LONDON: Britain is not usually considered the wild frontier of the oil industry, but it is proving to be a tough environment for what had been a fast-growing engineering and construction company called Petrofac.
The company on Monday said that it was likely to incur a deeper loss on an US$800 million natural gas plant that it has been building for the French oil giant Total on the Shetland Islands north of Scotland. The company’s stock price dropped about 10 percent in trading on Monday.
The company announced a write-down of 130 million pounds (US$194 million) less than three months after it disclosed that it would take a US$230 million hit on the same project. It said then that it was unlikely to have further losses.
The company’s chief executive, Ayman Asfari, said that in his 35-year career, spanning hundreds of projects in the Russian Arctic, Algerian desert and the tropics of Africa and Malaysia, “I have never faced a more difficult and challenging work environment” than in Britain. He mostly blamed bad weather and labor problems.
The setback highlights that companies in oil services are likely to be among the most vulnerable to the recent steep decline in oil prices. As the major oil companies that are the clients of these companies cut back spending, their revenues are likely to fall and they may run into difficulty over issues like cost overruns.
“In a recessionary or tough oil price environment, standard problems in the construction industry become amplified because when things go wrong no one wants to pay for them,” said Nicholas Green, an analyst at Bernstein Research in London.
Oil prices, which have fallen more than 40 percent since reaching about US$110 last June, have been rising during the last month. The international benchmark, Brent crude, was up slightly at about US$64 a barrel on Monday.
Despite the latest pledges from Petrofac that it had the North Sea installation under control, analysts said the losses and other problems could worsen. “Management’s assurances have (again) proven to be worth little,” analysts at Bernstein wrote in a note to clients.
The plant, which is almost finished, will process the output of a large new gas field called Laggan-Tormore, which Total is developing in waters northwest of the islands. The US$5.5 billion Laggan-Tormore project is likely to start this year and produce about 90,000 barrels of oil and gas per day, making it one of several substantial new ventures in British waters. Its production will temporarily slow the continuing decline of North Sea output.
Although Britain now produces less than 1 percent of global oil supplies, it remains the second-largest producer in Europe after Norway.
Petrofac, which is based in London and has been largely the creation of Asfari, has expanded rapidly into one of the world’s larger providers of engineering, construction and other services to the oil industry.
Its recent rise came during an easier high-oil-price environment, largely on the basis of work that Asfari obtained in North Africa and the Middle East. Over the decade through last year, revenue grew more than sixfold to US$6.2 billion, with profit rising about ninefold to US$581 million.
That performance seems to have encouraged Asfari to move into regions where he was less accustomed to doing business, like Britain, and to assume more risk on projects at a time when clients like Total have become less forgiving.
Asfari, however, blamed the environment in Britain, saying that costs were four times what the company pays elsewhere. The company attributed the new losses to bad weather on the islands, which are known for high winds, and on problems with the British labor unions. Most of Petrofac’s subcontractors had left the project, Asfari said, leaving the company to complete it largely on its own.
Workers from the GMB union did strike in January over demands that they be compensated for long travel times to the work site from barges where they were being housed. In a brief telephone interview, Phil Whitehurst, a GMB national officer, attributed Petrofac’s problems to its poor management of the gas project.
Asfari said that Petrofac would need to devote 2 million more worker hours than planned on the project at a cost of 120 million pounds.
It is no secret that the British oil industry faces difficult problems. Production is in decline, recent exploration results have been poor and costs have been soaring. The costs of producing a barrel of oil had been rising at about 20 percent a year, and some oil and gas fields in the area are said to be losing money.
Asfari said that his experience indicated that much of Britain’s remaining oil and gas reserves “will remain in the ground.” -- Reuters