Annual Report 2010 - SBM Offshore

Report of the Board of Management
with the lessons learned being incorporated into the
Emergency Contingency Plan.
Payment risk
Before the acceptance of each major contract, a credit
review and a detailed review of the terms and conditions
are carried out by experienced financial, risk, legal
and commercial professionals. Bank and/or parent
company guarantees are negotiated with customers,
and if doubts remain as to the financial strength of the
customer, payments due in respect of supply contracts
are covered by Letters of Credit. Payment risks on
banks and insurance companies are managed within
reasonable credit limits adjusted to account for credit
ratings of the institutions.
Lease risk
When making a proposal to lease a floating facility to
a client, ten main risk factors must be evaluated:
• client credit reliability and exposure limits;
• country stability, politics and exposure limits;
• health, safety and security;
• environmental conditions;
• contractual rights and obligations;
• performance criteria;
• finance availability;
• insurance availability;
• tax exposure;
• residual value exposure.
The Company reduces its exposure by a package of
means including guarantees, limited recourse financing,
interest rate swaps and insurance. When necessary,
finance structures may be arranged prior to bidding.
Beyond the traditional fixed day-rate lease model,
there is an increasing tendency for clients to look to
contractors to share risk, sometimes by linking a part
of the revenues to production throughput or even to
the oil price. A very careful approach to such proposals
is taken, firstly by capping the risk to an acceptable
level in a worst-case scenario and secondly by ensuring
an appropriate balance between the potential risks
and rewards. The Company has currently only one
lease contract (DeepDraft Semi® Thunder Hawk for
Murphy) where revenues are partially linked to production
throughput, with a second project (Tubular Bells,
for Hess and partners) currently in the early engineering
92 SBM Offshore – Annual Report 2010
phase under a Letter of Intent arrangement, to be confirmed
by full project sanction later in 2011.
Residual value risk relates to the portion of the unit
which is not amortised over the initial guaranteed lease
period. Deciding on that value involves taking a view
on the likelihood of the lease being extended, the technical
reusability of the unit and the expected market
demand. Correctly estimating the residual value is an
important component of the lease rate calculation. A
cautious approach is however taken when establishing
this key parameter and the residual book value is calculated
based on an economic life less than the design
life and below the estimated future market value.
Experience shows that almost all lease contracts have
been extended and so far no unit has been redelivered
to the Company with a market value lower than the
residual book value.
Operating cost risk
The SBM Offshore model operating contract is based
on a reimbursable cost principle and an inflation
adjusted fixed fee covering the Company’s production
management costs. The bidding rules of some clients
such as Petrobras require a fixed price contract and in
such cases the Company is exposed to cost inflation
over the long term. Such contracts are now subject
to a formula compensating for inflation although the
Company remains exposed to shortfalls between
revenue escalation under the formula and actual cost
inflation. The Company takes a conservative approach
in its lease pricing but some risk remains.
Political risk
The Company evaluates overall political and country
risk in discussions with banks and does not hold assets
in countries where acceptable insurance cover is unavailable.
The Company is exposed to revenue risks
from Brazil, Angola and other countries and risks are
reduced by a combination of solid contracting parties
or parent guarantee structures and insurance. Overall
country risk is evaluated objectively against credit limit
guidelines relative to total equity. Some operations
take place in regions which present identifiable security
risks and even terrorism. In such countries the risks are
assessed, protection measures are put in place and
crisis resolution plans established.