Engineering the Emirates

Spawned from Mubadala Petroleum Service’s desire to invest in long-term, capital intensive value creation projects, and Petrofac’s s craving for more of the large-scale, complex Middle Eastern energy projects, the relatively fresh faced Petrofac Emirates was born just shy of two years ago.

Both parent outfits have been rising stars in their respective fields for the past eight years. Mubadala has steadily and successfully stuck to its core values whilst widening its participation in the energy business. Petrofac, though formed in 1981 in Houston, Texas, only really went international a decade later, opening its EPC centre in Sharjah, UAE in 1991. In 2002 the company bought PGS Production, acquiring a foothold in Aberdeen’s important offshore facilities management business. At this point the company employed around 900 people. Skip forward nine years and the company’s 12,500 employees are entrusted with delivering on a 2009 backlog of US$8 billion, and last year generated revenues of $3.7 billion.

The logic of joining together a vehicle which represents both the financial muscle and lofty ambition of Abu Dhabi’s 2030 vision, and an energy EPC specialist at a time when crucial upstream and process plant decisions are being made not only in the UAE, but also across much of the MENA region is irrefutable.

Oil & Gas Middle East met with Peter Warner at the company’s corporate HQ in Abu Dhabi’s Mohammed Bin Zayed City, the new commercial hub emerging from the desert beyond Mussafah’s industrial areas. Looking relaxed following an Eid break in Europe, Warner sets out the mission of Petrofac Emirates. “First of all, I should mention that our remit covers all EPC projects onshore in the UAE.”

The company became a legal entity in January 2009. “Since then we have been involved in two major projects, the first of which was a US$ 2.3 billion project for Abu Dhabi Company for Onshore Oil Operations (ADCO) relating to the development of the onshore Asab oil field,” says Warner.

Under the 44-month lump-sum contract, Petrofac will provide engineering, procurement and construction (EPC) services to upgrade the production capacity of the Asab field.

The rejuvenation of the Asab field is central to ADCO’s overall development plan to increase its production and achieve the committed 1.8 million barrels of oil per day contributing towards achieving the country’s additional production. In addition to the production capacity upgrade of Asab, Petrofac’s scope includes upgrading the facility’s capacity to accept increased production from Sahil, Shah and other south east fields and to upgrade the associated utilities and water handling facilities.

The Asab development is one of the largest upstream projects recently awarded in the region, and fortuitous timing, says Warner, was key. “This project was awarded on the 25th January 2009 and the company was approved by the Supreme Petroleum Council on the 23rd – so timing is everything,” he quips.

“We are doing this project with Petrofac. However, now we are in a position to say that all of the construction management staff and all the engineers in the field are Petrofac Emirates staff as permanent employees – that’s very significant, these key positions are not secondees,” explains Warner.

That project is now over 50% complete, and slightly ahead of schedule. “It’s going well. Obviously all projects have new challenges every day so we are very pleased with the progress,” he says.

“Another project, awarded in July 2009, is the US$ 2.1 billion NGL 4 project in Ruwais for Gasco” says Warner.

“This is an interesting project for several reasons, in particular the way we are handling the engineering work. When we took on this job we still hadn’t fully developed our engineering capability, but we were more fully advanced in all our other departments,” he explains.

“The project is being conducted as a joint venture with GS E&C, a major Korean engineering firm. Petrofac is the project leader, but we are doing the engineering in their offices in Seoul. We have had a team there working jointly with them, and now the activity is moving to site as expected,” says Warner.

The CEO stresses that both companies are equally capable of doing the project, but at the time Petrofac Emirates qualified, the thinking was that the project was too large. “We were also looking ahead to the fact that there were several project awards coming up around the same time, so it made strategic sense to have a partner. As we got nearer the time, depending on what other projects we were involved in, we could either let GS do the engineering or we could take it on.”

Warner says that the company has been incredibly satisfied with the working relationship with GS. “On other days we would compete against them of course, but that’s the nature of the business.” The NGL project is reportedly ahead of schedule, but Warner says close attention is being paid to progress.

The principle of joint bidding for projects with other firms has not been ruled out in the future, but Warner says the fact that the company was in its infancy probably dictated the thinking behind conducting the bid as a JV, and that in future such a joint bid would need to display real commercial value to be considered again.

“I think that now we would prefer to go after projects by ourselves. At the time we needed each other, but I wouldn’t necessarily rule out working with any of our competitors if there was logic or value added proposition by doing so. If it makes good business sense then we are open to ideas.”

Building up that in-house capability in a very short time frame has been one of the significant challenges faced by Petrofac Emirates. However, the company has recruited at an astonishing pace, and as the year draws to a close the number of Petrofac employees has tripled since January.

“We are up to around 600 people today. In January we had 200 people, roughly split equally between people in the field and office based work. Crucially all operations departments are now fully functional with Petrofac Emirates employees holding key roles,” explains Warner.

The company is now handling all of its EPC proposals independently at its Mussafah headquarters. “We are self sufficient, but that doesn’t necessarily mean we have closed the door to future cooperation. If there are benefits from collaborating further with Petrofac or other business units of Mubadala then we would want to make that happen,” says Warner.

The years preceding the formation of Petrofac Emirates saw spiralling costs throughout the energy EPC sector, coming to a head in 2007 and 2008. Whilst generally speaking EPC firms had a better time of it than they had done for some years, project owners were having difficulty getting enough bidders. That situation reversed itself after the financial crash which followed, when contract prices and values dived as a raft of big firms chased the relatively few projects which pushed ahead. Warner says those NOCs which continued to award work managed to seize a real advantage from the period of contraction.

“Abu Dhabi in particular continued to invest, very astutely. They achieved some tremendously good value by pushing ahead. But contract prices and values dived. If you take the Shah Gas development as an example, the expected budget widely reported before the crash, compared to what a lot of the work has today been awarded at, it is perhaps half the original projections,” he says.

Today, major energy and infrastructure project process have come right down, and there are a tremendous number of able and qualified contractors vying for work in the Middle East which has seen competition spike and margins suffer.

Warner says that cost control is as important for owners and project managers as it ever has been, but the major players on both sides largely recognise they are working in a different environment. “We have always retained the position that we should only sell a project at a price which is greater than our cost and make a return which keeps our shareholders happy. In the short term there is intense competition. That said, the overall market looks very encouraging and we feel we are in good shape and well poised to take advantage of a market which is coming back strong.”

In order to keep costs under control the company has been using Petrofac’s detailed engineering and 3D modelling operations in Chennai and Mumbai, and Warner says that in order to compete with other globalised EPC outfit that is a trend likely to continue.

Project Pipeline

The region has many major, complex engineering challenges coming up in the medium term. These are exactly the jobs, Warner says, which Petrofac Emirates is ideally suited to.

The company is eyeing a growing abundance of opportunities offshore. “Much of the work offshore in the UAE, tends to be big, lump sum projects. All of the major opportunities offshore with ADMA and ZADCO are all more than $50 million, all fairly high risk,” he says.

Right now the UAE offshore market looks exciting to say the least. Some major projects coming up, which have been well advertised, include the ZADCO 750 project .

“We are reviewing the opportunities in that area. The Zakum work would principally be for the fabrication of units which may be on an artificial island, all in that’s a major project which looks like it will start moving before long.”

Looking further ahead, Warner adds that the increasingly complex engineering needs of the world’s deeper water drilling markets poses an interesting portfolio of opportunities.

“Deep water and ultra-deep water is perhaps an area we would like to go because it is highly differentiated and less competitive. In the past Petrofac has carried out its own FPSO conversions, and if there are more project opportunities which present large and complex engineering challenges, we would be interested in getting involved in that space too.”

Joined Up Thinking

Mubadala has targets, in line with the Abu Dhabi 2030 vision to make the UAE capital a world-wide hub for oil and gas, similar to Houston today. “To deliver on that there has to be expertise in every part of the value chain, whether that be drilling, project execution, operations and maintenance and EPC included,” explains Warner.

Initially Mubadala went to the market and spoke with several companies, and ultimately chose Petrofac as the partner of choice.

“First of all, Mubadala brings a great deal of expertise in terms of supporting and incubating new companies. Also the Mubadala team have provided us a lot of support in the way that they are a government supported entity, and so it follows that we are a semi-government supported entity and that opens a lot of doors for us” says Warner.

The union of Mubadala with an existing EPC firm brings advantages to both parties, but Warner says the remit to which he is working to goes beyond the scope of traditional CEO.

“I think it is important to say that whilst we have our business plan and financial targets to deliver upon, a big part of my role as chief executive is to deliver a social contribution, which includes Emiratisation, local sourcing and using local suppliers, which is all tied in with that 2030 plan,” he says.

The recruitment of UAE nationals throughout the organisation is making good progress, but Warner concedes he’d like to have achieved even more on that front.

“We have been successful and we are continuing to recruit Emiratis, but I see it as a long term project and we are certainly making progress. A lot of our key positions are now filled by Emirati’s,” he says.

Warner describes the wider, less economically focused targets of the company as a long term position. “If you look at it from a business perspective, for the shareholders, it signifies that we are in this for the long haul, and that’s a good thing. All of the neighbouring countries around the UAE have very young populations, and there is a fairly urgent necessity across the board to integrate these young people into the industries which are driving the economies of these countries.”

It is clearly a challenge Warner relishes. Certainly, from a Petrofac perspective, he says the management team there felt strongly coming into this that the partnership could help generate more than twice the business by strategically sharing the pot with Mubadala, than by going it alone.

“We provide the EPC intellectual know-how; Mubadala provides a lot of support and also has a lot of international potential business coming up. It’s a very interesting role for me because it gives you a motivation which goes beyond the purely commercial drive. It is more encompassing than the traditional CEO remit, in that it shouldn’t be seen as a CSR initiative, it’s actually much more than that,” he concludes.