Northern Drilling Cancels Second DMSE Drillship Contract

As a further sign of the challenges in the offshore drilling sector, Northern Drilling, a company set up by John Fredriksen with the ambition of acquiring and operating modern drilling assets announced that it has served notice to Daewoo Shipbuilding & Marine Engineering Co. Ltd (DSME) canceling its contract for one of two ultra deep water drilling ships. The ships, which were described as seventh generation, sophisticated high-end drilling units, were due for delivery and marked the second dispute between the company and shipbuilder.

The company’s announcement said that it had canceled the contract for the drillship West Aquila “due to delay of delivery as well as repudiatory breach of contract.” Built for demanding drilling operations in water depth up to 12,000 feet, the West Aquila features large deck space and load capacities and was designed for increased drilling activity and efficiency. She is one of two vessels that Northern Drilling had contracted with DMSE due to be delivered in January and May 2021. No reference was made to the second vessel in today’s announcement.

Recently during an earnings update to investors, Northern Drilling said, “The drillships have not been delivered to the company and there are still some remaining items to be completed by the shipyard.” They said they were “executing preservation and maintenance activities for the West Aquila and West Libra” while the company “remains actively engaged with stakeholders, including potential strategic partners to consider and assess all possible alternatives available for these drillships.” 

The company said it has made advance payments totaling approximately $90 million under the contract, which were due when it announced the agreement with DMSE to purchase the two vessels in May 2018. The vessels had originally been ordered by another Fredriksen company, Seadrill, and Northern later acquired the contracts from DMSE. An additional payment of $200 million was due at delivery of the West Aquila.

Northern said it will claim a refund of the installment paid, plus interest and damages.  “If this claim is disputed, the company will seek an award via London arbitration in accordance with industry standard procedures and timescales.”

It is not the company’s first dispute with DMSE. As part of the May 2018 agreement for the West Aquila and her sister ship West Libra, the company also received a six-month option to acquire a third drillship, then known as the Cobalt Explorer, from DSME. As with the other two vessels, the company was buying a distressed asset from DMSE, reported that it had agreed to pay $350 million which was half the previous owner’s estimated total project cost.  

Renamed the West Cobalt, the company had till the first quarter of 2021 to accept delivery. However, in October 2019 Northern Drilling rescinding the resale contract “due to various reasons including repudiatory breach of contract by DSME.” A dispute related to the West Cobalt is currently in litigation and according to Northern not expected to be resolved in the near future.

The company said it was waiting for further market improvements in the deep water market pointing to several indications of signs of strengthening before the pandemic’s impact. Northern Drilling said it believed the fundamentals would continue to tighten and that the company would be ideally positioned with the three high-spec drillships. 

It remains to be seen what will happen with the third contract and the future business plan for Northern Drilling.