- Adverse geopolitical and macro-economic changes in key geographies
- Low order intake
- Failure to deliver strategic initiatives
- Failure to deliver NES strategy
1. Adverse geopolitical and macro-economic changes in key geographies
The Group’s backlog is concentrated in emerging markets, which may increase our vulnerability to adverse geopolitical events. Recent global economic conditions and the enduring impact of the COVID-19 pandemic is having an impact on economies that are exposed to the downturn in commodities.
This, in turn, places greater pressure on governments to find alternative means of raising revenues and increases the risk of social and labour unrest. The impact of adverse geopolitical changes in our key geographies includes risks to the successful delivery of our strategy, our operations and associated impact on margins, the safety of our people, security issues, material logistics, and travel restrictions.
Mitigation and management
The Group Risk Committee (GRC) and the Board actively monitor political developments and seek to avoid or minimise our exposure to jurisdictions with risk levels beyond our appetite. A detailed risk analysis is conducted before entering any new country and while pursuing and executing projects in new geographies. We have good experience in project execution and maintain positive relationships with key stakeholders.
Careful consideration is given to contractual terms and security conditions through our detailed risk review process and we seek external advice on specialist issues as required. The delivery model is modified to suit each project and we limit exposure to single sources of supply and service. We limit our fixed asset commitment within each contract and closely monitor and manage our cash flow and commitments.
Our Business Continuity Management System considers response to and recovery from geopolitical incidents. There is also continued focus on evacuation and emergency response.
Our operations are assessed and executed in accordance with our security policy and security standards. In 2021, we continued to enhance our Business Continuity Management System and expanded it to cover all the key geographies where we operate and execute projects.
The risk remained unchanged in absolute terms. However, due to recalibration of financial materiality thresholds it increased in 2021. The increase in our risk profile was mainly driven by re-entry into countries such as Libya. It was offset by reduced exposures in countries exposed to high geopolitical risks and growth of our backlog and pipeline in the EU and the UK. The recent increase in geopolitical risks due to the conflict between Russia and Ukraine is offset by reduced exposure in this country.
2. Low order intake
The risk is that our clients exercise capital discipline, which impacts the demand for our services through the cancellation or delay of planned investments. The potential impact is that the Group could fail to deliver its anticipated backlog and growth targets.
The Group wins most of its work through a competitive bidding process, and as competition increases, there is a risk that we could fail to maintain differentiated margins.
Mitigation and management
Our order intake is driven by our strategy, the development of which is overseen by the Board. Our service lines work together to identify, review and win opportunities. We regularly analyse our business development activities, bid-to-win ratios and our competition.
We responded to the reduced number of awards in all our key markets in 2021 and prepare Petrofac for a recovery by addressing client objectives such as increased in-country value and improving sustainability.
Notwithstanding the challenging environment, we continued to secure new orders during 2021, including projects in Oman, the UK, Azerbaijan, Libya, Bahrain and Lithuania. We continue to focus on converting opportunities in target adjacent geographies and sectors. We see a good pipeline of bidding opportunities
for 2022 and 2023 in our core markets and targeted growth in selective new markets. We anticipate tendering activity will pick up in response to a recovery in the oil price and increased capital investment by clients.
Assessment: No change
The increase in the principal risk during the first half of 2021 was offset by the resolution of the SFO investigation.
We expect further improvement when we are able to return to bidding in markets from which we have been temporarily excluded in recent years.
3. Failure to deliver strategic initiatives
Each of our strategic priorities is supported by various strategic initiatives that are overseen by senior management and the Board.
To build enterprise value, we ensure each initiative is de-risked and respective success targets are met, assuring shareholders and opinion formers that we are pursuing an appropriate strategy capable of delivering shareholder value.
The impact is reflected in the appetite from new investors and, consequently, the market valuation of the Group.
Mitigation and Management
Each strategic initiative is governed by a stage-gate process and overseen by GEC or a formal Group-level steering committee. The Board regularly assesses our strategic initiatives and overall strategic plan to satisfy itself that the right balance of risk, capability and reward is maintained.
We conduct detailed sensitivity analysis to assess the robustness of our plans. The GRC reviews all material new business opportunities and projects, new country entries, joint ventures, investments, acquisitions and disposals.
In a challenging environment, we continued to deliver our strategic initiatives in 2021.
Key achievements for the year include:
- Finalisation of our structural cost reduction programme and introduction of the new operating model including creation of 1tec, a single technical services organisation
- Establishment of digital solutions, bringing tangible benefits to more clients, including cost savings, emissions reductions, and optimised uptime
- Approval and execution of a formal ICV programme with key targets and strategies agreed in order to drive growth in our core and new geographies
- Setting up of new partnerships and continued push into new territories
The priorities for 2022 include leveraging the new operating model to drive our excellence agenda; preserve our cost competitiveness; further strengthen our ICV proposition in core markets; and continue to digitalise the business.
Assessment: No change
Good progress has been made in all our strategic initiatives,
and the risk remained stable during 2021.
4. Failure to deliver New Energy Services strategy
Due to climate change and the energy transition, our markets are changing and the portfolios of our clients are going through a major transformation. New Energy Services (NES) was established to respond to this change, and the Group has outlined a medium-term ambition for 20% of revenue to come from this area by 2025. An inability to meet changing market needs will limit our future growth, and would hinder our commitments with regard to our response to climate change.
Mitigation and management
NES focuses on four clearly defined segments of the market, namely offshore wind, CCUS, hydrogen and waste-to-value where we have a strong track record and relevant experience. The growth will be facilitated through partnering in relevant technologies and with established developers; monitoring of relevant government policies; and supporting the NES organisation with 1tec expertise to successfully execute and deliver NES projects.
In 2021, we:
- Established an agile NES organisation and aligned 1tec to support the core team
- Extended our reach to government and representative bodies of relevant industries
- Agreed several strategic partnerships, including Protium and Boya Energy
- Demonstrated rapid progress in NES by securing new
contracts in 2021
Assessment: New risk
This emerging risk aims to assure the success of our response to changing market needs due to the energy transition. Good progress in pursuit of our medium-term ambition was made in 2021, with 6 FEED awards, new alliances and partnerships signed, and a NES pipeline of US$9 billion of opportunities.