Exclusive interview: Petrofac CEO Ayman Asfari

“I am pleased to report that we have made a good start to 2010 and we are confident that this will be another year of strong growth,” said Ayman Asfari, group chief executive, when he delivered another bumper set of results in March.

Following some massive contract awards in 2009, the company’s Engineering & Construction segment is now working on ten large EPC projects in seven countries, including in Syria, where mechanical completion on the Ebla gas plant was achieved in February 2010, two months ahead of schedule.

In March Petrofac were able to announce the award of an EPC contract for more than US$600 million for gas sweetening facilities for Qatar Petroleum, and Asfari tells Oil & Gas Middle East that the company’s bidding pipeline is “extremely active in both its existing core markets and selectively in to new but adjacent markets, such as Iraq.”

In its most recent trading update to the markets the company was able to announce, based on orders secured to date, total backlog of US$6.9 billion at 30 June 2010, and a cash balance around the $1 billion mark.

“As a business we have been focused on geographies and clients where the capital expenditure plans have continued through this economic downturn,” explains Asfari.

Petrofac’s footprint is the Middle East, North Africa, Central Asia and the UK, with a small presence in the Far East.
“These areas have perhaps two-thirds of the world’s oil, and the cost of production, particularly with onshore oil in these locations, is extremely competitive compared to some of the deep offshore plays we see in places such as the Gulf of Mexico and Brazil,” he says.

This has meant that throughout the down-cycle, in these areas most of Petrofac’s client base, and in particular the National Oil Companies, have continued to push on with their development plans.

“We really haven’t seen a significant slowdown in our main markets. Indeed, we have been fortunate enough to book a backlog and continue to grow our business,” explains the chief executive.

Asfari is quick to highlight the fact that it’s the company’s capability to deliver close to the client has made returning customers of the regional majors and NOCs.

“In many of the areas we have been successful the biggest enabling factor is our ability to execute on the ground in these locations. In Oman, Kuwait and many others we have been present for many years so we have our relationships established with local construction sub-contractors and suppliers. Crucially, we have maintained our commitment to these markets both when we had business and when we did not have business,” explains Asfari.

The company started its Middle Eastern presence with an engineering office in Sharjah back in 1991, almost 20 years ago. “That was a strategic decision because we felt that this was a very important part of the world, and increasingly there was a need to be able to deliver to clients with a very high level of local content.

That is something which has remained part of our ethos and is something we continue to work on very hard. There is no doubt in my mind that this is something which has paid dividends during the down cycle.”

The company is increasingly using the Gulf hub office in Sharjah as an engineering epicentre for projects spanning thousands of miles out to Africa and Eurasia, as well as the Middle Eastern markets it serves.

“The Gulf offices have become responsible for more of the engineering work over the years, and now we can utilise support from our two large engineering offices in India and one in Jakarta as well. We have a blended manpower rate for our business which is quite competitive,” explains Asfari.

Maintaining a cost-advantage for energy clients has always been important, but rarely has the client has as much power as in the past two years. As big-ticket jobs dried up or were put on an hold across much of the upstream landscape, EPC firms struggled to find sufficient project work to maintain their size. The danger in tight times is that a bout of ruthless bidding means contractors end up with dramatically reduced margins, whilst bearing a greater portion of risk for big projects.

Asfari insists that the company never under-bids on projects, and that profitability has to be found through greater efficiencies within the organisation. “We always strive to maintain a reputation for being very competitive amongst our peers, and that includes everyone from Western or European peers, but also ourselves to Far Eastern competition such as the contractors from South Korea,” he says. “Obviously, with the squeeze we have seen on cost, we have in turn seen a reduction in the supply chain from our vendors and sub-contractors.

Also, some of the underlying commodities have come down in price from the commodity bubble in 2007 and 2008.”
The CEO says Petrofac has managed to maintain its margins by ensuring a total cost-competitive structure throughout the organisation, and by making sure it obtains better prices throughout its entire supply chain from vendors and sub-contractors.

“We have the ability to engineer in any of our offices. As we speak now we are executing a major lump sum contract from four engineering offices at the same time, so we have the ability to deploy resources that are available, which means we can remain nimble and flexible while leveraging cost effectiveness,” he explains.

Gulf Business

Asfari acknowledges the importance of the Gulf region to the company’s recent successes, and says a regional surge in activity shows the NOCs have managed the market conditions wisely, getting maximum value from their suppliers and contractors.

“We have seen a lot of projects come out of Abu Dhabi, and Kuwait has some very ambitious plans for their upstream and downstream. Of course, we are always monitoring the situation in Saudi Arabia too. We see a lot of work coming up there next year. Saudi Arabia has focused heavily on downstream work this year, but we expect upstream to really pick up there in 2011 with some big developments,” he adds.

For Petrofac the Gulf has been its most dynamic region, but Asfari is keen to point out the company has maintained a solid work portfolio in Algeria, and that North Africa is an exciting prospective market for EPC opportunities.

“GCC project wins garner a lot of attention, but we are active in other locations where we don’t have the same level of visibility. We have executed two large projects in Syria in the last two years, for example. There is going to be more work coming from there but it is going to be on a more modest scale than some of the wider Gulf projects in the coming years,” he explains.

The Middle East has been a significant source of capital projects that has helped drive the growth in Petrofac’s backlog recently, and key among those developments has been the company’s tie-up with Abu Dhabi’s energy powerhouse, Mubadala. The joint venture was formed in September 2008, and its significance for Petrofac cannot be overstated.

“The Petrofac-Emirates tie up is very important for us. We are partners with a blue-chip company like Mubadala, which shares the same values and passion that we have for excellence in delivery and building a competency locally in Abu Dhabi,” explains Asfari.

“The second factor is that we believe as a business we need to be able to provide world-class standards but with local delivery. Houston and Aberdeen were built because of their proximity to major oil producing regions. I see absolutely no reason why Abu Dhabi should not be the next Houston in ten to fifteen years,” he adds.

This is the vision that Mubadala has been nurturing, and Asfari says Petrofac is fortunate the investment giant chose them as a partner for the facilities engineering side of their global expansion. “They have a very ambitious vision and we hope to be able to realise part of that vision. I personally passionately believe that the competency and capability is moving to places where you are closer to the assets,” says the CEO.

“Ultimately the energy molecules and hydrocarbons are in this region so it stands to reason that you should be able to deliver the services here too at source,” he reasons.

Petrofac will supply all of the technical resources and support and for the first two years of the JV through a technical services agreement with the head office of Petrofac. Over time, Asfari says, the plan is to create all of these core competencies within the joint venture, so that the JV is able to operate relatively independently, but within the framework of the systems, processes and procedures that have been established by Petrofac, and which have proven to be successful in the past.

“The current mandate for the business is to pursue opportunities in the UAE and in areas where Mubadala is active and where Mubadala’s upstream division is investing. But the JV has a wide mandate and we will look at opportunities around the world, and if we look at an area where we feel that JV is better able to deliver a service we are happy to do that.”

Asfari says the company is currently in discussions with Petrofac Emirates to possibly execute some of the business in Turkmenistan that Petrofac is hoping to conclude, even though the Caspian region was not part of the initial geographic mandate envisaged for the joint venture.

“So far we have had a fantastic start. We have two major projects in Abu Dhabi – One for ADCO and another for GASCO and the JV is growing rapidly. It has new premises in the Mussafah area, we have 200-300 employees and the plan is to grow that over time. I think that both partners are satisfied with the progress to date. It is a very young JV and over the last 12-18 months we have been able to accomplish a lot,” says Asfari.

Having the clout and growing global presence of Mubadala made the proposition extremely attractive to Petrofac, and a more useful ally on the world stage today is hard to think of.

“We are looking at projects where Mubadala has invested in worldwide. The current plan is, should we be successful in being awarded the business, that work would be carried out by Petrofac Emirates.”

Project Pipeline

Despite the massive backlog, and projects currently under construction, Asfari says there has been no time to sit back and rest on the company’s laurels. The ferocious competition in the energy market is unresting, and as such, Petrofac is constantly engaged in the bidding process.

“This is a business where you always have to pursue projects. All the big projects we secured last year will, in time, free up engineering capacity for new work. We have an extremely active bidding pipeline and we are very hopeful we will convert some of those bids into projects by the end of the year.”

Asfari says he is optimistic about being able to grow the group’s $6.9 billion backlog by the end of the year.

“We have flagged to analysts that we are in discussions to convert the front end engineering and design work in Turkmenistan job into a lump-sum turn-key project sometime in the next few months. That would be a very big piece of business in the $3 to $4 billion range.”

In addition to the mega-projects, Asfari says other opportunities exist, which are smaller in scope, but are in markets the company has been historically strong in. “We are hopeful that we will be able to maintain our growth trajectory, at least in the medium term,” he beams.

Challenges ahead

Although the company is tremendously busy, Asfari says he and his fellow board members still find time to focus on the strategic direction and management of the company.

“This year there is a huge amount of work going on inside the business in terms of tightening up the integrity of our delivery. By that I mean our quality operations and the integrity of our engineering. Following the disaster in the Gulf of Mexico, I think it really shows how important it is to keep processes and systems extremely tight to ensure that the delivery we have is not only differentiated by being competitive, but also by being best in class as far as quality is concerned.”

To do this the management team have flagged up key performance indicators within the business and are monitoring these so that being best in class in terms of delivery is more than a slogan. “That is my main task and my primary objective for this year and for the medium term,” he explains. “We want to grow the business but not at the expense of our quality principals or by cutting corners, or by compromising the quality of delivery in any way.”

Asfari says that his priority is maintaining a risk profile which is sustainable. “The last thing we want is to grow indiscriminately and end up having a disaster, tarnishing the reputation and wiping out all the value that has been created by thousands of employees over the past two or three decades. That is a challenge I’m always mindful of.”

Asfari clearly enjoys the responsibility, and says that work never stops being exciting and rewarding for him. “Personally, the most enjoyable part of my role is working with a very talented and professional and personable executive management team. My colleagues are some of my best friends and I very much enjoy the interaction,” he enthuses.

“I really do believe we are different in the wider upstream business. We have different outlooks, different risk appetite and diverse backgrounds, but I think that diversity amongst peers is a real strength.”

He says having an environment where people challenge each other, whilst unified in an overall objective, is exhilarating. “Ultimately, I really enjoy coming to work in the morning, and the day that stops it’s the time I stop being a CEO. But so far
I’m having a great time,” he quickly adds.