Virtually all companies involved in chasing or developing new business are in Brazil, lured there by the huge level of project activity under way and on the drawing board from state-owned major Petrobras and several of the world’s largest oil companies.
But all that glistens is not gold. The downside of bidding for and winning some of the largest contracts up for grabs can be an experience that leaves even experienced and streetwise companies battered and bruised.
When the “disappointed” CEO of a major subsea umbilicals, risers, and flowlines contractor like Subsea 7’s Jean Cahuzac admits that the company has decided “not to bid any further on [engineering, procurement, installation, and construction] projects with similar risk profiles” after getting its fingers burned on the high-profile Guara-Lula riser buoy project, things must be pretty serious.
The company had to take a big loss provision on the US $1 billion contract, with the contractor estimating full-life project costs will rise by between $250 million and $300 million. This also is not the first loss provision the company has made on this project, and it said it has now put in place a plan to improve margins in the territory, where it described its financial results as “unacceptable.”
Other companies doing business in Brazil may well recognize some of the following issues flagged by Subsea 7 as contributing to the losses: delays caused by ongoing problems with the supply chain, the delayed start of pipeline fabrication due largely to “customs clearance issues,” and Mother Nature adding insult to injury by weighing in with adverse weather conditions during the winter season.
The problems also perhaps reflect the rather treacherous nature of deepwater contracting generally as well as in Brazil specifically. My colleague Steve Sasanow, editor of E&P’s sister publication Subsea Engineering News (SEN), pointed out in that publication’s latest issue that Daniel Valot, Technip’s CEO prior to Thierry Pilenko, had spoken out previously and publicly at the Offshore Technology Conference in Houston and elsewhere about the risks associated with deepwater projects.
And Acergy, prior to the merger to form the larger Subsea 7, “nearly lost its shirt” on the engineering and installation contract for the steel catenary risers for Shell’s Bonga FPSO project in Nigeria, according to SEN.
“The problems at Guara-Lula were multiple – customs issues on the buoys, which were manufactured in China; damage to the main installation vessel Polaris as a result of severe winter weather in the sector; lack of local logistical support; delay in equipment delivery from abroad; productivity issues at the spoolbase, etc.,” SEN reported.
All these issues have moved back completion of the project until late summer 2014, with Cahuzac admitting that Subsea 7 had “made mistakes” on the project.
SEN also pointed out that Cahuzac mentioned tax, customs, and environmental issues in Brazil as well as referring to “certain Petrobras contractual terms and conditions.” These unspecified conditions made this project even riskier than would have been expected when such new technology is deployed for the first time, according to SEN.
Cahuzac did go on to say that Petrobras and Subsea 7 were “in discussion … not in litigation.”
But the short-term result is that Subsea 7 will be focusing on lower risk contracts in Brazil such as several recently awarded newbuild pipelay support vessel awards worth a combined $1.6 billion.
Significantly, Cahuzac was happy to state in the press material about the latest awards, “We are comfortable with the commercial model, the risk profile, and the expected financial return of these contracts.”
The offshore business has plenty of rewards right now – but the risks remain just as plentiful.
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