Battle of the super- rigs
Norwegian entrepreneurs plan to give U.S. oil rigs stiff competition
Norwegian billionaires John Fredriksen and Kjell Inge Roekke are racing to build some of the world’s largest oil rigs, with decks the size of soccer fields and legs able to resist 10-story waves in the icy Arctic Ocean.
They are part of a fundraising flurry in Oslo to finance potentially more than 40 floating rigs that may cost US$15-billion to US$20 billion, estimates Ole Slorer, a Morgan Stanley analyst.
Rig leases have climbed to records, exceeding US$400,000 a day for the biggest rigs, as companies such as BP Plc move to deeper waters in search of new oil and gas reserves. The new rigs, costing as much as US$600 million each, may turn the boom to bust, says Kristoffer Stensrud, chief investment officer at Stavanger Fondsforvaltning.
“It resembles the situation we saw in the Internet industry,” says Mr. Stensrud, 52, who oversees the equivalent of US$4.8-billion in stocks and bonds, including shares of Fredriksen’s rig unit SeaDrill Ltd. “ We are near a point where the market is entering an irresponsible phase. Some of the deals have maximum project, shipyard and organizational risk.”
Today, oil companies face the worst shortage of rigs in more than two decades, according to Jan van Bohemen, Middle East marketing manager for Ensco International Inc., a Dallasbased rig owner. Hurricanes Katrina and Rita damaged 24 rigs on their path to the Gulf Coast, highlighting the scarcity. That’s got investors’ attention.
The dearth of operational rigs has delayed the search for and development of new energy deposits. Oil companies are ramping up exploration, fueled by record energy demand. Crude oil rose to a high of US$70.85 a barrel in New York on Aug. 30 on concern the hurricanes would threaten supplies. Prices have since slumped to US$62.75 a barrel as higher fuel costs cut demand.
“Deep-water drilling is the biggest growth area in the rig industry,” says Rod Hutton, senior editor for rigs at consulting firm ODS Petrodata in Aberdeen, Scotland. “Everybody is betting that a lasting high oil price will provide continued strong rig demand.” He says the record lease prices aren’t sustainable.
Mr. Fredriksen, 61, amassed Norway’s biggest fortune with oil tankers. He built Frontline Ltd. into the world’s largest operator in the industry by capacity. Mr. Roekke, 46, saved
Kvaerner ASA, a Norwegian shipbuilder and engineering company, from bankruptcy in 2001.
Oslo’s over-the-counter market has become a hub for the financing frenzy because it has limited legal and regulatory costs compared with the U.S., says Morgan Stanley’s Mr. Slorer, who is based in New York. Norway is the world’s No. 3 oil exporter behind Saudi Arabia and Russia, and the third-richest country after Luxembourg and the U.S.
Mr. Slorer went to Oslo last month to meet executives from Fredriksen’s SeaDrill, which is incorporated in Hamilton, Bermuda; Stavanger; Norway-based Smedvig ASA, the country’s biggest owner of oil-drilling rigs; and Oslo-based
Fred Olsen Energy ASA. Smedvig has spent US$100-million for almost 40% of Eastern Drilling ASA, which is based in Grimstad.
Eastern Drilling has ordered a US$528-million deep-water rig from Samsung Heavy Industries Co. in South Korea for delivery at the end of 2007. The socalled sixth-generation rig has satellite- guided thrusters to keep the platform in position even as waves pound it and sea currents pull at its hull.
“ We left Norway with a very clear message,” says Mr. Slorer. “ There is a significant amount of exuberance in the offshore drilling market with a distinct taste now for the deep water, largely of a speculative nature.”
Fredriksen’s SeaDrill will be better equipped to compete against the world’s biggest rig companies, such as Houstonbased Transocean Inc. and Diamond Offshore Drilling Inc., and Noble Corp. of Sugar Land, Texas, than its Norwegian rivals, says Tor Olav Troim, a director of SeaDrill and other companies controlled by Fredriksen.
Fredriksen will try to avoid repeating mistakes made in the previous rig boom in 1997. That year, he listed a company called Northern Offshore on the Oslo exchange. Then the market turned, oil prices plunged to as low as US$10.35 a barrel and energy companies cut spending. Northern Offshore proceeded to default on its loans.
Founded in May, SeaDrill aims to become one of the world’s top five rig companies, Troim, 42, says. It has raised US$854.5-million selling shares, and committed to US$1.16-billion in rig investments through 2008. The company owns five rigs and has seven on order, of which three are semi-submersibles able to drill in waters as deep as 10,000 feet ( 3,048 metres).
To expand quickly, SeaDrill has spent about US$450-million on acquisitions, including stakes in Sandnes, Norway-based Ocean Rig ASA and Indonesia’s PT Apexindo Pratama Duta.
SeaDrill’s shares have more than doubled in value to 48.5 kroner since they began trading May 30 on Oslo’s over-thecounter market, valuing the company at 10.7-billion kroner (US$1.6-billion). The company may abandon Oslo to list the shares in New York, Troim says.
Transocean shares have risen 34 percent this year to US$56.93, valuing the company at US$18.7billion. Houston-based GlobalSantaFe Corp., the No. 2 oil driller, is valued at US$10-billion.
Fredriksen has an estimated fortune of US$5-billion, according to Oslo-based magazine Kapital’s annual ranking of wealthy Norwegians. His move into rigs coincides with a drop in tanker rates as global fleet growth has outpaced demand.
He owns 42% of SeaDrill through Hemen Holding Ltd., based in Limassol, Cyprus, and Geveran Trading Co.
Roekke is a high-school dropout who made his first fortune fishing off the U. S. West Coast. He won a six-week battle with now-jailed Russian billionaire Mikhail Khodorkovsky for control of Kvaerner, once the pride of Norwegian industry, and merged the 152- year-old shipbuilder with his Aker Maritime company.
Roekke’s Aker ASA investment company has now created Aker Drilling, which on Oct. 3 ordered the world’s two biggest oil rigs ever at a total cost of about $1.2 billion. Aker Kvaerner will build them.
“We are building rigs that can operate in harsh weather during winter, far from existing installations and in deep waters, making them stand out from the rest of the rig fleet,” says Geir Arne Drangeid, an Aker spokesman. “We are targeting a niche.”
The company is funding the project with a private placement of 2.5-billion kroner of shares and 800-million kroner of convertible bonds. It plans to complete the sale by Oct. 14. The company is valuing the rigs at between US$640-million and US$675 million each, higher than the estimated construction cost, Aker said in a presentation sent to the Oslo exchange on Oct. 3.
Norwegian companies such as SeaDrill, Aker Drilling and Eastern Drilling are behind orders for nine semi-submersible rigs and drillships and plans to reactivate and upgrade a further 10 floating rigs, most of which had previously been mothballed, according to a Sept. 26 note from Morgan Stanley’s Slorer and company statements. Denmark's A.P. Moeller-Maersk A/S, the world’s biggest ship owner, has two deepwater rigs on order.
Norwegian owners have yard options and indicated plans to build a further 18 floating rigs and drill ships.
U. S. rig companies have one new deep-water rig on order, and three upgrades under way. On top of that, another four units may be planned, Morgan Stanley's Slorer says.
“More rigs will probably be ordered if rates stay at today’s levels or even climb in the coming months,” says Per Solvberg, an analyst at Handelsbanken Capital Markets in Oslo. “ We may be heading for a situation in a few years’ time with too many rigs and companies that will have to underbid each other to get contracts.”