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Velesto abandons sunken drilling rig off Malaysia

The Velesto rig sinking off Malaysia
Velesto Energy's Naga-7 jack-up drilling rig sinks off Malaysia

Velesto Energy’s NAGA (dragon) 7 jack-up drilling rig that sunk offshore Malaysia last month while under contract to ConocoPhillips will be abandoned.

The driller said it has issued “a notice of abandonment” to its insurers and is currently awaiting their response. Although the rig looks set to be written off, presumably it will eventually have to be removed from the seabed. Still, industry observers suspect if may be left as a man-made reef.

The company, which reported a loss yesterday, said in its latest quarterly results that the rig remains submerged off the coast of Sarawak following the incident on 3 May. The rig sunk due to the penetration of one of its legs into the soil formation whilst jacking up at ConocoPhillips Salam-3 well, said Velesto.

The incident area is secured while Velesto is working with the insurance underwriters and Protection & Indemnity (P&I) Club on the way forward. Velesto said the rig is adequately covered by insurance.

“Progressing on the insurance claims, Velesto Drilling, as the insured under the Hull and Machinery (H&M) policy has on 31 May 2021 issued a notice of abandonment of the submerged rig, Naga 7 to the H&M insurers, pursuant to the H&M policy and
currently await their response,” added the driller.

“The incident location is being monitored for security and any potential adverse impact,” added the Kuala Lumpur-listed company.

“All 101 personnel on board were safely transferred to shore and all the relevant authorities were duly informed,” said Velesto.

Although Velesto last month said that it was investigating the incident, it remains unclear who is responsible for the sinking of the jack-up rig that was working for ConocoPhillips off Sarawak. So far, Velesto and ConocoPhillips have failed to answer requests from Energy Voice regarding where responsibility for an inquiry into the accident lies.

Significantly, the industry needs a clear understanding of what happened to avoid similar incidents in future. However, an open public inquiry will be unlikely in Malaysia.

Kuala Lumpur-based analyst Raymond Yap at investment firm CGS-CIMB last month described the incident as a possible “blessing in disguise” as the knock-on valuation for the rig may be positive as its insurance claims could exceed the written-off net book value (NBV), which is estimated at MYR400 million ($97 million).

“First, the Naga 7 is fully insured, and the insurance value is pegged to the outstanding debt secured on the rig,” said Yap.

He believes the insurance claims are conservatively worth MYR350 million but could exceed the net book value of the jack-up rig.

“In a perverse way, it may be better to secure a near-term cash payout than to suffer uncertainties over asset underutilisation,” he added.

Currently, three of the company’s six available jack-up drilling rigs are working. Another rig is scheduled to start mobilisation by the middle of June, presumably to replace Naga 7 and continue the drilling campaign for ConocoPhillips at another location. Its two remaining rigs are being proposed for several ongoing tenders.

In Malaysia, while most of the drilling contracts for the year have been awarded, there is a small number of new contracts, which are expected to be tendered and awarded this year, said Velesto.

Meanwhile, the demand for workover services and plug and abandonment (P&A) activities is improving inline with Petronas’ activity outlook 2021-2023, although progress has been slower than anticipated and some projects have been postponed to 2022, said Velesto.

For the first quarter ending 31 March Velesto posted a net loss of RM60.47 million from a net profit of RM16.33 million over the same period a year ago after drilling rig utilisation dropped.

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