Japanese shipbuilder Kawasaki Heavy Industries (KHI) has announced its intention to terminate a shipbuilding contract with the Norwegian offshore service vessel operator Island Offshore Shipholding’s subsidiary Island Offshore relating to the Island Navigator top hole drilling / light well intervention vessel.

The decision was taken due to engineering difficulties and increased material costs, as well as various other issues faced by KHI since the vessel’s construction.

“The agreement is expected to see KHI incur around JPY13bn ($115m) in extraordinary losses on revaluation of inventories.”

Island Offshore has also been conducting discussions with its finance providers regarding the company’s financial restructuring since November 2016.

The discussions are said to have been held as a result of the current economic climate, where many offshore service providers are facing a severe business environment because of the stagnant oil prices.

Considering these circumstances, KHI intends to temporarily suspend the construction of Island Navigator.

In addition, KHI is also holding talks with Island Offshore regarding the shipbuilding project and the companies are said to have reached a mutual agreement to terminate the shipbuilding contract.

The agreement is expected to see KHI incur around JPY13bn ($115m) in extraordinary losses on revaluation of inventories (work-in-progress) in relation to the vessel’s consolidated settlement accounts for the third quarter of the fiscal year ending 31 March 2018.

KHI originally signed the shipbuilding contract with the Island Offshore subsidiary in November 2013 with the intention of entering the offshore development industry.

The termination is expected to be implemented this month following approval from the banks financing the project.

KHI expects to complete the disposition of losses related to the offshore development industry as a result of the termination of the shipbuilding contract.

The company also intends to reallocate its operational resources, including human resources, from the offshore development industry to the merchant ship business in order to advance its structural reforms ahead of schedule.