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Royal Dutch Shell Terminates Rig Contract with Transocean

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By Mushhood Khan on Dec 28, 2015 at 9:07 am EST

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has terminated its rig contract with Transocean for the harsh environment semi-submersible rig, Polar Pioneer. The contract was initially scheduled to expire in 2017, but was rescinded today i.e. December 28. Transocean said in a press release that it would be compensated “for the early termination through a lump-sum payment.”

The contract for the Polar Pioneer rig was awarded to Transocean in 2013 at a $620,000 day-rate. The Polar Pioneer rig was a part of Shell’s controversial drilling project in the Arctic Ocean. It was used in the Burger J prospect in the Chukchi Sea, 70 miles from the village of Wainwright.

In September, the energy company suspended the Arctic drilling project for the foreseeable future, as it did not find enough traces of crude oil to warrant more exploration and production activities (E&P) in the region. Shell invested $7 billion in the project, where it used Polar Pioneer and Noble Discoverer drillship units.

The Polar Pioneer rig’s contract cancellation is the second in a row, with the first one being the termination of the contract of its drilling unit Noble Discoverer. Transocean Ltd.’s (NYSE:RIG) lump sum compensation amountfor Polar Pioneer rig contract will include adjustment to the company’s operating costs and the expenditure. The expenses include Pioneer rig’s transportation cost from Port Angeles Harbor to Norway.

The news of termination of the rig contract has come in at a time when Shell is pressing hard to close its merger deal with BG Group. After receiving approval from the five regulatory bodies, the company issued a prospectus for shareholders’ general meeting last week.

Shell and BG shareholders’ will vote on January 27 and January 28 next year to decide the future of the oil giants’ merger. Shell is determined on closing the deal successfully, as it expects $3.5 billion of cost synergies from the merger.

The European oil and gas corporation has taken measures to reduce its headcount and review its stake worldwide to streamline its global operations in order to make the deal work in a low oil price environment. The termination of the Polar Pioneer rig contract is a part of Shell’s initiative to keep its costs low and pool up money for the $70 billion merger.

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