“We will not be doing this again” –Petrofac issues new £130m profit warning over gas plant debacle

The group, which took on full construction responsibility for the project after some of its sub-contractors “failed to deliver in line with their agreed scopes”, had already announced in February that it lost £154m last year on the project.

The company blamed latest loss on poor weather, industrial action and failings by some sub-contractors.

The £800m gas plant under construction at Sullom Voe – the key piece of infrastructure for French oil company Total’s £3 billion Laggan-Tormore gas field West of Shetland – has been delayed a further month as a result. Total charge against the project now stands at £284m.

Petrofac said it expects to complete the project in the third quarter of this year.

The debacle is a particular blow to Petrofac as its shares dived by as much as 14 per cent at one point yesterday and could be further compounded because much of its work comes from companies such as BP, BG and Shell which are making huge spending cuts on new projects and collectively firing thousands of workers to save money, as low oil prices drag down profits.

Tim Weller, Petrofac’s chief financial officer, insisted that lessons had been learnt. “We will not be doing this again,” he said.

“Frankly, 70 per cent of the challenge in lump-sum projects is setting the lump sum in the first place,” Mr Weller added.

“Did we really understand the risks we were taking by committing to a big construction project in the UK environment on a lump-sum basis? We have been pretty clear we didn’t really understand those risks properly. We convinced ourselves that because we have a good track record of completing lump-sum projects, primarily in the Middle East and Africa, coupled with the fact that we have been operating in the North Sea, albeit in a different framework, for a decade that we could marry the two together. Fundamentally, the big difference between the Middle East and North Sea is wage rates and productivity.”

In an update, Petrofac said: “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.”

Petrofac added: “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.”

Group chief executive Ayman Asfari said: “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 (engineering, procurement and construction) 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.”