All at sea on the rig of doom

The Emerald Producer has sunk one company and savaged two others. Now it's someone else's turn to try their luck. David Bowen reports

ONCE upon a time there was an oil rig called Ali Baba. It was built in Norway in 1976 and for several years it plied its trade searching for oil in the North Sea.

Last week Ali Baba, now called the Emerald Producer, was sold by Trafalgar House to Norwegian Seatankers' management for pounds 21m. In the previous five years, it had been responsible for the collapse of one great British engineering name, Davy, and played a significant part in the enfeeblement of both Trafalgar House and an oil company, Midland & Scottish Resources. Between them, the three companies lost at least pounds 200m on the platform. Sailors would call it an unlucky ship; others might prefer rig of doom.

The story starts with a charismatic former oil industry diver called Martyn Deaner, who had made a fortune building a semi-submersible rig and hiring it out in the Far-East. Subsequent projects did not do as well but his company, Midland & Scottish Resources, continued to operate in the complex world of oil exploration. In 1987, Mr Deaner approached a quoted but near-moribund drilling company called Jebsens, which had been hit by the oil-price collapse and had its shares suspended at 15p.

He conceived a strategy designed both to develop an oil field and to push MSR into the big time as a quoted oil company. The Emerald field, east of Shetland, had been discovered in 1979 but had yet to be developed. It was in deep water and Sovereign, the biggest stakeholder, could not afford to tackle it. Mr Deaner reckoned he could, by converting a floating exploration platform and using it for production. Jebsens had three rigs that might do the trick; one of them was Ali Baba.

The prospects for Emerald looked good: analysts at BZW reckoned it contained at least 49 million barrels, and MSR projected production of 37 million barrels. Mr Deaner struck a deal with the Finnish oil company Neste Oy to take the field's entire output at a fixed and healthy price of $17.90 a barrel. The financing was complex, including commercial bank money and a loan guaranteed by the government's ship finance scheme. In early 1989, the final piece fell into place when Jebsens (soon to be renamed Midland & Scottish Resources as a result of a reverse takeover by Mr Deaner) signed a pounds 118m contract with Davy Corporation to convert Ali Baba from an exploration rig to a production plat- form. To satisfy the financiers, Davy agreed to buy the rig from MSR and to sell it back on completion in August 1990. It was in effect a fixed-price contract.

Davy had no rig-conversion experience and its Swedish partner, Gotaverken Arendal, pulled out of the deal almost immediately. But Davy pushed ahead, continuing an alarming habit of steaming into unfamiliar areas. It towed the rig to its Dundee yard, and started work.

According to Jon Hawksley, now managing director of MSR, the conversion was ill-managed from the start. "They got into construction before they had completed planning the work," he says. "Three months into the contract, the planning department had only just had its computers installed." As a result, "they were making components from rough drawings - some of them had to be reworked five times before they would fit."

In November 1990, three months after the deadline, Davy was promising delivery in the new year. "Martyn Deaner asked Sir Alistair Frame [Davy's chairman], to meet him on the platform," Mr Hawksley says. "When he saw it, his face fell because he could see it would not be ready on time." The management team was replaced, but relations between Davy and MSR had already soured. Davy sued the oil company for pounds 88m for supposed changes to specifications; it had lost so much money that this was its only hope of recouping anything. But the following May a judge threw its claims out, and Davy's directors concluded the company could not continue on its own. The pounds 118m contract had overrun by more than pounds 100m. In June 1991, Davy ended its 161- history as an independent firm when it was bought by Trafalgar.

Not that MSR was untouched: it had not paid Davy a bean for the platform, but it had lost about pounds 50m as a result of the delay. Despite this, Mr Hawksley says, "at this stage we thought our problems were essentially over". The Emerald Producer was towed out in September 1991, 13 months late, even though Davy's contractors had to work through the winter to finish it off. A second whammy then arrived in the form of a new appraisal of Emerald's potential: likely production was downgraded from 37 million to 15 million barrels. This caused the entire financial package to unravel - the banks said they wanted out, and the state guarantee vanished. Sovereign decided to quit too, and MSR - which had already committed pounds 80m to the project - had to buy its partners out and take full responsibility for the field.

MSR managed to arrange new bank finance, but the original plan to buy back the Emerald Producer was dead. Instead it came to a deal with Trafalgar under which it would charter the platform for $65,000 a day. "We still believed we would recoup our money because of the guaranteed revenue from Neste Oy," Mr Hawksley says.

Unfortunately, the Emerald Producer's wells had been drilled in the wrong place. Seismic surveys give 99 per cent accuracy in saying where an oil reservoir is, but when it is 5,000 feet below the seabed, that means there can be an error of 50 feet in any direction. The Emerald reservoir was only 50 feet deep and the error made was the full 1 per cent, which meant that two of the four wells failed to hit the oil.

Undaunted, MSR spent a year drilling another three wells. When they started producing, there was far too much water in the oil; the rock under the reservoir was fractured. "It was a fatal flaw. We realised then we wouldn't recover our investment," Mr Hawksley says.

A big oil company would have cut its losses, capped the well and withdrawn. MSR, which now had debts of pounds 100m, could not afford to. It could not just row away from the platform, because the environmental consequences could have been disastrous. Nor could its subsidiary operating the field go into receivership, because no receiver would take on such a complex operation. This was the first time a North Sea field had in effect gone bust. After frantic talks, a voluntary agreement was reached between the banks, Trafalgar and an increasingly anxious Department of Energy.

The banks held back, while Trafalgar said it would accept a halving of the charter rate. As a result, it had to reduce the book value of the Emerald Producer from pounds 66m to pounds 23.9m. This was at a time when the conglomerate was running into problems in its other activities - it could ill afford a pounds 42m write-off.

The Emerald Producer is still producing - it has sucked up 15 million tonnes of oil and is at least now making an operating profit; MSR's debt- meter has stopped ticking at pounds 100m. Mr Deaner, who lost a fortune, resigned a year ago, but Mr Hawksley's team is trying to make the best of a bad job. So far from steering clear of oil production, MSR commissioned a brand new platform, not unlike the Emerald Producer, which was built in Italy and is paid for largely by the Italian government. The company will hire the platform out, pointing out accurately that its experience in offshore production is unique.

The Emerald Producer itself is in excellent condition, Mr Hawksley says. When the field finally stops producing some time next year, it will be taken by its new owners to another location. With luck, it should continue working for many more years. But luck, as Seatankers' managers must know, has not favoured the platform. They will be keeping their fingers crossed.