Global Offshore Projects

December 2015

Those hoping for some clear direction from

OPEC were disappointed, and the immediate effect of the
inaction was a further fall in the oil price.

When will the oil price rise?

A time of opportunity

10 Brazil troubled waters seem set to continue?

12 Mexico slow but steady opportunities
14 Iran uncharted waters demanding care
16 Nigeria an overdue dose of clarity required
18 China a more cautious approach to financing
20 Offshore construction in China a step too far?
22 Prospects for the European offshore wind industry no good news
23 Wikborg Reins Global Offshore Projects team

Publisher WIKBORG REIN

Editor ANDREAS FJRVOLL LARSEN
Cover photo ISTOCKPHOTO
Layout HELENE S. LILLEBYE

Global Offshore Projects December 2015

This newsletter is produced by Wikborg Rein. It provides a summary of the legal issues, but is not
intended to give specific legal advice. The situations described may not apply to your circumstances.
If you require legal advice or have questions or comments, please contact your usual contact person
at Wikborg Rein or any of the contact persons mentioned herein. The information in this newsletter
may not be reproduced without the written permission of Wikborg Rein.

Finn Bjrnstad

Clare Calnan

PHOTO: Erik Burs

2015 will go down in history as a difficult one for the offshore industry. As the year
closes it remains uncertain what next year will bring but few expect it to be good
news. The challenges being faced in the oil and gas industry are perhaps illustrated
by the failure of OPEC to make any real decisions at their meeting on 4 December and
little by way of further action will be taken by OPEC until they meet again in June
2016. Faced with such a grim short term outlook most will need to remind themselves
that a recovery is expected in the long term. The difficult question is of course when
that recovery will start and what can be done in the meantime.
In this newsletter we have given the task of crystal ball-gazing to Gavin Strachan of
Firth Petroleum. He has made some interesting observations but not much positive news for
2016. We thank him for his informed contribution and interesting insights on the market.
There is no doubt that the challenges in the offshore market are taking a particular
toll on oil service companies. Many have tripped covenants in their loan agreements
and seen their share price fall well below underlying asset values making implementation of a revised capital structure a much needed but difficult task. The industry is
in survival mode, where some will pull thorough and some inevitably will fail. As in
previous downturns there will also be those players who are able to find opportunities
for growth through consolidations and acquisition of distressed assets and companies.
To survive may require a search for opportunities and investments in new m
arkets.
In this newsletter we look at some of these potential markets whilst at the same
time addressing the risks that may be met along the way. Iran may prove to be an
important market for the offshore industry, but even if the sanctions are loosening
there are still knots to deal with. Owners looking towards Nigeria will need to take
into account the increased focus on local content requirements the implications of
which are seen only too clearly by foreign contractors in Brazil these days. Mexico
remains a region where there is substantial potential. The implementation of the new
framework is under development as the third licensing round commences this month.
In their search for new markets some owners have been looking to the renewables
industry and for some this may provide some interesting opportunities. However the
industry also faces its own challenges which cannot be overlooked.
Chinese shipyards are continuing to take the brunt of the speculation in offshore
construction between 2012 and 2014. As owners of existing units are competing for work,
new units continue to be delivered. Cancellations are on the increase as are the list of
defaulting buyers who are unable to find the financing and employment needed to take
delivery. It remains unclear how the additional capacity represented by these new units
is going to be absorbed. Much hope has been placed at the door of Chinese financing
institutions but they are now taking a more cautious approach than previously.
Although the short term remains a serious challenge full of uncertainty it is to be
hoped that this may also be a period of opportunity for the companies able to take new
market position and weather the storm. Informed decisions about risks and opportunities will be imperative to ensure success.
We hope that you will find our newsletter interesting and informative.

PHOTO: Nina Rangy

GLOBAL OFFSHORE PROJECTS DECEMBER 2015

Dear friends and readers,

WHEN WILL THE

OIL PRICE RISE?
BY GAVIN STRACHAN

In the first half of 2015 there was some hope that the oilfield
market might pick up in time for a reasonable 2016. However
after the summer break it was evident to all, even the wishful
thinkers, that it would not and that oil companies and service
companies alike would be severely affected by poor cash flow
and high financing costs. Share prices and asset values have
tumbled and the utilisation of assets, day rates, and contract
terms agreed, have substantially altered as reality hit home.
This is the result of that ever-present problem of the
balance between oil supply and demand. However, this time
around there is one big difference: market dynamics are much
more complex than in previous downturns making it harder to
forecast the future.

In the first Global Offshore Projects newsletter, I looked at the
fall in the oil price and its impact on drilling and showed that:
as a result of having to pursue costly projects, many western
oil companies were already in trouble even before the oil price
began its fall from the June 2014 year-high of $115 a barrel
in 2014 Saudi Arabia believed that it was time for others
to shoulder the problems of world oversupply learning
from its mistake when it cut production, at the expense of
its market share, between 1981 and 1984 from 9.6m barrels
a day to just 3m barrels
earlier this year the majority of producing fields were
surprisingly resilient to the low oil prices of the time: Brent
was trading at about $55-$60 a barrel. It is now around
$36-37, its lowest point since early 2009
at $60 a barrel costs in early-2015 needed cutting by $170
billion, or 37%, to maintain debt at 2014 levels. Recent
price falls have exacerbated these figures
but longer term we need to start drilling again and on
a big scale. The global decline from existing production
is 5% a year so by 2030 over half of the worlds existing
production will need replacing.
4

(1)

RECENT OPEC MEETING DECIDED NOTHING

The OPEC meeting on 4 December 2015 ended in what can only
be called disarray. Nothing was agreed by the member states
except to reconvene at the June 2016 meeting. Expectations of
higher exports from Iran in 2016, when sanctions are set to be
lifted, was one reason why the organisation could not agree on
an output target.
Those hoping for some clear direction from OPEC were
disappointed, and the immediate effect of the inaction was a
further fall in the oil price. By default or design the cartel has
remained on a course that pursues market share and restricts
an ultra-high oil price. This is in spite of the fact that Saudi
Arabia and other OPEC members need oil prices at $100 a barrel to
balance fiscal budgets. However OPECs biggest crude exporter
believes that the low price will knock out the threat from shale
oil and in the longer term preserve its market share.
OPEC TENSION
There is certainly disagreement between OPEC members. They
are a disparate lot with varied capabilities and aspirations.
There are three factions within the organisation:
1. Saudi and its allies, including UAE and Kuwait. They have
low production costs and sizeable reserves, and although
there is distinct cost-cutting going on, the countries are
financially strong.
2. Iran and Iraq, which have their separate political problems,
but have the potential to produce considerably more than
they are currently.
3. The remainder who are struggling with the low oil price
and making ends meet, particularly Venezuela and Nigeria.
This is all against a background of increasing geo-political risk
in and around OPEC countries. Not only is the Islamic State
encamped in parts of Libya and Iraq, (both OPEC members),

trust between (two major OPEC countires), Shia Iran and Sunni
Saudi Arabia, where a new regime is in place, is non-existent,
and the two are fighting a de facto war in Yemen.
DIFFICULTIES IN GAUGING OIL SUPPLY
For a number of reasons there are difficulties in assessing
future oil supply:
the advent of US shale oil has resulted in a large, c ompletely
new sources of oil production - but one which will decline by
5% a month without constant investment. 2016 production
will be well down as a result
OPEC is pumping 31.5m barrels a day compared with its
agreed output of 30m barrels a day
OPEC has internal disagreement as to how to proceed
although the Saudi faction is winning the day at the moment
how are the activities of Islamic State going to affect
production in Libya and Iraq?
by how much and how quickly will Irans increase in
production come about after the possible lifting of sanctions?
4.5m barrels of new production have been delayed as a
result of low oil prices. How quickly will that become
important?

Market dynamics are much

more complex than in previous
downturns making it harder to
forecast the future.
OIL DEMAND IS IN FACT INCREASING FIRMLY
Cheap petroleum-based products resulting from the oil price fall
is leading to low inflation and a reduction in the cost of r unning
businesses. Lower crude prices are also limiting increases in
interest rates. This is all good for the world e
conomy which is
the fundamental driver of energy demand.
Although some analysts suggest that demand is slipping
given Chinas slowing economy, the countrys consumption
this year has increased by 6% according to China Oil, Gas &
Petrochemicals. The EIA reports that oil demand worldwide is
up 1.3m barrels a day. Others put global demand increases
even higher at 1.9m barrels a day.
EXCESS OIL PRODUCTION CAPACITY
DOES NOT HAVE TO FALL FAR
The downturn is set to remain in place for some time. But for how
long? What few analysts currently take into consideration is the
amount of excess production capacity. When it is reduced to something like 2.5% a strong market will result, as was the case between
the late-1990s and mid-2000s. Reservoir depletion, running at

about 3m barrels of daily production each year, and the increasing

demand for oil, will bring about a sharp upturn in the oil price.
Opinions vary as to when this will happen. Many industry
experts feel that the worst is yet to come. Goldman Sachs
predicts that the persisting supply glut is set to get even worse
and oil prices could fall as low as $20 a barrel in coming months.
On the other hand Barclays predicts the oil price will increase
to $60 a barrel by 2016 based on a demand growth from 2.1m
barrels a day to almost 4m barrels. The Bank of England model
suggests oil prices could rally quite substantially and probably
in the second half of 2016.
WESTERN OIL COMPANIES DILEMMA
There is one major problem that remains difficult for the industry
to resolve. Western oil companies have in recent years been
forced to compete in high cost production from frontier areas
and deepwater. Although deepwater fields are economic at lower
levels than some imagine (analysis by Rystad of Oslo in late-2014
indicates that deepwater oilfields have a breakeven level between
$35 and $75 a barrel with an overall average breakeven price
of $53), and while deepwater costs have diminished in recent
months, they still remain high cost environments. Oil companies
will be slow to resume their activity in these high costs areas and
this could delay the recovery in deepwater drilling.
THE SHORT TERM OUTLOOK IS BLEAK BUT
IT IS TIME TO LOOK TO THE FUTURE
Worldwide activity is much reduced. Western oil companies
are in survival mode, and many of the national oil companies
such as Pemex, Saudi Aramco and Petrobras are cutting back
on activity, the corruption scandal in Brazil contributing to
Petrobras woes. Oil companies and service companies alike
are reducing costs wherever they can. Termination clauses in
contracts between oil companies and service companies have
always been important but are now particularly under focus.
The market will not pick up in 2016. Even though oil prices
might rise in the second half of next year oil company budgets
are being agreed based on a low oil price environment and
surviving throughout the year. Operators are looking at their
free cash flow and will not start spending until they are assured
that the oil price will remain at good levels longer term.
Those companies with liquidity will survive. The oil
companies priority will be to pay dividends as otherwise Wall
Street will take its money to those industries which do. This
means that oil company M&A activity may be muted compared
with the 1990s, but for the brave and well-heeled contractors
the time is coming to buy distressed assets.

(1) Gavin Strachan is an independent consultant providing market

intelligence, Expert Witness opinion and due diligence expertise on the
offshore energy business in jurisdictions around the world
Contact email: gavin@firthpetroleum.com

The prolonged period of low oil prices

combined with reduced investments and
contract awards is taking its toll on oil
service companies in the North Sea and
elsewhere. For some though this may be a
time of opportunity when bargains may be
had. This can generate attractive rewards
to the cash rich investor but there can be
risks and pitfalls in acquiring a company
when it is on the ropes.
These days oil service companies can
be in varying stages of distress, from a
negative cash flow situation that sooner
or later is bound to hurt the company,
through to being in default right up to
the point when a formal court appointed
debt restructuring or bankruptcy process
is in place. Time is of the essence as the
distressed business either has an immediate need for assistance or has already
defaulted on its obligations.
Before approaching the target, a potential buyer should take steps to address
certain issues. If the acquisition is successful and the target is acquired, it may
trigger the cross default provisions of the
buyers existing financing arrangements.
So the buyer needs to ensure that its balance sheet and credit facilities are able to
absorb a distressed entity without a cross
default or breach of its own financial covenants on a consolidated basis. A temporary
waiver from the target companys banks
or bondholders in respect of on-going
defaults may be a necessary closing condition for the acquisition.
6

If the target company is not listed, the

buyer will have significant flexibility as
to how and when it will approach the
selling shareholder(s), and a bilateral
negotiation with the seller(s) can be
concluded as quickly as the parties are
able to reach an agreement. Some companies will already have been subject to
court-appointed processes, in which case
the proceedings for selling the company
and/or its assets may be fixed by law,
which may add to the timeline.
A listed company will in most cases
be subject to take-over regulations
imposed by the home state or stock
exchange. On the Oslo Stock Exchange,
a voluntary take-over offer usually takes
between four to six weeks to complete
(from preparation of the offer document
until completion), and if the desired
acceptance level is not reached at the
expiry of the offer period, it may take
additional time. In the event the listed
company has a concentrated shareholder
structure, a straight and quick block
trade acquisition of the majority of the
shares in the target company may be
possible in certain cases. Such majority
acquisition will in most cases trigger a
mandatory take-over offer to the remaining of the shareholders.
The protection a buyer will be able
to obtain through a negotiated transaction agreement may be less than one
would normally expect. The seller of a
distressed company or of assets may be

unable to offer substantial warranties.

If warranties are offered, they are usually backed by the sellers balance sheet
which may have been inadequate to save
the distressed business in the first place.
It is essential for potential buyers to be
prepared to undertake a thorough investigation of the target, as any meaningful
recourse may prove difficult to obtain.
In addition, a seller will usually require
cash payment, and the target may need
immediate funding through bridge loans
or other measures. The buyer, however,
will usually not be able to get security
for its acquisition risk which may impact
its ability to raise further financing.
A buyer may need to enter into negotiations with several interested parties
other than a seller. For example, holders
of secured debt may prefer the opportunity, particularly in asset-backed cases,
to enforce their security and take over
the asset rather than contemplate
the sale of the asset to a third party.
Otherwise, a buyer may need to preserve
relationships with key customers and
suppliers, and gauge whether they are
supportive of the potential acquisition
or whether the buyer risks that change
of control clauses are triggered and used
by such third parties to close or leverage
the relationship.
Whilst there clearly are risks when
looking at distressed businesses, there
is also an upside which the right buyer
may find opportunities to exploit.

PHOTO: Istockphoto

A TIME OF
OPPORTUNITY

8
9

PHOTO: Istockphoto

BRAZIL

It remains to be seen how

much of an impact the
application of ANTAQ rules
may have on the total OSV
fleet in Brazil.

10

PHOTO: Istockphoto

troubled waters seem

set to continue?

2015 has been a tough year for oil

service providers and particularly so for
those working in the Brazilian m
arket.
The Car Wash Probe continues and the
end of this corruption scandal, which has
had severe implications for Petrobras
and the industry, is still some way off.
That aside Petrobras has also taken the
opportunity in the prevailing market
conditions to clean-up and optimise both
its rig portfolio and the offshore support
fleets through the re-negotiation or cancellation of contracts.
Although the outcome of these renegotiations have not generally been made
public the view is that at least nine rigs
have been taken out of the Brazilian
market over the last few months, either
as a result of a cancellations, use of
favourable stand-by provisions or by
Petrobras not exercising options that
had previously been banked by the rig
owners. Outright terminations have also
occurred, usually on grounds that there
has been a breach of contract, but
normally without further explanation.
Some of these terminations may have
links to the Car Wash Probe, but this has
not been officially confirmed.
Another 13 rigs currently employed
by Petrobras will come off contract in
2016 and it is not expected that any
of these contracts will be extended or
renewed. In addition many contractors in
the Brazilian rig market appear to have

accepted amended terms in their existing contracts, g

enerally
by agreeing to reducing charter hire against an extension of
the contract period. This exercise will result in substantial
short term savings for Petrobras but hopefully will also give
rig owners in Brazil some relief (and increased p
redictability)
going forward.
At the same time Petrobras have increased their focus
on their periodic assessment of the offshore support fleet in
accordance with the ANTAQ rules. Petrobras is under an obligation under the ANTAQ rules to regularly (and normally on
an annual basis) assess whether any foreign vessel chartered
for operations in Brazil can be replaced by a Brazilian owned/
flagged vessel. Under the rules Brazilian tonnage is to be given
priority. This has resulted in increased prioritisation being
given by Petrobras to Brazilian owners and vessels and the termination of charters entered into with foreign owned vessels.
Over the last few months the need to secure annual renewal
of the ANTAQ license, which previously had been viewed as a
mere formality, has created substantial uncertainty for a number of foreign OSV owners, including those who have been long
term players in the Brazilian market and who have substantial
OSV fleets operating in Brazil. Similar regulations apply in other
jurisdictions, for example in Mexico, but foreign owners may have
previously viewed this as a sleeping provision. This is no longer
the case and a number of foreign OSV owners in Brazil, who are
hard pressed to find alternative employment for their vessels, are
looking at possibilities for converting into a more Brazilian
fleet, through either arranging bareboat charters to a Brazilian
entity and suspension of the current flag/dual registration.
However, not all ship registries accept dual registration and
restructuring often raises adverse tax and other consequences
that need to be carefully assessed. It remains to be seen how
much of an impact the application of ANTAQ rules may have
on the total OSV fleet in Brazil and whether Petrobras will
continue to prioritise its focus on this during 2016.
11

MEXICO

While the downturn in the oil and

gas sector has created a challenging
environment for all, including Pemex,

the Mexican Energy reform programme

is expected to create new opportunities
for those oil service providers who have
the will and capabilities to navigate
their way through the developing stages
of an emerging Mexican E&P industry.
These opportunities arise as a result of
the Mexican Governments decision to
invite foreign and private oil companies
to compete for blocks and licences offshore Mexico, thus providing important
sources of new investment for the industry. Hopefully this will, in the medium
term, reduce the effects of Pemex
tightening liquidity, recently leading
to a credit downgrade by Moodys and
expected to further reduce investments.
RECENT AUCTION PROCESSES
INROUND ONE
Following the implementation of the Energy
Reform in December 2014 the Mexican
Government announced the initial stages of
Round One of the public licence auctions,
in which private entities were also able to
bid for the opportunity to perform exploration and extraction activities in Mexico. The
total investment, including Pemexs farmouts, for Round One has been estimated
12

by the Mexican Government to be US$50.5

billion for the period 2015 - 2018.
The blocks offered in the first and second auctions launched by the National
Hydrocarbons Commission (NHC)
were presented under a Production
Sharing model and all of them presented
low geological risk with easy access to
the existing transport infrastructure.
However, since the offer came with strict
contractual requirements and a rather
high government take, there was a poor
turnout at the auction. Out of 14 possible blocks only two were awarded to a
consortium formed by Sierra Oil & Gas,
Talos Energy and Premier Oil.
In an attempt to attract more interest the government altered the terms
of the second auction by reducing
the amount of the upfront investment required by companies to bid and
increasing the size of the blocks available. This led to an increased interest and
in September 2015 the NHC awarded
three of five blocks forming part of the
auction to Eni SpA, a c onsortium formed
by Pan American Energy and E&P
Hidrocarburos y Servicios; and a consortium of Fieldwood Energy and Petrobal.
The third auction is scheduled for 15
December 2015 and consists of 26 fields
which are to be awarded under a more

favourable licence model. Considering

the characteristics of the fields and the
local content requirements (that are
slightly higher than for the two previous
auctions) there is reason to believe that
this bid presents good opportunities for
smaller and local participants to gain a
foothold in the process.
Oil companies that are awarded blocks
during these auctions and enter into contracts with the Mexican Government will
need to make firm commitments and will
be subject to firm deadlines by which they
need to meet their investments obligations. Thus they will not have the opportunity to postpone their obligations pending
an increase in the oil price. With these
new entrants to the sector, there should
be ample scope for oil service providers
to take advantage of increasing opportunities in a market that has been somewhat
passive for over 20 years. The Mexican
market is opening up and this is expected
to continue to develop over the next few
years notwithstanding the continuation of
a low oil price.

If you are interested in obtaining additional
information on this matter, please do not
hesitate to contact Santiago Seplveda
Yturbe (santiago.sepulveda@creel.mx) at
Creel, Garca-Cullar, Aiza y Enrquez.

PHOTO: istockphoto

slow but steady opportunities

13

IRAN

uncharted waters demanding care

PHOTO: Istockphoto

In this highly complex

environment great care
will need to be taken
once sanctions against
Iran are lifted.

14

The sanctions being applied in connection with Russia and

Iran differ in many ways. The former are recent, targeted and
fixed for the foreseeable future, the latter long-standing, broad
and likely soon to change. With regard to Iran, Adoption Day
under the 14 July Joint Comprehensive Plan of Action (JCPOA)
arrived as expected on 18 October 2015. Now the International
Atomic Energy Agencys (IAEA) verdict is awaited on the
nuclear infrastructure changes to which Iran has agreed. That
might come in the second quarter of 2016 and IAEA approval
will bring with it Implementation Day - the lifting of nuclearrelated sanctions against Iran.
The opportunities created by the lifting of sanctions against
Iran are obvious. The country sits high on listings of proven oil,
gas and mineral reserves and its economy craves foreign investment. However, the risks are considerable and the circumstances
unique acres of sanction text and decades of trade embargo will
vanish at the same moment, as part of an agreement centred on
preventing an ideologically different, unpredictable and often hostile regime from developing nuclear weapons.
In this highly complex environment great care will need to
be taken once sanctions against Iran are lifted. First, Iran ranks
130/189 in the World Banks Ease of Doing Business Report
and 136/175 on Transparency Internationals Corruption
Perceptions Index. Compliance awareness, procedures, written
instructions, contract terms, verification, audit, enforcement
and remedy will all need to match the likely difficulties. The
first task will be to explain, and then to apply, familiar concepts.
Thorough screening must continue, to support anti-corruption
and to detect individuals and entities that remain proscribed,
perhaps on account of human rights or even terrorism as it is
only the nuclear-related restrictions that will be lifted.
Second, what can be removed can be reinstated. This is the
snap-back mechanism, a core part of the reassurance underpinning the JCPOA. This is a procedure, not an instant fix. Any
party alleging fault could start the dispute resolution process,
and if a serious breach was made out against Iran then sanctions would be re-imposed. Perhaps then additional sanctions
would follow, but at the very least the neo-lawful would again
become unlawful. This would not be retrospective, so contracts pre-dating snap-back could still be performed, but it
is easy to foresee difficulties, for example with suppliers, or

with intended subcontracts. While not

actually expecting such developments,
parties should prepare. Much might be
gained from analysis of what would or
might happen on any snap-back, and
ensuring that there are adequate provisions in contracts to cover such an eventuality just in case.
Third, the US has only lifted sanctions directed towards non-U.S. persons. Save where there is a specific
OFAC licence, the sanctions will still
apply in full to US persons as defined.
This means that any such persons must
be sealed from any involvement in Iran
issues, whether they are individuals, or
companies owned or controlled in the
relevant ways. The structure of a company should not present difficulty, but
individual nationality status - for all,
from directors and other key decisionmakers through to clerical and ancillary
staff - might prove harder to establish,
and ready assumption must not replace
proper enquiry. The recent Schlumberger
and Deutsche Bank cases illustrate the
costly and other adverse consequences
of impermissible involvement of US
persons. A provable system for finding
who they are, and keeping them away
from Iran-related matters, needs to be in
place.
Lifting nuclear-related sanctions
against Iran will undoubtedly create
great opportunities, but the danger
areas offer serious challenges that will
require great care to be taken. In all
aspects of any emerging trade with Iran,
awareness must be heightened, issues
identified, due diligence performed and
caution exercised.
15

NIGERIA

PHOTO: Istockphoto

an overdue dose
of clarity required

In recent years the Nigerian authorities have paid a great deal of attention
to compliance with the requirements for
local content relating to marine vessels,
drilling units, equipment and services
utilised in Nigerias oil and gas industry.
However in order to attract international
investment and service providers there
is an urgent need for the recently elected
administration in Nigeria to create a
stable regulatory framework through
which such investments and activities
can be carried out.
CURRENT REGULATORY
FRAMEWORK
Owners wishing to utilise marine assets
in the offshore industry in Nigeria need
to take into account two main requirements regarding local content.
The first is the Nigerian Coastal and
Inland Shipping (Cabotage) Act of 2003.
This Act requires all vessels trading
16

between Nigerian ports or in Nigerian

waters (including in connection with
the exploration, exploitation or transportation of petroleum resources) to
be built by a Nigerian yard, registered
in the name of a Nigerian company
owned by Nigerian shareholders, to fly
the Nigerian flag and be manned only by
Nigerians. These requirements apply to
vessels (including FPSOs), but there are
on-going cases in the Nigerian courts
regarding whether the Act applies to
drilling rigs and their operations. If it
does, then owners would need to obtain
waivers from the three main requirements of the Act that they do not satisfy.
The ownership requirement may be
satisfied through a bareboat chartering
structure where a Nigerian company
bareboat charters a foreign vessel for a
minimum period of five years, during
which period the vessel will be registered in the Nigerian Ship Register and

fly the Nigerian flag with simultaneous

suspension of the primary registration
of the foreign vessel. The Cabotage Act
also provides for a system of waivers
whereby any of the three main Nigerian
content requirements may be waived
where no Nigerian capacity is available
or suitable. However waivers relating to
ownership and manning requirements
are increasingly difficult to obtain due to
the increase in the number of Nigerian
owned vessels and Nigerian seafarers. On the other hand the waiver from
the Nigerian build requirement is still
relatively easy to obtain due to the fact
that there are very few Nigerian shipyards with capability to construct the
type of vessels required. Where waivers
are given they are valid for one year
although they may be renewed. Foreign
vessels operating in the cabotage area
also require a licence in addition to the
waivers to operate within the cabotage

area. Where granted, the license also has

a lifespan of one year.
The second requirement arises under
the Nigerian Oil and Gas Industry Content
Development Act of 2010. This Act
requires operators in the Nigerian oil and
gas industry to demonstrate that certain
minimum levels of Nigerian content is
used in their exploration and production
activities. By way of example 65 % of
the spend must be on Nigerian offshore
support vessels, 55 % on hire for drilling
rigs and 50 % of the spend on production
units. Even though the Act was passed
in 2010, the Nigerian authorities only
started to enforce these requirements in
2013. These requirements may similarly
be difficult to satisfy for the operators,
but in practice the main requirement
from the supervisory Nigerian Content
Development Management Board (the
NCDMB), has been that the operators present a plan showing how they

plan to increase the Nigerian content in

their operations to the statutory minimum requirements. However, NCMB
has also separately been pursuing a
marine vessel utilisation scheme which
seeks to achieve at least 60% ownership
of marine assets by Nigerian companies
by 2015. Owners of marine assets able to
demonstrate a higher level of Nigerian
content will accordingly have a competitive advantage when tendering for contracts in Nigeria.
FUTURE DEVELOPMENTS
Following his election the new Nigerian
president, Muhammadu Buhari has
introduced significant changes to the
Nigerian petroleum industry. Mr Buhari
has assumed office as Nigerias new
oil minister, he has replaced the entire
board of the state-run Nigerian National
Petroleum Corporation (NNPC) and
split the NNPC into two entities. These

actions were taken as part of the new

presidents laudable aim to tackle the
substantial problems of corruption and
oil thefts within the oil industry.
However in addition to these challenges there is also an urgent need for
the new administration to bring greater
clarity to the legal framework applicable
to the Nigerian petroleum industry. It is
anticipated that this task will be tackled
although it is expected that the changes
will be more conservative than progressive. Thus it is unlikely that any change
will see an end or serious reduction in the
local content requirements. For some time
to come therefore owners of marine assets
will have to continue to take account of
the rather complex local content requirements when assessing business opportunities in Nigeria.

17

CHINA

a more cautious approach to financing

PHOTO: Ilja Hendel

In recent years Chinese financial institutions have proved

to be an increasingly important source of capital for shipping
and offshore assets. However difficult market conditions have
created challenges for the over-developed Chinese shipbuilding industry and have dampened the enthusiasm of the Chinese
financial markets. Most Chinese banks and financial leasing
companies have become more cautious in their approach to the
financing of international shipping and offshore assets. Despite
this China will continue to play an important role in financing
shipping and offshore transactions.

18

INTERNATIONALISATION OF CHINESE SHIP FINANCE

Traditionally, Chinese banks supported Chinese owners and
yards, but after 2008 more and more financial institutions also
engaged with international owners. This development followed
policy decisions by Chinese authorities, encouraging amongst
other things the promotion of Shanghai as a global shipping
centre, control of resources required for growth in the domestic
economy (including the fleet of vessels owned by Chinese state
owned entities), strategic links with resource rich countries and
general support for the Chinese shipbuilding industry.
An important instrument in this development has been the
availability of Chinese export credit guarantees. Export credit
arrangements have played a significant role as an instrument
which enables governments of many countries to support exporters and the importance of the Chinese export credit instructions is
a reflection of the growth of Chinese shipyards. Various financing
products such as buyers or sellers credits and export credit insurances have enriched the financing sources for Chinese ship or offshore unit exports and, to a certain extent, it has also contributed
to the prosperity of the Chinese shipyards.
Another important development in the Chinese fi
nancing
arena has been the growth of Chinese leasing companies and
more than 1000 leasing companies have emerged during the
last ten years. These companies provide funding through
ownership by way of sale and leaseback, lease and purchase
or other similar arrangements with or without a purchase
option for the lessee. Such arrangements may be attractive offbalance-sheet alternatives to international owners by providing
more flexibility in deal structures and financing costs.
THE NEXT STEPS
Chinese financing is no different from financing or leasing arrangements in other jurisdictions. There are, as in any jurisdiction,

cultural aspects to be taken into account, but the documentation

is similar to international transactions and industrial standards
(such as the LMA forms) and is often governed by English law.
Chinese financing and leasing institutions were once
considered to be rather over eager to participate in financing certain types of projects or assets, but a clear trend in
todays market is that owners backgrounds, the economics/
markets of assets and documentation underpinning projects
are required to undergo a detailed and thorough review before
funds are committed. This is particularly true within the
offshore segment, where gloomy market conditions are casting
shadows onto the financing opportunities. China Exim Bank has
on several occasions emphasised that they will give priority
to higher technology and higher value asset classes, such as
LNG, large containerships and eco-ships. On the other hand,
the Chinese funds are still available, and from many sources,
but the competition between the Chinese financing institutions
to secure the good projects is fierce.
The challenging conditions at Chinese shipyards are also
an important factor impacting the way forward for the Chinese
financing community. The backlog of orders at the shipyards
includes a significant number of units that are to be delivered
into a market where employment rates are low. This is an
environment where traditional shipping banks (and the capital
markets as a whole) may be reluctant to provide financing, and
where the Chinese export credit agencies once again will need
to provide significant parts of the funding required. The Chinese
export credit agencies have also expressed the need to guide
the shipping and shipbuilding sectors out of the c urrent downturn, but to what extent support is available may ultimately
turn on the political will of relevant authorities in respect of
the industry and asset class in question.
The multiple aspects affecting Chinese ship and offshore
finance makes it difficult to predict how matters will develop
but Chinese financing institutions will continue to play an
important role in providing future take-out financing or

refinancing of assets, which in turn will have a significant

impact on the Chinese construction markets. The expectation

is that such financing arrangements will become increasingly
complex and will involve elements of traditional bank funding,
export credit, leasing arrangements and other instruments. The
question is therefore not so much whether Chinese financing
is still relevant but rather how to match the correct source of
funding with the right project through the best framework.
19

OFFSHORE
CONSTRUCTION
IN CHINA
a step too far?
Over the last few years Chinese shipyards have moved
inexorably into the offshore construction market and, in

particular, into the jack up market. Progressing from the

construction of smaller units a number of Chinese yards are

now heavily involved in the construction of larger and more
sophisticated jack ups. At the start of 2015 60 jack up units
were scheduled to be delivered from Chinese yards in 20152016. This figure represents about 60% of all jack ups to be
delivered in 2015-2016 worldwide.
To secure such dominance in the market the Chinese yards
have provided attractive payment packages to prospective
owners, for example in some cases requiring a small down
payment of only 5% at the start of the construction process
with the remaining 95% being payable on delivery. Given
that larger jack ups commanded a price tag of around US$230
million such payment terms enabled more buyers to enter the
market, many of them on a speculative basis. It is estimated
that over half of the jack ups contracted for at Chinese yards
were contracted for at a time when the prospective owners did
not have the security of a drilling contract which is typically
required in order to secure take out financing.
This business model worked well for the Chinese yards in the
good years but with the falling oil price and the reduction in capital E&P budgets of oil companies, the demand for such drilling rigs
has fallen significantly and this has caused major p
roblems for the
Chinese yards. The oversupply in the market has led to contracts
being cancelled where the p
rospective owners no longer consider
the project to be economically viable. Even established drilling
contractors are looking to delay d
elivery of uncommitted rigs into
2016 and 2017 in the hope that market conditions will improve.
Faced with c ancellations by companies against whom often the
Chinese yards have limited rights of recourse, the situation that
20

At the start of 2015 60 jack

up units were scheduled to be
delivered from Chinese yards
in 2015-2016. This figure
represents about 60% of all
jack ups to be delivered in
2015-2016 worldwide.

the Chinese yards find themselves in is becoming increasingly

desperate. Where requests for extensions in delivery dates are
being made Chinese yards appear to be prepared to accommodate
such requests. However it remains to be seen whether the p
arties
can agree upon further delays beyond the already extended delivery dates should market conditions remain bleak.
At the same time the value of the rigs under c onstruction
has fallen significantly and where cancellations occur the
Chinese yards are left with assets on their hands that are
continuing to decrease in value. It is unlikely that the yards
will want to operate these rigs and consequently their future
remains
uncertain. Such circumstances may create oppor
tunities for other prospective purchasers who look to secure
high specification drilling rigs at a knock down price. At present
though there is little evidence to suggest that Chinese yards
most affected by rig cancellations are willing to part with the
units for a price significantly below the contract price agreed
for the construction of the unit.
In part this can be explained by the custom of Chinese
yards to take out insurance with companies such as Sinosure
to protect themselves against buyers default which sees them
made whole even if a buyer walks away from an uneconomic
project. However there also appears to be a general reluctance
on the part of the yards to sell such assets at a significant
discount. Other options being explored are joint ventures with
the yard to operate the rig (at least until such time as the yard
has earned back its construction costs) and/or initially leasing
the rig from the yard with a subsequent purchase option. Time
will tell as to how successful these inventive solutions are in
enabling the Chinese yards to overcome their problems but it
is clear that even the most optimistic amongst them consider
there are some very hard times still to be endured.
21

PROSPECTS FOR THE

EUROPEAN OFFSHORE
WIND INDUSTRY
no good news
Offshore wind remains one of the key
sources of renewable energy adopted
by European governments to meet
their commitments to mitigate climate
change and to decrease reliance on fossil fuels in the coming years. Despite
the offshore wind industry having flourished in recent years, the short-term
outlook for 2016 is set to see a sharp
decline in new grid connected offshore
wind capacity as compared to 2015. This
decline will affect all levels of the offshore wind supply chain.
The softening of the European offshore
wind market has also been compounded
by the recent slump in global oil prices,
which has forced many North Sea oil
and gas companies to cut budgets and to
freeze all non-essential expenditure. As
a result, many maintenance, brown field
enhancement and life extension projects
in the North Sea oil and gas sector,
originally scheduled for 2015, have been
temporarily halted and will likely only
now be sanctioned when the oil price
begins to stabilise at a realistic level.
This has led to an oversupply of
vessels across both sectors, resulting
in highly competitive rates in the offshore wind industry, particularly on
less technically challenging projects
22

Despite the offshore wind

industry having flourished
in recent years, the shortterm outlook for 2016 is set
to see a sharp decline in new
grid connected offshore wind
capacity as compared to 2015.
such as accommodation support, WTG
commissioning and substation hook-up
and commissioning.
The short term outlook is therefore
challenging and owners will need to
tighten their belts.
The mid- to long-term outlook
however is more positive, with demand
being expected to pick up in the
European o
ffshore wind sector in late
2016 or early 2017 with approximately
20 GW of capacity expected to be added
between now and 2020. It is to be hoped
that this will bolster demand for vessels
in the European sector and hopefully
restore some equilibrium to vessel
rates.
That said, the extreme pressure both
from governments and the industry itself
to cut the capital costs of offshore wind

farm installation has resulted in developers increasingly seeking

efficiencies
of scale, and as a result, many planned
projects will seek to utilise the new generation of larger 6-8MW turbines, with
correspondingly larger foundations.
The scale of these new projects will
therefore rule out many of the multipurpose vessels in the existing fleet of
offshore wind support vessels which
are often designed to perform both oil
and gas maintenance and offshore wind
installation work. A new generation
of purpose-build offshore wind farm
installation vessels will therefore be

required to meet demand.

The newly delivered SEAJACKS
SCYLLA, delivered from Samsung
Heavy Industries Co., Ltd. to Seajacks
Group in November 2015 is one such
example and with a lift capacity of over
1500 tonnes, SEAJACKS SCYLLA is
perfectly placed to install the new larger
turbines and foundations.
Whether other vessel owners will
follow suit and place orders for vessels
with a similar lift capacity is yet to be
seen, but with the worlds shipyards
being desperate to increase their contract backlog, there may not be a better
time to place an order.

WIKBORG REINS GLOBAL OFFSHORE PROJECTS TEAM

OSLO /

Finn Bjrnstad
Partner
fbj@wr.no
+47 415 04 481
+47 22 82 76 11

Trond Eilertsen
Partner
tei@wr.no
+47 901 99 186
+47 22 82 76 12

Oddbjrn Slinning
Partner
osl@wr.no
+47 481 21 650
+47 22 82 75 14

Gaute Gjelsten
Partner
ggj@wr.no
+47 995 23 535
+47 22 82 76 31

Are Zachariassen
Partner
aza@wr.no
+47 909 18 308
+47 22 82 76 72

Guy C. Leonard
Senior Lawyer
gcl@wr.no
+47 977 35 003
+47 22 82 76 37

ystein Meland
Partner
ome@wr.no
+47 901 42 033
+47 55 21 52 75

Geir Ove Rberg

Partner
gor@wr.no
+47 900 35 045
+47 55 21 52 65

Jon Heimset
Partner
jhe@wr.no
+47 908 55 702
+47 55 21 52 72

yvind Axe
Partner
axe@wr.no
+47 970 55 558
+47 55 21 52 71

Christian James-Olsen
Partner
col@wr.no
+47 928 33 919
+47 55 21 52 70

Cecilie K. Haltebrekke
Senior Lawyer
ckh@wr.no
+47 416 49 158
+47 55 21 52 81

Clare Calnan
Partner
clc@wrco.co.uk
+44 75 9560 7958
+44 20 7367 0304

Rob Jardine-Brown
Partner
rjb@wrco.co.uk
+44 77 8572 2147
+44 20 7367 0305

Birgitte Karlsen
Partner
bka@wrco.co.uk
+44 75 2507 1742
+44 20 7367 0309

Jonathan C. Page
Partner
jpa@wrco.co.uk
+44 20 7367 0303
+44 71 3112 103

Ole Henrik Wille

Partner
owi@wrco.co.uk
+44 78 0351 4071
+44 20 7367 0326

Andreas Fjrvoll-Larsen
Senior Lawyer
afl@wrco.co.uk
+44 77 1130 4251
+44 20 7367 0321

Tormod Ludvik Nilsen

Partner
tln@wrco.com.cn
+86 216 3390 0101
+86 186 2194 4892

Ronin Zong
Partner
rlz@wrco.com.cn
+86 138 1665 0656
+86 21 6339 0101

Chelsea Chen
Senior Lawyer
cch@wrco.com.cn
+86 138 1687 8480
+86 210 6339 0101

BERGEN /

LONDON /

SHANGHAI /

SINGAPORE /

KOBE /

Siri Wennevik
Partner
siw@wr.com.sg
+65 9674 4906
+65 6496 8219

Robert Joiner
Partner
raj@wr.com.sg
+65 8518 6239
+65 6496 8359

Tormod Klve
Senior Associate
tkl@wr.no
+81 90 3160 7668
+81 78 2721 777

23

Joe McGladdery
Partner
jmg@wrco.co.uk
+44 77 1311 3115
+44 20 7367 0302

www.wr.no

Oslo
Tel +47 22 82 75 00
Fax +47 22 82 75 01
oslo@wr.no

Bergen
Tel +47 55 21 52 00
Fax +47 55 21 52 01
bergen@wr.no

London
Tel +44 20 7367 0300
Fax +44 20 7367 0301
london@wr.no

Singapore
Tel +65 6438 4498
Fax +65 6438 4496
singapore@wr.no

Shanghai
Tel +86 21 6339 0101
Fax +86 21 6339 0606
shanghai@wr.no

Kobe
Tel +81 78 272 1777
Fax +81 78 272 1788
kobe@wr.no