Ukraine's murky Black Sea tenders cast shadow over Norway

By bne IntelliNews April 19, 2012

Graham Stack in Oslo -

Interviews with Norwegian executives shed new light on murky Ukrainian deals in 2011, where rigs sold by Norwegian companies to unknown parties were resold to a Ukrainian state oil company in apparently fixed tenders for enormous mark-ups.

Ukraine's state-owned Black Sea oil and gas driller Chornomornaftogaz (CMNG), a minor and moribund company prior to 2010, became - entirely unexpectedly - one of Ukraine's largest investors in 2011, with a spending spree of about $950m on buying new rigs and support vessels, a large part of which was spent in Norway. The spree was financed by CMNG's parent company, Ukraine's national gas operator Naftogaz Ukraine, which is itself dependent on state cash infusions to stay afloat. Suspicion is strong that CMNG's spending spree was motivated not by the riches of the Black Sea shelf, but by the opportunity to siphon off hundreds of millions of dollars from the state.

Esa Ikäheimonen, CFO of the world's second largest offshore driller, Norway's Seadrill, confirmed to bne in an interview that Seadrill in April 2011 sold its West Juno rig to a UK shell company Highway Investment Processing for $248.5m. In parallel to the acquisition from Seadrill, Highway Investment Processing participated in a Ukrainian tender to sell a rig of the same specifications to CMNG - and won the tender, apparently selling for just over $400m the rig purchased for $248.5m from Seadrill.

The news broke almost exactly one year ago, and was then followed by a second identical case in October 2011. The scandal has sent shockwaves through Ukraine, forcing government officials and state company executives to take to the airwaves to deny the allegations, but largely failing to alleviate suspicions. In Norway, however, the press completely missed the story - despite the involvement of local heroes of the scale of Seadrill, a company with a market capitalisation of around $17bn, which is owned by Norway's richest man, tanker king John Fredriksen, who is chairman of the board.

"That's news to me," said Ikäheimonen of the sale of the former Seadrill rig to CMNG for $400m. "You're telling me the Ukrainian government, who became the ultimate owners of the rig, paid $400m for our rig and had a tender out for similar rigs?" He called the price tag of $400m "ridiculous," but insisted that the company had been unaware of any scandal in Ukraine until now.

Asked why Seadrill had not participated in the Ukrainian tender directly - which could theoretically have netted the company $150m more for the same rig - Ikäheimonen said: "We have never even heard of such a tender. If that tender would reappear in front of me, I would definitely be very interested, but also a little suspicious as to why someone pays $400m for something not quite worth it."

Ikäheimonen said Seadrill had dealt directly with Highway Investment's representatives. According to the Seadrill CFO, the Highway Investment people were "English citizens" to the best of his recollection, but he said he could not name names because he had not met with them personally. He said there had been no involvement of Ukrainian state officials or state company executives in the deal. Seadrill have not disclosed the beneficiaries or representatives of Highway Investment. "What happened subsequently with the rig is not our business," Ikäheimonen said.

The Seadrill executive personally responsible for the sale, Jan Olaf Osthus, told bne that the fact that the rig would be deployed in Ukraine had been "part of the background" to the deal, and that the purchasing structure behind the Highway Investment vehicle had been from the "energy business," but said he could not disclose the identity of the counterparty.

Ikäheimonen said Seadrill had been paid a "good market price" for the rig by the intermediaries, saying the rig would cost $230m drill-ready from the yard, and said the company "felt comfortable with the transaction." The company's accounts say Seadrill made $23m on the deal.

Analysts tell bne that Seadrill indeed got a very good price for its rig, but that the concept of a market price is tricky for the illiquid market in jackup rigs, which are mobile rigs with support legs used for drilling in shallow water. The only comparable deal in 2012 was another second controversial Norwegian rig purchase by CMNG, discussed below. "Even a year later, with markets improving, I still view this as a solid price," says Kjetil Garstad of Arctic Securities, referring to the Seadrill sale of its rig.

Rigged rig tender

Ukrainian media allege the Ukrainian tender was rigged, since the difference between the winning and losing bid was only $10m. Ukrainian law requires state-owned companies to hold procurement tenders with more than one bidder and to publish the results.

Moreover, both the UK vehicle Highway Investment and the New Zealand vehicle Falcona Systems bidding against it in the tender involved the same Latvian nominee directors Erik Vanagels and Stan Gorin in their structure. This points to both vehicles being set up by a company incorporation network run by Latvian boutique banks to launder grey and black money, according to investigations of the network. Highway Investment has its bank account at Latvia's Trasta Komercbanka, according to a copy of its supply contract with CMNG leaked to the press.

Companies involving the Latvian proxy directors Erik Vanagels and Stan Gorin have been publicly named in investigations in 2009 and 2010 into Ukrainian sanctions-busting arms shipments to South Sudan, as well as a Ukrainian flu vaccine procurement corruption scandal. But Ikäheimonen claimed Seadrill had performed "reasonable" due diligence on the buyers, and that the use of special purpose vehicles was common in this branch of the business.

Seadrill announced the deal on April 13 after Highway Investment's Ukrainian tender victory had been published online, and only closed the deal with Highway Investment in the third quarter of 2011, according to company announcements.

Ukrainian officials have said that the difference in prices paid for the rig by Highway Investment and then by CMNG is accounted for by extra equipment and accessories supplied to the rig before it moved to the Black Sea. "First, we held a tender observing all of the rules; second, we make no secret of the fact that the cost of the platform's production at the plant is $250m... We took a platform with minimum equipment, and the platform is to have additional equipment installed to operate on the Black Sea," head of CMNG's parent company Naftogaz Ukrainy, Yevhen Bakulin, explained on TV in June 2011, as quoted by Interfax Ukraine. According to Bakulin, the $150m extra equipment was needed to protect against any environmental disaster such as the 2010 Deep Horizon catastrophe in Gulf of Mexico.

Neither tender documentation nor the contract for the rig between CMNG and Highway Investment leaked to the press specify extra expenses besides the cost of the rig. "That would be an enormous amount of money for parts and equipment," Ikäheimonen commented, saying the rig had been sold drill-ready and had already drilled off Burma.

Ikäheimonen, who will quit Seadrill in the second half of 2012, added in later email comments that, "it is my understanding that the subsequent deal included more assets than just the rig."

Hiding Highway Investment

Guttorm Bentsen, the broker responsible for the deal at Norway's Platou, the world's largest rig brokers, when asked about Highway Investment by Norwegian newspaper DagensNaeringliv, said: "The company you are referring to does not exist."

Shown documents of payment transfers from Highway Investment to a Platou escrow account, Bentsen explained the difference between the $248.5m purchase price from Seadrill and $400m tender price in an email seen by bne by saying: "In between, there is the upgrade of the rig and transport of the rig. Then there is the purchase of a helicopter and supply ships and a few other things. When you add up everything, and the work it takes, so you get the sum."

The support vessel deal may however add to, rather than subtract from, the murkiness surrounding the CMNG acquisitions.

Ukrainian state tender information shows that CMNG indeed acquired support vessels in March 2011, but did so not as part of the rig deal, but in two separate parallel tenders. CMNG bought two anchor-handling tug ships (AHTS) for $120m and two fast crew supply vessels for $34.7m from a British vehicle Verylux Company Ltd in tenders held late March 2011. Verylux Company bears identical hallmarks to Highway Investment, and is registered at the same UK address.

The AHTS vessels supplied to CMNG for $60m apiece were the Petra Admiral and Petra Majestic, sold by Malaysian operator Petra Perdana Berhad to an undisclosed buyer for an undisclosed sum, according to shipping records that list CMNG as the current owner of the vessels. Neither CMNG nor parent company Naftogaz Ukrainy responded to requests to confirm this information.

According to the shipbuilders Labroy Marine, the order price of the vessels was $45m apiece in 2007 at the peak of the market. Prices then collapsed by up to 50% in 2009 during the economic crisis. Martin Coombe of shipbrokers Marcon International put the market price for AHTS vessels of the same specifications in 2011 at $30m-35m apiece.

The two fast crew supply ships now operating for CMNG, Ocheretay and Kalos Limen, were supplied by Damen Shipyards Singapore, according to the company. Damen refused to disclose the original sale price. Captain Tork Buckley, Asia editor of the Superyacht Report, ballparks total price for both vessels at maximum $15m, depending on fitting. CMNG bought the pair from the intermediary Verylux Company for $34.7m, according to tender documents.

Bentsen, who brokered the West Juno rig deal in tandem with Platou's Moscow broker Odd Arild Espedal, left Platou in the first quarter of 2011 for reasons not connected with the rig deal, according to Platou. Espedal refused to talk to bne about the deals.

Standard procedure

In September and October last year, Ukraine's CMNG held a tender for a second jack-up rig, with bids again clustered around $400m. The tender was won with a bid of $398m by a small Latvian shipyard, Riga Shipyard, that has no history of building rigs. Payment on the contract in the last quarter of the year caused the Latvian shipyard's annual turnover to more than triple in 2011 compared with 2010, according to the company's financial statements.

In parallel to the tender process in Ukraine, in Norway a smaller oilfield service company Standard Drilling sold a rig similar to the West Juno, but still under construction at the producer Keppel's yard in Singapor, to "an undisclosed UK-incorporated company." The rig sale was announced September 1.

Despite naming a UK company as immediate purchaser of the rig, Standard Drilling sold their rig "to a Ukrainian company," said Platou Markets' head of equity research, Anders Bergland, without naming the buyer. The leading databank for the world's rig fleet, Riglogix, lists CMNG as the new owners of the rig. Keppel-subsidiary Caspian Shipyard Company, who are reassembling the West Juno rig in Turkey after it transited the Bosphorus, also confirmed to bne that a second Keppel rig from Singapor will pass their way moving to the Black Sea in 2012, thus pointing to the Standard Drilling rig.

According to Bergland, Standard Drilling sold their rig for $220m. Company accounts show Standard Drilling earned $37m on the sale of the rig.

Standard Drilling CEO Martin Nes refused to comment on the deal, but confirmed to bne that the sale of its rig was brokered by Guttorm Bentsen, after his leaving Platou earlier in the year. Bentsen refused to speak on the matter.

Mark A. Jackson, who was CEO of Standard Drilling at the time of the rig sale, resigned suddenly from the company in November 2011. In February, he was indicted in the US for bribery of Nigerian officials in his previous capacity as CEO of US oilfield service providers Noble. "The rig deal had nothing to do with Jackson," Martin Nes insisted, in comments to bne. Jackson refused to comment to bne on the matter.

That Ukraine continues to plumb the depths in terms of transparency should come as no surprise to those investors who watch the country with growing alarm. However, Norway normally tops the rankings of non-corrupt places to do business, coming in at 6th place in Transparency International's latest "Corruption Perceptions Index" compared with Ukraine's 152nd place. But bad money drives out good, and the 2011 Ukraine deals may yet cast a shadow over Norway's reputation.

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