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What was once considered a promising new product for SBM turned into an albatross for the company, which is refocusing on its core FPSO product.
After a financially taxing year, SBM Offshore plans to swear-off mobile offshore production units (MOPUs) for good and stick to what it knows -- floating, production, storage and offloading units (FPSOs).
With the market for FPSOs expected to grow steadily, SBM will focus its resources on capturing more of those orders
SBM took a huge writedown in 2011, causing it to go into the red with net losses totaling $440.6 million. This debt stemmed from the company’s interest in two money losers, the Panuke Project offshore Canada and the Yme Project offshore Norway.
The shift away from MOPUs and strictly toward FPSOs is backed by Bruno Chabas, chief executive officer of SBM, who said, "We shall not be building this type of facility again. We have one focus, one purpose, one market segment: the FPSO."
Mark Miles, SBM's chief financial officer, commented on SBM's stance on MOPUs, "That's what cost us an arm and a leg. It was certainly a dream of an engineer at one point in time, but it was not the strength of SBM Offshore."
That’s a far cry from the company’s 2010 annual report where SBM noted, “The lease of other types of facilities, such as MOPUstor™, MOPU and semi-submersible production units are now often being pursued using the same principles that apply to any oil and gas production unit provided that it has at least the same relocation potential as an FPSO.”
However, fabrication changes, cost overruns and delays for the MOPU projects saw SBM sour on putting any more effort into those products.
In its 2010 annual report, SBM noted, “The completion of the drilling rig projects and both MOPU platforms will mark the end of the difficult projects which have been affecting the company performance during the last couple of years.”
For the Yme development, the magnitude of the capex cost overruns in 2009 were such that the company had to incur an impairment charge to maintain a return on investment equal to the weighted average cost of capital during the lease period. In 2010, further costs led to an additional impairment charge.
The troubles continued into 2011. The Yme Project cost about $407 million out of the total year-end impairment amount of $978 million, according to the company's 2011 year-end report.
Talisman, operator of Yme, claimed that a faulty contract on SBM’s behalf is to blame for the project’s sky-high budget and workload increase.
John Manzoni, chief executive officer and president, said in a conference call, “Much of that work is rework, which turns out to be necessary due to poor initial fabrication. I have said before that I am very frustrated with this project and the root cause is a poorly executed fabrication contract.”
Payment for the cost increases on the Deep Panuke project ended up in the Supreme Court of Nova Scotia. In an interim update during 2011, SBM stated, “During the project, modifications to the original design were requested by the client and implemented by the company resulting in increased construction time and significant additional costs. The company did not manage to reach agreement with the client on compensation and has started legal action to obtain judgment from the Supreme Court of Nova Scotia.”
Chabas said in a press release that a decision from the Canadian court on the Panuke case was not expected until at least 2013.
Ultimately, the Deep Panuke project has cost SBM another $450 million of its year-end impairment.
The company claimed that poor productivity, bad weather, and work-load increase were the main setbacks of the two projects.
"Remedial action created the problems, however delays due to low productivity and additional work to some systems have forced us to provide for additional costs," Chabas explained. “Resolution of the Yme difficulties is an absolute priority, and we are in constructive discussions with both clients on the best way forward.”
The company spent $38 million on a core, FPSO product focus after the MOPU projects nose-dived into debt and lack of productivity.
CLSA Asia-Pacific Markets, a financial services group, published a U.S. equipment press release on the growing demand of FPSOs. The company relayed that an anticipated increase in deepwater exploration expenditures by companies would substantially help the demand of FPSOs.
Quest Offshore estimates a 35% jump in FPSO contracts within the upcoming three years, informed CLSA.
Recently, SBM issued a conference call that included 2012 plans for the company. The main list consisted of management restructuring, executive accountability and responsibility, and an exclusive focus on FPSOs.
Contact the author, Kate Permenter, at email@example.com.