http://online.wsj.com/article/SB120700920323078811.html?apl=y&r=822375
Sea Change
Billionaire Cashes In On Offshore Oil Rush
With Supply Scarce, His Rigs Are Hot; $600,000 Day Rate
By GUY CHAZAN
April 1, 2008; Page A1
LONDON -- As a buccaneering oil trader, John Fredriksen ****pped crude from
trouble spots like Iran and used hardball tactics to build up the world's
biggest tanker fleet. The son of a welder, this modern-day Onassis is now
Norway's richest man, worth at least $7 billion.
He is also one of a new breed of entrepreneurs reshaping the oil business.
Mr. Fredriksen has amassed an array of state-of-the-art oil rigs capable
of
drilling in the world's deepest oceans. With production declining in
mature
basins like Alaska, the deep waters of the Gulf of Mexico and offshore
Brazil and West Africa are oil's hottest real estate. But the rigs that
can
drill there are in short supply. That means contractors like Mr.
Fredriksen
can charge huge premiums for their services.
His success is part of a broader power ****ft from Big Oil -- the Shells,
Exxons and BPs of the world -- to the oil-field-services sector. As they
venture into ever harsher and more remote environments, the majors are
becoming more reliant on these outside contractors -- geologists, well
testers, seismic data experts and offshore drillers -- to find and extract
their crude. The service companies are the new rule-setters in an
increasingly costly game.
Helping to fuel their rise is a growing fear that the world's oil
production
may be about to plateau and decline. "Peak oil" anxiety has contributed to
the steep increase in the price of crude, which has nearly tripled since
2004. Peak theory is now feeding into wider concerns that demand for all
the
world's resources -- not only oil but wheat, copper and other commodities
--
is increasing faster than supply, creating new limits to global growth.
Mr. Fredriksen made an early bet many thought was insane. Three years ago,
his company, Seadrill Ltd., broke one of the cardinal rules of the rig
business. It ordered two "ultradeep water" rigs, capable of drilling in
waters at a depth of at least 7,500 feet, for nearly $900 million -- on
spec. It didn't have a single contract from an oil company to guarantee
them.
"We didn't feel it was a risk," said Mr. Fredriksen, a 62-year-old with
piercing blue eyes, elegantly attired in a blazer and cravat on a recent
afternoon in his London office. "We knew there was a boom coming on."
There's no telling how long that boom will last. But Mr. Fredriksen sees
years of strong demand ahead. The amount of oil pumped from deep-water
fields will nearly double between 2005 and 2010 to about 11 million
barrels
a day, according to the U.S. Energy Information Administration.
Douglas-Westwood, a consulting firm, says capital spending on deep-water
oil
will rise to $25 billion annually by 2012, nearly double the figure for
2003.
Yet there are only 39 rigs in the world capable of drilling in ultradeep
water. Seadrill has four of them, with eight more under construction.
While
there are older companies that are bigger than Seadrill, few have such a
modern fleet.
That gives Mr. Fredriksen enormous pricing power. His units are in such
demand he can charge major oil companies nearly $600,000 a day to use
them.
Similar rigs were earning about $70,000 a day just five years ago. With
leasing rates like these, a vessel that cost half a billion dollars to
build
can pay for itself in as little as four years.
The Oil Outsider
John Fredriksen was born in a working-class Oslo suburb in 1944. His
humble
background set him apart from Norway's blue-blooded ****pping aristocracy
--
men like Sigval Bergesen and Anders August Jahre, the Nordic equivalent of
the Vanderbilts and Rockefellers. They, along with the tycoons of Greece
and
Hong Kong controlled the world of international ****pping in the postwar
years. "There was an Ivy League of ****powners -- the founding fathers of
the
business," says Boris Nachamkin, one of Mr. Fredriksen's first bankers.
"He
was the outsider."
His first job was as a ****pping broker, running cargoes of fish from
Iceland
to Hamburg, Germany. After brief stints in Canada and New York, he moved
to
Beirut in the late 1960s. There he ****pped crude out of Saudi Arabia and
Iraq and sent back cargoes of refined products. He soon developed a firm
grasp of the oil trade. "He knows how oil moves, who gets it when it's
tight
and when it's flowing quickly," says Morten Arntzen, another of Mr.
Fredriksen's former bankers and later a business partner.
By the mid-1970s, ****pping was in deep trouble. The 1973 Arab-Israeli war
sent oil prices into orbit. Fuel consumption plummeted in the West, and
demand for long-haul tankers collapsed. Many venerable ****pping companies
went bust in the slump and Norway's fjords were full of empty tankers. Mr.
Fredriksen sensed an op****tunity. He started leasing cheap ****ps and later
buying many of them outright.
In the 1980s, Mr. Fredriksen was one of the few traders ex****ting Iranian
oil during the Iran-Iraq war, shuttling tankers through the Persian Gulf
from Kharg Island, a big oil terminal that was repeatedly targeted by
Saddam
Hussein's air force. Mr. Fredriksen says his tankers were hit three times
by
Iraqi missiles.
A noted reveler, he would often hold court throughout the 1980s at Oslo's
fa****onable Theatre Café. Locals nicknamed his regular table there Kharg
Island.
"When he was traveling, he needed three brokers with him -- one recovering
from the night before, one on duty and the other preparing for the next
day," says Clarence Dybeck, a fellow ****powner from Sweden. "He had a
tremendous capacity for work."
In the world of Norwegian business, he tended to keep a low profile. He
never admitted to owning any ****ps, claiming instead to be acting on
behalf
of a group of unnamed investors. That was common in the industry, where
****powners could be held liable for wrecks and oil spills, says fellow
Norwegian Tor Olav Troim, vice chairman of Frontline, Mr. Fredriksen's
****pping company.
"I was more secretive" in those days, says Mr. Fredriksen. Domestic
critics
denounced him for ****pping oil to South Africa, in defiance of the
apartheid-era trade embargo. He says all Norwegian ****pping firms did it.
In 1985, he moved to Cyprus, lured by lower taxes and the island's
reputation as a ****pping center. "It's almost impossible to do business in
Norway today," he says, citing the tax regime and frequent regulatory
changes. In 1986, the Norwegian authorities charged him with fraud,
alleging
that his tankers were found to have used customers' cargoes for fuel.
Police
raided his offices in Oslo, and he turned himself in a few days later. The
main charges were later dropped and he paid a fine on a lesser charge. But
the affair still rankles: It was motivated by "jealousy" of his success,
he
says.
Mr. Fredriksen's penchant for secrecy changed in 1996 when he bought
Frontline, a publicly listed Swedish ****pping company. It soon grew into a
giant, and a key force in the consolidation of the fragmented ****pping
business. In 1996 he owned seven tankers. By 2001, Frontline had 70. The
company today has the world's biggest tanker fleet, with 86 vessels.
Hardball Tactics
A year after he bought Frontline, he launched a hostile takeover bid for
ICB
****pping, a Swedish tanker firm. His methods -- full-page ads in local
newspapers, angry letters to ICB board members, pressuring shareholders --
shocked some Swedes. "No one had seen those sort of tactics before in
Sweden," says Clarence Dybeck, the then head of ICB. "He could be quite
brutal." After a grueling two-year battle, he finally won control of the
company.
Mr. Fredriksen was meanwhile benefiting from big changes in the
oil-****pping
industry. After notorious oil spills like the Erika, a tanker which broke
up
off the coast of France in 1999, oil companies stopped chartering
dangerous
single-hull tankers. Such ****ps have a single outer shell between the oil
and the ocean; double-hull tankers, which have an extra space between hull
and storage tank, are considered safer. ****powners who had invested in
double-hulls cleaned up. John Fredriksen was one of them.
The tanker business was also coming out of its slump. Fields close to the
big oil-consuming countries -- in the North Sea, Alaska and Mexico -- were
declining. Crude was increasingly coming from faraway places like West
Africa and the Middle East. China and India were emerging as major oil
im****ters. Long-haul tankers were back in vogue. With his expanded fleet,
Mr. Fredriksen cashed in on a freight market that was entering a new
golden
age. By 2001, the chartering rates paid by the oil companies to ****p crude
around the globe were the highest they had been in 30 years.
Already a billionaire, in 2002 he bought the Old Rectory, a mansion in
London's ritzy Chelsea district, from the Greek ****pping family of
Theodore
Angelopoulos, for £38 million (at the time, about $57 million), one of the
highest prices ever paid for a London home. The house has a rich history:
The Battle of Waterloo was planned in its garden.
He also continued to diversify. He currently has stakes in dozens of
businesses, from ****pping to fish farming to oil trading. His empire
includes "dry bulk" ****ps, those that carry things like coal, steel and
grain, as well as liquefied-natural-gas carriers and tugboats that supply
offshore oil platforms. His company Marine Harvest is the world's biggest
producer of farmed salmon. Among other investments: Aktiv Kapital, a buyer
of distressed consumer debt, and Arcadia Petroleum, a big crude-oil
trading
firm.
A Big Rig Bet
One of his boldest moves, in terms of startup costs and the risk of
failure,
was into the drilling business. As oil prices began their ascent in 2003,
contractors were putting in big orders for mobile drilling platforms that
operate in shallow waters. But Mr. Fredriksen says his contacts in Asian
****pyards told him the majors weren't investing enough in deep-water rigs.
Yet deep-water drilling's potential was clear: Offshore Angola, some
companies drilling for crude had an unprecedented 95% "hit" rate, says Mr.
Troim. Messrs. Fredriksen and Troim started ordering semisubmersibles, or
"semis" -- one of the most advanced kind of floating rigs. In June 2005, a
month after taking the newly created Seadrill public, they commissioned
two
semis, one for $394 million and another for $490 million. "Everyone was
laughing at us at the beginning," says Mr. Troim. "We were Mr. Nobody."
Larger than a football field, semis are floating vessels, sup****ted by big
pontoonlike structures submerged below the sea surface, that can operate
in
waters up to 10,000 feet deep. Dynamic positioning -- a
computer-controlled
thruster system fed by data from satellites and transponders located on
the
seabed -- keeps them in place directly above the oil well. The price tag
for
such a vessel is now around $655 million.
Seadrill expanded aggressively, ordering new rigs and swallowing up
competitors in a flurry of deal making. Its market value has grown from
$200
million when it listed in 2005 to $10.5 billion today.
"Fredriksen and Troim move very fast," says Odd Harald Hauge, a Norwegian
journalist who has written two books on Mr. Fredriksen. "They do deals on
napkins."
A Wave of Mergers
One of their most daring acquisitions was of Smedvig ASA, a big Norwegian
driller, in January 2006. Noble Corp., a U.S. rival, had taken a 30% stake
in the company, but Seadrill snapped up shares and eventually forced Noble
to sell out. "We bought that in a taxi in Seoul," says Mr. Fredriksen.
The revved-up drilling sector was being swept by merger fever. In July
2007,
Transocean Inc. and GlobalSantaFe Corp., the world's two biggest
offshore-drilling contractors by market value, agreed to an $18 billion
merger. Seadrill itself has often been touted as a potential takeover
target
by a more established U.S. or Asian driller. Mr. Troim said it approached
some U.S. rivals about a tie-up in 2006, but the talks went nowhere.
A merger would help solve one of Seadrill's key problems -- a lack of
staff,
especially engineers and drill operators who are in short supply. Seadrill
has tried to deal with that by aggressively poaching managers and crews
from
its peers. The company recently hired one of Transocean's top executives
to
run its Houston office.
There are some worries the sector's boom may be unsustainable. Analysts
fret
that contractors may have ordered too many rigs, which will lead to
overcapacity and a collapse in day rates. But others say high oil prices,
which underpin the business, will stay lofty for years to come, and that
with many rigs contracted out well into the next decade, the deep-water
drillers have a bright future.
For the time being, the majors are in a bind. In the 1990s, when oil
slumped
to $10 a barrel, they aggressively cut costs, shed jobs and divested
themselves of assets. When oil prices recovered, they often lacked
personnel
and equipment and were forced to outsource a lot of the work of drilling
and
extracting crude.
Some of the majors are now resorting to building their own, cheaper rigs.
Royal Dutch Shell PLC has designed a new class of drilling vessel, the
bully
rig, which it says is suitable for both deep-water and arctic conditions
and
will cost 20% less to lease than the competition. But it will only take
delivery of the first two in 2010.
Mr. Troim was recently in Houston meeting with potential customers: One
person familiar with the talks said oil executives came away shaken by the
sky-high rates Mr. Troim was demanding -- up to $600,000 a day. Mr. Troim
says Seadrill's charges are typical for the industry, and the market can
bear them. "It's been fun to see a company grow from two men and a dog to
being a major player in this market," says Mr. Troim. "More fun than
making
money."
Write to Guy Chazan at guy.chazan@[EMAIL PROTECTED]
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