The delay will add another US $3-4 million to the construction cost of Thule Power to about US $106 million including finance cost, supervision, administration, and extras to comply with the Saudi Aramco specific requirements to enhance the rig's capabilities. The performance bonus of US $3.6 million in favor of QGM will not be paid due to delayed completion.
Reasons for the three month delay refer to a mechanical breakdown during jacking operations at Dubai Drydocks of two of the jacking gears with long lead delivery of new spares. The default causing the breakdown has since been remedied. Also the progress made while at Dubai Drydocks was disappointing as leakage was found on all three spud cans produced by Dubai Drydocks. This caused extra docking time. At Dubai Drydocks we also experienced shortage of labor resources, limited access to cranes due to crane downtime for maintenance as well as limitations of access of QGM's and QGM's subcontractor's labor force. Consequently the improved performance expected while at Dubai Drydocks did not materialize. In addition, the preparations made by QGM prior to moving to Dubai Drydocks turned out to be inadequate. QGM's plan for meeting the completion date previously planned for mid February clearly underestimated the time and resources required after return of the rig from Dubai Drydocks.
Remedies have been implemented to secure May 2007 completion. The project management at QGM has been partly replaced and supervision strengthened also by bringing in experienced rig builders from Davie Shipyard in Canada. Sufficient workforce has been secured. The present plan is based on detailed and well documented CTRs which have been thoroughly quality checked. The plan allows for adequate time for contingency for the testing and commissioning phase.
The delayed completion has been presented to Saudi Aramco and cooperation will continue towards the adjusted commencement date with regular reporting of progress and coordination of integrated commissioning with Saudi Aramco's acceptance test procedures.
The effect of the delay in completing Thule Power will result in an increased funding requirement for Thule Drilling of about US $35 million. This requirement relates to about US $17 million for delayed commencement (including penalty) of the drilling contract, US $6 million relates to none exercise of 1.65 million warrants by founders of the Company (expire as delivery of Thule Power is completed after date of right to exercise on April 14th), and the rest to adjustment of Thule Power reconstruction cost, finance cost and other items. It is assumed that the 3.5 million warrants linked to the original bond financing will be exercised early May 2007. It is the intention of the Board of Directors to minimize dilution of values for the present shareholders by finding the optimal balance between bond and equity financing. Any equity financing will be made in favor of existing shareholders. Major shareholders have accepted to provide a subscription guarantee for the equity portion. The Board of Directors will revert with a final financing proposal.
The construction of the two 300 ft water depth jack-ups of the Friede & Goldman Super M2 design, Thule Energy and Thule Force, is progressing well at QGM and scheduled delivery is maintained as first and second quarter of 2008 respectively.
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