20 April 2015
Update on Laggan-Tormore Project
The Company is entering the final stages of the Laggan-Tormore gas plant project on Shetland in the UK.
As we noted in our full year results announcement issued on 25 February 2015, in line with our latest assessment of schedule and cost-to-complete for the Laggan-Tormore project, and the final commercial settlement agreed with our client, Total, the Group had recognised a loss on the project of US$230 million(1) in the year ended 31 December 2014. We also stated in the results announcement that we expected to recognise no further profit or loss on the project over the remainder of the contract duration with completion expected in the third quarter of 2015.
During late March and early April, activity on the Laggan-Tormore site has ramped up substantially as we have moved into the final construction and commissioning phases of the project. Continued adverse weather conditions during March on Shetland and industrial action has delayed this ramp up by almost a month from our original expectations. As the activity levels have increased, it has become apparent that we will need to expend significantly more man-hours to complete the project than anticipated as a result of low manpower productivity levels as the project nears completion, a greater level of rectification and reinstatement work than expected, coupled with the failure of one of our sub-contractors to deliver in line with their agreed scope.
In light of these issues, we have just completed a full re-assessment of the schedule and cost-to-complete estimate for the Laggan-Tormore project. Whilst we still anticipate project completion in the third quarter of 2015, as a result of the significant amount of additional man-hours and associated support costs required over the remaining months of project execution, we now expect to recognise a further pre-tax loss on the project of around £130 million (US$195 million at current exchange rates) in 2015. The additional costs we expect to incur reflect our firm intention to devote all the necessary resources to the project to meet the delivery commitments we have made to our client. We anticipate that construction activity on the site will be substantially complete by mid-June and we intend to provide an update to the market on the status of the Laggan-Tormore project with our trading statement scheduled for 23 June 2015.
Ayman Asfari, Petrofac’s Group Chief Executive commented:
“We are deeply disappointed by this additional cost to complete on the Laggan-Tormore project. As we noted in our year-end results announcement, given the extent of direct construction involved in the project, Laggan-Tormore is different from the rest of our EPC project portfolio, where we typically utilise sub-contractors to deliver construction services. We had to take on this level of direct construction responsibility when some of our sub-contractors failed to deliver in line with their agreed scopes. Our lack of experience of operating a direct construction model in a wholly new geography for our Onshore Engineering & Construction (OEC) business, particularly in a location where labour costs are much higher and productivity much lower than we are used to, has cost us dearly.
“We have already affirmed that we will no longer take construction risk on large lump-sum projects within the UK to avoid a similar experience to Laggan-Tormore moving forward. For now, my senior management team and I are focused on delivering the project in line with the revised schedule agreed with our client. As such, we have refreshed the site leadership team and further strengthened it with key members of our Sharjah-based OEC team and have changed a number of elements of our working practices to drive the project through to completion.
“Putting the challenges we are facing on this project to one side, the rest of our portfolio continues to perform in line with expectations.”
(1) The Group recognised a loss on the Laggan-Tormore project of US$230 million in the year ended 31 December 2014. With around US$50 million of profits having been recognised on the project in previous years, overall the Group had recorded a cumulative loss on Laggan-Tormore by 31 December 2014 of around US$180 million.
A conference call for analysts and investors will be held at 7:30am on Monday 20 April. The participant details are as follows:
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International: +44 203 426 2886
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A playback facility will be available as follows:
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