Keppel Faces Attempt to Cancel $425M Rig Newbuild
With oil prices down by half relative to last year's levels, a push to cancel rig newbuilding contracts may have begun - a pattern seen in the last offshore downturn. Offshore shipyard Keppel has received a notice from UK-based rig operator Awilco Drilling seeking to end a contract for a $425 million semisub, the future Nordic Winter. Awilco alleges that Keppel has breached its construction contract, allowing Awilco to avoid further payments and claim a refund of $54 million.
In a response, Keppel noted that the next payment installment for the rig was deferred at Awilco's request in March; the yard received the notice of intent to terminate the contract on Monday, and under the revised schedule the payment was due on Tuesday.
In first quarter results released in mid-May, Awilco reported no contract revenue and a $9 million loss for the first three months of the year. With $28 million cash on hand and about $7.5 million combined quarterly expenses, Awilco said in the report that it would need additional funding to meet its next $32 million installment payment to Keppel. The firm's share price has lost two thirds of its value since December.
Keppel denied Awilco's allegations of breach of contract. The firm said that it reserved the right to keep Awilco's previous payment installments and cautioned that it could seek further compensation if Awilco fails to pay the next installment.
The Nordic Winter contract was awarded in March 2018, when Brent was trading in the range of $64 per barrel. A contract for a second rig, the Nordic Spring, was signed in March 2019, when oil prices were about the same. With the coronavirus pandemic, the tide has turned: Brent crude bottomed out in April 2020 below $20 per barrel and was trading in the range of $40 per barrel on Monday.
Virtually all oil majors have announced steep reductions in capital expenditures for the year, and offshore rig owners like Maersk Drilling have had to lay up semisubs and drillships coming off contract - indicating an oversupplied market for the medium term. UK North Sea industry association Oil and Gas UK (OGUK) expects up to 30,000 lost jobs in the UK offshore sector alone.