Last week (here) we looked at the impact of the horrific Russian invasion of Ukraine. Brent crude closed on Friday at US$118 per barrel. Russian artillery and missiles pounded Kyiv and Kharkiv, Russian troops occupied the Black Sea city of Kherson and besieged the port city of Mariupol on the Sea of Azov.
Commodity markets reacted with shock. Petrol prices in many countries across Europe are now higher than US$2 per litre (see here) and prices for natural gas in Europe and Asia touched new records. Meanwhile, the Russian ruble collapsed to an all-time low as Russian banks were barred from the Swift payment network, the Russian government was cut off from much of its foreign exchange reserves, and Facebook and Twitter were banned in the country. President Putin also threatened fifteen years of jail time for journalists in Russia who "spread lies" about the war.
In the EU, natural gas peaked at over €213 (US$231.87) per megawatt-hour on the afternoon of Friday, March 4, a stunning rise of 900 per cent since last February (see graph here). Traders remain concerned about supply disruptions from Russia, which accounts for more than 30 per cent of Europe's natural gas imports, even though oil and gas were explicitly excluded from the package of sanctions applied to Russia by the EU and UK since the invasion.
However, now the US government is reportedly considering a ban on imports of Russian hydrocarbons.
Consumers everywhere will feel the price squeeze from the war when they fill their cars with fuel, or receive their next household electricity or gas bills. Oil companies are scrambling to find new sources of supply, which is very positive for offshore drilling demand. BP's partner Kosmos Energy was quick to announce that the pair are considering a fast-track approval to accelerate development of their deepwater BirAllah gas discovery offshore Mauritania. BirAllah holds reserves of 15 trillion cubic feet (424.75 billion cubic metres) and is being earmarked as a liquefied natural gas project, which would target gas sales to Europe, reducing reliance on Russia. BirAllah will follow on from BP's Greater Tortue Ahmeyim LNG project to develop a 20 trillion cubic feet (566.33 billion cubic metres) gas reservoir that lies further south, directly under the maritime boundary of both Mauritania and Senegal.
Greater Tortue Ahmeyim's LNG facilities are currently under construction, with both Saipem and McDermott International chartering vessels to BP for the transport and installation of the various civil works at the LNG hub, risers, pipelines, and BP's condensate FPSO later this year.
Senegal and Mauritania now look well-placed as low-risk providers of gas to Europe now that the political landscape has been transformed by the war. BP is already moving ahead with Phase Two of the project to double its LNG export capacity (here).
Meanwhile, the Ukrainian people face a humanitarian disaster, as over a million have fled for their lives in the face of the Russian assault and the indiscriminate killing of civilians. This diary from Kherson (here) gives a feeling of the horror of the situation. Kherson is one of the major centres from which many of Ukraine's seventy thousand strong commercial seafarers hail. It is now under Russian occupation.
Crises have a habit of making what seemed good decisions turn sour, and turning around other positions. Some of the players who looked like they might lose from the crisis are now seeing surprising benefits, whilst unexpected links to Russia have emerged for others, following the imposition of sanctions.
For several years (here), we have been banging on about P&O Maritime Logistics' fleet of twenty module carriers; self-propelled, 123-metre-long, shallow-draught, narrow-beam barges that were purpose-built to transport production equipment through the Volga-Don canal system from the Black Sea to the Caspian for the Tengiz Project in Kazakhstan. We called them white elephants, which should have been written down over the course of the contract, and which we expected to have limited usefulness when the Kazakhstan logistics work wound down.
Fortunately for TengizChevroil, the operator of the Tengiz oil field, the transportation had largely been completed in 2021, for it is now clear that the Volga-Don canal system is unlikely to be opening this year. Mariupol, through which vessels transited from the Sea of Azov into the Volga-Don canal system, is currently a war zone, besieged by the Russians and under fierce bombardment, with thousands of Ukrainian civilians desperately seeking evacuation. Clearly none of the module carriers will be returning there any time soon. Bad news for P&O Maritime?
However, salvation for P&O has emerged from the roaring container market, where day rates for container ships have hit six-digit figures. The Khaleej Times reported last week that the company is in the process of "re-purposing" the module carriers as short haul container vessels (here).
Given the sizzling container vessel market, this seems a great example of "thinking out of the box". We commend P&O Maritime Logistics' CEO Martin Helweg on his initiative to try to create value from these legacy vessels now that the trade for which they were built is impossible.
With container capacity facing a squeeze, the synergy with P&O's Maritime's parent company DP World's ports business looks excellent. Bravo!
With access to the Caspian Sea now effectively closed, it is not clear what the impact on P&O's twelve offshore support vessels (OSV) on charter to BP in Azerbaijani waters will be. They could be trapped there, but if they are on long-term charter to BP, this scarcely matters.
The UAE has been ambivalent on action against Russian aggression, and was recently added to the money laundering "grey list" by the Paris-based Financial Action Task Force due to its failure to take serious measures to prevent money laundering into Dubai property and local bank accounts, amongst other assets. Dubai, Saudi Arabia, and their fellow members in OPEC have declined to increase production even as oil prices have spiked and consumers suffer. However, the Emirate was fast to suspend visa-free access for Ukrainians to prevent them seeking asylum in Dubai, and local airline Emirates continues to service Russia (here).
Long-term observers of Dubai will hardly be shocked that a city known for its bling and "no questions asked" mentality about the origins of cash has been censured for money-laundering. What took the Financial Action Task Force so long?
What's more worrying for the UAE as a whole, perhaps, is if the US authorities, in particular, start to dig into some of the unsavoury characters who now call Dubai home. But that's a story for another article.
It is not just the oil and gas markets that are reacting.
The copper price also hit an all-time high last Friday, with Mining.com (here) reporting that contracts for copper for delivery in May reached a record US$10,910 per tonne, up more than three per cent on the day. The orange metal is up ten per cent since the Russian invasion of Ukraine began in the final week of February. Russia is currently only a minor copper producer with less than four per cent market share in the mineral. Unfortunately, Chile, which is responsible for more than a quarter of global copper production, recorded its lowest January output since 2011, contributing to fears of global scarcity.
We'd noted (here) in February that subsea mining faced a tough challenge from two huge Russian minerals developments in Siberia, and the developments threatened to add lower cost capacity with big production volumes. One of these developments, the Udokan mine, was being pursued by oligarch Alisher Usmanov's USM Holdings. Udokan was based on an investment of US$7 billion in the mine 400 kilometres north of the border with China with annual production expected to be ramped up to 400,000 tonnes by 2026, around two per cent of global production.
We highlighted that this would be bad news for subsea mineral pioneer The Metals Company and even commented, "Whom do you trust to deliver copper to the market first, in large volumes, and most reliably? Gerard Barron of The Metals Company (market capitalisation of US$347 million as of close last Friday) and his merry band of subsea speculators, or Vladimir Putin's loyal team of oligarchs, with their billions of dollars in investment plans in new Siberian copper and nickel mines?"
Perhaps not our smartest call. Whilst we remain extremely sceptical about The Metals Company, Mr Barron's venture is actually looking a lot better than that of its Siberian rivals today, comparatively speaking.
Now Mr Barron will need to prove that his subsea nodule harvesting vessel, the converted drillship Hidden Gem operated by Dutch construction company Allseas, is up to the task of collecting the polymetallic nodules from the seabed of the Pacific Ocean in an environmentally safe and cost-effective manner.
When the sanctions on Russia were first announced and contracts with state-owned entities were forbidden by law, one obvious loser in the offshore space appeared to be Viking Supply Ships, owner of a fleet of ice-class anchor handlers and platform supply vessels (PSVs) suitable for Arctic operations. Viking also has the operational and technical management for the five Swedish state-owned icebreakers for the Swedish Maritime Administration. The company's shares are listed in Stockholm.
Earlier in February, the company announced a four-vessel contract win for an unnamed client in Russia for the summer of 2022, with options for 2023 and 2024. This contract would see the 250-tonne bollard pull anchor handlers Brage Viking and Loke Viking brought out of lay-up from Uddevalla.
The day after the 240-day firm charter with up to 660 optional days was announced, Viking's CFO resigned. The estimated contract value for the fixed days, including mobilisation and demobilisation fees, was around US$20 million, the company said. Unfortunately, Viking was forced to admit on February 25 that the sanctions and the war now made it likely impossible to fulfil its charter (here).
However, as day rates for anchor handlers have spiked at over US$100,000 per day in the North Sea spot market, staying at home in Aberdeen and not going to Russia this summer may prove more lucrative for the Swedish vessel owner.
Whilst media attention has fallen on Viking, we would suggest that scrutiny also needs to be turned to Sevnor, the mysterious Cyprus-based owner and manager of a fleet of both anchor handlers and PSVs and that is intimately connected to Russian state-owned firms.
Not much is known about the ownership of Sevnor, although VesselTracker.com states (here) that one of the owners is Gunnar Nordsletten, a Norwegian living in Russia. Nordletten's father was the Norwegian ambassador to Russia from 2000 to 2008 (according to investigative journalists at OCCRP here), and Nordletten himself was involved with former Moldovan Prime Minister Ion Sturza in an offshore company exposed in the Panama Papers investigation in 2015 (here). Ion Sturza has denied any wrongdoing.
We covered Sevnor's bareboating of several anchor handlers to Russian state entities here. In 2020, we observed that the former UT722LX large anchor handler Bourbon Surf, which Sevnor bought in February of that year out of lay-up in Norway, had been reactivated, renamed, and re-flagged to Russia as Finval.
The vessel promptly mobilised to Kaliningrad in the Russian Baltic to work on the Nord Stream 2 pipeline, which had to be completed by a purely Russian spread, after Swiss-Dutch contractor Allseas was prevented from completing the final section of the gas line by the first set of American sanctions on Russia. Nord Stream 2, the Swiss-registered but Gazprom-controlled company that owns the pipeline, now may or may not be bankrupt, depending on which source you believe.
Sister vessel Kazanin Explorer, the former Bourbon Borgstein, was also Russian-flagged, reactivated from lay-up by Sevnor and mobilised to the Arctic for Sevnor's close and repeat charterer MAGE, the Marine Arctic Geological Exploration joint stock company, which is controlled by the Russian government.
Both vessels appear to be in Murmansk at present.
In 2017, Sevnor had previously bought two large anchor handlers of UT722 design, both built in the late 1990s in Norway, and both laid up. These were Olympic Poseidon, purchased from Nordea Bank that February, as part of the restructuring of Olympic Shipping, which Sevnor renamed Sayan Cloudberry, and Stril Power, bought from Simon Møkster, which it renamed Sayan Power.
Miraculously, no sooner had Sevnor purchased Olympic Poseidon/Sayan Cloudberry that the company announced it had flipped the anchor handler and doubled its money, according to industry press. The buyers? Unnamed Russian interests, which renamed the ship Umka. In May 2018, Sayan Power followed Sayan Cloudberry/Umka to Russia, when the ship was bareboated to…Russian company MAGE on a five-year deal, and renamed Almaz under the Russian flag.
It's not clear how the company can be paid for these charters now, or how it could recover the vessels from their Russian disponent owners, either. Answers on a postcard to Cyprus/Oslo/Moscow, please.
Sevnor Management had already been named by Ukraine's representatives in a list of eight companies that were accused of violating previous American sanctions on Russia in 2021. The list can be viewed here and also includes Chevalier Floatels of the Netherlands for its ownership of the offshore supply ship DP Gezina, and Singapore's Intan OSV as owner of the 150-tonne bollard pull AHTS Errie, formerly Sanko Birdie.
Meanwhile it is not clear whether a company like Sevnor with such close ties to the Russian state will be able to keep operating in the North Sea, nor whether OSM will be able to continue to offer crew management services to Sevnor. In 2021, OSM announced it was crewing Sevnor's North Sea fleet, which includes Sayan Prince.
But we'll leave that question to others to answer.
Also exposed to Russia is new seismic player PXGEO, which has the seismic vessel Vyacheslav Tikhonov on bareboat charter to Russia's state shipping company, and former Swire Pacific Offshore partner in Russia, Sovcomflot. Vyacheslav Tikhonov was outside the reach of Polarcus' vengeful creditors and was quickly sold in its bareboat charter to PXGEO, which was set up as a newly founded seismic player run by former Polarcus CEO Duncan Eley and most of the former Polarcus management team. Now it is Russian-flagged and is lying in Vladivostok.
In a week when its biggest competitor Shearwater announced it was scrapping four of its older, laid-up seismic source vessels (here), PXGEO probably didn't need the complication of the war or the sanctions. But who does?
As the Ukrainian people continue to suffer under Russian attack, companies and their ties to Russia are going to face increasingly difficult questions.
Background reading
More information on the Tengiz Field Expansion in Kazakhstan is here.
We covered P&O's twelve vessel contract award in the Caspian Sea here.
Details of the Viking Supply Ships fleet is here.
Full details of Sevnor's fleet is available on the internet but their site sevnor.com may trigger your anti-virus warnings.
We covered the creation of PXGEO from the collapse of Polarcus in 2021 here.
For an often tragic but insightful view of the economic impact of the war, see Alex Nice's Twitter feed here.
You can also join economist Adam Tooze's superb substack blog here.
