In Saudi Arabia, Qatar and the UAE, public investment by petro-states is increasingly focused on squeezing out private sector businesses in oilfield services, especially international ones. This is leading to state-owned companies competing with one another in the region. Drilling rigs, supply vessels, and even forklifts and mobile cranes have now joined VLCC tankers and refineries as investments by these rich Gulf states.
Does this symbolise an excessive mission creep by the state oil companies and the state investment companies that they feed?
In December (here) we looked at how the falling value of offshore assets had led BW Energy and Perenco to build up their own offshore drilling and production fleets, buying units from distressed players and putting them to work on in-house projects.
We noted that none of the major oil companies or independents were copying them, preferring to lock in low charter rates instead, through long-term frame agreements with key contractors – such as the one signed between ExxonMobil and driller Noble Corporation for Guyana in February 2020 (a "unique commercial enabling agreement" described here), or were struggling to escape the legacies of high-price, long-term contracts that they signed at the top of the market, such as the Bully deep-water rig joint ventures terminated between Shell and Noble in late 2019, and discussed by analyst Vladimir Zernov here.
The one exception has proved to be the Gulf states, where a massive splurge of capital on oilfield services companies is ensuing, led by state oil companies and state investment funds. Do it yourself is now the latest Gulf fashion offshore.
Saudi Arabia, ever prolific in its investment, including those in US$450 million paintings purportedly by Leonardo da Vinci (here), and ADNOC, the state oil company of Abu Dhabi, lead the splurge. However, Qatar and its Milaha investment company, and Dubai are also players.
Companies rumoured to be on the ADNOC shopping list are conveniently based in Abu Dhabi: the highly leveraged lift-boat player Zakher Marine Services; Stanford Marine, which was recently rescued by a royally connected private equity company called Shuaa Capital; and the rags-to-riches tale of hard work and savvy fleet expansion that is Allianz Marine Services, a company that often seems to have the inside track on key contracts in the Gulf.
In April last year, after Saudi over-production had led to a massive fall in the oil price during the first wave of lockdowns, Reuters reported here that Saudi Arabia's sovereign wealth fund, the Public Investment Fund (PIF), had accumulated stakes in four major European oil companies: Shell, Total, Equinor and Eni. The wire service reported the PIF building a billion US dollar position across the oil players, which had plunged to huge losses when the oil price collapsed, and had seen their share prices fall sharply. Hmm…
The PIF has a mandate to help move the Kingdom away from its historic reliance on oil revenue, according to Prince Mohammed Bin Sultan, Saudi Arabia's heir to the throne and purported leader of the conspiracy to assassinate and dismember journalist Jamal Khashoggi. PIF jets were used to carry the murderers to and from Istanbul, according to CNN (here). PIF also received the proceeds of the IPO of Saudi Aramco in 2019 (here).
Apart from aiding his efforts to murder his enemies, the prince has set the PIF six targets by 2025, according to Al Arabiya (here): doubling assets under management to reach US$1.07 trillion (with a "T"), creating 1.8 million jobs, both directly and indirectly, investing at least US$40 billion annually in the Saudi Arabian economy, contributing US$320 billion to non-oil GDP in Saudi Arabia, and raising the local content contribution to 60 per-cent in PIF and its portfolio companies (whatever that may be).
So, no one was more surprised than us to find that the Saudi Arabian investment fund dedicated to escaping dependence on oil was, er, buying an offshore drilling company.
This is especially strange as Saudi Aramco, in which PIF is the majority shareholder, already has a drilling company, ARO Drilling, a joint venture with Valaris. ARO Drilling owns seven jackup rigs and leases in another nine from its shareholder Valaris (the fleet list is here). It has a stated objective of being "committed to purchasing up to 20 newbuild jackup rigs over 10 years, taking delivery of the first rig as early as 2021, in order to meet Saudi Aramco's offshore drilling requirements in the Kingdom."
Aramco, in order to align with King Salman's 2030 Vision for Saudi Arabia, has also invested in a large shipyard and fabrication yard, International Maritime Industries in Ras Al-Khair on the east coast of Saudi Arabia, a joint venture between Saudi Aramco, Lamprell, Bahri and Hyundai Heavy Industries. The joint venture has funding of US$5.6 billion and claims it will create 80,000 jobs for Saudi Nationals by 2030, as well as allegedly contributing an estimated US$17 billion to Saudi Arabia's GDP.
At the start of this month PIF announced it was buying the UK-listed driller ADES International Holdings for US$516 million. ADES is the owner of 12 drilling rigs, a MOPU and a jackup barge, working offshore Egypt and Saudi Arabia, plus a fleet of land rigs working in Saudi Arabia, Kuwait, Egypt and Algeria. It also has over US$600 million of debt.
That investment will propel PIF to third place among operators of jackup rigs in the Red Sea and Arabian Gulf. However, the ADES fleet is one of the oldest in in the industry.
ADES' offshore drilling began with the purchase of the jackup barge Admarine II in 2004. This unit is still in the fleet that PIF is acquiring and was built in 1982. From 2012 onwards, ADES acquired nine legacy jackups constructed between 1974 and 1981 from Transocean, Paragon Offshore, Diamond Offshore, Hercules Offshore, KCA Deutag and TODCO.
Quite why buying vintage rigs from a UK-listed company is in Saudi Arabia's national interests is not clear, unless, perhaps, PIF wishes to start a maritime museum of antique drilling units refurbished by ADES' enthusiastic CEO Dr Mohamed Farouk.
Dr Farouk assured the industry press here in 2017 that the old units, "were all well maintained by their previous owners." I am sure they were.
Rather than buying ADES, which has only six jackups in the Kingdom, it would perhaps have made more sense for PIF to buy out Valaris, which is the second largest rig operator in the region, and the joint venture partner in ARO. Freshly out of Chapter Eleven bankruptcy protection, as it announced on March 3 (here), Valaris would come with only a negligible debt burden and with a much larger, more modern fleet than ADES.
But wait, there's more. Not content with owning two competing offshore drilling companies, the Saudi state also owns a controlling interest in a third. The number five player at the table, the Arabian Drilling Company (ADC) owns seven jackups working in the Kingdom. ADC is a partnership between the Industrialization and Energy Services Company (TAQA), which owns 51 per cent, and Schlumberger.
Guess who is the largest shareholder in TAQA? That would be the Saudi government through its holding company – PIF, of course (here).
"TAQA is owned 45 per cent by the Saudi Government, while the remaining 55 per cent is owned collectively by joint stock companies and several private and industrial investors representing a cross-section of the Saudi industrial community."
The crown prince has created an ill-conceived jumble of competing drilling companies working for the same client, his own state oil company, with the same ultimate beneficial controlling interest as that client: himself. So much for Vision 2030.
A quick examination of the underlying details of the graphic above shows the dominance of Gulf state players in the drilling market beyond the tangled web of Saudi involvement in ARO, ADC, and ADES.
The number one rig owner in the Gulf is ADNOC Drilling. ADNOC also has a 2030 Vision. "People with visions should go to the doctor," said former German chancellor Helmut Schmidt, and this equally true of companies.
ADNOC Drilling has effectively driven out nearly all foreign rig competition from Abu Dhabi and has partnered with Baker Hughes to provide fully integrated drilling services and well construction. Goodbye, Schlumberger and Halliburton.
Earlier this year, ADNOC Drilling bought a nearly new jackup from Shelf Drilling for US$78 million (as we reported here).
Drilling isn't the only area where ADNOC has been making big investments to take activities in house. It owns 70 per cent of the National Petroleum Construction Company (NPCC), which builds and installs topsides, pipelines, and jackets, and competes with McDermott and Saipem even outside the UAE, although Abu Dhabi remains its most important market and headquarters.
NPCC was established in 1973 and is 70 per cent owned by SENAAT, an Abu Dhabi Government Holding Company, and Consolidated Contractors Group (here).
With oil prices now back to their pre-crisis levels, ADNOC has been diversifying significantly, and spending significantly. In February it announced its ADNOC Logistics and Services (ADNOC L&S) division was buying six VLCCs, three of which are newbuilds. This follows the example of Kuwait Oil Company, which has long been a major player in the tanker market with ten VLCCs, and Saudi Aramco, which owns 29 tankers, mainly VLCCs, through its subsidiary Vela International Marine, established in 1984.
In addition to its new VLCC fleet, ADNOC L&S confirmed the order of five newbuild and one recent second-hand dual-fuel very large gas carriers (VLGCs) for AW Shipping, its joint venture with China's Wanhua Chemical Group. It also, very randomly, recently announced the purchase of four bulk carriers (three Ultramax and one Handysize).
Not content with buying ships, ADNOC then also bought the entire UAE assets of Speedy Hire, the equipment rental company. This, ADNOC announced, adds "more than 2,000 pieces of equipment, including cranes, forklifts, fire trucks and other high-value machinery used for offshore and onshore material handling services."
Those rental forklift trucks are suddenly "high value machinery?" Really? You have to admire the PR people working for ADNOC, if not the strategists behind the purchase.
At the core of ADNOC L&S' offering is a mixed bag of offshore support vessels, mainly ordered at the peak of the market before 2014 to very high specifications. These vessels were acquired when ADNOC consolidated its erstwhile offshore supply vessel fleet, formerly called Esnaad, with Irshad, its terminal tug business, which was itself born of a joint venture with Lamnalco.
The legacy Esnaad business operated fifteen DP2 platform supply vessels (PSVs), ten anchor handling tug supply vessels (AHTS), and 27 miscellaneous units ranging from water taxis to landing craft, whilst Irshad brought 21 terminal tugs, mainly ASD tugs, nine diving support and maintenance vessels, ten mooring and line boats, and seven pilot boats and crewboats to the party. These are employed primarily on ADNOC's own fields and offshore terminals in Abu Dhabi waters and provide a stable core of long-term chartered boats for the ADNOC fields.
The latest investments create a sprawling marine conglomerate within ADNOC with both international ambitions, forklift trucks in the industrial area of Abu Dhabi, and a complete lack of focus. There are no synergies between the various assets being acquired, and there is an increased lack of competitive tension within Abu Dhabi's marine services market.
There are rumours in the regional press (Gulf Business – here) that ADNOC may buy either or both of Zakher Marine Services with its fleet of liftboats and mixed bag of OSVs, or Allianz Marine Services. Allianz decided not to buy Pacific Radiance (as we reported here), and has instead recently been an aggressive beneficiary in Swire Pacific Offshore's "sale of the century" (here), buying two large accommodation barges (Pacific Intrepid and Pacific Installer) and two older anchor handlers from the shrinking Singapore-based owner.
Market sources suggest Allianz will place the units with ADNOC for its massive Hail and Ghasha gas projects, if ADNOC does not first buy Allianz as a whole.
Recently rescued Stanford Marine might be another candidate, although its fleet is more internationally focused.
The new purchases put ADNOC on a direct strategic parallel with Qatar Petroleum (QP). You will note from the table that Gulf Drilling International (GDI) owns six jackups. And guess who owns GDI?
GDI was originally formed as a joint venture between the state oil company QP (60 per cent share) and Japan Drilling Company (JDC) with a 40 per cent share. In July 2007, QP acquired another 10 per cent interest in the company from JDC's shareholding, raising its ownership to 70 per cent. Then in April 2014, when oil was sizzling hot, the Qatari government agreed to acquire all of JDC's 30 per cent shareholding in GDI.
GDI is now part of a public shareholding company owned by individual investors and select institutions including QP, but its chairman is His Excellency Sheikh Khalid Bin Khalifa Bin Abdulaziz Al Thani, who also happens to be prime minister of Qatar and Chairman of QP itself.
It is not surprising then, that in May 2019, GDI was awarded six of the eight offshore jackup drilling rigs to execute the US$28 billion North Field Expansion Project for QP. Following the award, GDI formed a 50-50 joint venture with Seadrill to manage and operate five jackups on hire to QP. GDI announced here that the five contracts are worth US$656 million.
But, of course, like ADNOC, the government of Qatar doesn't just own drilling rigs – it also owns eight LNG carriers, a bunch of harbour tugs, and pilot boats, and some product tankers and ammonia carriers, through its Milaha investment company.
And like, ADNOC L&S, Milaha owns its own captive fleet of OSVs used in its home market: Halul Offshore, which has a fleet (here) of 32 OSVs built mainly in China and India and mainly servicing QP.
No surprise that the former CEO of Halul Offshore, Vivek K. Seth, is now the Senior Vice President, Marine Services at ADNOC L&S. The strategies are the same, and in my view, equally flawed.
Of course, the government of Dubai hates to be outdone by the government of Abu Dhabi or Qatar, which is why the region has three of the world's largest airports and three of the world's largest international airlines packed into the space of a small post card geographically.
In 2019, DP World, the state-owned port company known for its worldwide network of terminals and the remnants of the P&O fleet, purchased Topaz Energy and Marine, as we reported here. This US$1 billion transaction valued the company at book value, a good deal for the shareholders and lenders, who swapped a shaky private company as counterparty for the sovereign status of Dubai. A good deal, especially given the approach to depreciation on key assets which we had identified here.
This brought Topaz's 117-vessel fleet sail under the control of the government of Dubai. The fleet was quickly rebranded P&O Maritime Logistics, and many of the largest PSVs were laid up in Spain when the market downturn hit less than a year later. One of Topaz's largest customers was…Saudi Aramco, of course.
And how galling for ADNOC L&S and Milaha in Doha that the Dubai-owned OSV fleet is actually larger than theirs!
Over and over, the sovereign wealth funds of the Gulf have shown themselves to be prey to conflicts of interest, and to poor management. Two senior directors of Abu Dhabi's International Petroleum Investment Company, a previous sovereign wealth fund, were jailed in 2019 for their involvement in corruption (here) and must jointly repay the US$336 million that they embezzled.
The Gulf sovereign funds have created confused and conflicted investments in overlapping marine services and drilling businesses, which are a long way removed from their core role as oil producers.
Their market timing has consistently been found to be poor – with QP buying the minority interests in GDI in early 2014, for instance, and DP World buying Topaz shortly before the offshore market collapsed last year, and Esnaad ordering its newbuilds in 2013 at the OSV shipyard pricing peak.
Removing the private sector from business in the Gulf may appeal to the statist interests of the sheikhs and princes. They like the prestige and control. Indeed, Crown Prince Mohammed bin Sultan in Saudi Arabia began his control of the kingdom by detaining most of the country's private businessmen in a five-star hotel in Riyadh, the Ritz Carlton, and forcing them to sign over their assets to him (here).
If you want your cost of production to be low, creating state-run monopolies to provide services to your offshore oilfields is probably not a great way to start.
One of the recurring themes of the corruption stories we regularly run is how state-owned oil and gas companies are vulnerable to capture by crooked leaders. The Middle East is no different, and governance standards and transparency are often lower. "Those who cannot remember the past are condemned to repeat it," as the philosopher George Santayana wrote.
And if you truly want to diversify your economy from dependence on oil and gas, buying an assortment of aged jackup rigs is probably not a great way to start (i.e. PIF buying ADES).
I don't see this overreach having a happy ending for the companies involved.
Background reading
You can read ADES' most recent results presentation for the first six months of 2020 here
The Kuwait Oil Tanker Company fleet list is here
The documents establishing the link between the planes used by the assassins of Jamal Khashoggi, and the Crown Prince and PIF, were filed by a group of Saudi state-owned companies as part of an embezzlement suit they opened last month in Canada against a former top Saudi intelligence official, Saad Aljabri (here).
Zakher Marine Service website and fleet list is here.
