Petrofac has announced that it expects a further £130m loss on its Laggan-Tormore project in the Shetland Islands in its third profit warning in 12 months – highlighting the hostile operating conditions and high costs faced by oil and gas developers in the North Sea.
The oilfield services group had already said in February that it would book a £154m operating loss on its Laggan-Tormore gas plant site and has blamed the further losses on adverse weather conditions – delaying construction by over a month – as well as industrial action at the site.
The slump in global oil prices over the last 10 months has compounded the impact of high investment costs and the harsh climate in the North Sea region, prompting oil and gas companies to put billions of dollars of assets up for sale.
Ayman Asfari, Chief Executive, Petrofac, said: “We are deeply disappointed by this additional cost.
“Our lack of experience of operating a direct construction model in a wholly new geography where labour costs are much higher and productivity much lower than we are used to, has cost us dearly.”
“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.”
French oil major Total which owns 80% of Laggan-Tormore, put its stake up for sale in March, seeking about $1.5 billion. Petrofac shares, as high as 1483p a year ago, fell 124p to 890p, the company lost its place in the FTSE 100 at the end of last year.
Asfari added: “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.
“We now expect to recognise a further pre-tax loss on the project of around £130 million in 2015.
“As a result, 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.”
Laggan-Tormore is considered a high-quality oil and gas asset and is expected to reach peak production rates of about 93,000 barrels of oil equivalent per day.
Lewis Sturdy, dealer at London Capital said: ‘Economic conditions are bad enough for North Sea oil and gas explorers and service providers but the notorious stormy weather has made it worse for Petrofac with further losses at its Shetland Islands gas project.
“The oil and gas services provider has pointed to a further £130 million pre-tax loss this year 2015 on the Laggan Tormore gas plant project in the Shetland islands, which had already caused a hefty loss as its progress has been delayed by bad weather.
“Certainly not good news, as if the economic conditions did not make it hard enough for North Sea operators currently.’