This week we revisit some developments to our favourite stories, featuring all the usual suspects – crashing share prices for troubled European wind turbine players again, BP seemingly looking to wiggle around its Net Zero commitments through cunning ruses in Russia and Norway, a defeat for Shell in its efforts to explore in high potential geology off South Africa, as well as problems at Shell's Prelude FLNG facility off Australia again.
We close with what looks like potentially the riskiest investment by a shipping company since… since what? Since Greek shipping magnate Theodoros Angelopoulos lost most of his fortune in two deepwater drillships in 2015 when creditors seized his Metro Exploration Holding Corporation? Since our old friend Jacques de Chateauvieux saw his shareholding in Bourbon eviscerated in 2020? Since every other piece of ill-advised speculation by a cash-rich owner?
Read on!
Guess what? Offshore wind turbine installations in Europe hit a record in 2021, with 3.7 GW installed over the course of the year. The United Kingdom led the way with two GW of offshore turbine capacity installed, while the balance came from the Netherlands, Denmark, and France. Offshore wind is growing and growing.
In Asia, Taiwan and China pushed ahead with massive offshore installation programmes for windfarms as well. A rush to complete offshore wind turbine installations in China in order to obtain a favourable electricity price subsidy before year end led to a mad scramble to install a record capacity of five GW of new turbines in 2021. Clarksons Platou also reported a record newbuilding book for wind turbine installation vessels (WTIVs) in 2021, with 17 units on order, plus nine options.
The brokerage also reported that newbuild contracts for 15 service operation vessels (SOVs) were placed last year, constituting another record. Investment in offshore wind shows no sign of stopping.
But contractors have been struggling to make money. Eneti, the WTIV operator formerly known as Scorpio Bulkers, saw its share price collapse by more than 50 per cent over the last year. Despite its takeover of Seajacks (here) and the announcement of both an international newbuilding WTIV and a Jones Act-compliant unit (here), the shares closed at less than US$7 apiece last Friday.
Worse, Siemens Gamesa hit the market with a third profit warning, sending its shares plunging again (here). Another Britney Spears "Oops, I did it again" moment. Its German parent Siemens Energy, which owns about two-thirds of the company, saw its own shares fall 13 per cent at the same time.
The turbine manufacturer effectively reported that it cannot currently make turbines profitably and that it expected to incur a hit of over US$300 million to profits in the quarter up to December 31 due to those old excuses: "supply chain tensions," "the Covid-19 pandemic," and "onerous contracts".
In fact, for the whole of the year up to September 30 2022, the company forecast that there would be no profits at all, due to these "volatile market conditions". In the best case, Siemens Gamesa foresaw margins of just one per cent before interest was paid on its US$1.2 billion of debt, before it paid taxes, and before the inevitable integration and restructuring costs were included. In the worst case, it would have negative EBIT margins and bigger losses.
The company has a total order backlog of over US$36 billion at the end of the last quarter. But if it loses money on all the orders, why bother?
Not surprisingly, "mismanages" is an anagram contained within "Siemens Gamesa."
Denmark's leading wind turbine manufacturer Vestas also shocked the market on January 26, when it also issued a profit warning (here). Vestas reported what it described as an "underlying operating profit margin" of just three per cent for 2021, below its previous forecast of four per cent and well below its initial guidance of six to eight per cent. It said that it expected its margin for 2022 would be between zero and four per cent.
"The industry must show the discipline needed to protect profitability and improve value creation in the long term," commented Vestas chief executive Henrik Andersen.
Vestas's shares have fallen 40 per cent since November. We maintain that unless they can get their houses in order, Europe's wind turbine manufacturers face the same fate as the continent's solar panel makers – completely wiped out by state-owned Chinese competitors.
However, even as clouds darkened around Siemens Gamesa and Vestas, and even as its competitor Eneti plunged, WTIV owner Cadeler was boasting of new contracts with Vestas last week (here).
"The contract with Vestas adds yet another important project to our strong order backlog and further highlights our close relationship with clients in the industry," said Cadeler chief executive Mikkel Gleerup.
One of the lessons of any business is that if your customers are hurting, you can expect to share the pain, too. We can expect to see Vestas and Simens Gamesa sharing their suffering with suppliers in the year ahead.
Cadeler investors beware!
In 2020 BP announced to the world (here) that it would become a net zero company by 2050 or sooner, and would also help to get the world as a whole to net zero. The company pledged to increase the proportion of investment into its non-oil and gas businesses over time.
This trend continued when the results of the long-awaited Scottish wind acreage were announced last week – see Press and Journal coverage here.
Nearly US$1 billion will be paid in option fees by the 17 successful bidding consortia for licences with a combined potential generating capacity of 25 GW. The proceeds will be passed to the Scottish Government for public spending.
The auction was a big win for Edinburgh, with more than 2,700 square miles (6,990 square kilometres) of seabed dedicated to both fixed installation and floating wind operations.
BP paid out the biggest option fee of all, £86 million (US$115 million) for a fixed 2.9MW licence. No surprise there.
An optimist might say that the company is putting its money where its mouth is.
A realist might read the small print associated with BP's net zero announcement. As part of commitment, BP announced that it will cut its oil production by 40 per cent by 2030.
What BP doesn't highlight is that there's a carve out around its non-operated production. About ten years ago, BP sold out of its massively profitable joint venture in Russia, BP TNK, after being pressured by the Russian government.
BP received US$12 billion in cash from Rosneft for its stake in BP TNK, and also shares in Rosneft, the Russian state-owned oil producer. Mr Looney is now a director of the Russian company, which is 70 per cent owned by the Kremlin. Rosneft accounts for around one third of BP's actual production, and BP currently holds a 19.75 per cent stake in Rosneft.
In 2020, Rosneft announced it would spend US$111 billion on the Vostok project, onshore in the Russians Arctic on Siberia's Taymyr peninsula, the northernmost part of the Asian continent. The project will see Rosneft exploit over 30 billion barrels of recoverable reserves, with peak production estimated at 1.8 million barrels per day. BP's share of this is excluded from its net zero commitment.
So, BP can achieve Net Zero and still own a fifth of a Russian oil company, which currently produces over four million barrels a day of hydrocarbons, and may be producing over six million by 2030.
But Rosneft is not the only oil company in which BP holds a large stake and which is ramping up production. In Norway, BP owns half of Aker BP, in conjunction with Kjell Inge Røkke's the Aker Group.
In late December, Aker BP announced it was becoming Europe's largest independent oil producer after it agreed to a US$14 billion cash and shares deal to take over all the petroleum activities of Sweden's Lundin Energy. Aker BP will payout US$2.2 billion in cash and issue about US$11.7 billion of its own shares to buy out the Norwegian oil and gas production of the target.
"We are now creating the exploration and production company of the future, which will offer among the lowest CO2 emissions, the lowest cost, high free cash flow and the most attractive growth pipeline in the industry, with a high dividend capacity combined with a strong investment-grade credit rating," Aker BP's chief executive Karl Johnny Hersvik remarked.
The combined Aker BP Lundin will have production of about 400,000 barrels of oil and gas per day, with reserves of 2.7 billion barrels of oil, and it will be the second-biggest producer in Norway. The Financial Times reported here that Aker will own 21 per cent of the newly merged company, BP 16 per cent, the Lundin family 14 per cent, and other shareholders 49 per cent.
"Creating long-term value for shareholders has been at the core of this business for 20 years since inception," Lundin's chairman Ian Lundin said of the deal, "and this combination of Lundin Energy and Aker BP is a unique opportunity to create a future-proof independent exploration and production company, exposing shareholders to a business with significant scale, production growth and strong free cash flow into the next decade."
And, of course, Aker BP is now conveniently "off-book" for BP's net zero purposes. At this rate, BP could be net zero in 2050 and still hold stakes in millions of barrels of daily oil production.
Hmmm… That's "future-proofing," but not in the way most of us would understand it.
In our Christmas round up (here), we looked at how Shell had overcome both an initial legal challenge from Greenpeace and a demonstration headed by giant fish puppets against its plan to conduct a seismic survey with Shearwater's vessel Amazon Warrior off the Wild Coast of South Africa. Its legal success was short-lived, however.
Just before New Year, the high court in Makhanda issued a judgement that Shell had to halt the seismic survey (local press coverage here).
Shell declared force majeure on the activities, Amazon Warrior aborted the survey and was back in Cape Town on January 3, before sailing to Las Palmas and arriving in Farsund in Norway last week (AIS data here). It's not clear whether Shell will ever be able to continue the exploration, which is a shame as further offshore gas development might enable South Africa to reduce its dependence on state electricity company Eskom's dirty and unreliable coal-fired power stations.
Greenpeace is now attempting to block another survey on the west coast of South Africa, alleging that seismic "blasting" will harm marine wildlife (here).
One step forward, one step back. Fifteen months ago we covered (here) how Shell's US$17 billion Prelude floating LNG project off Australia had been shut down since February 2020. It finally restarted production in January 2021. Now it is out of service again.
On December 2, an electrical fire in an enclosure that housed batteries for backup power resulted in a complete loss of power at the facility. The small fire triggered an emergency shutdown that depressurised the Prelude FLNG production plant, and diverted all the gas in the system to be flared off. There must have been a spectacular fireball atop the flare tower, and a carbon emissions nightmare. Unfortunately, Prelude depends on its produced gas to generate power, and the three diesel backup generators for emergency power all failed.
The fire was thankfully put out quickly, but without power for the air conditioning system onboard, seven crew suffered heat-related injuries, with some requiring drips.
And whilst the crew were suffering from the heat, the vessel itself was at risk from the cold, from the super chilled LNG cargo stored at minus 162 degrees Celsius.
Reports in the Australian media based on the safety regulator's report into the accident have revealed how the Prelude blackout risked causing a "catastrophic failure" of the structure of the FLNG facility, as the steel of the vessel cooled due to the power outage. This jeopardised the integrity of the deck supporting the 80,000 tonnes of gas processing equipment onboard. You can read Peter Milne' excellent coverage here.
The crew battled to restore power for several days as lighting, IT systems, radio and other communication systems, fresh water and sewage treatment were all out of action. Power is now restored, but the vessel remains out of service.
Prelude is an impressive piece of engineering. At 488 metres LOA, the FLNG facility is longer than the Petronas Towers in Kuala Lumpur are high. It displaces 600,000 tonnes when fully laden, the same volume of water as five of the largest aircraft carriers in the world. Some 260,000 tonnes of steel went into building the hull and topsides.
At 74 metres wide, it is wider than the wingspan of a Boeing 747 Jumbo jet (64 metres). The mooring turret, designed by SBM, is nearly 100 metres high. It cost around US$17 billion. However, all of this is nothing if it can't safely and reliably produce LNG.
The latest shutdown means that Prelude has produced LNG for less than two years in the past four years. It was late, overbudget, and is now on its second extended shutdown for safety.
ENI's Coral Sul FLNG unit has now arrived in Mozambique for hook-up and commissioning there (press coverage here). Let's hope that ENI can do a better job of running that unit than Shell has with Prelude.
The world needs FLNG, and Prelude has been a fiasco.
If ever there was evidence needed that the 2021 surge in container rates has left the big carriers with too much money burning a hole in their pockets, here's proof: a press release (here) confirming that the Swiss-headquartered container line MSC is looking to buy a chunk of ITA Air, the successor to Italy's disastrous flag carrier Alitalia.
In only the 21 years since the turn of the millennium, Alitalia managed to make cumulative losses of over US$12 billion, (nearly enough to pay for a non-functioning FLNG vessel), and the airline was a byword for bad management and chronic losses. Alitalia handed over millions of euros of bad debts to the Italian government when it finally liquidated last October, after years of claiming state aid. ITA Air emerged from the ashes of Alitalia, with the same livery of the Italian national colours, the day after the latter was shut down.
The world's largest container line at the end of 2021 is partnering with Lufthansa on the bid, and MSC reckons that the opportunity for air cargo "synergy" makes it worthwhile to bid for the new airline, which is controlled by the Italian Ministry of Economy and Finance.
Alitalia always had a dreadful reputation for customer service, and a chaotic and unreliable schedule… so, there's actually a great cultural fit with one of the major container lines.
Meanwhile, last year the number of container vessels ordered surpassed all those ordered in 2017, 2018, 2019, and 2020 combined, according to VesselsValue. Clarkson Research has calculated that boxship orders reached a total of 4.2 million TEUs of capacity in 2021, which brings the current orderbook for containerships to a total of 5.7 million TEUs.
This is equal to a quarter of the entire global containership capacity.
What could possibly go wrong? This time its different? Yeah, right!
Background Reading
More on BP and Rosneft here.
Rosneft's 2030 strategy was released just before Christmas (here) and to its credit the company does commit to a 25 per cent reduction in absolute emissions (Scopes 1 and 2 versus 2020 level), and the "implementation of additional projects related to the development of natural forest sinks, and carbon capture and storage. As an interim target, emissions to be reduced by five per cent by 2025."
Greenpeace's coverage of their legal win against Shell in South Africa is here.
More on the demise of Alitalia and the phoenix-like rise of ITA here.
Ahead of the Winter Games in Beijing, the Chinese government says that "You Are The Miracle"here. No, really, you are!
