start-up later this year. Photos of the rig tow-out and the press release from the major are here.
When I say that US$373 million is a mind-blowing sum, it's not really clear how much of a good deal it is for Maersk, as the unit had been contracted by Repsol for "up to five years of options" on an "undisclosed rate," and Maersk has been very silent on how much it was spending on modification to the unit for the project. So, we can't work out what future cash flow is being lost by Maersk selling the rig, or how much was invested in the first place compared to the sale price.
Even stranger, the sale is to a company called Havila Sirius, rather than Repsol itself. Instead, Maersk Drilling will sell Maersk Inspirer to Havila Sirius, owned by the same Saevik family owners as Havila Supply, and the Yme licensees will then lease the rig from Havila Sirius under a bareboat charter, whilst all the existing crew are transferred to the Repsol payroll.
Anyway, the sale provides much-needed cash to Maersk Drilling, and any Yme problems now lie completely with Repsol. Well done.
Unfortunately, Mr Madsen's overview of the challenges of the drilling industry seems worthy, if unimaginative:
"There are basically three main issues we need to address. Firstly, our industry's long-term financial durability. Secondly, our response to the climate challenge. And thirdly, our ability to significantly increase the profitability of our customer's drilling projects."
To clarify the first problem, he stated that "there are simply too many rigs and too many players in our industry."
He hinted that the best solution would be consolidation and scrapping. Actually, the response to climate change is an integral part of this problem of rig over-capacity as well, in my opinion.
In the short term, Mr Madsen is probably right. But in the long-term, scrapping ten-year old assets for pennies on the dollar looks value-destructive, especially in the light of the second challenge of climate change.
Junking bad decisions and laid-up drilling rigs may be economically rational, but it also comes at the price of sacrificing future options.
We have seen laid-up rigs bought by SpaceX for cents on the dollar as launch platforms (here). We have seen other drillships sold to the Turkish state oil company, TPAO, which recently announced (here) the discovery of 135 billion cubic metres of gas in the Amasra-1 well in around 2,000 metres of water in the Black Sea near the Northern Sakarya Gas Field, bringing the total reserves to 540 billion cubic meters. Many more rigs have been scrapped in Turkey.
What's amazing to me is that Denmark was one of the first countries in the world to adopt offshore wind power. Denmark is home to the headquarters for Ørsted, in which the Danish state retains a significant shareholding, which has built up an impressive track record in offshore wind, and to Copenhagen Infrastructure Partners, a major institutional offshore wind investor and project manager.
Copenhagen is also home to Cadeler, former Swire Blue Ocean, which has two of the highest specification wind turbine jackups in the world in operation, with plans to upgrade them further, and plans to build two more X-Class units (here). The BW Group has joined Swire has a major shareholder in this venture.
Unfortunately, Maersk no longer owns Esvagt, and its private equity owners 3i Infrastructure and AMP Capital have just raised anther US$32 million to boost its windfarm plans in the US with Crowley (here).
Here's Denmark's largest operator of jackups selling its laid-up units for pennies, whilst its CEO observes that "the energy transition will be deep, fundamental and change many aspects of modern life." Duh!
Maersk Drilling, like its competitors, seems to see itself purely as a drilling company, rather than a company with expertise in jackups and floaters, which could be leveraged across many diverse uses.
Any future strategy regarding the energy transition will likely encompass LNG and offshore wind. Indeed, the two jackups Maersk sold to New Fortress Energy will be converted as LNG production MOPUs in the western hemisphere. You can read New Fortress' presentation on how it will use the jackups as production platforms to deliver its Fast LNG concept in the company's May presentation here.
Rather than being at the cutting edge of LNG technology and looking at new ways to deploy its assets, Maersk Drilling seems to be happy to sell steel, and compete with Transocean, Diamond, Valaris and Noble in the cutthroat business of contract drilling.
The company's "Stockholm Syndrome" like mentality was revealed by Mr Madsen's comments on his third point.
"Recently," he said, "Maersk Invincible completed a 30-well plug and abandonment campaign for Aker BP at the Valhall field offshore Norway, which achieved a reduction of more than thirty per cent of time spent per well. This meant that the work was finished years ahead of schedule, saving Aker BP costs in the order of US$600 million."
Of course, Aker BP isn't sharing these massive cost savings and benefits with Maersk; indeed, Maersk will be paid 30 per cent less revenue than it would have been had its crews not been so competent and energetic, and had just drilled the wells on time.
Despite Maersk Drilling losing US$1.2 million in 2020 even as it transferred huge benefits to its customers through greater efficiency, Mr Madsen naively said that "instead of competing for the biggest slice of the pie, we can make the pie bigger for everyone to share!" (His exclamation mark, not mine.)
If only Shell, BP, and the rest looked at the world in the same way, and actually shared the pie fairly with rig owners and vessel operators.
Already in offshore construction, Saipem, Subsea7, Sapura and Allseas have pivoted to wind and found ways of using their existing equipment to install offshore wind turbines to diversify.
Saipem has so far deployed its Saipem 7000 heavy-lift ship on a several North Sea wind projects including the Dogger Bank, Neart Na Gaoithe, and Seagreen wind farms in the UK, as well the installing the jacket and topsides of the offshore substation at the Saint Brieuc wind farm off France.
"As a company, we can do all aspects of installation for fixed-foundation wind farms, even though we don't have our own jackup," Guido D'Aloisio, Saipem's head of offshore renewables, told the industry press.
Jackups are what Maersk Drilling does, but only in oil and gas, it seems.
Even the Chinese yards have realised that flogging drilling rigs on the second-hand market is often a mug's game, and have realised that the assets can be deployed much more effectively in the wind farm space.
In 2019, SinoOcean was set up by the Chinese state to deal with the hang-over of abandoned newbuilding rigs and offshore vessels, whose owners had defaulted and left the units in Chinese shipyards.
Surprisingly, the Chinese government-owned company seems to have more imagination than Mr Madsen at Maersk.
This year, SinoOcean has opted to modify two abandoned jackup rigs to make them suitable for wind farm work and agreed bareboat agreements to charter two of its newbuild former drilling rigs to PowerChina Guizhou Engineering (PCGE), part of the utility company China Huadian.
Upstream reported that one of the jackups to be converted is a GustoMSC CJ46-X100-D drilling rig currently stacked at Wuchuan Shipbuilding Industry. The rig was ordered in 2014 from British Virgin Islands-registered, single-purpose vessel company Cyclotech Offshore, but was never delivered to the original owners.
The Norwegian publication stated (here) that the second jackup was a rig that had been ordered by China State Shipbuilding Company Leasing in 2014, and finished in 2018, then stacked.
CIMC Raffles shipyard has also completed the conversion of a jackup rig into a wind farm installation vessel, as it too looks to find alternative work for offshore drilling rigs.
Earlier this month, CIMC Raffles announced that it had delivered a converted Super M2 design jackup drilling unit as a wind farm vessel by dismantling the drilling tower and installing an 800-tonne lifting capacity crane instead. As a jackup drilling rig, the unit was called formerly Gulf Driller 5 and was managed by Bluewhale Offshore. The rig brochure is here.
The shipyard reported that the rig has been chartered by power utility contractor Huadian Heavy Industries to install a wind farm offshore Shandong province. CIMC Raffles also announced an agreement with Norwegian energy company Equinor to co-operate together on wind farm developments off China (here).
As we reported here, Boskalis is in the process of converting the former Transocean drillship GSF Jack Ryan as windfarm vessel at Dubai Drydocks in UAE.
It seems that the both the Chinese state shipyards and Boskalis have greater imagination than Maersk Drilling and its western compatriots.
I would be embarrassed to admit that I had handed US$600 million of value for increased efficiency to BP in Norway for nothing in return.
In the medieval period, gallows were often placed at busy crossroads (here), "so that justice could be seen to have been done and as a salutary warning to others."
Mr Madsen is correct that the drilling industry is at a crossroads. But he and his peers risk being left in the gibbets – fighting to the death a futile battle against each other for market share in oil and gas. US$70 crude prices have lifted sentiment but the benefits continue to accrue mainly to the oil companies, not their contractors.
What is required is vision and foresight. Nobody created a great company, or a great industry, by scrapping assets, and handing hundreds of millions of dollars of value to its customers for nothing in return.
Offshore drillers need to follow the road less travelled and show some imagination in how they use their skills and resources differently. Mr Madsen should throw his old roadmap away and embrace a new course.
