Petrofac power: interview with Maroun Semaan

Together, Semaan and Asfari have built a turnkey titan in the oil and gas industry which today hires around 15,000 people and operates in oil and gas projects from the Middle East and Mumbai to Mexico and Malaysia.

The group’s focus on the Middle East, and its willingness to blend more routine works with an appetite for riskier upstream projects, helped it to resist the downturn which blighted other services firms wedded to ever tighter margins.

National oil companies in particular – with Qatar, Saudi Arabia and the UAE notable examples– have all come to appreciate the firm’s delivery record.

The company set a strict definition of success in June last year, setting a target of doubling its 2010 sales of $4.354 billion by 2015.

Last year saw the company already well on the way, as earnings rose to $539.4 million last year, on sales which increased by 33% to $5.8 billion. The order backlog reduced to $10.8 billion at the end of 2011, compared with $11.7 billion a year earlier, as the company shifted focus to delivery.

These figures prompted European finance house Unicredit to brand the ambitious 2015 target “entirely realistic,” and to reckon Petrofac to reach its goal by 2014.

Petrofac expects profit to gain 15% this year after it beat a 20% growth target in 2011. Chief Executive Officer Ayman Asfari is expanding the business in Thailand, Nigeria, Mexico and Iraq, and the company gives the impression that it only saw its backlog drop last year because the London-listed firm was too busy to replenish it.

EPC MARKET

High oil prices and the long term geopolitical goals of the Gulf States and its key customers in the east have made the regional EPC market ultra-competitive, with a bent towards Asian firms. Semaan is unfazed by what has become an exptremely competitive market.

“I would prefer to think of the market as busy rather than crowded!”

“The NOCs and IOCs remain keen to invest, particularly with a $100+ oil price, which cascades into the supply chain. A busy EPC arena keeps all the contracting community ‘on its toes’,” Semaan says.

Semaan moved from Petrofac’s Chief Operating Officer to Company President in January 2012, and his primary focus is now on drawing in new business, corporate strategy and corporate development.

“We recognise the need to actively seek out differentiated opportunities while maintaining a close watch on the competitive arena,” Semaan, who started in the industry on projects in Oman and Bahrain, says. “With a deep understanding of our customers and markets we are comfortable that we can plan around changes in the macro-economic environment.”

The relentless pressure on costs has led some to grumble that some EPC providers have driven a wedge through the EPC market, but Semaan disagrees with the view that a two-tier EPC environment – with one side differentiated by costs, and one on capability, has emerged.

“The lowest priced technically acceptable solution is always the winner in a lump sum EPC operating environment,” Semaan says. “We have been very successful in this respect but so have many of our competitors.

“The South Koreans are faring well in this market that’s for sure,” he admits. “In 2011 we saw high levels of activity from Korean EPC contractors as their domestic market was depressed. At the end of the day, we all have businesses to run and targets to meet so have to be as competitive as we possibly can in order to achieve this.”

While Semaan strikes a sanguine note on the competition, Petrofac has taken bold, innovate steps to shake up their offering, adding value beyond the basic turnkey EPC model where possible.

In September last year the company struck up a joint venture with China Petroleum Engineering & Construction Corporation (CPECC), in a move which few EPC firms could have pulled off.

Petrofac will gain improved access to Chinese oil companies doing brisk business in the upstream sector, and in return is set to improve CPECC’s technical offering. The two companies already work together at the BP-CNPC operated Rumaila field in Iraq, where they are undertaking a $90 million inspection, maintenance and repair contract.

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IES

Petrofac has won plaudits for its new Integrated Energy Services (IES) division, headed up by BP’s former head of exploration and production, Andy Inglis. The division – which combines the company’s former production solutions, energy developments and training services units – aims to boost resource holders’ reserves under incentives-driven contracts.

Analysts have roundly backed IES, agreeing it creates shareholder value, and have endorsed the company’s aim to have the division contribute a third of group earnings by 2015. Nomura Securities, a financial services firm, has a strong ‘buy’ rating on Petrofac and expects the firm to record revenues of $6.4 billion for in 2012 with pre-tax profits of $848 million.

National oil companies have quickly warmed to the IES business model. Malaysia’s Petronas and Romania’s Petrom were early customers, and Mexico’s Pemex has signed two production enhancement contracts, with the prospect of more to follow shortly.

“IES helps customers develop their resources either through the development of new fields or by enhancing production from mature reservoirs,” explains Semaan. “We do this through a variety of commercially flexible contracting models: risk service contracts, production enhancement contracts and production sharing contracts.”

Semaan resists the idea that, by transcending the traditional EPC contract to take on performance risk and reward in upstream projects, Petrofac is aiming to nibble away at the position of oilfield operators.

“We do not believe this is challenging the position of IOCs or other operators: we are merely responding to a niche in the market place,” he says.

“Whilst we have a business model for commercial alignment on projects alongside our customers and partners, as a service company we have no requirement or desire to book barrels of hydrocarbon reserves.

“It is simply our aim to deploy our services in a manner which generates optimum returns.”

The company is certainly backing IES as a major contributor to its future growth. “We expect to deploy some US$800 million in IES in 2012, predominantly on our existing projects, with around half of that on our projects in Malaysia,” says Semaan.

“We continue to anticipate our annual gross investment in IES will run at up to US$1 billion per year over the next few years,” Semaan explains, “although our net investment is much less as projects quickly become cash generative.”

In addition to taking on performance risk for increased revenue, IES contracts give Petrofac longer-term revenue streams.

“Contracts tend to be long term in nature: we have a 15 year production enhancement contract on the Ticleni field in Romania and 25 years on the Magallenes and Santuario fields in Mexico.”

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Schlumberger

News in January that Petrofac will team up with Schlumberger to launch bids for major oil projects was well received, as an increasingly vibrant upstream environment has started to create scarcities of resources and technical capability.

“With Schlumberger we are able to combine our capabilities with those of a world leader in the subsurface domain with an unrivalled track record for technological innovation,” says Semaan. “This enables us to bid jointly for production enhancement projects of a scale that we would not pursue independently, and to develop them at a much faster pace.”

Schlumberger and Petrofac have complementary skills sets and execution capabilities. Both have built these through subsurface knowledge, facilities expertise and operational experience in integrated asset management with Petrofac having particular strengths in facilities, engineering and O&M and project management while Schlumberger has particular strengths in subsurface knowledge, production engineering, well construction, and project and asset management.

“Together with Schlumberger we can offer a one-stop shop for customers in emerging field development and asset management services,” says Semaan. “Both companies will deploy their own capital in these production enhancement projects and neither company will seek to book reserves.”

“The market opportunity for the collaboration is significant as major resource holders seek to develop discovered low-risk reserves against an industry environment characterised by a shortage of capability and capacity,” he adds.

ECOM Outlook

It’s easy to forget after the immediate success of IES that Petrofac’s current strength came from engineering & construction and operations & maintenance (ECOM) work, and the division remains the bedrock of the company’s dominant position in the region.

“We are targeting over $6 billion of ECOM new orders this year, which will help us to maintain average double-digit revenue growth over the medium term,” says Semaan.

Petrofac’s mammoth $3.4 billion field development deal at the South Yoloten field in Turkmenistan (see boxout) is a leading example of the firm’s technical capacity and expertise in a grand scale.

“Our South Yoloten gas field project is going well and is approximately 50% complete,” Semaan reveals. “We have completed the majority of the engineering, placed the bulk of the orders for procurement, and construction activities are well under way. We are also operating with local content well in excess of 70% which is pleasing to report from a local delivery and sustainability perspective.”

The country is by no means a free market, and there are aspects of working in Turkmenistan that can be difficult. The key for Petrofac is in building the right relationships and working with the business environment.

“As a country in which to do business; we understand the landscape well and work collaboratively with our customer and many other stakeholders in a progressive learning environment,” says Semaan.

More generally, while O&M work will garner fewer headlines that IES and big ticket EPC deals, it is set to remain a core part of Petrofac’s offering.

“We have good visibility of the O&M opportunity pipeline in certain countries in the region and will continue to bid for contracts as they arise,” Semaan says.

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Iraq

Last month Petrofac won a $330 million engineering, procurement and construction (EPC) contract from Russian firm Gazprom Neft for the first phase of the Badra Oilfield Development Project in Iraq. The project is due to start very soon, and Petrofac aims to complete work at the field in three 18-month phases to Q3 2015.

The contract win builds on work a similar $240 million package of works the company won from Shell for developments in the Majnoon field, where the company has been building a new early production system since 2010.

The system comprises two trains each with capacity for 50,000 barrels of oil per day, along with upgrading of existing brownfield facilities. Work on the project began in mid-2010 and is expected to complete during the fourth quarter of this year.

The contracts wins did not just come out of the blue, and Semaan is keen to emphasise the preparation and research needed to start doing large scale works in Iraq under turnkey pressures.

“There are specific challenges associated with working in Iraq, however it is all down to doing your homework to understand the uniqueness of the operating landscape, as with any new country of operation,” he says. “For example Iraq has very specific security challenges to understand and work through.”

Recent violence throughout the country and a high unemployment and poverty rate show that Iraq still has a long way to go to meet the promise of its natural wealth.

“Iraq is still very much an emerging market as it works to stabilise and grow its economy,” Semaan says. “For the contracting community, I can only stress one thing that is very important to me, particularly developing markets, ‘listen and understand’: working together in transparent and forward-looking relationships is the only way to achieve our joint goals.”

“I am very encouraged by our progress to date,” Semaan enthuses. “It is not about getting easier to do business, but rather a journey of knowledge-sharing which leads to improved efficiency. As protocols and processes evolve to support the legislative framework, these all serve to improve our delivery effectiveness.”

Oil field companies in Iraq quickly encounter high expectations of employment from the local population.

With almost no industrial sector and few structured opportunities outside the public sector, this is understandable, though managing expectations requires tact and patience.

Yet the lack of trained staff limits opportunities for Iraqis, and an unofficial minimum wage of $600 a month can make importing labour, or keeping the lion’s share of work outside the country, attractive.

Despite that, Iraqi companies are instrumental in operations such as demining at Shell’s field development project in Majnoon, and Semaan is keen to see Iraqi involvement with Petrofac at the field.

“Wherever we work, our focus is always to optimise the use of local resources either through recruitment or the use of local businesses through the supply chain,” claims Semaan. “At Majnoon, the local manpower content is very encouraging for us and an area we see growing significantly as more projects are developed and the economy grows. “We are supporting several IOCs in this context in Iraq.”

Project focus: South Yoloten

Petrofac’s $3.4 billion EPC contract at the South Yoloten field is one of the largest ever awarded in upstream EC history.

The South Yoloten field has been estimated by Gaffney Cline & Associates to be the second largest in the world after Iran’s South Pars, with the Turkmen government claiming it holds 21 trillion cubic metres of recoverable reserves.

Petrofac secured the contract from state firm Turkmengas in December 2010, after proving itself ready to enter one of the most challenging business environments in the industry.

Under the second phase of the contract, which is scheduled to last 31 and a half months, Petrofac is providing engineering, procurement and commissioning work on a lump-sum basis for a 10 billion cubic metres per annum (bcma) gas processing plant along with the infrastructure and pipelines for the entire 20 bcma development.

The feed gas from the field contains up to 6% hydrogen sulphide, and the development will include gas treatment and sulphur handling facilities, along with well pad facilities, gathering facilities, infrastructure and utilities, condensate processing, storage and export.