John Fredriksen

Billionaire Cashes In On Offshore Oil Rush
http://online.wsj.com/article/SB120700920323078811.html?mod=googlenews_wsj

With Supply Scarce, His Rigs Are Hot;
$600,000 Day Rate

By GUY CHAZAN
April 1, 2008

LONDON -- As a buccaneering oil trader, John Fredriksen shipped 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 shift 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 shipping 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 shipping in the postwar years. "There was an Ivy League of shipowners -- 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 shipping 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 shipped 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, shipping 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 shipping companies went bust in the slump and Norway's fjords were full of empty tankers. Mr. Fredriksen sensed an opportunity. He started leasing cheap ships and later buying many of them outright.

In the 1980s, Mr. Fredriksen was one of the few traders exporting 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 fashionable 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 shipowner 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 ships, claiming instead to be acting on behalf of a group of unnamed investors. That was common in the industry, where shipowners could be held liable for wrecks and oil spills, says fellow Norwegian Tor Olav Troim, vice chairman of Frontline, Mr. Fredriksen's shipping company.

"I was more secretive" in those days, says Mr. Fredriksen. Domestic critics denounced him for shipping oil to South Africa, in defiance of the apartheid-era trade embargo. He says all Norwegian shipping firms did it.

In 1985, he moved to Cyprus, lured by lower taxes and the island's reputation as a shipping 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 shipping company. It soon grew into a giant, and a key force in the consolidation of the fragmented shipping 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 Shipping, 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-shipping 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 ships 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. Shipowners 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 importers. 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 ship 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 shipping 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 shipping to fish farming to oil trading. His empire includes "dry bulk" ships, 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 shipyards 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, supported 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@wsj.com