Petrofac

Source: Energy Digital

Date :19/03/2007 19:00:00

Petrofac: Dubai entrusts a lifetime’s work to Petrofac

Petrofac works with national oil companies (NOCs), the major oil and gas companies and an increasing number of independent operators to provide them with a single source that can design, build, operate and maintain their facilities in some of the most difficult environments in the world. Operating out of four strategically placed international centres in Sharjah, Aberdeen, Mumbai and Woking, the group has a network of 14 offices worldwide

Written by John O’Hanlon & Produced by Glen White

Petrofac started life 25 years ago in the oilfields of Texas, supplying engineering services to the upstream oil & gas and downstream refining markets. Since then it has developed into a global, billion dollar group with offices in Sharjah in the UAE, and in the UK. The group has a tripartite structure. Engineering and Construction (E&C) provides fast-track engineering, procurement and construction services for facilities and processes – from wellhead to finished refined products and covers oil and gas gathering, processing and transportation in both greenfield and brownfield developments. Operations Services runs and maintains the facilities once they are built, offering operations management, equipment management, and specialist manpower supply and consultancy services. The third division, Resources, is the arm through which Petrofac invests selectively alongside its customers, developing financing solutions that optimise project viability and reduce risk.

There’s also Petrofac Training. The oil and gas industry is hazardous and highly specialized: it is also highly regulated, and best practice demands that training is used both to make it as safe as possible for the employees, and to save money on the traditional model, which relies on highly-paid expatriates flying round the globe to do the key jobs.

Paddy Mallan has had nearly 30 years in the oil and gas exploration and extraction business, and has worked for some of the biggest moil companies before joining Petrofac, where he is now director of facilities management in the Operations Services division, which provides operation management with a turnkey service, delivering production, safety and environmental performance from the clients’ hydrocarbon production and processing assets.

“We are seen as a leader in engineering and construction, especially in challenging environments,” he says. “By ‘challenging’ we don’t just mean that the geographical conditions are hard – they always tend to be in our industry - but difficult from the point of view of politics, logistics and the like,” he says. We did the Baku-Tbilisi Caspian pipeline with INPEX and BP, and are doing major work for Total and ENI, the rapidly growing Italian oil producer, in Kazakhstan. We are in some of the most robust places in the hydrocarbon environment!”

The Dubai connection

On January 16 Petrofac announced that it has acquired for $7 million a 51 percent interest in SPD Group Limited with an option to buy the rest of the equity. SDP is based in Aberdeen and Dubai and is a specialist in oil well project management and engineering. The purpose of the acquisition was to bring an important part of the whole-life responsibility for Dubai’s hydrocarbon assets in house, allowing Petrofac to do something no service company has ever done before in the history of the oil industry, according to Mallan. “We were recently awarded a contract with the Dubai government to look after 70 platforms - their entire hydrocarbon production. There’s a point at which a national oil company would normally hand over the contract to one of the international majors like shell or BP, but acquiring SDP gave us the capability to handle the wells management, and for the first time this responsibility has been handed over to a non-operator”

Paddy Mallan’s Operations Services division has its core business in the UK, where it works with clients in the North Sea, but it has taken that model to the global market, especially the Middle East, by establishing a joint venture company to manage the clients’ assets. The model was tested in the $40 million machinery management contract Petrofac won with the Greater Nile petroleum Operating Company in the Sudan in 2004 and in the major maintenance contract it signed in 2005 with the Kuwait Oil Company, and came to fruition in the Dubai contract signed in August 2006, though the client company is a wholly owned and newly established subsidiary of the government of Dubai called Dubai Petroleum Establishment (DPE). Paddy Mallan describes the contract as an evergreen. It starts in April 2007 and lasts as long as there is oil to be extracted – at least 30 years.

Now that this has been done, for the first time in the energy industry, Mallan hopes that other NOCs will realize that there is an alternative to handing their assets over to the major international companies. Petrofac, he points out, has the capability to do the job, its primary goal is to deliver the strategy of its client unlike the oil companies who invariably have their own agenda, and a parochial one at that.

Growing the model

The strategy for 2007, however, will be to get the DPE relationship off to a flying start on April 1, create a sustainable asset for the Dubai government, and to allow the new relationship to bed in properly, he says. “You don’t get a Dubai every year. At the group level we tend to look for growth of around ten percent a year. It is a major challenge to sustain that from ongoing operations, and the returns we get are dependent on a number of factors over which we have no control, such as oil prices, the strategic positioning of the majors, tax regimes and the like.” If you take the North Sea, the question is, how quickly global operators like Shell or Conoco can be persuaded to give up some of their assets so that independent operators can come in and exploit the remaining deposits. “Those independents will come in without the infrastructure the majors had, and we can provide that infrastructure and stability and capability to operate the assets on their behalf.”

The oil industry is changing constantly. It was dominated for decades by large American oil firms trading abroad almost like branches of the US administration, however today four of the world's six largest publicly traded oil companies are European: BP, Shell, Total and ENI. One reason for the change of emphasis was the flurry of mergers in the late 1990s, which saw BP and Total buying up rivals. But the Europeans also have had access to parts of the world where US companies can't easily operate, either because they are resented or because of Washington foreign policy.

And in many areas residual reserves are being exploited by highly efficient small independent companies like Venture Productions or EnCana, who are happily extracting oil from North Sea fields and expect to continue doing so for many years to come. “We may now be a net importer, but there are 60 million barrels of recoverable reserves in the North Sea,” says Mallan. “The recovery rate of hydrocarbons is currently about 40 percent. If we can improve the technology there are big gains to be had even if you ratchet up recovery by only two percent. We will help investors in the North Sea to recover hydrocarbons for a longer time buy optimising operations and maintenance, and keeping the cost base as low as possible so they can sustain their business for longer.”

Where there is risk there is margin

One of Petrofac’s strengths is its willingness to share the risk of a project with its client. Paddy Mallan is convinced that sound engineering and sound supply chain management are the best way to mitigate business risk. “We have strategic relationships with clients who want repeat business and also, potentially, would be interested in us taking an equity stake in those assets.” This was what happened at Ohanet in Algeria where Petrofac took a ten per cent share in a joint venture company and after the construction and development phase continued under the terms of the Risk Service Contract to receive a portion of the liquids production over a target eight to twelve year period.”

Another way to mitigate risk is by intelligent supply chain management. Petrofac lays off some of the risk by operating rather like a car manufacturer. Materials such as structural steel work, capital equipment, stainless steel valves and pipework are delivered to the site, and do not become the property of Petrofac until then. Suppliers are amply rewarded by the volume of work they can gain through partnering with Petrofac. “This benefits us because we can negotiate good prices, and they like to work with us because they don’t have to chase multiple small orders.”

Initial conversations with the suppliers are held well ahead of the contract being awarded, he says. When pursuing a major contract, Petrofac will complete all of the pre-engineering part of the work, and even order material and capital equipment on the understanding that if the bid is unsuccessful it will bear any cancellation charge. It pays off, says Mallan. That way we can be weeks ahead of the programme when the award is made because we have already set up the supply chain and ordered the capital equipment – that’s what happened when we won the Kashagan contract in Kazakhstan in 2004; we ordered a gas turbine for a power generation plant six weeks ahead of the contract being finalised!”

Skills to match risks

Petrofac Training is an important part of Petrofac Operations Services, and a very important part, according to Paddy Mallan. “We are the number one provider of offshore survival training for people in the North Sea, and now we are moving to replicate that internationally. Because we design, build and operate hydrocarbon facilities we are uniquely placed to understand the very significant skills shortages in our industry. If you go into ‘new’ countries with this attitude, and train local people to enhance their skills you can reduce the reliance of the industry on a mobile force of expatriates. It’s an attitude that is synergistic with our community involvement - design, build, operate, maintain – and train!”

The company has training facilities in the UK, Sharjah, the CIS and, since January 15 a $4 million contract to provide operations and technical training to Sakhalin Energy’s operations and maintenance trainees on Sakhalin Island through its Russian entity, PKT Training Services. A significant element of the award will focus on Russian sustainable growth with the participation of Russian trainers and support staff for the Sakhalin based supply, further demonstrating PKT’s commitment to bring long term development and opportunities to Sakhalin.

It may be difficult to see a company whose whole business is extracting hydrocarbons as in any sense ‘green’. However Paddy Mallan is clearly passionate about the need to opiate in as sustainable a way as possible. “I think we should try to minimise our environmental footprint as much as we possibly can. It’s for society to decide how it uses the hydrocarbons our industry provides. One way of looking at it is, the more efficiently society uses petrol and gas, the less of it will get burnt and the longer our industry will be sustained!”