FOCUSING
ON CORE
STRENGTHS
Annual report and accounts 2015
We are an international service provider to
the oil and gas production and processing
industry, with a diverse customer portfolio
including many of the world’s leading
integrated, independent and national
oil and gas companies.
We design, build, operate and maintain oil and gas facilities,
delivered through a range of innovative commercial models,
enabling us to respond to the distinct needs of each client
and helping them to transform the value of their assets
across the oil and gas life cycle. Our service offering is
underpinned by our ability to develop resource holders’
local capability through the provision of skills training with
competency development and assurance frameworks.
At the heart of everything we do, the six Petrofac values
guide our decisions and behaviours: safe, ethical, innovative,
responsive, quality and cost conscious, and driven to deliver.
Above all, we aim to be the world’s most admired oilfield
service company.
Strategic report
02
Group performance
at a glance
08
04 Year in review 2015
Renewed focus on
06
operational excellence
Focused on our
core markets
Our focus on values
drives our success
12 Chairman’s statement
10
14 Market outlook
18 Our business model
20
Group Chief Executive’s
Strategic review
24 Key performance indicators
26 Risk management
30 Principal risks and
uncertainties
34 Segmental performance
46 Financial review
50 Corporate responsibility
Governance
68 Chairman’s introduction
70 Directors’ information
72 Our leadership team
73
Corporate Governance report
82 Nominations Committee report
84 Audit Committee report
90
107 Directors’ statements
Directors’ remuneration report
Financial statements
108 Group financial
statements
168 Company financial
statements
109 Independent auditor’s report
117 Consolidated income
statement
118 Consolidated statement
of other comprehensive
income
119 Consolidated statement
of financial position
120 Consolidated statement
of cash flows
121 Consolidated statement
of changes in equity
122 Notes to the consolidated
financial statements
169 Company income statement
169 Company statement of other
comprehensive income
170 Company statement of
financial position
171 Company statement
of cash flows
172 Company statement
of changes in equity
173 Notes to the Company
financial statements
185 Shareholder information
186 Glossary
Against the backdrop of a very
challenging industry environment, and
a disappointing operational performance
on one project in particular, 2015 was
the year in which Petrofac returned
to its traditional areas of focus.
During the year we renewed our
commitments on operational excellence
and cost efficiency across the business,
and refocused our priorities on our core
areas of expertise.
We continue to identify and progress cost
saving opportunities which will deliver
benefits in 2016 and beyond. The strength
of our backlog and position in our core
markets means our revenue visibility is
better than it has been at any other point
in our 35-year history.
Ayman Asfari
Group Chief Executive
To view and download our Annual report online
www.petrofac.com/investors/ara2015
Petrofac Annual report and accounts 2015 / 01
Strategic report Group performance at a glance
Revenue
Earnings per share (diluted)1
US$6,844m
(2014: US$6,241m)
2.65¢/s
(2014: 168.99¢/s)
EBITDA1
US$312m
(2014: US$935m)
Net profit1
US$9m
(2014: US$581m)
Return on capital employed1
Backlog
3%
(2014: 18%)
US$20.7bn
(2014: US$18.9bn)
Performance Highlights 2015
• Achieved order intake in 2015 of
US$8.6 billion, securing major new
awards and extensions, including
in Kuwait, Saudi Arabia, Oman and
the United Kingdom
• Commercial production has now
commenced on Laggan-Tormore
following completion of construction
activities, transfer of care and custody
of the plant to our client and introduction
of gas before end 2015
• Substantially completed the Bab
Compression project and phase 1
of the Bab Habshan project, both in
Abu Dhabi, and completed the second
of three trains on the Badra project in Iraq
• Good progress on commissioning of
the topside systems on the FPF1 floating
production facility with marine work
expected to be completed to enable
sailaway during the second quarter of
2016; first production from the Greater
Stella Area development is expected
in summer 2016
• Continued to work towards migration of our
Production Enhancement Contracts to
Production Sharing Contracts in Mexico
1 Before exceptional items and certain re-measurements.
Onshore
Offshore
Oil and gas
development
and production
Oil and gas
processing facilities
Storage and pipelines
Upstream
Midstream
Refining and
petrochemicals
Downstream
Oil and gas
engineering, construction
operations and decommissioning
Offshore
wind
02 / Petrofac Annual report and accounts 2015
A leading global service provider Related pages
Market outlook
p14
Our business model
p18
Divisions
Engineering, Construction,
Operations & Maintenance (ECOM)
Onshore Engineering
& Construction (OEC)
Onshore Engineering &
Construction delivers onshore
engineering, procurement
and construction projects.
Predominantly focused on
markets in the Middle East,
Africa and the Caspian region
of the CIS.
Offshore Projects
& Operations (OPO)
Offshore Projects & Operations,
which includes our Offshore
Capital Projects service line,
specialises in both offshore
engineering and construction
services, for greenfield and
brownfield projects, and the
provision of operations and
maintenance support, onshore
and offshore.
Integrated Energy
Services (IES)
Integrated Energy
Services (IES)
Integrated Energy Services
provides an integrated service
for hydrocarbon resource
holders under innovative
commercial models that are
aligned with their requirements.
Projects cover upstream
developments, both greenfield
and brownfield, and related
energy infrastructure projects,
and can include investment.
Engineering & Consulting
Services (ECS)
Engineering & Consulting Services
is Petrofac’s centre of technical
engineering excellence. From
offices across the Middle East and
North Africa, CIS, Asia-Pacific,
Europe and The Americas, we
provide engineering services
across the life cycle of oil and gas
assets. Our teams execute all
aspects of engineering, including
conceptual studies, front-end
engineering and design (FEED)
and detailed design work, for
onshore and offshore oil and
gas fields and facilities.
Group revenue contribution
Group revenue contribution
Group revenue contribution
Group revenue contribution
62%
21%
10%
7%
Revenue
US$4,383m
(2014: US$3,241m)
Revenue
US$1,484m
(2014: US$2,009m)
Net loss1
US$59m
(2014: US$403m net profit)
Net profit1
US$68m
(2014: US$64m)
Revenue
US$715m
(2014: US$437m)
Net profit
US$50m
(2014: US$33m)
Offshore
Revenue
US$531m
(2014: US$782m)
Net profit1
US$5m
(2014: US$131m)
Onshore
Oil and gas
development
and production
Oil and gas
processing facilities
Storage and pipelines
Upstream
Midstream
Refining and
petrochemicals
Downstream
Oil and gas
engineering, construction
operations and decommissioning
Offshore
wind
Petrofac Annual report and accounts 2015 / 03
Strategic report Year in review 2015
2015 backlog by geography
(%)
4
4
4
22
8
13
17
14
14
Kuwait
Oman
Saudi Arabia
UAE
Mexico
United Kingdom
Algeria
Malaysia
Other
22%
17%
14%
14%
13%
8%
4%
4%
4%
Excellent revenue visibility
In a challenging market, Petrofac has enjoyed high
levels of new orders and contract extensions. In 2015 we
increased our order backlog further to US$20.7 billion,
and our pipeline of bidding opportunities remains robust.
This sets us apart from our peers and gives us excellent
visibility of future revenues.
See pages 39–40
UKCS
• Five-year contract extension from EnQuest
for Duty Holder and brownfield modifications
services for the Kittiwake platform
• Duty Holder Support Services contract
to support Oranje-Nassau Energie (ONE)
US$45 million over three years
• Renewed six operations and maintenance
contracts in the UKCS, including one
for five years with Canadian Natural
Resources International (CNRI) across
its North Sea assets
• Petrofac and GE awarded a contract worth
over £110 million to connect up to 336
megawatts of clean energy from the
Galloper Offshore Wind Farm off the
coast of Suffolk, UK, to the British grid
31 December 2015 backlog ageing
(US$bn)
Backlog by reporting segment
(%)
10%
Increase in Group backlog 2015
US$20.7bn
at 31 December 2015
8.0
0.9
1.0
1.1
6.6
0.6
0.6
0.8
5.0
4.6
6.1
1.6
0.3
1.3
2.9
2016
2017
2018+
OEC
OPO
ECS
IES
9
15
16
60
OEC
OPO
IES
ECS
60%
16%
15%
9%
04 / Petrofac Annual report and accounts 2015
See page 37
Saudi Arabia
• Contract to undertake the engineering,
procurement and construction of a
sulphur recovery plant as part of Saudi
Aramco’s Fadhili gas programme
Our year-end backlog stood at record levels
See page 40
Iraq
• US$100 million one-year extension operations
and maintenance services contract with
South Oil Company
• Three-year general construction management
services contract by BP Iraq for the Rumaila field.
• Multi-million dollar technical training contract
with Shell Iraq
Related pages
Segmental performance
p34
See page 35
Kuwait
• US$4 billion award for Kuwait Oil
Company’s (KOC) Lower Fars heavy
oil development programme, Petrofac
leading a consortium with Greece-based
Consolidated Contractors Company
(CCC) as its partner
• Award for KOC’s Manifold Group Trunkline
system in the north of Kuwait, valued at
approximately US$780 million
See page 39
Bahrain
• Contract win for installation of a new gas
dehydration facility for Tatweer Petroleum
See page 41
Australia
• Award of an Integrity and Maintenance
Programme Development contract for
the Ichthys LNG Project
See page 41
Oman
• Circa US$900 million engineering,
procurement and construction
management contract (EPCm) for
Petroleum Development Oman to provide
services for its Yibal Khuff project
Petrofac Annual report and accounts 2015 / 05
Strategic report RENEWED FOCUS
ON OPERATIONAL
EXCELLENCE
With a 35-year history, we have built a strong
reputation for commitment and delivery across
our core markets, backed up by a strong ethos
of delivery and execution.
06 / Petrofac Annual report and accounts 2015
Segmental performance
p34
US$4bn
contract awarded in consortium with
Consolidated Contractors Company
(CCC) for the Lower Fars heavy oil
project, Kuwait
20m LTI-free
man-hours and the Best Contractor Safety
Initiative award at the Upper Zakum,
UZ750 field development in Abu Dhabi
Delivering complex
and challenging projects
Petrofac has been behind some of
the world’s most impressive oil and
gas installations. In the tough climates
of our core Middle Eastern and North
African markets, we excel in delivering
large, demanding projects.
Maintaining an excellent
safety record
‘Safe’ is a core Petrofac value. At many
of our projects we have delivered tens
of millions of man-hours without a safety
incident. Across our key safety indicators,
we operate substantially better than
industry norms.
Effective risk management
From the moment we choose to bid
for a project, the discipline begins. We
identify risks from the outset, ensure a
clear understanding of project complexity,
and maintain our risk management rigour
each step of the way.
Petrofac Annual report and accounts 2015 / 07
Strategic report FOCUSED
ON OUR CORE
MARKETS
Across our core markets in the Middle
East and North Africa, our National Oil
Company clients are continuing to invest
in large, strategic projects – and we offer
them an unrivalled track record, long-term
relationships and a very cost-competitive
delivery capability.
88%
of ECOM’s 2015 year-end
backlog is in core markets in the
Middle East and North Africa
US$800m
contract extensions in the UK
North Sea
Onshore Engineering &
Construction 2016 prospects
10
26
9
10
20
25
Oman
UAE
CIS
Saudi Arabia
Algeria
Other
26%
25%
20%
10%
9%
10%
08 / Petrofac Annual report and accounts 2015
Market outlook
p14
Long-term partnerships
Our success rests on building trusted,
long-term client relationships, such as
in the UK Continental Shelf where our
drive to support clients improve their
cost effectiveness helped us secure
substantial contract renewals in 2015.
Relationships with
National Oil Companies
Petrofac has strong, long-established
relationships with many of the world’s
leading National Oil Companies, who are
less sensitive to market sentiment and
more inclined to make long-term strategic
investments in their oil and gas assets.
A record backlog of projects
Despite a sharp slowdown in upstream oil
and gas spending, Petrofac has delivered
an excellent business development
performance, which means that we now
have the largest year-end order backlog
in our entire 35-year history.
Petrofac Annual report and accounts 2015 / 09
Strategic report OUR FOCUS ON
VALUES DRIVES
OUR SUCCESS
As a people-based business, we have
a problem-solving culture, clear values
and strong leadership. We respond to
the distinct needs of each client to unlock
the full value of their energy assets.
19,000
employees
10 / Petrofac Annual report and accounts 2015
Corporate responsibility
p50
Engineering expertise
Engineering excellence is core to almost
everything we do. Our teams provide
engineering services across the life cycle
of oil and gas assets, including conceptual
studies, front-end engineering and design
(FEED) and detailed design work for both
onshore and offshore facilities.
In-country value
Local delivery has always been key to
the Petrofac model, which means that
we make a determined effort to employ
local people, build local capabilities,
draw on local supply chains, stimulate
local economies, and engage with
local communities.
Can-do culture
With every Petrofac project comes an
array of complex technical and operational
challenges – and our Group is full of
committed, driven people who go the
extra mile to find solutions and deliver
for our clients.
Petrofac Annual report and accounts 2015 / 11
Strategic report Chairman’s statement
The Board’s priority for
2015 was to continue to
guide Petrofac back to
its traditional areas of
strength in the face of
another challenging year.”
Last year I spoke of the Board’s determination to restore
Petrofac’s reputation for excellence in project delivery, reduce
its capital intensity, and position the Company to succeed in
a more challenging business environment.
This year, I want to update you on progress made so far. Whilst
2015 was undoubtedly challenging and we delivered disappointing
financial results, I am encouraged by our progress. We have made
significant changes to some of our processes during the year,
which should ensure that the business returns to delivering a
portfolio of well executed projects with differentiated margins.
12 / Petrofac Annual report and accounts 2015
Restoring our reputation
Anyone familiar with the Petrofac story will know about the issues
that overshadowed our recent performance.
The Laggan-Tormore project on Shetland in the UK unsurprisingly
took up a great deal of the Board’s time during the year. Whilst the
project was initially approved in 2010, it significantly reduced our
earnings in 2014 and 2015. In April we were obliged to update the
Market that we expected the cost-to-complete the project would be
significantly higher than we had previously anticipated and the costs
unfortunately continued to escalate. Nevertheless, I am proud that
we stayed the course, notwithstanding the many challenges that
we faced in such an extreme environment. Total E&P UK announced
first production from the Laggan and Tormore fields on 8 February
2016 and anticipates that the overall development will help meet
the UK’s gas needs for decades to come.
In addition, the FPF1 conversion for the Greater Stella Area field
development has been another project where our delivery has fallen
short of our usual high standards. However, we are now making good
progress and anticipate that sailaway will be achieved in time for first
production in summer 2016.
Given the difficulties associated with these two projects, the Board
spent time in 2015 looking at how we can protect the Company
from making the same mistakes again. Three separate reviews
were commissioned: an external independent investigation of the
relevant internal controls by KPMG; a review of operational risk
management; and an analysis of the risk oversight processes that
were in place at the time the projects were initially approved and
were applied throughout project execution. Further details are set
out on page 86. We have since revised our delegated authorities
to ensure that the lessons learned are incorporated into our risk
management oversight.
Adapting to an ever tougher environment
Oil prices continued to decline during 2015 and the consensus is
they will remain lower for longer. We believe we are better positioned
than most to come out of the downturn stronger. Although our
IES business does have exposure to the oil price, the bulk of the
Group’s income comes from National Oil Companies in the Middle
East and North Africa (MENA) which have historically continued to
invest throughout the cycle. We finished 2015 with a record year-end
backlog of US$20.7 billion and the pipeline of opportunities for
2016 is robust. Our initiatives to reduce our cost base, maintain
good capital discipline and manage our working capital and cash
collection, collectively underpin our business.
The Board supported management’s decision to cancel the
contract for the construction of the JSD6000 vessel at the ZPMC
shipyard in China due to performance issues. The rest of the
contracts for construction of the vessel including the J-Lay tower,
heavy-lift crane and other owner-furnished equipment remain in
place and we are currently appraising proposals from alternative
shipyards to replace the cancelled contract. Nevertheless the
Board has asked management to update its strategic assessment
of our offshore strategy in light of the cancellation of the ZPMC
contract and it is expected that this assessment will be reviewed
in the next few months. Given the current state of the offshore
Related pages
Corporate Governance report
p68
Directors’ information
p70
oilfield services market, the Board believes it is right to consider
its options carefully and to devote sufficient time and effort to
determine the best way forward to maximise shareholder value.
Progressing to a more balanced portfolio
Our core ECOM business in MENA continued to perform well and
we continue to review the IES portfolio. We are exiting the Ticleni
field in Romania and are seeking to migrate our Mexican Production
Enhancement Contracts to Production Sharing Contracts to
help reduce existing and future capital commitments. We are very
pleased to have won project awards during the year for the Lower
Fars Heavy Oil Development and Manifold Group Trunkline,
both in Kuwait, and a further EPCm contract in Oman.
Maintaining a strong Board for the future
The Board aspires to live the Company’s values: safe, ethical, innovative,
responsive, quality and cost conscious, and driven to deliver.
This year, two of our Board meetings took place in the Middle East.
I also took the time to visit our Malaysian offshore operations, whilst
all Non-executive Directors are encouraged to gain first-hand
knowledge of the business.
Following the incorporation of the Board Risk Committee into
the Audit Committee, the Board increased its direct oversight
of strategic risk and, with the appointment of a new Group Head
of Enterprise Risk, the Company further developed its Key Risk
Register (details of which are set out on page 28).
This past year we have had more Board change than anticipated.
Following his appointment as CEO of one of our main competitors,
Stefano Cao stepped down as a Director in April. Then, in the face
of a significant increase in her US commitments, Roxanne Decyk
retired at the AGM in May. We thank both of them for their
contribution to the Board and wish them well for the future.
In view of these resignations, we initiated a search for two
new Non-executive Directors during 2015. As a result, we are
delighted to recommend to shareholders the appointments
of Andrea Abt and George Pierson at our forthcoming AGM.
Meanwhile, the appointment of Matthias Bichsel in May 2015
was very well received. Alongside his deep industry experience,
he brings an all-important client-side perspective.
Going forward, I am confident that we will benefit from a strong,
multi-disciplinary Board, with a good ratio of Non-executive-to-
Executive Directors.
Developing the right people within the best
organisational structure
With the move back to Petrofac’s core areas of strength, it was
logical to reorganise the Company.
Our strong desire was to see a simple, streamlined organisational
model, which improves efficiency through de-layering and centralising
back-office functions, yet does nothing to detract from our distinctive,
entrepreneurial and delivery focused culture. In recognition of
the Group’s refocus on its core services, Marwan Chedid was
promoted to Group Chief Operating Officer from 1 January 2016.
People are our most critical asset. Hence the Board is focused on
managing our present and future talent including succession plans,
and this matter continues to have the full attention of the Nominations
Committee. This not only includes the identification of potential
successors at a senior level but also understanding how the
business identifies and develops the next generation of leaders.
Reflecting on our 2015 financial performance
The Group delivered US$9 million in earnings (before exceptional
items and certain re-measurements) attributable to Petrofac
shareholders. This clearly falls short of our expectations at the
start of the year.
Predominantly reflecting the lower oil price environment, future
anticipated earnings from the IES contract portfolio and the Group
reorganisation, we recognised charges for exceptional items and
certain re-measurements of US$358 million (2014: US$461 million).
This reduced overall Group earnings attributable to shareholders
to a loss of US$349 million.
At the end of 2015 our net debt was US$686 million (2014: US$733
million) and our cash generated from operations was US$827 million
(2014: US$790 million). This is the second year-on-year improvement
in cash generated from operations, which is a notable achievement
in light of the substantial losses we incurred on Laggan-Tormore.
I want to thank all Petrofac shareholders for your loyalty. We
maintained a constructive dialogue throughout the year and the
Board is committed to rewarding your trust. I am delighted that
we are therefore in a position to maintain the same dividend as
last year and are proposing a final dividend of 43.80 cents per
share, which, if approved, will be paid on 27 May 2016.
Staying on course in 2016 and beyond
Risk and crisis management will remain an area of focus. HSSEIA
is always high on our agenda. Whilst we are not complacent, I am
heartened that for the second successive year we have seen an
overall improvement in HSSEIA performance. Management and
employees should be commended.
We remain mindful of the evolving geopolitical situation in some
parts of MENA. We are also aware of the likelihood of increased
competitive intensity in our core markets and, to that end, are
focused on managing our cost base.
Finally, I want to thank all our employees for their commitment
during another challenging year. In particular, I would like to
acknowledge our Group Chief Executive, Ayman Asfari. He has
been relentless in his efforts to restore Petrofac to corporate good
health. It is reassuring to see how hard he and his executive team
are working to deliver our collective commitments and position the
Group for sustainable growth over the longer term. The Board will
carry on supporting Ayman and his team as they continue to guide
Petrofac back to good health in 2016.
Rijnhard van Tets
Non-executive Chairman
23 February 2016
Petrofac Annual report and accounts 2015 / 13
Strategic report Market outlook
Long-term market
fundamentals are robust
Figure A
Change in natural gas production in selected countries
in the New Policies Scenario
2013-2025
2025-2040
China
United States
Iran
Turkmenistan
Australia
Canada
Iraq
Argentina
Qatar
Brazil
Saudi Arabia
Mozambique
India
Azerbaijan
Nigeria
Algeria
Russia
Venezuela
Libya
Angola
United Arab Emirates
Kazakhstan
Tanzania
Israel
Egypt
Kuwait
Malaysia
Thailand
United Kingdom
Trinidad and Tobago
Norway
Netherlands
-60 -30 0
30 60 90 120 150 180 210 240
Billion cubic metres
© OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/
14 / Petrofac Annual report and accounts 2015
Introduction
Irrespective of the low oil price environment in which we currently
operate, we are satisfied that the long-term market fundamentals
are robust – and Petrofac is well positioned to benefit.
Among industry analysts, there is consensus that global energy
demand is set to grow strongly over the long term and that
hydrocarbons will continue to play a significant role. Large-scale
investments in oil and gas infrastructure will therefore be needed to
meet this demand and to offset a natural decline in existing production.
In terms of the global appetite for energy, the most recent analysis
from the International Energy Agency (IEA) estimates that demand
is set to grow by 32% by 2040 – by which time the world’s energy
supply mix will divide into four almost-equal parts: oil, gas, coal and
low-carbon sources1.
This presupposes that demand for oil will grow by 10 million barrels
per day, or 13%, to exceed 100 million barrels per day by 2040
(see figure B). Meanwhile, demand for gas is estimated to grow by
more than 45%. Clearly, in order to meet this demand, continued
investment in the exploration and production of hydrocarbons will
be required. Indeed, the IEA suggests that its projections to 2040
will entail a cumulative investment in the oil and gas sectors of
some US$25 trillion, of which just under 80%, or US$20 trillion,
is in the upstream sector. This represents an annual average of
US$750 billion for upstream oil and gas2 (see figure C).
Of course, the future for the oil price environment is far from clear.
In its most recent World Energy Report, the IEA concedes that
there is a large element of uncertainty around its analysis, and
that much will depend on a combination of economic growth,
government policy, and the approach of the main oil producers.
The IEA therefore presents an alternative, Low Oil Price Scenario,
in which the price of oil remains within a US$50–60 per barrel (bbl)
range until well into the 2020s, and only rises towards US$85 by
2040. Under these circumstances, however, the demand for oil
would remain higher than would otherwise be the case (meeting
28% of global energy demand by 2040, compared with 26%
under the IEA’s central planning scenario)3. Once again, this would
necessitate continuing investment in the necessary infrastructure.
Whilst many Independent and International Oil Companies (IOCs)
will face ongoing financial pressure, particularly in the short-to-
medium-term, we expect that many of the National Oil Companies
(NOCs) will continue to invest in long-term strategic projects –
especially in regions with lower marginal costs of production.
Meanwhile, we see an in-built need for reinvestment in existing
fields in order to arrest their declining production. Indeed, once
production has peaked, a conventional oil field can expect to see
1 International Energy Agency, World Energy Outlook 2015 (which, under its central New
Policies Scenario, suggests that by 2040, coal will account for 4,414 million tonnes of
oil equivalent (Mtoe) of primary energy demand, whereas oil will account for 4,735
Mtoe, Gas will account for 4,239 Mtoe and low carbon sources for 4,547 Mtoe)
© OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/
2 Ibid
3 Ibid
Related pages
Our business model
p18
average declines of around 6% per year4 – and, especially in a
period of lower oil prices, reinvesting in these assets can deliver
a more immediate return on capital employed than can more
speculative exploration and production projects.
As the IEA puts it: “An annual US$630 billion in worldwide
upstream oil and gas investment – the total amount the industry
spent on average each year for the past five years – is required
just to compensate for declining production at existing fields
and to keep future output flat at today’s levels.”5
The Organization of the Petroleum Exporting Countries (OPEC)
provides an alternative yet broadly similar analysis. In its 2015
World Oil Outlook report, it estimates that oil demand will reach
97.4 million barrels by 2020, and will grow to almost 110 million
barrels per day by 2040. OPEC believes that this will require
oil-related investments of at least US$10 trillion, and asserts that,
“OPEC Member Countries maintain their readiness to invest in the
development of new upstream capacity, in the maintenance of
existing fields and in the building and expansion of the necessary
infrastructure. This underscores OPEC’s commitment to security
of supply for consumers, which needs to go hand-in-hand with
security of demand for producers.”6
Petrofac is well positioned in the most promising
market segments
Although upstream capital spending is thought to have fallen by
23% in 2015 and is set to drop by at least another 15% in 2016,7
we do expect it to return to long-term growth, if only to offset the
underlying production decline. Also, certain segments of the
market are poised for higher levels of investment, from which
Petrofac is well positioned to benefit.
• Good prospects in markets where Petrofac
is well established
Petrofac’s operations tend to be concentrated in those regions
that are expected to make the most significant contribution to
long-term energy supplies.
Petrofac is particularly strong in the Middle East and North Africa
(MENA). In mid-2015, in its annual ranking of EPC contractors
servicing the oil and gas industry, the Middle East Economic
Digest reported that: “Petrofac tops the ranking for the third year
running, confirming its status as the most successful contractor
in the MENA region.”8
This is significant because, according to the IEA, meeting
long-term demand will depend increasingly on the larger
resource-holders in the region (see figures A and D). By 2040,
for example, oil production from the OPEC members located in
the Middle East is forecast to rise by more than 10 million barrels
per day (up from 27.2 million barrels per day in 2014 to 37.5
million barrels per day in 2040)8.
In addition, the lower the oil price remains, the greater the
proportion of world production the region is likely to account for.
In its Low Oil Price Scenario, the IEA suggests that, by the 2030s,
the share of OPEC countries in total oil production could rise
above 50%, a level not seen since the early 1970s. It goes on to
explain that: “This is a logical outcome over the longer term: OPEC
countries are those with the largest and lowest-cost resources.”9
• Continued investment from NOCs – where Petrofac can
draw on strong relationships
NOCs collectively control around 80% of the world’s combined
conventional and unconventional reserves. Given that NOCs are
typically less sensitive to short-term financial pressures and are
relatively immune to market sentiment, they will continue to
invest in long-term strategic projects.
Figure B
World oil supply by type in the New Policies Scenario (mb/d)
Conventional production
Crude oil
Existing fields
Yet-to-be developed
Yet-to-be found
Enhanced oil recovery
Natural gas liquids
Unconventional production
Tight oil
Extra-heavy oil and bitumen
Total production
Processing gains
Supply
* Compound average annual growth rate.
2000
73.8
65.5
64.0
–
–
1.4
8.3
1.2
–
0.8
75.0
1.8
76.9
2014
81.9
68.0
66.6
–
–
1.4
13.9
7.6
4.0
2.6
89.5
2.2
91.7
2020
82.6
67.3
53.6
12.4
–
1.4
15.2
10.9
5.8
4.1
93.5
2.4
95.9
2025
84.5
68.4
44.8
17.7
3.7
2.2
16.1
10.8
5.2
4.3
95.3
2.6
97.9
2030
85.1
67.9
36.9
19.3
8.7
3.1
17.2
12.1
5.5
4.9
97.2
2.7
99.9
2035
85.6
67.4
29.7
20.8
13.1
3.8
18.2
13.2
5.4
5.7
98.8
2.9
101.7
2040
85.9
66.8
23.8
22.3
16.3
4.4
19.2
14.5
5.0
6.9
100.4
3.0
103.5
2014–2040
Change
CAAGR*
4.0
-1.2
-42.7
22.3
16.3
2.9
5.2
6.9
1.0
4.3
10.9
0.8
11.8
0.2%
-0.1%
-3.9%
n.a.
n.a.
4.4%
1.2%
2.5%
0.8%
3.8%
0.4%
1.2%
0.5%
4 International Energy Agency, World Energy Outlook 2013
5 © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/
6 Organization of the Petroleum Exporting Countries, World Oil Outlook 2015
7 Barclays Upstream Spending Survey 2016
8 Oil price drop reshapes top 10 contractors, Middle East Economic Digest, 11 May 2015
9 © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/
Petrofac Annual report and accounts 2015 / 15
Strategic report Market outlook continued
By building on strong, well-established relationships with many
of the world’s leading NOCs, particularly in MENA, Petrofac is
well positioned in this respect.
In addition to sustained spending on upstream oil and gas
projects, Petrofac is well placed to participate in a market of
downstream opportunities in the refining and petrochemicals
sectors. Once again, many of the MENA-based NOCs are
continuing to invest in large strategic projects, and have signalled
their intent to capture more of the downstream market in order
to secure more of the value chain. As a recent report from
McKinsey & Company states: “Major crude exporters in the
Middle East continue to add to refining capacity, motivated by a
number of factors. Firstly, ensuring security of domestic supply
remains a top political priority… Second, Middle East players
are motivated by maintaining their competitiveness in the global
crude markets.”10
To complement our ability to deliver large demanding projects in
the MENA, and our established relationships across the industry,
Petrofac has been building its credentials in the refining sector.
For example, in 2014 we were selected as a 50/50 partner in the
US$2.1 billion refinery improvement programme in Sohar, Oman,
and are progressing apace with our US$1.7 billion share of the
Clean Fuels Project in Kuwait. Further afield, we continue to
work on the sizeable engineering, procurement, construction
and commissioning contract (EPCC) for a refinery package in
the new Refinery and Petrochemicals Integrated Development
(RAPID) project in Johor, Malaysia.
As noted by the Middle East Economic Digest: “Petrofac’s
success comes from being able to diversify its business across
several sectors within the hydrocarbons industry, as well as
operating across a geographic footprint that covers the entire
MENA region.”11
Compared with its peers, Petrofac is less exposed to lower
oil prices
Petrofac is relatively well positioned to succeed in a sustained
period of lower oil prices.
More specifically, our direct exposure to oil price fluctuations is
limited to a small number of equity upstream investments within
IES, and our record year-end backlog gives us the best visibility
of future revenues in our 35-year history. Indeed, we enter 2016
with an order book of US$20.7 billion.
Also, our existing operations tend to be concentrated in those
geographies with lower production costs and, again, much of
our income comes from NOCs whom we expect to continue
to invest in their assets.
In our core MENA geographies, which are the source of the
majority of our backlog, we continue to see an attractive pipeline
of bidding opportunities.
Of course, with fewer opportunities available globally, which tend
to be concentrated in a more limited geographic area, we face the
risk of greater competitive intensity.
Figure C
Cumulative oil and gas supply investment by region in the New Policies Scenario, 2015–2040
(US$2014 billion)
Oil
Gas
Upstream
Transport
Refining
Total
Upstream
Transport
OECD
Americas
United States
Europe
Pacific
Japan
Non-OECD
E. Europe/Eurasia
Russia
Asia
China
India
Southeast Asia
Middle East
Africa
Latin America
Brazil
Inter-regional transport
World
European Union
4,560
3,798
1,998
616
146
2
7,996
1,383
817
1,011
705
62
235
2,271
1,356
1,975
1,193
n.a.
153
129
42
11
13
1
646
69
36
107
40
31
32
280
90
101
64
338
452
241
190
138
73
28
1,259
100
69
690
315
192
159
266
87
116
70
n.a.
5,164
4,167
2,230
765
232
31
9,901
1,552
921
1,808
1,059
285
425
2,816
1,533
2,192
1,327
338
2,617
1,864
1,426
458
295
3
4,290
1,333
710
1,289
555
127
434
554
634
480
128
n.a.
1,314
743
575
333
238
44
1,615
404
265
543
262
84
114
319
233
115
34
97
12,555
1,136
1,711
15,403
243
7
124
374
6,907
226
3,026
302
9,932
528
Total
3,931
2,607
2,001
791
534
47
5,905
1,737
974
1,832
817
212
548
873
868
594
162
97
Average
annual oil and
gas upstream
276
218
132
41
17
0
473
104
59
88
48
7
26
109
77
94
51
n.a.
749
18
10 Profitability in a world of over capacity, McKinsey & Company, May 2015
11 Oil price drop reshapes top 10 contractors, Middle East Economic Digest, 11 May 2015
16 / Petrofac Annual report and accounts 2015
Improving our cost-effectiveness in the North Sea business
There is, of course, greater uncertainty surrounding Petrofac’s
operations in the UK Continental Shelf (UKCS). Here, the future of
the oil and gas sector rests on structural and fiscal considerations
as well as the prospects for the oil price.
Also, while we would not want to downplay the challenges
faced by our sector, it is clear that a low oil price environment
will also offer some new opportunities for a company such as
Petrofac, including:
It should be noted, however, that our business in this region is
more reliant on ongoing operational expenditure than on new
capital investment, and we continue to work closely with clients
to improve the cost effectiveness of their asset operations.
A trend we do see is for well-established operators to divest their
assets in this region. Often they are succeeded by new entrants,
who are looking for outsourced asset management services, and
Petrofac is a natural partner (as we saw when Oranje-Nassau
Energie UK Limited took over the Sean gas field in mid-2015).
We also believe Petrofac is in prime position to compete for a
substantial decommissioning market that, through to 2040,
is valued at some £37 billion.12
Turning an industry challenge to our advantage
We believe that the dynamic economics within the industry play
to Petrofac’s strengths in operational excellence – as well as our
flexible approach and our expertise in developing innovative
commercial approaches with our clients.
With our strong ethos of balancing quality with cost-consciousness,
we had begun to adapt to price constraints in the industry well
before the reduction in oil prices, and we remain convinced that
our approach will stand us in good stead during a period of lower
oil prices.
As clients consider any new investments, or seek to improve
their existing operational efficiency, it is abundantly clear that now,
more than ever, they will demand certainty of delivery and budget,
and will incentivise gains in efficiency. In particular, we believe they
will look for three key things from their suppliers:
• A clear capability to deliver the work on the ground
• A competitive cost base with a culture of cost control
and incremental improvement
• A willingness to share in the risk of delivery – whether that
be through a lump-sum EPC contract or a performance-related
operational contract
• Reduced executional risk – in a low-inflation (or perhaps
even a deflationary) environment, executional risks such as
cost over-runs and shortages of key materials, equipment or
components, can be reduced
• Increased availability of hitherto scarce skills – in recent
years the industry has faced a crippling skills shortage. The new
industry economics may alleviate this pressure, making it easier
and cheaper to access expertise
• Improved access to adjacent market segments – again,
any reining-in of production, by definition, opens up access
to a potentially lucrative decommissioning market. Meanwhile
Petrofac is continuing to build its credentials in the downstream
market, which tends to be less sensitive to oil price fluctuations
Given our business model and our distinctive, delivery-focused
culture, the new environment represents a definite opportunity
for Petrofac to increase market share and to continue to deliver
differentiated margins. It also means that, when oil prices
do eventually recover, Petrofac can emerge in an even
stronger position.
Figure D
Change in oil production in selected countries in the New Policies
Scenario, 2014-2040
Crude oil
Tight oil
Other unconventional oil
NGLs
Iraq
Brazil
Canada
Iran
Saudi Arabia
Venezuela
United Arab Emirates
Qatar
Kazakhstan
Kuwait
Argentina
United Kingdom
Azerbaijan
Norway
China
United States
Russia
12 UK Oil & Gas Survey 2014
-4
-3
-2
-1
0
1
2
3
4
5
Million barrels per day
© OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/
Petrofac Annual report and accounts 2015 / 17
Strategic report Our business model
Working across the international oil and
gas industry, we help our clients unlock
the full value of their energy assets.
Value inputs
Operational excellence
Our people
As a people-based business, we have
a problem-solving culture, clear values
and strong leadership.
Risk processes and risk management
By thinking through every eventuality,
we de-risk our projects and bring certainty
to clients.
Our supply chain and contractors
With deep knowledge of the many businesses
in our supply chain, we know when and how
to call on their respective strengths.
Financial capital
Exerting capital discipline, we operate
a balanced portfolio, we judiciously
co-invest, and sometimes tap into
third-party capital.
Design
From the concept to the detail, we provide
design and engineering services across the
life cycle of oil and gas assets.
Build
Onshore or off, greenfield or brown,
upstream or down, we provide the full
spectrum of engineering, procurement,
construction and commissioning services.
Manage and maintain
We operate and maintain oil and gas assets
on behalf of clients under contract to suit
their requirements.
Train
We assess needs, build facilities, design
curricula and deliver programmes to develop
safe and effective local workforces.
Our
values
Safe
Ethical
Innovative
Responsive
Quality
and cost
conscious
Driven
to deliver
18 / Petrofac Annual report and accounts 2015
Related pages
Segmental performance
p34
Financial review
p46
Corporate responsibility
p50
Commercial models
Outcomes
Lump-sum turnkey
Projects where we are remunerated on a fixed-price
(lump-sum) basis. For example, on the Lower Fars
heavy oil project in Kuwait (see page 35).
Reimbursable services
Where the cost of our services is reimbursed by the
client plus an agreed margin.
Cost plus KPIs
Often our reimbursable contracts will include income
linked to the successful delivery of key performance
indicators. For example, the Yibal Khuff project in
Oman (see page 41).
Production Enhancement Contracts (PECs)
Where we are paid a tariff per barrel for enhancing oil
and gas production above an agreed baseline.
Risk Service Contracts (RSCs)
Where we co-invest, develop, operate and maintain
a field, while the resource holder retains ownership
and control of the reserves.
Equity Upstream Investments
Upstream investments made through production
sharing contracts or concession agreements,
which will typically have production and commodity
price exposure.
Shareholder value
Delivering sustainable, long-term value,
through dividend payments to our
shareholders and the financial returns
from share price growth.
In-country value
Developing local skills and capabilities,
benefiting local development, and stimulating
productivity in local economies.
Client value
Benefiting from certainty of cost and delivery,
and taking advantage of commercial models
that meet client needs.
Petrofac Annual report and accounts 2015 / 19
Our
values
Safe
Ethical
Innovative
Responsive
Quality
and cost
conscious
Driven
to deliver
Strategic report
Group Chief Executive’s Strategic review
Our big theme
for 2015 was a
refocusing on
Petrofac’s core
strengths.”
20 / Petrofac Annual report and accounts 2015
As a result, the Company is well
positioned to withstand a challenging
business environment. Our order
backlog stands at record year-end levels,
we continue to see a robust pipeline
of bidding opportunities, and we enjoy
excellent visibility of future revenues.
Like every other player in our sector, Petrofac has had to adapt
to a market in which oil prices have reached new lows, with
an anticipated recovery being slower and longer. This has led
to a sharp reduction in capital spending among some of our
clients and an increase in competitive intensity in some markets.
Going forward, there is bound to be a clear focus on operational
excellence and disciplined cost control.
In adjusting to this environment, Petrofac is in a good position.
Our operations are concentrated in the most resilient sectors of the
global market and our model has always been grounded in project
excellence. The operational challenges we faced in recent years
have taught us to be extremely cautious when stepping outside
of our core areas of capability. Meanwhile, as we choose how to
proceed with those areas of the business that are more exposed
to lower oil prices, we are not under any pressure to make hasty
decisions, so can move at a measured pace and in a way that
preserves shareholder value.
Performance against a challenging backdrop
Before talking about our future prospects and priorities, let me first
reflect on our 2015 achievements.
A more diligent approach to risk management
Of course, our 2015 performance continued to be overshadowed
by two difficult projects, specifically the Laggan-Tormore gas plant
project on Shetland and the Greater Stella Area development.
In both cases I am proud to say that we stayed the course.
We faced up to our mistakes and remained determined to limit
any damage to our reputation among clients. With Laggan-Tormore,
we delivered a world-class facility for our client in challenging
circumstances. With the Greater Stella Area development,
the commissioning of the topside systems on the FPF1 floating
production facility is progressing well, and first production is
expected in summer 2016.
Through these projects, we learnt difficult and expensive lessons.
To ensure the mistakes are not repeated, we have introduced
and institutionalised a more structured and diligent approach
to operational risk management.
In doing so, we are paying particular attention to the initial stages
of bidding and project planning, giving us the clearest possible
understanding of associated risks and project complexities.
On 1 January 2016, we restructured our business into
three reporting segments: Engineering & Construction
(our lump-sum activities onshore and offshore); Engineering
& Production Services (which now includes all of our
reimbursable engineering and production services activities);
and a leaner Integrated Energy Services business, focused
on delivering value from our existing IES asset portfolio.
Whilst our 2015 results throughout the rest of this
Report and Accounts are presented on the basis of the
four reporting segments that subsisted during the year,
this page looks at performance and priorities through
the lens of our new reporting structure.
1. Lump-sum business
2. Reimbursable business
3. Integrated Energy Services
Performance in 2015
• Secured major new awards in
Kuwait and Saudi Arabia
• Achieved major milestones on the
Laggan-Tormore project, with
completion of all construction activities,
transfer of care and custody of the
plant to our client and the introduction
of gas before the end of the year
• Substantially completed the Bab
Compression project and phase 1
of the Bab Habshan project, both
in Abu Dhabi
• Completed the second of three
trains on the Badra project in Iraq
with completion of the third train
expected in early 2016
• Gas introduced into the central
processing facility for In Salah
southern fields development
Priorities in 2016
• High quality execution of the existing
project portfolio
• Clear focus on operational excellence,
and disciplined cost control
• Maintain our bidding discipline in a
challenging market, targeting projects
within our core capabilities and in
which the risk/reward balance is right
• Embed our reorganised business
structure to provide a platform for
future growth
• Resolution on the future of our
deepwater ambitions taking account
of the market and need to preserve
shareholder value
Performance in 2015
• Secured a number of major new
contracts and extensions in the UK North
Sea, including for CNR International,
Eni, Centrica, EnQuest and Oranje-
Nassau Energie (ONE) UK Limited
• Secured a US$100 million one-year
contract extension with South Oil
Company to support its Iraq Crude
Oil Expansion Project
• Announced our first contract in Bahrain,
to supply a new gas dehydration facility
for Tatweer Petroleum
• Awarded a contract worth more than
£110 million in consortium with GE,
to engineer, construct and install a
turnkey power system for the Galloper
Offshore Wind Farm, UK
• Awarded an engineering, procurement
and construction management contract
by Petroleum Development Oman,
worth around US$900m, to provide
services for the Yibal Khuff project
Priorities in 2016
• Entrench the new structure of our
reimbursable business to provide
maximum efficiency in a tough
market and build a platform for
longer-term sustainable growth
• Increase business footprint across new
geographies, sectors and client base
• Collaborate with new and existing clients
on innovative models for sustainable and
cost effective oil recovery from UKCS
• Position ourselves as a strong competitor
in the decommissioning market
Performance in 2015
• Progressed well with the commissioning
of the topside systems on the FPF1
floating production facility in Poland,
with first production from the Greater
Stella Area development expected
in summer 2016
• Progressed towards contract
migration on our Production
Enhancement Contracts in Mexico
as part of Mexico’s energy reforms
• Berantai Risk Service contract
continued to operate in line with
expectations
• Chergui gas concession in Tunisia
continued to produce near capacity,
other than when interrupted due to
infrequent periods of civil unrest
• Production levels on Block PM304 in
Malaysia improved during the second
half of the year as we drilled and tied
back further wells on the field
• Agreed with OMV Petrom to exit
the Ticleni Production Enhancement
Contract in Romania
Priorities in 2016
• Conclude negotiations on migration
of our Mexican service contracts
to Production Sharing Contracts
• Complete commissioning of FPF1
floating production facility
• Manage the asset portfolio to
maximise shareholder value
Petrofac Annual report and accounts 2015 / 21
Strategic report Group Chief Executive’s Strategic review continued
A record new business performance
In a market that is very challenged, a year in which global
upstream capital spending is estimated to have shrunk by more
than 20%, and prospects for a further tightening of both capital
and operational spending, Petrofac nonetheless enjoyed strong
order intake. During 2015, we added US$8.6 billion to an order
backlog that, by the start of 2016, had reached US$20.7 billion.
This is a considerable achievement, which sets us apart from
our peers and gives us excellent visibility of future revenues.
We are, of course, helped by the fact that we are strongest in
the most resilient segments of the market, with deep experience
in the Middle East and North Africa, and long-established
relationships with some of the world’s leading National Oil
Companies, many of whom have signalled their intention to
continue investing in large strategic projects.
A relentless focus on operational excellence
In past years our industry has not been terribly efficient. All too
often, project delivery has been lacking and project uptime
has been sub-optimal. Previously, buoyant commodity prices
masked these shortcomings but, in a lower price environment,
revenue in the system will be reduced and discipline will be
paramount, with no further room for inefficiencies in performance.
Nonetheless, we believe that there are opportunities to improve
efficiency, and the lower oil price makes this an imperative.
At Petrofac, we have always benefited from a distinctive,
delivery-focused culture, underpinned by our values: safe,
ethical, innovative, responsive, quality and cost conscious,
and driven to deliver. As we gear the Company up to fulfil
our order backlog, and optimise our wider operations, we are
recommitting to this heritage.
Evidence comes from many areas. Good examples include
the reductions to our cost base, improvements in an already
strong safety performance, and our ability to increase further the
efficiency of our sizeable UKCS operations, which helped us to
secure more than US$800 million in contract renewals in 2015.
A streamlined Company, structured to meet
today’s challenges
As part of our adjustment to the new commercial environment,
we begin 2016 with a new organisational model, which we will be
reporting against in future years. This Group-wide reorganisation
aims to improve our efficiency through de-layering and centralising
back office services. At the same time, it provides stronger functional
support and oversight, thereby enhancing our focus on delivery
and our responsiveness, both to market conditions and our clients’
needs. We are clear on our strategic objectives for the realigned
business for the coming year (see page 21 for more information).
In recognition of the Group’s refocus on its core services, Marwan
Chedid has been promoted to Group Chief Operating Officer
and under his leadership will be two external reporting segments:
Engineering & Construction (E&C), which will include our lump-sum
businesses (OEC and Offshore Capital Projects); and Engineering
& Production Services (EPS), which will include our reimbursable
businesses (OPO, ECS and Petrofac Training Services), plus our
global service capabilities in areas such as well engineering and
asset management, which will be transferred from other areas
of the business.
Meanwhile, IES will continue to report as currently, led by IES
Chief Operating Officer, Rob Jewkes. It will remain focused on
delivering value from its project portfolio.
A clear commitment to our people and their
career growth
The foundation of Petrofac’s continued success is its
distinctive culture. Another of the principles of our organisational
redevelopment was to reinforce this culture, by empowering
our people to live the values, supporting their professional
development, and enabling them to benefit from any career
progression opportunities that may open up across the Group.
Wherever I go in the Petrofac world, I am always struck by the
commitment, quality and dedication of our people. Ultimately,
it is they who set us apart. So I do want to pay particular tribute
to all of our employees and thank them for their efforts during
2015, and look forward to working with them in the next phase
of our development.
Finally, I would like to thank our Chairman and the Board for their
continued support; their collective expertise and wise counsel has
been invaluable during this challenging year.
22 / Petrofac Annual report and accounts 2015
A financial performance that reflects the realities
of our situation
The losses and impairments incurred during 2015 from the
Laggan-Tormore and Greater Stella Area projects in particular,
prevented us from meeting our initial forecasts.
However, as explained in the financial review, there were
positives to note. For example, following strong cash collection
in the fourth quarter of 2015, our net debt decreased over the
calendar year.
Revisiting our deepwater ambitions
Turning to our offshore ambitions, it is widely acknowledged that
the proprietary design of the JSD6000 would create an industry
leading multi-purpose vessel capable of accessing top tier deepwater
construction and installation opportunities. Whilst the JSD6000
project is still progressing, given the cancellation of the shipyard
construction contract, development is continuing at a much slower
pace, which is appropriate given the market circumstances. As noted
elsewhere in this report, we will review our options carefully over
the next few months before determining how to take things forward.
Looking forward, capital discipline will remain a key theme,
although our relatively strong financial position means that
we are able to take a responsible and measured approach.
Well positioned for 2016 and beyond
Whilst it is important to be cautious and tempered in our
ambitions, I certainly do not want to underplay our robust
position nor the strength of our core business.
Good prospects in our core E&C and EPS businesses
We need to focus on executing our backlog of orders to the
highest standard. At the same time, we continue to see a robust
pipeline of bidding opportunities, and will only pursue those that
play to our strengths, where the return is commensurate with the
risk inherent in the opportunity.
Building on our existing experience, we are also in a good position
to pursue opportunities in adjacent sectors, such as petrochemicals,
and in new geographies. However, this will be about incremental
growth, and does not signal a major strategic shift.
Repositioning our IES operations
With regards to IES, the immediate focus is to finalise ongoing
negotiations in Mexico to migrate our Production Enhancement
Contracts to Production Sharing Contracts. This should allow
us to reduce our capital intensity as we farm down some of our
position, enable us to be remunerated for the value we bring,
and provide a model for future contracts. Across the wider portfolio,
the focus will remain on delivering value from the project portfolio.
Continuing to improve the efficiency of our UKCS business
In the North Sea, our core business has always revolved around
operational and maintenance support rather than capital spending.
The recent round of contract renewals gives us relatively good
visibility of future earnings and demonstrates our desire to work
with clients to improve cost-effectiveness. As production is
reined in, clients will be looking for new models to run mature
assets, and we are also well placed to compete for work in the
decommissioning market.
Strong foundations for long-term growth
Although the short-to-medium-term prospects for the sector
are far from clear, we do anticipate increased long-term demand
for energy, fuelled by a growing appetite for hydrocarbons and
ongoing capital spending by resource holders.
The achievements of 2015 demonstrate that, thanks to the strength
of our backlog, our refocus on execution and our flexibility to
adapt to client and market demands, Petrofac is well equipped
to grow market share, deliver sector-leading margins in today’s
challenging business environment, and is well positioned to
resume earnings growth when more favourable conditions return.
Petrofac Annual report and accounts 2015 / 23
Strategic report Key performance indicators
To help the Group
assess its performance,
Executive Management
sets KPI targets and
monitors and assesses
performance against
these benchmarks
on a regular basis.
Revenue
+10%
US$6,329m
US$6,241m
US$6,844m
2013
2014
2015
Description
Measures the level of operating activity
and growth of the business.
Measurement
Revenue for the year as reported in
the consolidated income statement.
EBITDA1
-67%
US$1,031m
US$935m
US$312m
Net profit1
-98%
2013
2014
2015
US$650m
US$581m
US$9m
Return on capital employed (ROCE)1
2013
2014
2015
28%
18%
3%
2013
2014
2015
Description
EBITDA means earnings before interest,
tax, depreciation and amortisation and
provides a measure of the operating
profitability of the business.
Measurement
EBITDA is calculated as profit before
tax and net finance costs, but after our
share of results of associates (as per
the consolidated income statement),
adjusted to add back charges for
depreciation and amortisation (as per
note 3 to the financial statements).
Description
Provides a measure of the net profitability
of the business, i.e. profit for the year
attributable to Petrofac Limited shareholders.
Measurement
Profit for the year attributable to Petrofac
Limited shareholders, as reported in the
consolidated income statement.
Description
ROCE is a measure of the efficiency with
which the Group is generating operating
profits from its capital, per the consolidated
balance sheet adjusted for gross up of
finance lease creditors.
Measurement
ROCE is calculated as EBITA (earnings
before interest, tax and amortisation,
calculated as EBITDA less depreciation per
note 3 to the financial statements) divided
by average capital employed (being total
equity and non-current liabilities per the
consolidated balance sheet adjusted
for gross up of finance lease creditors).
1 Before exceptional items and certain re-measurements.
24 / Petrofac Annual report and accounts 2015
Earnings per share (diluted) EPS1
Employee numbers
-98%
189.10¢/s
168.99¢/s
2.65¢/s
-4%
2013
2014
2015
18,300
19,800
19,000
Related pages
Our strategic review
p20
Group financial statements
p108
Cash generated from operations
and cash conversion
2013
2014
2015
US$5m
US$790m
US$827m
Description
EPS provides a measure of net profitability
of the Group taking into account changes
in the capital structure, for example,
the issuance of additional share capital.
Measurement
As reported in the consolidated income
statement and calculated in accordance
with note 8 to the financial statements.
Description
Provides an indication of the Group’s
service capacity.
Measurement
For the purposes of the Annual Report,
employee numbers include contract
staff and the Group’s share of joint
venture employees.
Lost time injury and recordable
injury frequency rates
per 200,000 man-hours
0.046
0.044
0.019
0.14
0.16
0.16
2013
2014
2015
2013
2014
2015
Description
Provides a measure of the safety
performance of the Group, including
partners and subcontractors.
Measurement
Lost time injury (LTI) and recordable injury
(RI) frequency rates are measured on the
basis of reported LTI and RI statistics for
all Petrofac companies, subcontractors
and partners, expressed as a frequency
rate per 200,000 man-hours. We aim
continually to improve our safety record,
but our target for these measures is zero.
Backlog
+10%
US$15.0bn
US$18.9bn
US$20.7bn
2013
2014
2015
Description
The Group uses this KPI as a measure
of the visibility of future revenues.
Measurement
Backlog consists of the estimated revenue
attributable to the uncompleted portion of
lump-sum engineering, procurement and
construction contracts and variation orders
plus, with regard to engineering, operations,
maintenance and Integrated Energy Services
contracts, the estimated revenue attributable
to the lesser of the remaining term of the
contract and five years. Backlog will not
be booked on Integrated Energy Services
contracts where the Group has entitlement
to reserves. The Group uses this key
performance indicator as a measure of the
visibility of future revenue. Backlog is not
an audited measure.
2013
2014
2015
2013
2014
2015
0%
84%
265%
Description
These KPIs measure both the absolute
amount of cash generated from operations
and the conversion of EBITDA to cash.
Measurement
Cash generated from operations is as per
the consolidated cash flow statement; cash
conversion is cash from operations divided
by EBITDA.
Part of 2015 Executive
Directors’ remuneration.
See more on pages:
p90–106
Petrofac Annual report and accounts 2015 / 25
Strategic report
Risk framework
Sets risk appetite.
Approves Key Risk Register.
Approves significant projects.
Board oversight of framework
of internal controls and risk
management.
Board
Audit
Committee
Provides
assurance on
framework
Key Risk Register
review by Audit
Committee
Oversight of Key Risk Register.
Senior management consider
risk on significant projects
and investments for formal
consideration by the Board.
Group Risk
Committee
Divisional management oversight
and review of projects.
Divisional Risk
Review Committees
Risk management is
embedded within each
business unit.
Assurance to management
and the Board.
Business
Units
Group
Functions
Internal
Audit
Risk management
Petrofac operates in a
challenging environment
and we recognise that,
with careful management,
risks can offer opportunities
as well as challenges.
The successful delivery of Petrofac’s
strategy depends on the Group’s
identification, assessment, monitoring
and management of its principal risks.
During 2015 we made a number of
improvements to our risk management
processes in order to ensure our risk
and control framework is firmly embedded
throughout the Group. We have ensured
that lessons learnt from our reviews of
the issues experienced on the Laggan-
Tormore project, in particular, have been
reflected in these improvements to
strengthen our procedures and controls.
We believe our risk management framework
provides us with the structure to identify the
risks and uncertainties which may impact
our business, thereby underpinning our
ability to achieve future objectives and
opportunities as our business evolves.
26 / Petrofac Annual report and accounts 2015
Each of our individual businesses has its
own business management system that
incorporates risk management policies
and procedures and produces its own
risk register. Each business service line’s
management team meets regularly and
monitors these risks as a matter of course,
notes risk assessment changes and seeks
to take appropriate mitigating action. The
risk registers for each business are reviewed
formally each month by that business’s
leadership team and are then shared with
the Group’s senior leadership team.
Risk agenda
Our annual budget and business plan
review process incorporates a review of
risks which have previously been identified.
The effectiveness of existing controls and
mitigating action plans are also considered.
When compiled, risk reviews are assessed
by the senior leadership team, the GRC
and considered by the Audit Committee
(where relevant and appropriate), and
ultimately form the basis of a detailed
Board review. Further detail with regards
to the outcome of the Board’s internal
control and risk management review for
the year is provided on page 79.
2015 review
We continually seek to improve our process
for managing risk and during 2015 we
made the following enhancements to our
processes and controls to improve the
transparency of our approach:
• We strive for operational excellence
and have recognised that improvements
were necessary to strengthen our project
controls and management of large projects.
We have enhanced these with the
introduction of a formal assurance team
across the Engineering & Construction
and Engineering & Production Services
businesses that will provide independent
peer reviews of project progress, execution
plans and costs.
Risk governance
Petrofac’s overall system of risk governance
relies on a number of committees and
management processes which bring
together reports on the management
of risk at various levels. The risk governance
process relies upon regular risk assessments
and reviews of existing and new opportunities,
by considering the risk exposure and
appetite of each business unit, service
line and function. The diagram on page 26
sets out the risk governance structure in
operation, showing the interaction between
the various risk review and management
committees. Terms of reference are in
place for each of the key committees.
The Group Risk Committee (GRC) is a
management committee constituted as
the principal executive forum for the review
of enterprise, project and investment
risks, in accordance with the Delegated
Authorities approved by the Board.
The GRC reviews all material new business
opportunities and projects (including bid
submissions, country entry, joint ventures,
investments, acquisitions and disposals) and
is responsible for making recommendations
as to the management and mitigation
of risk exposure; and also recommends
proposals for approval by the Board or
the relevant executive.
The GRC is responsible for the assurance
of the Enterprise Risk Management
framework agreed by the Board including
the approval of Group standards and the
application of the Group’s Delegated
Authorities. In addition, the GRC reviews
the Key Risk Register (KRR) prior to its
submission to the Audit Committee.
Each division has a Risk Review Committee
(DRRC) chaired by the responsible Managing
Director/Chief Operating Officer which
provides peer review of proposed projects
and investments in accordance with the
Delegated Authorities. Where required by
the Delegated Authorities, the DRRC then
prepares appropriate materials for the GRC
and ensures that no proposal is presented
without first being reviewed and supported
by the DRRC.
Related pages
Corporate Governance
p68
Audit Committee Report
p84
• We have strengthened and further
empowered our functional groups
through the recent reorganisation with
greater interaction of specialist areas in
the risk review process. We have further
increased the level of functional review
in our Delegated Authorities.
• We have enhanced our review of major
projects with many of these having been
brought to the GRC a number of times
whilst we are still in the early stages of
the bidding process. The increased
number of reviews has enabled us to
analyse fully the key risks and identify
appropriate mitigation before any
contractual commitment and provides
assurance to the GRC that the contract
at pre-signature stage remains within
our agreed risk appetite.
• We have introduced additional controls
to provide assurance to the GRC that
actions identified during previous risk
reviews have been fully closed out.
• We, like all companies, continue to
be exposed to external cyber-security
threats. During 2015 we have expanded
our intrusion detection monitoring and
have made significant changes to tighten
controls. We have also initiated an
information security/cyber awareness
campaign to ensure our people are
informed of the risks.
Over the course of 2015 we have made
a number of improvements in how we
run our business and have learnt from risk
management weaknesses identified over
recent years.
Petrofac Annual report and accounts 2015 / 27
Strategic report Risk management continued
Risk management framework
The Group’s risk management framework
encompasses the policies, culture, organisation,
behaviours, processes, systems (and other
aspects of the Group) that, taken together,
facilitate its effective and efficient operation.
The framework is designed to underpin the
Group’s longer-term sustainability.
The framework supports the Board in
exercising its overall responsibilities and to:
• Regulate the entry of appropriate
opportunities and risks into the Group
• Develop our understanding of the most
significant threats and opportunities
• Promote active management of risk
exposures down to acceptable levels
• Assist the Group in delivering business plan
objectives and operational performance
During 2015, the framework has continued
to mature and a more robust process was
defined. The principal aspects are explained
in the following sections.
Risk Management System
Petrofac’s Enterprise Risk Management
System (PERMS) was deployed during
2014 and was embedded across the
Group in 2015. Its purpose is to systematise
our risk management process (which itself
is based upon the principles and guidelines
of BS ISO 31000:2009), with the aim of
providing an integrated approach to risk
and control and to standardise the means
of assessing, reviewing and reporting
on risk and to enhance visibility and
accountability. The system aggregates
and records risks (by type and exposure)
under the same framework.
Key Risk Register (KRR)
The KRR identifies those risks that,
given the Group’s current position, could
materially threaten its business model,
future performance, prospects, solvency,
liquidity, reputation, or prevent us from
delivering our strategic objectives. The Board
treats such risks as principal risks. The KRR
is the means by which the Group’s principal
risks are reported to the Audit Committee
and the Board for their review. It includes
business, financial, hazard and operational
risks, together with external factors over
which the Group may have little or no
direct control.
On certain projects our clients have access
to the PERMS system and are monitoring
project risks jointly with the appropriate
project team. During 2015 we identified a
number of enhancements that will further
improve our use of the system and these
are currently being developed.
The KRR is updated on a quarterly basis
and looks forward over a three year time
horizon to identify the:
• Nature and extent of the risks facing
the Group
• Likelihood of the risks materialising and
their potential impact on the achievement
of business plan objectives
• Means of mitigation to reduce or control
the incidence or impact on the business
of risks that do crystallise
• Aggregate enterprise risk profile
(and associated key risk indicators)
Group’s risk management framework
Risk integration
Strategic planning
Medium term planning
Prospect phase
Go/No-go process
Proposal phase
Design
Procurement
Execution
Operation
Hand over
Management support processes
Infrastructure
Company vision
and strategy
Company values
Group policies
and standards
Risk appetite and
delegated authorities
Asset integrity framework
Code of Conduct
Risk management process
Risk Review Committees
Global insurance programme
Emergency preparedness
Risk management process
Communicate and consult
Risk
identification
Risk
assessment
Risk
treatment
Risk
monitoring
Risk
reporting
Assurance
Company values and culture
Enterprise Risk Management system (and other tools)
Leadership, communications and engagement
28 / Petrofac Annual report and accounts 2015
and therefore the extent to which different
categories of risk are regarded as acceptable
for the Group to bear.
Some of the parameters used to exercise
control over risk appetite include:
The KRR is designed to provide the Board
and Audit Committee with clarity around
ownership, accountability and mitigation
strategies, to promote active engagement,
informed debate and constructive challenge,
and to keep under review the effectiveness
of decision making processes.
Risk appetite
The Group’s risk appetite has developed
organically over a number of years (based
on historical risk taking characteristics) and
this has continued to develop during 2015.
Our appetite for risk is largely governed
through the Delegated Authorities and Risk
Review Committees which are embedded
across the Group.
The Board recently reviewed and updated its
Delegated Authorities to clarify expectations
and incorporate lessons learnt. Financial
thresholds for determining acceptable
levels of risk have also been reviewed.
As part of the review of our risk framework,
the Board continues to believe that it
should not apply a single aggregate risk
appetite for the Group as a whole, preferring
to see risk appetite managed through limits
and parameters, which are continuously
monitored in each business service line
and aggregated for review at Group level.
Risk appetite is articulated in a variety of
ways appropriate to the category of risk
being considered. For example, at the
highest level are our policy statements
which describe our risk-based approach
to each category; and our policy standards,
which describe acceptable controls and
limits, examples of which, can be found in
the Sovereign and Financial Market Risk
Policy, or our Asset Integrity Policy.
Related pages
Our strategic review
p20
Group financial statements
p108
Risk culture
As with all aspects of good governance,
the effectiveness of risk management
and internal control also depends on
the individuals responsible for operating
the systems that are put in place. A risk
management maturity assessment was
carried out in 2014 to assess the culture
within the Group. In 2015 a number of
improvements were made to existing
processes to encourage and incentivise
desired behaviours and to increase
capabilities further. An example of this is
the improvement in effectiveness of the
DRRC and GRC processes. The recent
reorganisation provides the Group with
a strong platform to standardise certain
processes. Plans for 2016 will continue
to develop the desired values, behaviours
and capabilities so that they become
embedded at all levels.
• Health and Safety – monthly reviews
of KPIs for Lost Time Injuries and
High Potential incidents
• Asset Integrity – monthly reviews of
control KPIs associated with all key
assets across the Group
• Concentration risk – tolerable exposure
by: territory; client; contract type; revenue
• Market growth risk – agreed bi-annually
in strategy setting meetings, with trends
reviewed monthly
• Investment limits – for capital
expenditure, minimum rates of IRR
and annual cash-flow targets
• Liquidity headroom – agreed by the
Board and specified in the Sovereign
and Financial Market Risk Policy
• Financial strength – maintain an EBITDA
Debt Ratio agreed with the Board
• People risks – non-conformances with
Code of Conduct, incident reporting
and attrition rates
• Off-strategy risks – where the Group
has a zero tolerance, for example,
sanctioned territories
Viability statement
In accordance with the provisions of Section
C.2.2 of the UK Corporate Governance
Code 2014, the Directors have assessed the
viability of the Group over a three year period
to 31 December 2018 having taking into
account the potential impact of the principal
risks and their mitigating strategies identified
on pages 30 to 33. The Board believes that a
viability assessment period of three years is an
appropriate time horizon as this aligns with the
average duration of our long-term contracts.
This period also represents the first three years
of the Group’s longer-term five year financial
planning period and therefore provides a more
robust view of financial outcomes than a five
year period.
The three year cash flow forecasts reflect
assumptions relating to the underlying
operating performance of the Group’s
contracts, movements in working capital,
capital expenditures and divestments,
and the repayment of loans due within
the forecast period.
The cash flow forecasts have been stress
tested against a number of what the Directors
believe are severe but plausible risks to the
business that could potentially impact the
Group’s ability to fund its future activities and
meets its banking covenants. The key stress
test scenarios applied were as follows:
• A substantial reduction in the level of new
order intake in the Onshore Engineering &
Construction lump sum contract business
• A major lump-sum project delivery failure
in the Engineering & Construction business
which results in material financial losses
being incurred
• A reduction of between US$15 and
US$30 per barrel in the market price
of oil compared with our base case
business plan assumptions for Integrated
Energy Services’ oil and gas assets
• A significant adverse variance in the
anticipated cash flows in respect of the
rationalisation of the IES portfolio and
JSD6000 vessel construction project
Based on the results of this analysis,
the Directors have a reasonable expectation
that the Group will be able to continue in
operation and meet its liabilities as they fall
due over the next three years.
Petrofac Annual report and accounts 2015 / 29
Strategic report
Principal risks and uncertainties
Principal risks are a risk or a combination of risks that,
given the Group’s current position, could seriously affect the
performance, future prospects or reputation of the Group.
They include those risks that could materially threaten our business
model, performance, solvency or liquidity, or prevent us from
delivering our strategic objectives. In terms of managing these
risks, our systems of risk management and internal control are
founded upon deployment of our Enterprise Risk Management
Framework (based upon ISO 31000:2009); and our Internal Control
Framework. Details of which are included in the Audit Committee
report on pages 84 to 89.
Market conditions
Description and impact
Volatility in oil and gas prices
could influence the level of
investment within the industry
and the demand for our services.
The financial performance of
IES is directly impacted by oil
and gas price volatility (due to
Equity Upstream Investments).
Significant movements in exchange
rates could also impact our
financial performance.
Mitigation and management
Group backlog stood at US$20.7 billion at 31 December 2015; largely insulating the Company from the
immediate effects of the fall in hydrocarbon prices.
However, low prices and uncertainty in the forward oil price are having an impact on the level of investment,
exploration, development and production activity among International Oil Companies (IOCs)
and National Oil Companies (NOCs) who are increasing their capital discipline.
This, in turn, could influence the level of demand for our services in this sector and the longer-term prospects
for our E&C and EPS businesses. In mitigation of this risk, we are maintaining strong client relationships with
NOCs; carefully diversifying operations by client and by geography; increasing our activity in the oil and gas
sub-sectors of maintenance, modifications and operations (MMO); and extending our offshore portfolio.
Under our Sovereign and Financial Market Risk Policy we aim to hedge, on a rolling annual basis,
the net profit exposure to hydrocarbon prices from IES’s Equity Upstream Investments as appropriate.
However, we do not begin hedging until a development has achieved steady-state production.
The majority of Group revenues are denominated in US dollars or currencies pegged to the US dollar.
In instances where we are procuring equipment or incurring costs in other currencies, we use forward
currency contracts to hedge any related exposures.
Links
For more information see:
pages 8–9; 12–17 and 162
Change
We have continued our own business model evolution with a focus on our cost
base and the indentification of innovative solutions to client problems.
Assessment
The risk has
increased in 2015
Worsening political risks in key geographies
Description and impact
The risk of exposure to civil or
political unrest, civil war, regime
change or sanctions that could
adversely affect our operations.
The risk of over-concentration in
a particular market or geography.
Mitigation and management
We face a range of political risks in a variety of territories, including the possibility of unforeseen regime
change as well as legal or regulatory changes. The Board regularly monitors the changing political
landscape, particularly in those countries regarded as unpredictable and core to our business.
All current and new projects or operations in all high risk territories are assessed and executed in
compliance with our Security Policy and Security Standards.
Security risk assessments are carried out in all high risk territories before entering into new contracts.
Careful consideration is also given to project, investment and income exposures, and to the associated
contract terms and conditions.
We take all reasonable measures to reduce and limit our commercial exposure in each territory.
This includes regular security risk assessments, careful selection of contracting parties, out-of-country
arbitration, advance payments, and disciplined approach to cash management.
When considering the entry into new territories, or extending our activities in existing territories, our plans
are reviewed by the GRC. The Audit Committee regularly reviews the Group’s overall concentration risk.
Links
For more information see:
pages 8–9; 16 and 55
Change
All significant oil producing countries are facing varying degrees of challenge from
factors related to oil price, sectarian conflict and the wider global economic situation.
Assessment
The risk has
increased in 2015
Failure to meet future order targets
Description and impact
The risk of a significant change
to the marketplace dynamics
and the ways in which this could
threaten our market position
or our geographic footprint.
Mitigation and management
The capital discipline of our clients continues to increase and we therefore expect the demand for our
services in this sector to be challenging.
Bid-to-win ratios and segmental competition are regularly analysed to monitor this risk; improved
competitiveness through streamlined bidding and estimating processes is reflected in the high bidding
success rate to support targeted business acquisition.
Links
For more information see:
pages 14–17
Change
Competitors are planning to expand their presence in the Middle East,
despite the increased political risks.
Assessment
The risk has
increased in 2015
30 / Petrofac Annual report and accounts 2015
Related pages
Our strategic review
p20
Operational and project performance
Description and impact
The portfolio typically includes
a relatively small number of
very large contracts. The risk
is the impact on our financial
performance if any of these
contracts were to be disrupted
or if we fail to execute in line with
our expectations.
The risk of experiencing a
serious environmental, asset
integrity or safety incident – and
the commercial and reputational
damage that could be caused.
If we are unable to transfer
certain risks to the insurance
market (due to the availability
or cost of cover, for example),
we could be exposed to material
uninsured losses.
Mitigation and management
Notwithstanding some recent exceptions, we have a long history of successful project execution (from bid
submission through to project completion), which has demonstrated our rigorous approach to risk identification
and mitigation.
We have continued to reinforce our delivery framework across our E&C and EPS businesses to include:
operational excellence; margin capture; cost reduction; design optimisation; change to execution and
subcontracting models; and reinforced our system of governance to maintain delivery focus and ensure
tighter commercial and contractual decision making. Within IES we have continued to strengthen the
engineering design Technical Authority; subsurface and operational Technical Authorities; enhanced our
governance and assurance processes; and provided greater interdependence between technical, asset
management and sub-surface teams.
We always seek to enter into legally strong contracts with clear deliverables and avoid liabilities that are
unquantifiable or for which we could not reasonably be held responsible. We also monitor the level of
insurance provision and the extent to which we could bear the financial consequences of a major disruption.
Our culture of health, safety and environmental awareness is central to our operational and business activities.
This culture is continually re-emphasised and is supported by our operating framework and its associated
management processes and systems – including our Group-wide Asset Integrity Framework.
Health, safety and environmental awareness continues to be a key driver for the Group and the Board receive
regular briefings throughout the year.
We also have a wide variety of controls embedded within the business including: health, safety, security,
environment and integrity assurance (HSSEIA) processes, safety case management processes, major accident
hazard risk assessments and audits, and regular monitoring of integrity management and maintenance schedules.
We continue to reinforce Group level crisis response capabilities and procedures to respond in the event of a
significant direct threat to any aspect of our workforce or assets.
We maintain a Group-wide insurance programme to mitigate against significant losses. The programme is
consistent with general industry practice, and it also incorporates a captive insurance vehicle for the management
of low level additional losses.
Insurance premium costs are subject to changes based on various facts including a particular company’s
loss experience; the overall loss experience of the insurance markets accessed; and capacity constraints.
To mitigate these risks, we have worked with our insurance brokers, Aon, to optimise the insurance policies
that we purchase in terms of their limits; deductibles; and specific policy terms and conditions.
Links
For more information see:
pages 6–7; 20–22; and 52–55
Change
We have restructured the organisation and introduced separate assurance teams.
We have revised our Delegated Authorities to strengthen our controls around
commercial and contractual decisions.
Assessment
No change
Application of the commercial strategy
Mitigation and management
The Board assesses the level of project management discipline and executive capability necessary
to support the business, to satisfy itself that the right mix of risk, capability and reward is established.
We have been clear and transparent in our communications around the execution challenges we have
faced and have made a number of improvements as a result of lessons learnt.
We remain focused on consistent delivery; strategically, operationally and financially.
We aim to minimise our cash flow exposure on contracts, especially where we deploy capital alongside
our services (as in certain IES contracts). We will only do so where we are comfortable with the level
of counterparty risk and with the contractual terms and conditions.
Description and impact
The risk that poor strategic
or investment decisions
could negatively impact
our business model.
As the Group’s strategy
for growth moves into new
geographies and Petrofac
competes for larger, more
integrated projects, the Board
is required to sanction more
complex bids and investments,
such as the JSD6000 vessel.
This includes investments in the
business itself and co-investment
in our customers’ assets (as is
often the case with IES contracts).
Links
For more information see:
pages 12–13; 17 and 23
Change
We have strengthened our review of major projects at the early stage of the
bidding process.
Assessment
No change
Petrofac Annual report and accounts 2015 / 31
Strategic report Principal risks and uncertainties continued
IT resilience
Description and impact
There is a risk that IT security
or integrity failings could result
in the loss of commercially
sensitive data and create
substantial business disruption.
Mitigation and management
During the year we have migrated our critical applications to new data centres; we have expanded our
intrusion detection monitoring and an information security and cyber awareness campaign has been
initiated. Across Petrofac we are alert to the related risks, and conscious of the need to be able to
respond effectively to any far-reaching systems failure.
Links
For more information see:
pages 74 and 86
Change
We continue to develop our capability and have recently further tightened
our controls.
Assessment
No change
Counterparty risk
Description and impact
The risk of over-exposure to any
one customer – and the impact
this could have if the relationship
were to be jeopardised.
Mitigation and management
The Board regularly monitors the total value of contracts by customer to ensure that we are not overly
dependent on any one relationship.
We have a formal programme of regular, senior level dialogue with our major customers to understand
and pre-empt any concerns they may have.
The risk of financial or
commercial exposure if
counterparties (such as
key financial institutions,
customers, partners,
subcontractors or vendors)
default on their commitments.
Links
For more information see:
pages 87; 163 and 182
We regularly monitor our exposure and ensure that our financial assets are spread across a number
of creditworthy financial institutions and that limits are not breached. We also maintain close working
relationships with clients and exercise close cash flow monitoring.
Our Sovereign and Financial Market Risk Policy requires that material financial counterparty risk is only held
with counterparties that are rated by Standard and Poor’s as ‘A’ or better (or the equivalent Moody’s rating).
Financial Counterparty Risk is managed by Group Treasury and the Audit Committee has established
specific limits for financial counterparties.
Change
We have increased our focus within the business units on cash collection. We
continually review and seek robust contractual protections as we enter contracts
with new clients.
Assessment
No change
Loss of financial capacity
Description and impact
The risk arising if we
were not able to meet our
financial commitments.
Mitigation and management
Given the need to finance our ongoing operations and invest in future growth, we are exposed to certain
liquidity risks. We manage these risks by ensuring that we always maintain an adequate level of liquidity
in the form of readily available cash, short-term investments or committed credit facilities.
The Audit Committee has defined a minimum level of liquidity that must be maintained. Additionally,
the Board has set a target for the maximum level of leverage. Cash flow forecasting is carried out across
all service lines on a regular basis to identify any funding requirements well in advance.
Links
For more information see:
pages 13; 48; 87; 164;
171 and 181–183
Change
We have improved our net debt position following settlement of a number
of commercial positions.
A global cash management initiative is underway which will minimise the number
of bank accounts and reduce surplus cash through consolidated cash pooling.
Assessment
No change
32 / Petrofac Annual report and accounts 2015
Related pages
Our strategic review
p20
Corporate responsibility
p50
Dilution of Company culture and/or capability
Description and impact
A lack of availability of sufficiently
skilled, experienced and capable
personnel (particularly at senior
levels) could impact on our ability
to deliver our business plans.
Mitigation and management
Given our long-term growth expectations, it is necessary for Petrofac to attract and retain significant
numbers of appropriately qualified employees. We have therefore developed a systematic, Group-wide
approach to talent management.
We regularly review our resourcing needs, and aim to identify and nurture the best people through talent
and performance management programmes, linked to effective succession planning and recruitment.
Individual performance scorecards are implemented for employees, with end of year reviews being actively
promoted across each business group.
We remain confident that our policies to attract, retain, train, promote and reward our people are
appropriate for the Group – and will enable us to meet our strategic goals.
Links
For more information see:
pages 10–11; 13; 17;
and 56–58
Change
In 2015 we reviewed our e-learning resources and we embedded our Leadership
and Management Competency Framework.
The current volatility in the sector has increased the pool of talented oil and gas
professionals, providing a better market for recruitment.
Assessment
No change
Effectiveness of the internal control framework
Description and impact
The risk that employees or
suppliers may fail to live up
to our high ethical standards –
and the consequent impact
on our reputation.
The potential financial and
reputational risk that would arise
if any of our employees (or third
parties) were to breach local or
international laws.
The potential of material
financial losses if there are
weaknesses in our financial
internal control framework.
Links
For more information see:
pages 26–29; 66–67; 69;
74–81; and 86–89
Mitigation and management
Our Code of Conduct sets out the behaviours we expect of our employees and the third parties we work with
(including suppliers, contractors, agents and partners).
We are disciplined in monitoring and managing the social impacts of our operations, as set out in our Social
Performance Standard. This includes supporting and investing in local communities affected by our operations.
We seek assurances that the third parties we employ comply with our Code of Conduct and the principles set
out in our Ethical, Social and Regulatory Risk Policy, and our Social Performance Standard.
Our business is conducted in a growing range of territories, and is therefore subject to a broad range of
regulations including sanctions compliance. The Group has an anti-corruption compliance programme that
seeks to manage related risks across all of our business activities.
This programme recognises the requirements of the UK Bribery Act 2010, and focuses on training, monitoring,
risk management and due diligence.
Our management takes a risk-based approach to due diligence activities. In recent years, we have increased
the level of due diligence for new contracts in higher-risk countries; and, where appropriate, this includes the
commissioning of independent investigations.
We have strengthened and further empowered our functional groups through the recent reorganisation.
An annual self assessment questionnaire is completed by each business unit where management review and
confirm the adequacy of financial and other controls and compliance with Company policies.
The Audit Committee has oversight of the Group’s financial controls, approves the annual internal audit plan
and reviews the results of internal and external audits together with ad hoc control or compliance reviews.
There are specific delegations of authority for all financial transactions.
Change
We have further increased the level of functional review in our Delegated Authorities.
Three separate reviews were commissioned: an external independent investigation
of the relevant internal controls by KPMG; a review of operational risk management;
and an analysis of the risk oversight processes that were in place at the time the
projects were initially approved and were applied throughout project execution.
Assessment
No change
Petrofac Annual report and accounts 2015 / 33
Strategic report Segmental performance
A review of our segmental
performance throughout 2015
Segmental analysis
The Group reported the financial results of its seven service lines under four segments:
Divisions
Engineering, Construction, Operations
& Maintenance (ECOM)
Integrated Energy Services
(IES)
Reporting
segments
Onshore Engineering
& Construction
(OEC)
Offshore Projects
& Operations
(OPO)
Engineering
& Consulting Services
(ECS)
Integrated Energy Services
Service
lines
Onshore
Engineering &
Construction
Offshore
Projects &
Operations
Offshore
Capital
Projects
Engineering
& Consulting
Services
Training
Services
Production
Solutions
Developments
We present below an update on each of the Group’s reporting segments*:
US$ millions
Onshore Engineering & Construction
Offshore Projects & Operations
Engineering & Consulting Services
Integrated Energy Services
Corporate, consolidation & elimination
Group
Growth/margin analysis %
Onshore Engineering & Construction
Offshore Projects & Operations
Engineering & Consulting Services
Integrated Energy Services
Group
Revenue
Operating profit1,2
Net profit3
EBITDA2
2015
4,383
1,484
715
531
(269)
6,844
2014
3,241
2,009
437
782
(228)
6,241
2015
(55)
67
69
43
(12)
112
2014
395
89
39
172
(4)
691
2015
(59)
68
50
5
(55)
9
2014
403
64
33
131
(50)
581
2015
(9)
74
78
171
(2)
312
Revenue growth
Operating margin
Net margin
EBITDA margin
2015
35.2
(26.1)
63.6
(32.1)
9.7
2014
(8.3)
20.2
20.7
(16.3)
(1.4)
2015
(1.3)
4.5
9.7
8.1
1.6
2014
12.2
4.4
8.9
22.0
11.1
2015
(1.3)
4.6
7.0
0.9
0.1
2014
12.4
3.2
7.6
16.8
9.3
2015
(0.2)
5.0
10.9
32.2
4.6
2014
438
107
45
345
–
935
2014
13.5
5.3
10.3
44.1
15.0
1 Profit from operations before tax and finance costs.
2 Operating profit and EBITDA includes the Group’s share of results of associates.
3 Profit for the year attributable to Petrofac Limited shareholders.
* Before exceptional items and certain re-measurements.
34 / Petrofac Annual report and accounts 2015
Engineering, Construction,
Operations & Maintenance (ECOM)
Onshore Engineering & Construction
Onshore Engineering & Construction delivers onshore
engineering, procurement and construction projects.
We are predominantly focused on markets in the Middle
East, Africa and the Caspian region of the Commonwealth
of Independent States (CIS).
Group revenue contribution
Revenue
62%
+35%
US$3,534m
US$3,241m
US$4,383m
Net (loss)/profit
Net profit margin
-115%
US$433m
US$403m
US$(59)m
Employees
6,900
(2014: 5,900)
2013
2014
2015
12.3%
12.4%
(1.3)%
We achieved major milestones on the
Laggan-Tormore project with the completion
of all main construction activities at the
Shetland Gas Plant for our client Total E&P
UK and transfer of the care and custody of
the plant and the introduction of gas before
the end of the year. We have also substantially
completed the Bab Compression project
and phase 1 of the Bab Habshan project,
both in Abu Dhabi. In Iraq, we have completed
the second of three trains on the Badra
project and the third train is expected to
be completed shortly. We continue to
make good progress across the rest of
our portfolio of engineering, procurement
and construction (EPC) projects.
2013
2014
2015
2013
2014
2015
New awards
Order intake for the year totalled US$6.1 billion
(2014: US$6.3 billion), including the following
major awards:
Lower Fars heavy oil project, Kuwait
In January 2015, we announced that we
are leading a consortium with Consolidated
Contractors Company (CCC) to deliver
the first phase of Kuwait Oil Company’s
(KOC) Lower Fars heavy oil development
programme, which is located in the north
of the country. The contract, which is worth
in excess of US$4 billion, with Petrofac’s
share being approximately US$3 billion,
will be completed in approximately 52 months.
The scope of work covers greenfield
and brownfield facilities and includes
engineering, procurement, construction,
pre-commissioning, commissioning (EPC),
start-up and operations and maintenance
work for the main central processing facility
(CPF) and associated infrastructure as
well as the production support complex.
This also includes a pipeline of almost 162
kilometres which will transport the heavy
crude from the CPF to the South Tank
Farm located in Ahmadi, from where KOC
has the option to send it to the proposed
Al-Zour refinery in the south of Kuwait.
Manifold Group Trunkline (MGT)
system, Kuwait
In July 2015, we received an award notification
for KOC’s Manifold Group Trunkline (MGT)
system in the north of Kuwait. Valued at
approximately US$780 million, it is integral
to KOC’s plans to increase and maintain
crude production over the next five years.
Three new gathering centres, which form
part of the broader project, are already under
construction with Petrofac executing the
EPC contract for GC29. Due for completion
towards the end of 2017, the MGT system
will provide the feedstock to each of the
gathering centres via three independent
networks of intermediate manifolds and
pipelines. Each of the three gathering
centres will be capable of producing
around 100,000 barrels of oil per day
together with associated water and gas.
Petrofac Annual report and accounts 2015 / 35
Strategic report 97%
of original project scope completed by the
end of 2015
Operational excellence
Design
Build
Related pages
Business model
p18
DELIVERING
LOCALLY IN
SAUDI ARABIA
Back in 2012, Petrofac was awarded
two engineering, procurement and
construction (EPC) contracts for the
prestigious PetroRabigh Phase II
petrochemical project in Saudi Arabia.
This expansion of the existing 3,000-acre
facility will enable PetroRabigh (a joint
venture between Saudi Aramco and
Sumitomo Chemical) to start producing
a new range of high value petrochemical
products within Saudi Arabia.
As with so many Petrofac projects, the
ability to deliver locally was an important
factor, and all of the work has been led
from the Company’s Al-Khobar offices.
The contracts cover a full range of common
utilities along with two sizeable tank farms,
comprising 47 tanks and five spheres.
By the end of 2015, 97% of the original
project scope had been accomplished,
with completion scheduled for later in 2016.
Building on the quality of our work,
we were recently awarded a significant
increase to the scope of the original
contracts, including the EPC requirements
for two additional tanks, two additional LPG
spheres, and all the associated utilities.
This phase of the work is also underway,
and due to be completed in 2017.
36 / Petrofac Annual report and accounts 2015
Segmental performance continued
Fadhili gas programme, Saudi Arabia
In November 2015, we were awarded a
contract by Saudi Aramco to undertake the
engineering, procurement and construction
of a sulphur recovery plant as part of their
Fadhili gas programme. Fadhili is a greenfield
development located 30 km west of the
city of Jubail in the eastern province of
Saudi Arabia. When completed, the gas
plant will have a capacity for around
2,500 million standard cubic feet per day
(MMSCFD) and will process sour gas from
the Khursaniyah oil field and the Hasbah
non-associated gas field. Petrofac’s scope
of work includes: the construction of six
sulphur recovery trains with associated
facilities for the sulphur and heavy duty oil
handling, loading, unloading and storage;
sour water stripper; flare system; and waste
water treatment plant.
Financial performance1
Revenue for the year increased 35% to
US$4,383 million (2014: US$3,241 million),
reflecting an increase in activity levels as we
moved into the execution phase on a number
of projects, particularly in Oman, Abu Dhabi,
Algeria, Kuwait and Saudi Arabia.
The net loss for the year was US$59 million
(2014: US$403 million net profit), reflecting
the recognition of a post-tax loss of
US$431 million on the Laggan-Tormore
project. The net margin for the year
was minus 1.3% (2014: 12.4%), while
the underlying net margin before the
Laggan-Tormore loss was 8.5%, reflecting
the geographic mix of the portfolio and
the contribution from projects in their late
stages in the prior year.
Onshore Engineering & Construction
headcount stood at 6,900 at 31 December
2015 (2014: 5,900), reflecting the increase
in activity levels.
At 31 December 2015, Onshore
Engineering & Construction backlog
increased to a record year-end level of
US$12.5 billion (2014: US$10.8 billion),
reflecting the high level of order intake
secured during 2015.
Timeline for ECOM key projects
NOC/NOC led company/consortium
Joint NOC/IOC company/consortium
IOC/IOC led company/consortium
Laggan-Tormore gas processing plant, UKCS
In Salah southern fields development, Algeria
Badra field, Iraq
PetroRabigh, Saudi Arabia
Jazan oil refinery, Saudi Arabia
SARB3, Abu Dhabi
Upper Zakum field development, Abu Dhabi
Bab Compression, Abu Dhabi
Alrar, Algeria
Sohar refinery improvement project, Oman
Clean Fuels Project, Kuwait
Khazzan central processing facility, Oman
Rabab Harweel Integrated Project, Oman
BorWin3, German North Sea
Reggane North Development Project, Algeria
Gathering Centre 29, Kuwait
RAPID project, Malaysia
Lower Fars heavy oil development, Kuwait
Yibal Khuff project, Oman
Manifold Group Trunkline, Kuwait
Fadhili sulphur recovery plant, Saudi Arabia
2013
2014
2015
2016
2017
Original contract
value to Petrofac
>US$800m
US$1,200m
US$330m
Undisclosed
US$1,400m
US$500m
US$2,900m
US$500m
US$450m
US$1,050m
US$1,700m
US$1,200m
> US$1,000m
Undisclosed
US$970m
US$700m
>US$500m
>US$3,000m
US$900m
US$780m
Undisclosed
1 Financial performance is reported before exceptional items and certain re-measurements unless stated otherwise. An explanation of exceptional items and certain
re-measurements is included in note 5 to the financial statements.
Petrofac Annual report and accounts 2015 / 37
Strategic report 270
active oil and gas installations
across the region
Operational excellence
Manage & maintain
Related pages
Business model
p18
INCREASING
EFFICIENCY
IN THE UK
CONTINENTAL
SHELF
In response to the sustained low oil price the
industry is turning to collaboration through the
supply chain to drive efficiencies and reduce costs.
By thinking differently about delivery Petrofac has
leveraged its position as a UKCS Duty Holder to
join up the activities of two of its key customers to
increase efficiency and reduce costs across their
respective operations.
Faroe Petroleum and Eni Hewett both have assets
in the Southern North Sea (SNS). As a result of a
review undertaken by Petrofac to identify synergies
across their respective operations a new tripartite
agreement was formed.
Faroe Petroleum increased the capacity of and
opened up its aviation arrangements to Eni Hewett.
In return, Faroe’s offshore personnel who service
nearby unmanned assets now stay overnight at Eni
Hewett’s facility. This approach results in increased
productive time across both operations as it
reduces the number of offshore mobilisations
required, maximises helicopter capacity and
enables Petrofac resources to be shared.
It has been a great example of how the industry
can work together to create efficiency and flexibility
within operations. This initiative has saved around
£1.2 million and has increased productivity by an
average of 50 planned activity days.
The industry regulator Oil & Gas UK, has described
the initiative as a great example of “co-operation
in action”.
38 / Petrofac Annual report and accounts 2015
Segmental performance continued
Offshore Projects & Operations
Offshore Projects & Operations (OPO), which includes our
Offshore Capital Projects (OCP) service line, specialises
in both offshore engineering and construction services
for greenfield and brownfield projects, and the provision
of operations and maintenance support, onshore
and offshore.
Group revenue contribution
Revenue
21%
Net profit
+6%
US$71m
US$64m
US$68m
Employees
3,600
(2014: 5,500)
-26%
US$1,671m
US$2,009m
US$1,484m
Net profit margin
2013
2014
2015
4.2%
3.2%
4.6%
2013
2014
2015
2013
2014
2015
Overall activity levels in 2015 were
lower than during 2014. This was primarily
due to lower levels of activity on capital
projects, such as the Laggan-Tormore
gas plant on Shetland in the UK and the
upgrade and modification of the FPF1
floating production facility (which will
subsequently be deployed on the Greater
Stella Area development), and lower
levels of brownfield engineering activity.
Activity has remained robust and we
continue to make good progress across
our portfolio of operations support contracts
and offshore capital projects, such as the
SARB3 project in Abu Dhabi, which is now
over 80% complete, and the BorWin3 project
in the German North Sea, where we have
completed over 50% of the engineering.
New awards and extensions
We secured the following major new
contracts and extensions during the year:
Oranje-Nassau Energie (ONE) UK
Limited support contract, Southern
North Sea
In June 2015, we secured a contract to
support ONE UK Limited, a subsidiary of
Amsterdam based oil and gas producer
Oranje-Nassau Energie B.V., as the
company became the operator of the
Sean gas field in the Southern North Sea
on 1 June 2015. The contract is for Duty
Holder support services and is worth
US$45 million over three years, with the
option of two one-year extensions.
Gas dehydration facility,
Kingdom of Bahrain
In September 2015, we announced our
first contract in Bahrain, to supply a new
gas dehydration facility. The scope of the
contract includes the installation of a new
500 MMSCFD gas dehydration facility,
which is the first of a series of planned
gas capacity projects scheduled for the
next three to five years. The project is a
significant part of Tatweer Petroleum’s
commitment to secure the delivery of
natural gas needed to meet the growing
demands of the Kingdom of Bahrain.
Petrofac Annual report and accounts 2015 / 39
Strategic report Segmental performance continued
Galloper wind farm, UK
In November 2015, we were awarded a
contract worth more than £100 million in
consortium with GE, split approximately
50/50 between the consortium parties.
The scope of work covers provision
of an offshore substation as well as a
receiving onshore substation, which will
transmit high voltage alternating current
from the offshore wind farm. Petrofac
and GE have also undertaken the
front end engineering and design and
accompanying pre-construction works.
Contract extensions
We were successful in securing contract
extensions with a range of clients in the UK
North Sea during the year, including CNR
International, Eni, Centrica and EnQuest,
totalling approximately US$800 million.
The extension with CNR International
includes the provision of operations and
maintenance teams across its North Sea
assets – the three platforms in the Ninian
complex; Murchison; and Tiffany – for the
next five years. For Eni, our services cover
operations and maintenance services
in the East Irish Sea for the Douglas fixed
platforms, Offshore Storage Installation
and Point of Ayr terminal and Duty Holder
responsibility for the Irish Sea Pioneer
operations support vessel. During the
second half of 2015, we secured a
US$100 million one-year extension
with SOC to support its Iraq Crude Oil
Expansion Project.
McDermott marketing alliance
In February 2015, we entered into an
agreement with offshore engineering,
procurement, construction and installation
(EPCI) company, McDermott, to form a
strategic marketing alliance. Under the
terms of the five year alliance, we will jointly
pursue opportunities in the deepwater
subsea, umbilicals, risers and flowlines
(SURF) sector.
JSD6000
In October 2015, we announced that we
had terminated the contract with the shipyard
for the construction of the proprietary
design Petrofac JSD6000 deepwater
multi-purpose offshore vessel due to issues
with the shipyard’s performance and the
Board is reviewing its options.
Financial performance2
Revenue for the year was substantially
lower at US$1,484 million (2014: US$2,009
million), predominantly reflecting lower
levels of activity on capital projects, such as
the Laggan-Tormore gas plant on Shetland
in the UK and the upgrade and modification
of the FPF1 floating production facility,
and lower levels of brownfield engineering
activity. In addition, cost savings achieved
in the supply chain, particularly in the UK,
enabled the delivery of services to clients
at a lower cost.
Net profit for the year increased to US$68
million (2014: US$64 million), representing a
net margin of 4.6% (2014: 3.2%). The lower
net margin in 2014 was due to the recognition
of a loss of US$27 million in relation to
Offshore Projects & Operations’ scope
of work on the Laggan-Tormore project.
Adjusting for the Laggan-Tormore loss in
2014, net margins were broadly unchanged.
The Group recognised exceptional items
and certain re-measurements in the OPO
reporting segment primarily reflecting
reorganisation and redundancy costs
together with provisions for leases on
vacant offices in the Aberdeen area.
Headcount stood at 3,600 at 31 December
2015 (2014: 5,500), reflecting the decrease
in activity, particularly on the Laggan-Tormore
project where we substantially de-manned
our direct construction workforce as we
handed over care and custody of the plant
to our client before the end of the year.
OPO’s backlog was marginally lower at
US$3.2 billion at 31 December 2015 (2014:
US$3.4 billion), with new awards and
contract extensions more than offset by
progress delivered on existing contracts.
2 Financial performance is reported before exceptional items and certain re-measurements unless stated
otherwise. An explanation of exceptional items and certain re-measurements is included in note 5 to the
financial statements.
40 / Petrofac Annual report and accounts 2015
Engineering & Consulting Services
Engineering & Consulting Services
Engineering & Consulting Services (ECS) operates as our centre of
technical engineering excellence. From offices across the Middle East
and North Africa, CIS, Asia-Pacific, Europe and the Americas, we provide
engineering services across the life cycle of oil and gas assets. Our
teams execute all aspects of engineering, including conceptual studies,
front-end engineering and design (FEED) and detailed design work,
for onshore and offshore oil and gas fields and facilities.
Group revenue contribution
Revenue
10%
Net profit
+52%
US$32m
US$33m
US$50m
Employees
5,500
(2014: 4,900)
+64%
US$362m
US$437m
US$715m
Net profit margin
2013
2014
2015
8.8%
7.6%
7.0%
2013
2014
2015
2013
2014
2015
We are making good progress on our
engineering, procurement and construction
management (EPCm) contracts for
Petroleum Development Oman (PDO)
(the Rabab Harweel Integrated Project
(RHIP) and Yibal Khuff, see below) and
the Al Taweelah Alumina refinery in Abu
Dhabi. Utilisation remains high across
our engineering offices, particularly in
our engineering centres in India, which
predominantly support Onshore
Engineering & Construction’s activities.
As well as supporting the rest of the Group,
we have secured and undertaken a wide
range of projects during 2015 for a number
of our external customers. Engineering &
Consulting Services’ larger awards won over
the course of the year included:
Yibal Khuff Project, Oman
In June 2015, we were awarded an
engineering and procurement contract by
PDO to provide services for its Yibal Khuff
project, a field located approximately
350 km south west of Muscat. Under the
terms of the four and a half year contract,
we will provide reimbursable engineering,
and construction and commissioning
management support services and
procurement on an incentivised pass-
through basis. This will extend throughout
construction and during start-up of the
integrated oil and sour gas facility. The total
contract value is expected to be around
US$900 million with around one-quarter
of the revenues relating to professional
services (engineering, construction and
commissioning management). Development
of the field will add to PDO’s future oil
production, whilst the associated gas
will be utilised for power generation and
enhanced oil recovery developments.
Plant Asset Management (PAM), various
Throughout the year, we were awarded a
number of contracts in our PAM business,
our asset performance management
consultancy. The awards included an
Integrity and Maintenance Programme
Development contract by INPEX for the
Ichthys LNG Project in Australia. This is
one of the largest global projects awarded
to PAM, involving an integrated gas chain
covering both upstream and midstream
assets. In addition, PAM has won a number
of awards in the UK North Sea during the year.
Financial performance
Revenue for the year increased 64%
to US$715 million (2014: US$437 million),
reflecting the ramp up of activity on the
Rabab Harweel project awarded in
March 2014, and high utilisation across
our Indian engineering offices. Net profit for
the year increased 52% to US$50 million
(2014: US$33 million), representing a net
margin of 7.0% (2014: 7.6%).
Headcount increased to 5,500 at
31 December 2015 (2014: 4,900),
reflecting the increase in activity levels.
ECS’ backlog increased to US$1.9 billion
at 31 December 2015 (2014: US$1.4 billion),
following the award of the Yibal Khuff
contract in June 2015.
Petrofac Annual report and accounts 2015 / 41
Strategic report 2018
expected completion date
Operational excellence
Design
Build
Related pages
Business model
p18
BREAKING
NEW GROUND
IN ABU DHABI
The Al Taweelah Alumina project in Abu Dhabi
involves the engineering, procurement and
construction management (EPCm) of a
greenfield alumina refinery with an initial
capacity of 2.0 million tonnes per annum.
Awarded by Emirates Global Aluminium
to a joint venture of Petrofac Emirates
and Bechtel Mining and Metals (BPJV),
the project brings together the skills of
the respective organisations.
Whereas Bechtel is a global leader in mining
and metals projects, Petrofac has deep
experience of working in the UAE – we know
the region, we know the local supply chains,
and we know how to deliver large, demanding
projects in the sweltering desert climate.
As an integrated joint venture, the two
organisations are working hand-in-hand
across every dimension. More than 145
Petrofac employees are based at the BPJV
project office in Abu Dhabi and also the
New Delhi-based engineering team.
42 / Petrofac Annual report and accounts 2015
Segmental performance continued
Integrated Energy Services
Integrated Energy Services (IES) provides an integrated service for
hydrocarbon resource holders under flexible commercial models
that are aligned with their requirements. Projects cover upstream
developments, both greenfield and brownfield, and related energy
infrastructure projects, and can include investment.
Group revenue contribution
Revenue
7%
Net profit
-96%
US$125m
US$131m
US$5m
Employees
2,900
(2014: 3,300)
-32%
US$934m
US$782m
US$531m
Net profit margin
2013
13.4%
2014
16.8%
2015
0.9%
2013
2014
2015
2013
2014
2015
IES deploys the Group’s capabilities to meet
the individual needs of customers using a
range of commercial frameworks, including:
• Production Enhancement Contracts (PECs)
• Risk Service Contracts (RSCs)
• Traditional Equity Upstream Investment
models, including Production
Sharing Contracts (PSCs) and
concession agreements
Production Enhancement Contracts
As part of the ongoing energy reforms
in Mexico, we continue to work towards
migration of our PECs to PSCs.
We have agreed with OMV Petrom to exit
the Ticleni PEC in Romania in the second
quarter of 2016.
We earn a tariff per barrel on PECs for an
agreed level of baseline production and an
enhanced tariff per barrel on incremental
production. During the year we earned
tariff income on a total of 7.5 million barrels
of oil equivalent (mboe) (2014: 9.2mboe),
reflecting lower investment as we exit the
Ticleni field and prepare for migration of the
Mexican PECs into PSCs.
Risk Service Contracts
The Berantai RSC continues to operate in
line with expectations and has experienced
high uptime during the year.
Equity Upstream Investments
Through OPO, we are making good
progress with the topside systems on
the FPF1 floating production facility and
onshore topsides commissioning is
expected to be completed before the end
of the first quarter of 2016. The marine
work on the FPF1 floating production facility
is expected to be completed to enable
sailaway during the second quarter of
2016, with first production from the Greater
Stella Area development expected in
summer 2016.
On Block PM304 in Malaysia, production
levels improved during the second half of
the year as we drilled and tied back further
wells on the field. Following periods of civil
unrest during March and April, production
from the Chergui gas concession in Tunisia
has been steady through the second half
of the year.
Our net entitlement from production
for 2015 from Block PM304 and the
Chergui gas concession was 2.4 mboe
(2014: 2.1 mboe).
Petrofac Annual report and accounts 2015 / 43
Strategic report 12%
of Tunisia’s total gas consumption
produced by the Chergui field
Operational excellence
Design
Build
Manage & maintain
Related pages
Business model
p18
OPTIMISING
PERFORMANCE
AND INCREASING
EFFICIENCY
Located on the Kerkennah archipelago,
some 30 Km off the Tunisian coast, the
Chergui field delivers up to 30 million
standard cubic feet (SCF) of gas per day,
and makes up around 12% of Tunisia’s
total gas consumption.
As well as being the operator, Petrofac
holds a 45% interest in the field, which we
operate on behalf of the Tunisian state oil
company, Enterprise Tunisienne D’Activitiés
Pétrolières (ETAP).
In the face of declining reservoir pressure,
the emphasis for 2015 was to find new
ways to optimise performance – by
maintaining historic production levels,
keeping both operational and capital
spending in check, and extending
Chergui’s strong safety record.
So, for example, the Petrofac teams worked
with ETAP to conduct and assess a series
of plant optimisation trials. The asset
management team has identified several
ways to bring increased efficiencies to
Chergui; meanwhile, an extensive subsurface
remapping project has identified new drilling
targets that would allow us to extend the
production plateau considerably.
As the islands’ largest employer, Petrofac
also plays an important role in the local
economy, and our range of community
investment programmes is designed to
improve local livelihoods and education.
44 / Petrofac Annual report and accounts 2015
Segmental performance continued
Summary of IES* key projects
Production Enhancement
Contracts*
Magallanes and Santuario, Mexico
Pánuco, Mexico**
Arenque, Mexico
Risk Service Contracts***
Berantai development, Malaysia
Equity Upstream Investments
Block PM304, Malaysia
Chergui gas plant, Tunisia
Greater Stella Area, UK
2014
2015
2016
2017
2018
End date
2037
2043
2043
2020
2026
2031
Life of field
* Ticleni PEC in Romania excluded following decision to exit.
** In joint venture with Schlumberger.
*** OML119 not included, as Field Development Plan not yet defined.
commodity price expectations, the Group
reviewed the carrying value of its PM304
oil and gas asset. This resulted in a
post-tax impairment of US$33 million
(2014: nil). The Group has reviewed the
carrying value of goodwill allocated to the
IES portfolio in light of revised commodity
price expectations and underlying asset
performance during the year. As a result
of this review, a further post-tax impairment
charge of US$33 million has been recognised
in respect of IES goodwill (2014: US$18 million).
See note 5 to the financial statements for
further details.
Headcount decreased to 2,900 at
31 December 2015 (2014: 3,300), with
the largest reductions in our projects in
Malaysia and in Petrofac Training.
Backlog decreased marginally to US$3.1 billion
at 31 December 2015 (31 December 2014:
US$3.3 billion). Of this balance, US$2.8 billion
relates to our Mexican PEC portfolio, which
we will cease to recognise as backlog in
the event we are successful in migrating
the contracts to PSCs.
Financial Performance1
IES’ revenue decreased 32% to
US$531 million (2014: US$782 million),
predominantly reflecting the lower oil price
environment and lower investment in our
PECs in Mexico as we work through the
contract migration process.
IES made a net profit of US$5 million
(2014: US$131 million), reflecting the lower
oil price environment, lower investment in
our PECs in Mexico and a gain in the prior
year of US$56 million from the sale of
floating production facilities to PetroFirst
Infrastructure Limited (‘PetroFirst’).
The Group recognised exceptional items
and re-measurements in respect of the
IES reporting segment of US$330 million
post-tax (2014: US$461 million), predominantly
in relation to impairment of assets and
fair value re-measurements. The Group
revalued its loan receivable from Ithaca
Energy in respect of the Greater Stella Area
development in the UK, primarily as a result
of a re-assessment of oil and gas forward
prices. This resulted in a post-tax reduction
in fair value of the Greater Stella Area
receivable of US$214 million (2014: US$207
million). As a result of significantly lower
1 Financial performance is reported before
exceptional items and certain re-measurements
unless stated otherwise. An explanation of
exceptional items and certain re-measurements
is included in note 5 to the financial statements.
Petrofac Annual report and accounts 2015 / 45
Strategic report Financial review
We delivered net
profit for the year of
US$9 million1, EBITDA
of US$3121 million and
backlog increased 10%
to a record year-end
level at US$20.7 billion.”
At a glance
• Revenue up 10% to US$6.8 billion
• Net profit1 of US$9 million, after Laggan-Tormore post-tax
loss of US$431 million
• Group backlog up 10% to record year-end levels of
US$20.7 billion at 31 December 2015, giving excellent
revenue visibility for 2016 and beyond, with embedded
margins consistent with guidance
• Net debt decreased over the second half of 2015 to stand
at US$0.7 billion at 31 December 2015, reflecting strong
cash collection during the fourth quarter of 2015
• Full year dividend maintained at 65.80 cents per share,
reflecting confidence in the Group’s future prospects
Revenue
Group revenue increased 9.7% to US$6,844 million (2014: US$6,241
million). We delivered strong revenue growth in Onshore Engineering
& Construction, reflecting an increase in activity levels as we
moved into the execution phase on a number of projects, and in
Engineering & Consulting Services, following several engineering,
procurement and construction management (EPCm) contract
wins over the past two years. Strong growth in these areas more
than offset substantial declines in revenue in Offshore Projects &
Operations, due to a lower level of activity on capital projects and
brownfield engineering and cost deflation in the supply chain, and
in Integrated Energy Services (IES), predominantly reflecting the
lower oil price environment and lower investment in our Production
Enhancement Contracts (PECs) in Mexico.
Net profit
The net profit for the year attributable to Petrofac Limited
shareholders before exceptional items and certain
re-measurements was US$9 million (2014: US$581 million),
predominantly due to the recognition of a post-tax loss on
the Laggan-Tormore project of US$431 million (see page 37
in the Segmental Review). The net loss for the year attributable
to Petrofac Limited shareholders after exceptional items and
certain re-measurements of US$358 million (2014: US$461 million;
see note 5 to the financial statements) was US$349 million
(2014: US$120 million net profit).
The largest component of exceptional items and certain
re-measurements relates to IES. As part of our normal year-end
process, we review the carrying value of the IES portfolio for
potential impairment. The Group revalued its loan receivable from
Ithaca Energy in respect of the Greater Stella Area development
in the UK, primarily as a result of a reassessment of oil and gas
forward prices. This resulted in a post-tax reduction in fair value
of the Greater Stella Area receivable of US$214 million (2014:
US$207 million). As a result of significantly lower commodity
price expectations, the Group reviewed the carrying value of its
PM304 oil and gas asset. This resulted in a post-tax impairment
of US$33 million (2014: nil). The Group has reviewed the carrying
value of goodwill allocated to the IES portfolio in light of revised
commodity price expectations and underlying asset performance
during the year. As a result of this review, a further post-tax
impairment charge of US$33 million has been recognised in
respect of IES goodwill (2014: US$18 million).
46 / Petrofac Annual report and accounts 2015
1 Before exceptional items and certain re-measurements.
Excluding exceptional items and certain re-measurements
(“business performance”), reported profit for the year attributable
to Petrofac Limited shareholders was lower at US$9 million (2014:
US$581 million) predominantly due to:
• A post-tax loss of US$431 million incurred on the Laggan-Tormore
project (2014: US$227 million, but mitigated by the net release of
tax provisions, accounting for previously unrecognised tax losses,
and other financial outperformance on late-life contracts)
• Lower net profit from IES, predominantly reflecting the lower oil
price environment, lower investment in our PECs in Mexico and
a gain in the prior year of US$56 million from the sale of floating
production facilities to PetroFirst
The net margin1 for the Group decreased to 0.1% (2014: 9.3%),
predominantly due to the lower profitability of Onshore Engineering
& Construction and IES as noted above. Net margins improved
in Offshore Projects & Operations, as a US$27 million loss was
recognised in this reporting segment in 2014 on the Laggan-
Tormore project.
Earnings before Interest, Tax, Depreciation and
Amortisation (EBITDA)2, 3
EBITDA was lower at US$312 million (2014: US$935 million),
representing an EBITDA margin of 4.6% (2014: 15.0%). EBITDA
margins were substantially lower in Onshore Engineering &
Construction, due to the recognition of a pre-tax loss on
the Laggan-Tormore project of US$480 million, and in IES,
predominantly reflecting the lower oil price environment, lower
investment in our PECs in Mexico and a gain in the prior year
of US$56 million from the sale of floating production facilities
to PetroFirst.
Backlog
The Group’s backlog increased 10% to a record year-end level
of US$20.7 billion at 31 December 2015 (2014: US$18.9 billion).
ECOM backlog increased 13% to a record year-end level of
US$17.6 billion, reflecting a strong intake of new orders in Onshore
Engineering & Construction, Offshore Projects & Operations and
Engineering & Consulting Services.
It should be noted that US$2.8 billion of the IES backlog relates
to our Mexican PEC portfolio, which we will cease to recognise as
backlog in the event we are successful in migrating the contracts
to PSCs.
Related pages
Group financial statements
p108
Company financial statements
p168
31 December 2015
US$ billion
31 December 2014
US$ billion
Onshore Engineering &
Construction
Offshore Projects & Operations
Engineering & Consulting Services
ECOM
Integrated Energy Services
Group
12.5
3.2
1.9
17.6
3.1
20.7
10.8
3.4
1.4
15.6
3.3
18.9
Exchange rates
The Group’s reporting currency is US dollars. A significant
proportion of Offshore Projects & Operations’ revenue is generated
in the UK (around 60%) and those revenues and associated costs
are generally denominated in sterling, as are the reported results
in respect of the Laggan-Tormore project The table below sets out
the average and year-end exchange rates for the US dollar and
sterling as used by the Group for financial reporting purposes.
US$/sterling
Average rate for year
Year-end rate
31 December 2015
31 December 2014
1.53
1.47
1.65
1.55
Finance costs
Finance costs for the year increased to US$101 million (2014:
US$79 million), principally due to the interest cost of finance
leases in relation to floating production facilities in Malaysia
for Block PM304 and the Berantai Risk Service Contract (RSC)
which, prior to the 80% disposal of these vessels to PetroFirst
Infrastructure Holdings Limited in August 2014, eliminated
on consolidation. Finance income was US$9 million (2014:
US$22 million) with the majority of the finance income relating
to the unwinding of the long-term receivable in relation to the
Berantai RSC.
Taxation
Our policy in respect of tax is to:
• Operate in accordance with the terms of the Petrofac
Code of Conduct
• Act with integrity in all tax matters
• Work together with the tax authorities in jurisdictions that
we operate in to build positive long-term relationships
• Where disputes occur, to address them promptly
• Manage tax in a pro-active manner to maximise value
for our customers and shareholders
Management responsibility and oversight for our tax strategy
and responsibility and governance over our tax policy, which
is approved by the Board and Audit Committee, rests with the
Chief Financial Officer and the Global Head of Tax who monitor
our tax activities and report regularly to the Board and the Audit
Committee. The Group’s tax affairs and the management of tax
risk are delegated to a global team of tax professionals.
2 Before exceptional items and certain re-measurements.
3 Including our share of results of associates.
Petrofac Annual report and accounts 2015 / 47
Strategic report Financial review continued
The Group’s effective tax rate for the year ended 31 December
2015 is negative 2.7% (2014: 18.4%). The Group’s effective
tax rate, excluding the impact of exceptional items and certain
re-measurements, for the year ended 31 December 2015 is
30.0% (2014: 5.2% tax charge).
A number of factors have impacted the effective tax rate, excluding
the impact of exceptional items and certain re-measurements,
this year, principally being the net release of tax provisions held
in respect of income taxes which is partially offset by the impact
of tax losses created in the year for which the realisation against
future taxable profits is not probable.
Gearing ratio
Interest-bearing loans and
borrowings (A)
Cash and short-term deposits (B)
Net (debt) (C = B – A)
Equity attributable to Petrofac
Limited shareholders (D)
Gross gearing ratio (A/D)
Net gearing ratio (C/D)
Net debt/EBITDA
31 December 2015
31 December 2014
US$ millions (unless otherwise stated)
1,790
1,104
(686)
1,230
146%
56%
220%
1,719
986
(733)
1,861
92%
39%
78%
As with prior years, the effective tax rate is also driven by the mix
of profits in the jurisdictions in which profits are earned.
Earnings per share
Fully diluted earnings per share before exceptional items and
certain re-measurements was 2.65 cents per share (2014:
168.99 cents), in line with the Group’s decrease in profit for the
year attributable to Petrofac Limited shareholders predominantly
due to the loss recognised on the Laggan-Tormore project.
Fully diluted earnings per share after exceptional items and
certain re-measurements was a loss of 102.65 cents per share
(2014: profit of 34.81 cents).
The Group’s total gross borrowings less associated debt
acquisition costs and the discount on senior notes issuance
at the end of 2015 were marginally higher at US$1,790 million
(2014: US$1,719 million) due to higher drawings on the Group’s
revolving credit facility (see note 25 to the financial statements).
As noted in note 25 to the financial statements, both the Group’s
term loan and revolving credit facility are subject to a leverage
covenant. Prior to 31 December 2015, the term loan and revolving
credit facility lenders granted a waiver of the leverage covenant
for the year ending 31 December 2015, as a result of which the
Group was in compliance with its financial covenant obligations
for that period.
Operating cash flow and liquidity
The Group’s net debt stood at US$0.7 billion at 31 December
2015 (2014: US$0.7 billion) as the net result of:
None of the Company’s subsidiaries are subject to any material
restrictions on their ability to transfer funds in the form of cash
dividends, loans or advances to the Company.
• Operating profits before working capital and other non-current
changes of US$313 million
• Net working capital inflows of US$602 million, including:
– a decrease in trade and other receivables of US$605 million
following strong cash collection in the second half of the year
– an increase in accrued contract expenses of US$367 million
offset by an increase in work in progress of US$192 million
as a number of Onshore Engineering & Construction projects
moved into the execution phase
– a reduction in trade and other payables of US$168 million
• Investing activities of US$361 million, including loans advanced
and capital expenditure of US$228 million on IES projects and
US$74 million on the Petrofac JSD6000 installation vessel
• Capital proceeds of US$43 million, including further
consideration of US$41 million from the PetroFirst transaction
(see note 4f to the financial statements)
• Financing activities, in particular, payment of the 2014 final
dividend and 2015 interim dividend totalling US$223 million
and financing the purchase of shares for US$39 million for the
purpose of making awards under the Group’s share schemes
• Net taxes paid of US$49 million and interest paid of US$96 million
Excluding bank overdrafts and Export Credit Agency facilities,
the Group’s total available borrowing facilities were US$2,450 million
at 31 December 2015 (2014: US$2,450 million; see note 25 to the
financial statements for further details). Of these facilities, US$660
million was undrawn as at 31 December (2014: US$725 million).
Combined with the Group’s cash balances of US$1,104 million
(2014: US$986 million), the Group has substantial sources of
liquidity available.
Capital expenditure
Capital expenditure on property, plant and equipment totalled
US$260 million in the year ended 31 December 2015 (see note 10
to the financial statements; 2014: US$668 million), including:
• US$121 million on the Petrofac JSD6000 installation vessel
• US$95 million on oil and gas assets in IES, predominantly in
relation to investment in the Group’s four production
enhancement contracts in Mexico
Capital expenditure on intangible oil and gas assets during the
year was US$10 million (2014: US$97 million), predominantly
in respect of pre-development activities on Block PM304,
offshore Malaysia.
48 / Petrofac Annual report and accounts 2015
The carrying value of Integrated Energy Services’ portfolio (excluding working capital balances) is:
Expenditure on Integrated Energy Services projects
Cost
At 1 January 2015
Additions/(adjustments)
Transfers
At 31 December 2015
Depreciation and impairment/
revaluation
At 1 January 2015
Charge for the year
Impairment/revaluation
At 31 December 2015
Net carrying amount:
At 31 December 2015
At 31 December 2014
Oil and gas
assets per
note 10 (Block
PM304, Chergui
and PECs)
US$m
Oil and gas
facilities per note 10
(floating production
facilities)
US$m
Intangible oil and gas
assets per note 13
(Block PM304,
and other pre-
development costs)
US$m
Greater Stella
Area development
loan per note 16
US$m
1,256
97
73
1,426
(415)
(78)
(32)
(525)
901
841
625
(4)
–
621
(197)
(42)
(15)
(254)
367
428
161
10
(73)
98
(5)
–
(7)
(12)
86
156
399
182
–
581
(207)
–
(214)
(421)
160
192
Less floating production facilities held under finance leases within ‘oil and gas facilities’
Add Berantai long-term receivable (see note 16 to the financial statements)
Add investment in Seven Energy International Limited (see note 15 to the financial statements)
Total IES investment before working capital at 31 December 2015
Total
US$m
2,441
285
–
2,726
(824)
(120)
(268)
(1,212)
1,514
1,617
(346)
357
169
1,694
Total equity
Total equity at 31 December 2015 was US$1,232 million (2014:
US$1,871 million). The main elements of the net movement during
the year were: loss for the year of US$344 million, less dividends
paid in the year of US$228 million and other comprehensive loss
of US$74 million.
Return on capital employed
The Group’s return on capital employed for the year ended
31 December 2015 was lower at 3% (2014: 18%), reflecting lower
EBITA (earnings before interest, tax, amortisation and impairment)
predominantly due to the loss on the Laggan-Tormore project.
Dividends
The Company proposes a final dividend of 43.80 cents per
share for the year ended 31 December 2015 (2014: 43.80 cents),
which, if approved, will be paid to shareholders on 27 May 2016
provided they are on the register on 22 April 2016 (the ‘record
date’). Shareholders who have not elected to receive dividends
in US dollars will receive a sterling equivalent, based on the
exchange rate on 27 April 2016. Shareholders have the opportunity
to elect by close of business on the record date to change their
dividend currency election.
Together with the interim dividend of 22.00 cents per share
(2014: 22.00 cents), this gives a total dividend for the year of 65.80
cents per share (2014: 65.80 cents), in line with the prior year.
Tim Weller
Chief Financial Officer
Petrofac Annual report and accounts 2015 / 49
Strategic report
Corporate responsibility
A safe, ethical, responsive
business that is driven to deliver
Good engineers have consummate technical
ability, but great engineers are also aware of
the political, social and economic environment
in which they work. A disciplined approach to
corporate responsibility is therefore an important
competitive strength for Petrofac.”
Ayman Asfari
Group Chief Executive
What matters most to our stakeholders
Petrofac materiality matrix and issues for 2015
Over the past few years we have engaged with a range of internal and external stakeholders to
identify the corporate responsibility (CR) issues that are most relevant to our business. In 2015,
we repositioned some of these issues based on further stakeholder feedback during the year.
How we report:
Information on the issues listed can
be found in the sections shown below.
l
s
r
e
d
o
h
e
k
a
t
s
l
a
n
r
e
t
x
e
o
t
e
c
n
a
t
r
o
p
m
I
D. Occupational health
A. Environmental
management
B. Political risk
C. Human rights
H. Trade sanctions
H. Revenue and
tax transparency
C. Worker welfare
B. Joint venture management
A. Water management
A. Waste management
A. Materials
A. Biodiversity/habitat protection
D. Well-being and
stress management
D. Disease prevention
A. Energy and climate
change
A. Legacy soil
contamination
C. Indigenous populations
C. Land acquisition and
resettlement
C. Social investment
(community investment)
h
g
H
i
i
m
u
d
e
M
w
o
L
A. Environmental incidents
B. In-country value
B. Supplier and contractor mgmt
E. Major accidents/process safety
E. Worker safety/ fatalities
E. Contractor safety
and management
F. Emergency preparedness
G. Diversity and equality
H. Bribery and corruption
H. Ethical conduct
H. Governance
C. Social licence to operate
C. Industrial relations disputes
F. Security risks
G. Learning and development
G. Succession and career planning
H. Whistleblowing
C. Employee volunteering
G. Employee retention
G. Employee recruitment
Low
Medium
High
Key
Changed position
Same position as 2014
Emerging issue
Importance to Petrofac
50 / Petrofac Annual report and accounts 2015
H
Ethics
P66
A
Environmental
protection
P64
G
People and
resourcing
P56
B
Economic
performance
P62
E F
Safety,
asset integrity
and security
P52
C
Social
performance
P59
Key: Issues by group
A Environmental protection
B Economic performance
C Social performance
D Health
E Safety
F Security
G People and resourcing
H Ethics
In 2016, we will also
increase the quality and
volume of CR reporting
at www.petrofac.com
At Petrofac, we believe that sustained commercial
success and a commitment to corporate responsibility
(CR) go hand-in-hand. More specifically, we see that
our CR capability helps us to:
• Maintain strong employee engagement
• Build productive relationships
• Bid for challenging projects
• Optimise the performance of our assets
• Manage our risks
During 2015, we continued to formalise our approach to CR,
with more rigour and improved reporting standards.
Progressively raising our reporting standards
To bring more discipline to our CR programmes, we continue to
work towards the Global Reporting Initiative (GRI) G4 guidelines.
As a commonly used framework for reporting on social, environmental
and governance matters, the GRI guidelines help us to:
• Identify and address the material issues that matter the
most to our stakeholders – including investors, clients,
staff and NGOs
• Prioritise areas for improvement and track our progress
over time
• Benchmark our performance against our peers
In 2016, we will also increase the quality and volume of CR
reporting at www.petrofac.com.
Understanding what matters most to our stakeholders
For the past few years, we have worked to develop our reporting in
line with stakeholder and investor expectations.
The process dates back to 2012 when, working with representatives
from across our business, we identified those CR topics we believed
to be most relevant.
In subsequent years, we conducted a series of in-depth interviews
with several of our most important stakeholders (including clients,
suppliers, investors, NGOs, government representatives and
industry associations). These enabled us to validate our initial
assumptions and understand changing expectations. In 2015,
we continued the process.
For example, we engaged with several external stakeholders in the
Middle East, enabling us to understand those issues that are most
relevant in our key geographies. We also engaged with a number
of large institutional investors to understand more fully the views of
large shareholders.
At Hassi Messaoud training facility, more than 850 Algerians have been trained
since 2010. See page 63 for more information.
Based on this work, we have developed an authoritative ‘materiality
matrix’. To give us a balanced view and take account of changing
stakeholder attitudes, this is updated on an annual basis. It is used
by the Leadership Team and the Board to inform our management
approach to CR. It is also used by the wider business to help improve
the quality of our CR programmes and feed through to our reporting.
Improving our performance and providing
a fuller picture
We also conducted a benchmarking and good practice review
of our 2014 Annual Report and Accounts. In this, we compared
our CR reporting with the reporting from several of our peers,
and identified several opportunities for improvement.
Drawing on this analysis, we will continue to raise our standards.
For example, we have refined our reporting around social performance,
ethics and environmental performance.
Petrofac Annual report and accounts 2015 / 51
Strategic report Corporate responsibility continued
Safety, asset integrity and security
Safety, asset integrity and security are fundamental
disciplines for Petrofac – enabling us to protect
our people, our clients and the communities we
work in, as well as the assets we design, build,
operate and maintain.
As we shift the emphasis of our business, and undertake the
construction phase of many large new projects, we are taking steps
to maintain our safety performance. We continue to enhance our
well-established programme of health, safety, security, environment
and integrity assurance (HSSEIA) measures.
‘Safe’ – a core Petrofac value
Reflecting on our safety performance
Across Petrofac, our aspiration is for zero safety incidents, as
reflected in the name of our Horizon Zero global safety campaign.
We are proud to say that, much of the time, we do live up to
this goal – and, in 2015, we were able to recognise several
encouraging developments.
Despite a busier year for Petrofac (when the number of man-hours
worked increased by almost 60% to 183 million), we nonetheless
achieved a reduction in High Potential (HiPos) and Lost Time
Incidents (LTI). And, across many of our operations, we have now
gone a considerable length of time without a single LTI reported.
Total man-hours worked (million)
Million man-hours completed by employees and subcontractors
160
115
183
Lost time frequency rate
per 200,000 man-hours
0.046
0.044
0.019
Recordable incident frequency rate
per 200,000 man-hours
0.14
0.16
0.16
Driving incident frequency rate
incidents per million kilometres driven
0.02
0.58
0.34
52 / Petrofac Annual report and accounts 2015
2013
2014
2015
2013
2014
2015
2013
2014
2015
2013
2014
2015
Highlights include:
• 20 million LTI-free man-hours and the Best Contractor Safety
Initiative award at the Upper Zakum, UZ750 field development in
Abu Dhabi
• 28 million LTI-free man-hours across all of our Offshore Projects
& Operations (OPO) projects across Middle East, North Africa
and the Commonwealth of Independent States
• 15.5 million LTI-free man-hours and an HSSE award for the
second consecutive year at the Kuwait Oil Company (KOC)
Pipelines project
• 8 million LTI-free man-hours at the Satah Al Razboot package
(SARB3) project off the coast of Abu Dhabi
• 5 million LTI-free man-hours at the Sohar refinery project in Oman
• 9 years without a single LTI at the Point of Ayr Gas Terminal in
the UK
• 5 million LTI-free man-hours at the Gdansk shipyards in Poland
• 1 million LTI-free man-hours on the Berantai operations in Malaysia
• 4 years without a single LTI for Petrofac Training Services
In terms of our actual performance, an important measure is what
we term HiPos, or incidents that could have resulted in a fatality or
serious injury had the situation been slightly different. Compared
with 2014, the number of HiPos recorded reduced from 77 to 58.
We measure our wider safety performance according to the
US Occupational Safety and Health Administration (OSHA) rules.
In every category, the results were encouraging:
• Our recordable incident frequency rate remained level at 0.16 per
200,000 man-hours. This is well below the industry norm of 0.31
(as extrapolated from the figures published by the International
Association of Oil and Gas Producers).
• Our LTI frequency rate was 0.019 per 200,000 man-hours,
compared with a rate of 0.044 in 2014. Again, this compares
well with the industry norm of 0.072 (as extrapolated from the
International Association of Oil and Gas Producers figures).
• The driving incident frequency rate was 0.34 per million
kilometres driven. This is down from a rate of 0.58* in 2014.
In January 2016 the International Association of Oil and Gas
Producers published a report of vehicle accident rates in the
oil and gas industry. Petrofac is currently reviewing this data
to establish if this can be used as an appropriate external
performance benchmark.
We are pleased to report that, for the second consecutive year,
no fatalities were recorded at any of our operations.
*
A calculation error in the 2014 Annual Report and Accounts resulted in the vehicle
accident rate being quoted per 200,000 kms rather than the correct and stated per
1,000,000 kms. The figure of 0.58 is correct on the per million kilometres basis.
During the year we established and began to implement a
new Control of Work Standard, which covers construction,
maintenance, demolition, remediation and other such
aspects of safety control.
Strengthening our safety culture
When a company enjoys a good safety record, complacency
can sometimes set in. Throughout 2015, we therefore sought
to maintain a strong safety culture and to prepare the Company
for a progressive increase in the number of man-hours due to be
worked in 2016 and beyond.
Making our Golden Rules of Safety accessible
and understandable
Our analysis reveals that, in more than 75% of our reported HiPos
in 2015, the root cause is a failure to observe our Golden Rules
of Safety. As in previous years, we therefore worked hard to raise
awareness of these Rules and their importance. For example:
For example, the executive leadership team and the Board
shifted the focus of our internal safety reporting from LTIs to HiPos.
The intention was to emphasise those ‘near misses’ that could
have had the most serious consequences. In each case, we
provide details on the circumstances, the mitigating actions and
the lessons learned.
• We continued to roll-out our Golden Rules of Safety e-learning
package. Using clear illustrations and graphics, this clearly
articulates the Rules and our expectation that they should
always be followed. By the end of 2015, this had been
completed by 880 employees.
• We sought to make the Rules more accessible and understandable
In a similar spirit, we added three new leading indicators to our
safety reporting, namely:
• The number of leadership visits to site
• The extent of active monitoring of safety on site
• The effectiveness of closing-out actions intended to improve
safety at site
Experience suggests that these measures can have a direct impact
on our safety performance. So, by routinely monitoring and reporting
on them, we can become more proactive in our approach.
Meanwhile, in gearing up for a progressive increase in construction
projects, our OEC business ran a Safety Seven campaign,
comprising seven key initiatives intended to contribute to its
safety performance – namely contractor management initiatives
such as: our Contractor Safety Forum; our HSE Boot Camp
training programme; Supervisor Competency Assessments;
our Stop, Think, Evaluate, Perform (STEP) programme; our
Short Service Employee (SSE) programme; the roll-out of HSE
Management software; and the implementation of the Petrofac
Assurance Index (PAI) system.
The Petrofac delegation, including Andy Nickerson (HSSE Director of our
OEC service line) and Mohamed Shanan (Project Director of KOC Pipelines),
receives the award from the KOC CEO, Hashem S. Hashem.
to all onsite personnel, irrespective of their native language
or level of literacy. Using vivid pictograms, we created a suite
of materials, including posters, reference cards and pictorial
learning guides.
Confined space
entry
Management
of change
Ground disturbance
Lifting operations
Energy isolation
Permit to work
Driving safely
Working at heights
Keeping our entire policy framework relevant
and consistent
During 2015, we conducted a root and branch review and
refresh of our entire Health, Safety, Security and the Environment
(HSSE) Framework, covering each of its constituent policy
documents, namely:
• Health and Safety Policy
• Environmental Policy
• Security Policy
• Asset Integrity Policy
For each of these, we ensured the content was up to date,
compliant with current regulatory requirements, and consistent.
The new Framework is due for roll-out in 2016.
We also established and began to implement a new Control
of Work Standard, which covers construction, maintenance,
demolition, remediation and other such aspects of safety control.
Petrofac Annual report and accounts 2015 / 53
Strategic report Corporate responsibility continued
Empowering our most senior people to lead by example
When it comes to safety, we expect all of our senior executives
to lead by example. For example, during 2015:
Across the Group, we are responsible for managing and assuring
the integrity of 21 operating assets, and we seek to apply the
underlying principles across all of our operations.
• We continued to emphasise the importance of site visits by
senior managers, and the opportunity for them to reinforce the
importance of safety to onsite personnel. Again, the frequency
of such visits has become a safety performance indicator for
all of our sites.
• We once again held our annual safety conference attended
by 130 of our most senior leaders, including our Group Chief
Executive and all Service Line Managing Directors. The theme
was emergency response and the event included a live crisis
management exercise.
In 2015 we continued to tighten up our everyday processes.
A particular focus for 2016 will be on the changes we anticipate
in the coming years, when several assets may be divested, and
several others may come under our control, while key personnel
and roles and responsibility changes are likely. Experience suggests
that, during times of change, attention to asset integrity can suffer.
So, we are working proactively to protect our performance by
taking action that keeps a focus on asset integrity, and ensures that
the valuable activities developed over recent years are maintained
and further enhanced.
Extending our commitment to our suppliers and partners
All Petrofac safety policies and procedures apply equally to our
suppliers and partners as well as our own employees. To underline
this principle, we held our second annual Contractor Safety Forum
in Sharjah in 2015.
A rigorous, consistent process
Every month, each of our 21 operating assets is obliged to report
against 20 key performance indicators, which are derived from
the UK Health and Safety Executive’s guidance on Developing
Process Safety Indicators. These comprise:
Following the success of the inaugural event, we scaled up the
Forum. It was open to contractors from across our business, and
we also invited several of our clients, bringing the total delegate
numbers to almost 200. The key aim of the event was to develop
a statement with three clear safety actions for all the companies
present to take away and implement. The statement was then
signed by each company to demonstrate their commitment.
Sharing best practice across the industry
We continue to share expertise across the industry by collaborating
with our peers. For example, we remain an active member of the
UK Oil Response Forum, and the Step Change in Safety initiative,
including its Asset Integrity Steering Group, the Helicopter Safety
Steering Group, and the Behavioural Safety Workgroup.
Asset integrity – fundamental to our business
At Petrofac, we design, build and operate assets that are safe,
reliable and meet or exceed their specified purpose. Key to
this is our Asset Integrity Framework, which enables us to take
a structured and consistent approach to integrity across all
Petrofac operations. This Framework comprises:
• Lagging indicators – relating to the physical condition of our assets
and the status of their respective maintenance programmes
• Leading indicators – relating to the quality of our management
processes and the degree of compliance with our Asset Integrity
Management Policy
Drawing on this data, an asset integrity dashboard is published
monthly and distributed to more than 100 people across the
Group. Additionally, our Asset Integrity Review Board, consisting
of senior representatives from each operating asset, holds monthly
teleconferences to review performance, discuss integrity issues
and receive challenge and support from their counterparts.
Working quickly to address integrity issues
During 2015 we received an Improvement Notice from the UK Health
and Safety Executive regarding the Kittiwake Platform in the UK
North Sea. This related to the failure of small-bore gas tubing due
to a combination of vibration and fatigue. Following completion of
an action plan, we had complied fully with the requirements by early
November, and actively shared the learnings among our design
teams as well as our operating teams across the Petrofac Group.
• Our Asset Integrity Management Policy
• Our Asset Integrity Standard, comprising
the 12 Elements of Asset Integrity
• Related guidance documents and a toolkit
of supporting processes
• Audit programmes to assure compliance
and continuous improvement
Seeking continuous improvement
We seek continuously to improve our approach to asset
management. Enhancements in 2015 included:
• Updating our Asset Integrity Management Policy – as part
of a wider review of our HSSE Framework
• Implementing a Tank Survey Programme – performing a
systematic review of the 180 storage tanks that Petrofac operates
across the world and establishing improvement programmes
54 / Petrofac Annual report and accounts 2015
• Conducting a series of audits across our portfolio
of assets – including
– Milestone audits, to assure the integrity of projects
through engineering and construction
– Operations phase integrity reviews, to assure control
of hazards and safe operating performance
– Hull integrity audits of all our marine assets
• Establishing an improved understanding of well integrity
– across all our high consequence wells
• Implementing our new Group-wide Asset Integrity
e-learning package – which, by the end of 2015, had been
completed by more than 2,000 technical employees
• Improving consistency across the Group via new
standards and guidance documents – including issue
of Technical Due Diligence Guidance, Operations in Projects
Guidance, Pressure Systems Repair Guidance, Technical
Authority Standard, and development of new Management
of Change and Control of Work Standards
• Conducting monthly project asset integrity status
reporting – together with successes and lessons learned
shared across all major projects
Plans for 2016 include:
• Implementing a Pipeline Survey Programme – to follow-up
on the success of 2015’s Tank Survey Programme
• Revisiting learning from previous incidents – and refreshing
awareness and vigilance in attention to asset integrity hazards in
all areas of our work
Security – protecting our people and assets
Petrofac’s security team works closely with the business to protect
our people and assets and ensure that our operations proceed
smoothly. In 2015 we continued to enhance our already robust
security management systems, reflecting the volatile social and
political environments in which we work.
Implementing a stronger security focus in the Middle East
and North Africa
During 2015, dedicated security specialists were assigned to
our North African projects, and our security teams became more
closely involved with our operations across the Middle East.
With a stronger regional focus, our security teams have become better
informed and more responsive in our core markets. They are also able
to engage more closely with our project teams – from the very early
stages of business development through to bidding and delivery.
Appointing more local security managers
In IES, we implemented a security localisation programme, including
the appointment of local country security managers in Malaysia,
Mexico and Tunisia. As well as providing effective security support,
the provision of employment opportunities helps us to maintain
productive relationships with the communities in which we operate.
Making technical improvements to our security systems
A focus for 2015 was to improve the quality of our threat assessments,
taking better account of the diversity in the size and duration of
our respective projects. As part of this process, we introduced new
access control systems at many of our offices and sites. As well
as improving physical security, this has enhanced our related
management information.
The process will continue in 2016, as we seek to bring more global
consistency and integration to our access control systems.
Improving maritime security
During 2015, we conducted a full review of the security of our
maritime assets. This has given us a better understanding of the
related security implications and helps us to monitor our assets in
compliance with the International Ship and Port Facility Security
(ISPS) Code.
Respecting human rights
Where necessary (for example, where we have a contractual
requirement to engage with armed public or private security
providers), we conduct security and human rights risk assessments.
In 2015, we did this in Algeria, Mexico and Tunisia. Such audits
enable us to demonstrate to our clients and other stakeholders
that we follow good practice in reducing the risk of inadvertent
human rights violations.
‘Safe’ is a core Petrofac value. At many of our projects we have delivered
tens of millions of man-hours without a safety incident.
Petrofac Annual report and accounts 2015 / 55
Strategic report Corporate responsibility continued
People and resourcing
Petrofac is a people-based business.
Our people, their attitude and their skills are key
to our distinctive, delivery focused culture. By living
our values, they set us apart from our competitors,
allow us to attract and retain clients, and enable us
to earn differentiated margins.
For the next phase of our development, we aim to bring more
efficiency, consistency and effectiveness to the way we recruit, develop
and manage our people – while also enabling and encouraging
employees from around the world to progress in their careers.
In a company with such a strong culture, we need everyone to
understand and live up to our values. Our HR teams are therefore
working closely with their colleagues from across the business to
reflect these values in our recruitment processes, our performance
management systems, and our continuous learning programmes.
Our values underpin all that we do and, during the current
challenging period, are helping the Company to maintain its
focus on disciplined cost containment.
The North Kuwait New Distribution Network Project was one of our 2015
EVE Award winners.
Pursuing a business-focused HR strategy
Throughout the Group, we employ HR professionals with expertise
in a number of disciplines. They are based in each of our key
locations and, together, they deliver a business-focused HR
strategy. The guiding principles include:
In light of the challenges faced across the oil and gas sector,
jobs have become scarce and voluntary turnover levels within
the industry are thought to have reduced commensurately. Here
at Petrofac, voluntary staff attrition (measured in terms of those
leaving the Company by choice) reduced to around 6% compared
with 8.5% in 2014.
• Developing all of our people – viewing current employees
as the natural candidates for tomorrow’s roles and equipping
them to progress in their careers
• Identifying and developing those with leadership
potential – with effective talent management and succession
planning identifying the next generation of senior leaders and
providing the support they need
• Strengthening our leadership capabilities – developing
the skills of those responsible for others
• Driving high performance – cascading consistent and
aligned performance measures to enable us to achieve our
business plans
• Attracting and developing the right graduates – evolving
our graduate programmes to create a global cohort who are
closely networked and highly collaborative
• Encouraging people to ‘join our journey’ – portraying a
consistent employee value proposition that helps us to compete
for and retain talent
Adapting to an uncertain business environment
As covered elsewhere in this Annual Report, the Group is adapting
to an uncertain business environment, in which oil prices may
remain low for a sustained period of time. There is a renewed
focus on operational excellence and disciplined cost control.
Fortunately for Petrofac and our employees, much of the Group
is well positioned in the most robust segments of the oil and gas
industry and we enter 2016 with our largest ever year-end backlog.
However, some parts of the business are not so well insulated
from lower oil prices, such as our IES operations and also our
operations in the UK Continental Shelf (UKCS). So, in effect,
we are now managing two types of businesses:
• The operations concentrated in the Middle East and North Africa
and our centres of excellence in India, which are continuing to see
growth but are nonetheless facing increased competitive intensity
• Getting the HR fundamentals right – seeking greater
• The more cost-constrained operations located elsewhere
efficiency, integration, consistency and effectiveness across
all our HR activities
In 2015, the total number of employees and long-term contractors
decreased by around 4% to reach 19,000.
To reflect these circumstances, the Group has been preparing for
a reorganisation, which took effect from early-2016, where the HR
team has taken a central role. As a result, we have had to manage
our cost base tightly and implement reductions in our headcount
in a number of locations.
56 / Petrofac Annual report and accounts 2015
During 2015, we climbed more than 100 places (to 174)
in the ‘Guardian UK 300’ listing, which ranks the country’s
most popular graduate employers.
In our UK-based operations, which have been hit particularly
hard by falling oil prices, we took the opportunity to establish a
UK-wide consultation forum, to act as a conduit for two-way
communications with our UK-based employees. With the decision
to reduce our UK headcount, this forum played an important role
in employee engagement, under very challenging circumstances.
In our other locations, such as Mexico and Malaysia, the business
has also been restructured and reductions in workforce have
been implemented.
A clear focus on growing our own talent
In the past, Petrofac typically relied on external recruitment to fill
key roles. Now, as part of our HR strategy and our talent management
programmes, we want our existing employees to benefit from career
progression opportunities that may open up across the Group.
With this emphasis on identifying, developing and progressing
our own talent, we aim to be seen as an attractive employer,
offering tangible opportunities for career progression and
personal development. Achievements include:
• We are now regarded as one of the world’s most in
demand employers
Back in 2014, we developed an ‘employee value proposition’,
encouraging potential job applicants to ‘Join our Journey’. We
also introduced a new online recruitment and application-tracking
system, designed to improve the experience of potential employees,
streamline our recruitment processes, and bring more rigour
to the planning and evaluation of our recruitment advertising.
We recognise LinkedIn as a key channel to position ourselves
as an employer of choice. Our presence and strength of brand
continues to grow and we experience high levels of engagement
with content on our page. This contributed to our appearance
on LinkedIn’s 2015 list of 100 Most InDemand employers for
Europe, the Middle East, and Africa (EMEA). In 2015 we were
also named, for the second successive year, as one of
LinkedIn’s top 20 most influential UK brands.
• We are a popular career choice among today’s graduates
Attracting and developing the right graduates is one of the
principles of our HR strategy.
Regrettably, conditions in 2015 forced us to pause our UK
graduate recruitment programmes. But, elsewhere in the world,
the graduate programme continued unabated. In Sharjah for
example, our graduate intake for the year was around 140
people (a slight increase from 2014) and, in India, we recruited
around 90 new graduates.
To reflect our emphasis on graduate recruitment and development,
we brought greater Group-wide alignment to our induction and
development programmes. The Petrofac Academy, which is
located in Sharjah, for example, is becoming responsible for
continuous learning initiatives across the Group. In addition,
Group Chief Executive Ayman Asfari took the opportunity whilst
visiting the Sharjah office to welcome 2015’s graduate intake to
the Group by attending an interactive event, which linked via video,
graduates based in Sharjah with those based in Mumbai, Chennai
and Malaysia. This joined-up approach helps our graduate cohort
become closely networked and highly collaborative, accelerates the
acquisition of skills, and allows our young professionals to achieve
autonomy more quickly.
We are proud that our graduates reflect the level of diversity we
enjoy across the wider Group. They represent almost 50 nationalities
and females continue to make up around 20% of the total. We also
benefit from high levels of retention – among the 1,000 graduates
recruited since 2004, the retention rate remains around 70%.
During 2015, we climbed more than 100 places (to 174) in the
‘Guardian UK 300’ listing, which ranks the country’s most popular
graduate employers.
A commitment to continuous learning and development
Again, the central ethos of our HR strategy is to develop our
own people.
We want to enable all employees to progress professionally.
We also want to help those employees who are responsible
for others to improve their management and leadership skills.
Irrespective of their role or seniority, we want to help our
employees to live the Petrofac values.
• Individual development
We offer a growing range of programmes and resources to help
individual employees develop their respective competencies.
During 2015, we conducted a review of our e-learning resources,
in order to provide more flexibility for employees and ensure
that programmes developed in one part of the Group can be
accessed by colleagues elsewhere. Going forward, we intend
to implement an integrated, Group-wide learning management
system, which makes better in-house use of the technologies
and tools developed by Petrofac Training Services. This will
give us more consistent means of identifying training needs,
delivering learning, assessing competence and tracking
individual progress.
• Management and leadership development
As in previous years, we continued to develop the skills of those
responsible for others. As well as improving their capabilities,
this helps us to cascade the right behaviours through the
organisation. An important component is our Leadership
Excellence Programme, which around 200 of our most senior
leaders have participated in. The programme comprises a
leadership event, skills modules and alumni workshops.
Another focus for 2015 was to implement and embed our newly
developed Leadership and Management Competency Framework.
Petrofac Annual report and accounts 2015 / 57
Strategic report Corporate responsibility continued
We set out clearly what we expect of all our managers,
from first line supervisors right through to our most senior
leaders. The framework covers four dimensions:
A disciplined approach to succession and career planning
A focus of our HR strategy is to develop the Group’s
leadership capabilities.
– Driving performance
– Developing people
– Delivering for clients
– Being a role model for our values
To live up to these expectations, we operate an all-embracing
management and leadership development programme, which
we call the Petrofac Pathway. During 2015, 420 managers went
through the programme. A priority for 2016 is to continue to
embed the Petrofac Pathway across the Group, and to support
local offices with its implementation.
Forever emphasising the importance of our values
It is important that all employees understand the importance
of the Petrofac values and the role they play in our distinctive,
delivery-focused culture.
Our values are therefore integrated into everything we do and
we explain their importance to employees at each stage of their
Petrofac career. This enables everyone to understand what is
expected of them, the behaviours we value, and the contribution
they make to the success of their teams. In addition, our values
are linked to our Group-wide performance management process
and therefore play a part in setting employee objectives and
conducting mid-year reviews and year-end appraisals.
This helps us drive a high performance culture across the Group,
whilst also maintaining a focus on how our people should work
in partnership with the wider Petrofac team.
Each year, we also celebrate employees and teams who embody
our values through the EVE (Excellence, Values, Energy) Awards.
As in 2014, we received around 320 entries from across the Group,
demonstrating a significant level of interest and enthusiasm.
For 2016 we will ensure that our values are even more visible
to employees, at every stage in their career journey, including
the initial recruitment and induction, and also the learning and
development programmes.
Back in 2014, we conducted a thorough talent review of our
most senior managers, and we continue to review and update
succession plans for all our critical roles.
In 2015, we extended our talent reviews further into the organisation,
with a focus on emerging talent, focusing on around 1,600 young
professionals. In doing so, we assessed their progression to date,
and how best to support their future development.
Going forward, we will continue to look at ways to gain more value
from the combined knowledge and experience of our most talented
people, such as more internal secondments and appointments.
The aim is to ensure that we can always place our most effective
people into our most important roles.
Global mobility where it makes business sense
Wherever possible, Petrofac delivers locally, by employing local
people, working with local partners and developing local capabilities.
However, in some instances, it makes good business sense for us
to facilitate international moves.
By mobilising some of our key people, we can supplement local
skills. We can also strengthen our global culture and add to the
experience of our managers and leaders. By drawing on our
in-house HR expertise, we are able to advise local business
leaders, support assignees and follow consistent processes.
At the end of 2015, around 50 of our employees were covered
by our global mobility programmes. Given our order backlog,
we anticipate an increase in the number of short-term and
rotational assignments and expect assignees to be drawn from
a wider range of countries.
An engaged workforce with a sense of ownership
Our aim is to monitor formally employee engagement levels across
Petrofac. In the past, we have conducted a biennial employee
survey, PetroVoices. However, given the impending restructure
of the Group, we chose not to do so in 2015 but will endeavour to
reintroduce the survey once the restructuring has been embedded.
Meanwhile, we actively encourage employee share ownership,
believing that it builds commitment to the Company’s goals and
rewards our people for their contribution. In 2015, 32% of our
employees participated in at least one of the Petrofac employee
share schemes.
The 2015 EVE (Excellence, Values, Energy) Award winners.
58 / Petrofac Annual report and accounts 2015
In 2015 our spending on social investments amounted
to US$3.5 million, contributing to tangible benefits for
those we support and also for Petrofac.
Social performance
For many of our projects, we have a regulatory,
contractual or other requirement to manage the
impact (both positive and negative) our business
may have on the communities where we are active.
Where this is the case, we are becoming ever
more rigorous in the way we work with our
clients to understand and manage these impacts.
This means we are becoming better able to reduce
risk and create value for the Company, our clients
and neighbouring communities.
We describe our approach to this as social performance.
Our management framework
Our Social Performance Framework governs how we manage
social performance across the Group. Our Social Performance
Standard and associated guidelines set the expectations and
requirements that enable us to meet the commitments set out
in the Petrofac Ethical, Social and Regulatory Policy as they relate
to social performance.
In 2015, we conducted a review of some of our key engineering,
procurement and construction (EPC) contracts to identify areas
where we have contractual requirements and/or regulatory
responsibility for implementing any elements of social performance.
This is enabling us to identify how social performance is relevant to
this aspect of our business, and to ensure that it is implemented
effectively across all relevant projects.
Integrating social performance into our wider
business processes
During 2015, we continued to raise awareness of social
performance issues across the Group and incorporate them into
our wider business processes. For example, social performance
considerations are incorporated into:
• The Petrofac Enterprise Risk Management System (PERMS)
• The risk assessment phase of pre-bidding and bidding
processes (in order, for example, to anticipate potential
community relations considerations)
• Our approach to security (to understand and address any situations
where community relations could constitute a security risk)
For 2016, we will continue to increase the social performance
awareness and capability across the Group and continue to
implement the Framework.
The Social Performance Standard is designed to be consistent
with relevant international standards, such as the International
Finance Corporation (IFC) Performance Standards on
Environmental and Social Sustainability. In 2015, as part of
a three-yearly review process, we refreshed the Standard
and reviewed the related guidelines.
The Framework is significant in four main ways:
1. It sets out our minimum expectations and requirements for
those contracts where we have a regulatory or contractual
accountability for managing social impacts
2. It provides consistent guidance across the Group on
how we have decided to manage the various elements
of social performance
3. It demonstrates to clients our approach to social performance
and indicates our related credentials
4. It indicates to all stakeholders that we have a coherent approach
to working in sensitive locations, and are capable of fulfilling
internationally recognised social performance requirements
Implementing the Social Performance Standard
We implement our Social Performance Standard in countries
where we are contractually responsible for managing community
relations, such as Mexico and Tunisia. In both of these countries,
we have completed social assessments and have mitigation
measures in place to address identified issues. We also have
dedicated community relations teams to manage our social
performance commitments and engage regularly with our
neighbouring communities.
Petrofac supports local fishermen and the mangrove conservation project
in Tabasco, Mexico.
Petrofac Annual report and accounts 2015 / 59
Strategic report
Corporate responsibility continued
Social investment programmes
Our social investments fall into two categories:
• Community development – spending on initiatives that benefit
neighbouring communities in our areas of operation. They are
based on needs assessments to help local communities meet
their long-term priorities.
• Strategic corporate giving – spending on philanthropic initiatives
that have altruistic aims but nonetheless contribute to Petrofac’s
reputation. They are managed by our local offices, and are
moving towards a focus on our Group-wide theme of science,
technology, engineering and mathematics (STEM) education.
In 2015, our spending on these social investments amounted
to US$3.5 million. This was down from US$4.1 million in 2014,
in part due to reduced expenditure in Mexico, where we have
been renegotiating our contracts as part of the country’s energy
sector reforms.
Although the amount we spend may have decreased, we believe
our approach is becoming progressively more rigorous and therefore
more effective in contributing to tangible benefits for those we
support and also for Petrofac. For example, we have strategic
plans in place for all our IES assets, and a growing number
of our corporate centres are involved in strategic corporate
giving initiatives.
One of our community meetings in Mexico.
60 / Petrofac Annual report and accounts 2015
• About our community development initiatives
Where we operate assets and are directly accountable
for managing social impacts, we implement community
development programmes.
In recent years, we were particularly active in Mexico, where
we have been contractually committed to spending 1% of our
total annual expenditure on sustainable initiatives (75% of which
is cost-recoverable). With the renegotiation of our Mexican
contracts, the level of capital expenditure has reduced and,
therefore, the amount invested in community development has
decreased from US$3 million in 2014 to US$2.6 million in 2015.
Our focus is currently on finalising the implementation of existing
initiatives as we prepare to work under new contract terms.
Similarly, in Romania, where we are exiting from our operations,
we have been closing out our existing social investment programme.
Meanwhile, in Tunisia, we continue to face a challenging social
context, including some instances of civil unrest (resulting,
for example, in a 37-day shutdown at our Chergui concession
during 2015), and our investment in community development
initiatives has dropped 27% to US$334,000. However, as we
prepare for a future drilling campaign, we remain engaged in an
active community consultation process, and continue to target
our community investment programmes on improving local
livelihoods and education.
A recent success in Tunisia was our work with the local agriculture
association to invest in an oil press, which is the first on Kerkennah
Island. This allows local farmers to process their olives without
the need to transport them to the mainland, resulting in a saving
of around 45%. During the last harvest, the press was used by
over 450 farmers, who processed 650 tonnes of olive oil – around
40% of the islands’ total olive production.
• About our strategic corporate giving programmes
Petrofac has a formal corporate giving strategy, focusing
on initiatives that promote STEM education and/or improve
access to education and employability for young people from
marginalised groups.
We believe this focus fits well with our business while addressing
global development priorities. Although guided by a Group-wide
strategy, our related programmes are typically selected and
implemented at a national or regional level and managed by
local offices.
Our strategic corporate giving also covers initiatives intended
to enhance employee engagement. For example, we support
matched-funding programmes, and often make donations to
charities that are relevant to our employees or are located near
to our offices.
Examples include:
• The Royal Academy of Engineering, UK
In the UK, we have a long-standing partnership with the
Royal Academy of Engineering and our Group Chief Executive,
Ayman Asfari, is a Fellow of the Academy.
Each year since 2009, we have supported the Royal Academy
of Engineering Fellowship Programme, which provides funding
for graduate engineers to pursue a one-year Masters programme
in applied technical roles in the oil and gas industry, and has
now benefited 31 fellows.
In 2015, we also extended our support of the Academy’s STEM
Teacher Connectors project, which employs an expanding
network of Teacher Coordinators, who provide local STEM
teachers with training, resources and networking opportunities.
During the most recent academic year, an estimated 1,100
pupils from 68 schools benefited.
• The Kincorth Academy Partnership, Aberdeen
For several years, we have enjoyed a partnership with Kincorth
Academy, a local secondary school in Aberdeen. We support
various projects including STEM outreach programmes, CV
writing and interview skills coaching. Our support involves a mix
of financial, in-kind and employee volunteering contributions.
Managing and monitoring our human rights performance
Petrofac’s Ethical, Social and Regulatory Policy prevents us
from engaging in any business activities that could implicate the
Company – either directly or indirectly – in the abuse of human
rights or the breach of internationally recognised labour standards.
As such, we respect human rights as set out in the United
Nations’ Universal Declaration of Human Rights, as well as the
core conventions of the International Labour Organization (ILO).
We also support the United Nations’ Guiding Principles on
Business and Human Rights.
Most human rights protections are covered in a range of Company
policies and standards, such as our Code of Conduct, Social
Performance Framework and HR policies.
In line with the GRI G4 reporting requirements, and in response
to stakeholder expectations (see the materiality matrix on page 50)
we continue to recognise the need to:
• Become more explicit in our reporting on human rights issues
• Enhance our due diligence in relation to human rights issues,
with an emphasis on the concerns that are most relevant
to our sector – such as the management of large temporary
workforces, particularly those working on projects that entail
large numbers of contractors and subcontractors
• Ensure that all related risks are appropriately monitored
and managed
Some of the graduate engineers from the Royal Academy of Engineering
Fellowship Programme.
During 2015, to become more explicit about our expectations, we
updated several areas of our policy framework. For example, we
developed a policy statement on child labour, which states that we will:
• Not employ anyone under the age of 15 (in accordance with the
ILO Conventions relating to child labour)
• Adhere to minimum age provisions of any national labour laws
and regulations which specify a higher minimum working age
• Work with suppliers and contractors to ensure that they comply
with this policy
We also updated our Social Performance Standard to reflect our
policy commitments to human rights.
A priority for 2016 is to ensure that Petrofac complies with the
requirements of the UK Modern Slavery Act. In particular, we
intend to enhance our due diligence process to demonstrate
our commitment to eliminating the risks of modern day slavery
in our supply chain.
Petrofac Annual report and accounts 2015 / 61
Strategic report Corporate responsibility continued
Economic performance
As a global business, Petrofac operates in many
different countries – and we seek to make a positive
and tangible contribution to their respective economies.
Quantifying and maximising our in-country value
Local delivery has always been key to the Petrofac model –
employing local people, working with local suppliers, and
developing local capabilities.
The concept of In-Country Value (ICV) seeks to formalise and
quantify the net contribution Petrofac makes to the economies
in which we operate.
Across many of our projects, we have started to evaluate our
impact. In future years, we aim to become more consistent in the
way we set and monitor targets and to share the lessons learnt
across the Group.
Working with local suppliers
Through the procurement of goods and services, we have an
important opportunity to contribute to local economies and we
always aim to work with local vendors and suppliers. This enables
us to meet our contractual and regulatory obligations regarding
local content. It also helps us to reduce costs and enhance
relationships with clients and other local stakeholders.
In 2015, just taking into account the key projects listed on page 37,
we purchased more than US$2.2 billion worth of goods and services,
more than 25% of which was supplied by vendors located within
the country of operation.
For various reasons, the level of local content varies significantly
by country. For example, in Abu Dhabi, where we are delivering
projects worth US$4.1 billion, more than 72% of our procurement
was through locally registered vendors, and the equivalent figure
for Saudi Arabia exceeds 66%.
In 2016 we aim to harmonise the way that we gather data relating
to local content, which should enable us to report our contributions
more clearly in future.
Supporting local employment
We are also working towards gathering consistent data to report
how many jobs are created and sustained on our key projects.
Our goal is to understand the total number of jobs created, as well
as the ratio between expatriate and local workers – to indicate the
level of the local content of our workforces.
As of December 2015, just taking into account the key projects
listed on page 37, we supported over 55,000 jobs at our project
sites. The vast majority of these, 93%, were through our sub-
contractors, with a smaller number of expatriate and local Petrofac
employees and contractors.
62 / Petrofac Annual report and accounts 2015
Total amount paid to governments in tax
US$605m
(2014: US$720 million)
Value of goods and services ordered for
key projects in ECOM
US$2.2bn
(2014: not reported)
Number of jobs supported at key ECOM
project sites
55,000+
(2014: not reported)
Many of these subcontractor jobs are held by local people. In 2016,
in order to understand the total number of people who are hired
locally, we aim to analyse further and report on the make-up of
our subcontractors’ workforces, as well as the employees at our
country offices and other assets.
Examples include:
• Investing in Omani content
Petrofac has a strong heritage in Oman dating back to 1988.
Today, we continue to provide engineering, procurement and
construction (EPC) services, and are also extending our local
capabilities in engineering consultancy services (ECS), which
enables us to support the development of local service providers
and vendors. In addition, our recently expanded country office
in Muscat demonstrates our commitment to working as an
integral and sustainable part of the Omani market.
We are currently delivering four strategic projects in the
country (the Khazzan gas field project, the Yibal Khuff project,
the Rabab Harweel Integrated Project, and the Sohar refinery
improvement programme) with a combined value of more than
US$5 billion. In partnership with Takatuf Oman, we are also
developing a state of the art vocational training facility to train
Omani school-leavers to international standards for careers in
the oil field industry.
At the end of 2015 we directly employed over 600 staff at our
Muscat office and project sites, and more than 40% of them
are Omani nationals. In addition, more than 14,500 people
are employed through our contractors and work on our sites,
many of whom are Omani nationals.
As required by the government of Oman and in support of our
clients’ respective ICV targets, we report regularly on our ICV
spending. To date, on the four strategic projects mentioned
above, we have invested over US$1 billion in ICV. Of this, 85%
has been spent through local goods and services providers, as
well as on supplier development and training support initiatives.
• Developing local capabilities in Algeria
Building on a 15-year track record in the country, we are
currently delivering three major projects in Algeria, with a
combined value of more than US$3.1 billion (namely, the
In Salah Gas Southern Fields development, the Alrar Gas
Compression plant and the Reggane North Development
Project). In addition, we have an ongoing engineering services
agreement with the In Salah Gas joint venture, and have
entered into two further strategic agreements with Sonatrach,
the Algerian state owned energy company.
In combination, these assignments are benefiting the Algerian
economy in several ways. For example, as of December 2015,
we employed directly and through third parties over 800 people
in the country, 56% of whom are Algerian nationals. Through our
subcontractors, an additional 6,650 people are employed, 6,000
of whom are Algerian nationals. In combination, this equates to
a ratio of over 86% in local content.
Meanwhile, on the three major projects mentioned above,
we spent a total of US$60 million in 2015 through local vendors.
In addition, we have invested more than US$7 million in establishing
a world-class training facility at Hassi Messaoud which,
since 2010, has trained more than 850 local people.
Making a significant contribution to public finances
Through the taxes we pay, Petrofac makes a significant financial
contribution to the public finances of the local economies in which
we operate.
For example:
• We supported the Extractive Industries Transparency Initiative
(EITI), which introduced country-by-country reporting on tax
and non-tax payments made to governments in respect of
companies’ extractive activities, and were actively involved
in developing the related policies. The first submissions under
this initiative will be made in 2016.
• In 2015, we continued to contribute to research into the structure
of business taxation and its economic impact by participating
in the OECD’s public consultations into tax transparency, the
issues surrounding base erosion and profit shifting (BEPS),
and other proposed legislative initiatives.
• We continue to maintain memberships of a number of industry
groups that proactively participate in the development of future
tax policy and transparency initiatives.
Our worldwide contribution to public finances
– total taxes paid
The total amount that we pay is not confined to the corporate
income tax disclosed within the financial statements. The total
tax collected includes payments made in respect of: corporate
income taxes, employee and employer taxes and social security
payments, VAT and sales taxes and other taxes such as
withholding, property and other indirect taxes. The total taxes
collected shows the contribution made by Petrofac in payments
to governments, so includes those taxes which are borne by
Petrofac, as well as those collected by Petrofac but recoverable
from tax authorities or customers and suppliers. VAT and sales
taxes are shown on an accruals basis, which is not expected
to be materially different to a paid basis.
Our worldwide tax contribution – total taxes paid1
(US$m)
In 2015, the total amount paid to governments in tax was
US$605 million, comprising corporate income tax, employment
taxes, other forms of tax and social security contributions.
912
720
605
2013
2014
2015
Bringing more transparency to our tax reporting
Across the world, there are a number of new and proposed
initiatives relating to increased transparency of companies’
reporting on tax arrangements and tax payments, as well
as disclosure of tax policy, strategy, governance and risk
management. We are fully supportive of such initiatives and,
in many cases, are actively contributing to their development.
1 Total taxes collected have not been subject to audit.
Petrofac Annual report and accounts 2015 / 63
Strategic report Corporate responsibility continued
Environmental protection
We are committed to operating our business in an
environmentally responsible manner and aim to
make continuous reductions to the intensity of the
environmental footprint of our global operations.
In 2015, we continued to bring increased rigour and
consistency to the way that we measure and manage
our environmental performance.
Improving consistency across our operations
During 2015, we developed a new Group Health, Safety, Security,
and Environmental (HSSE) Framework, which brings more rigour
to our existing standards. With an integrated approach to managing
HSSE, we also benefit from greater consistency across our operations,
and become better able to make organisational improvements.
To support the new HSSE Framework, our Group Environmental
Data Reporting Guide (as developed in 2014), was rolled-out
across the organisation. The content of this guide is aligned
with recognised international reporting standards, such as the
Greenhouse Gas Protocol, the Global Reporting Initiative, the
Petroleum Industry Guidance on Voluntary Sustainability Reporting,
and the UK’s Mandatory Greenhouse Gas Reporting Guidelines.
With an enhanced reporting system, we can monitor and
compare the performance across our operations more accurately,
and manage and reduce our environmental footprint.
Thanks to our new reporting methodology, Petrofac achieved a
disclosure rating of 92 out of 100 for our response to the Climate
Disclosure Project’s (CDP) climate change questionnaire. This
rating indicates a comprehensive response to the questionnaire,
as well as sound understanding and management of climate
change-related issues – including greenhouse gas emissions –
relevant to the Company.
Our reporting principles and procedures
Petrofac discloses greenhouse gas emissions in line with the
mandatory GHG reporting requirements of the UK Companies Act
2006 (Strategic Report and Directors’ Reports) Regulations 2013
on a voluntary basis.
In 2014, we commissioned Ricardo-AEA, a specialist consultancy,
to assure and validate our greenhouse gas emissions data collection
processes. In 2016, we plan to undertake a more extensive
data assurance programme, consisting of field visits to various
operations and in-depth surveys of our data collection processes.
64 / Petrofac Annual report and accounts 2015
To provide an accurate and consistent estimate, we have adopted
the following principles:
• Our emissions data is calculated in line with the principles of the
Greenhouse Gas Protocol Corporate Accounting and Reporting
Standard, produced by the World Resources Institute and
the World Business Council for Sustainable Development –
a globally recognised standard
• Greenhouse gas emissions and our corporate carbon footprint
report are based on:
– For fuels and electricity use – emission factors published by the UK
Department for the Environment, Food and Rural Affairs (DEFRA)
– For gas flaring – The American Petroleum Institute’s SANGEA
methodology using the chemical composition of the gas
• For those operations that are jointly owned, we use an equity
share approach to account for emissions
• Those operations that are wholly controlled by third parties
are excluded from our reporting
• All Petrofac operational sites are included in this report
To take into account the recently updated Greenhouse Gas
Protocol Scope 2 Corporate Accounting guidance, we are
reporting our emissions using the location-based method.
As well as calculating our own emissions, we also monitor and
report on air emission data to our clients for the facilities we
manage on their behalf. We monitor the compliance of our North
Sea operations in line with the Oslo-Paris Convention standards.
In accordance with the European Environmental Emissions
Monitoring System, we measure:
• All discharges of hydrocarbons, heavy metal and radiation
contamination
• All air emissions of sulphur dioxide, nitrogen oxides, and volatile
organic carbons
In addition to greenhouse gas emissions data, we also collect data
on the waste that leaves our facilities, which is typically segregated,
measured and reported by category.
Our environmental data collection and analysis enables us to
monitor and improve our energy use and waste management,
which helps to minimise our related environmental impact.
The data is also made available to various stakeholders to
demonstrate that we comply with all related requirements,
and to show our commitment to environmental protection.
Emissions and spill performance
We have been monitoring and reporting our carbon emissions
since 2008.
In 2015 we saw a slight increase in our carbon emissions.
This was primarily due to an increase in the production of crude
oil at our Malaysian operations, and a consequential increase in
energy consumption.
With an enhanced reporting system, we can monitor
more accurately and compare the performance
across our operations, and manage and reduce
our environmental footprint.
We report an intensity metric for our GHG emissions in line with
the GHG reporting requirement of the Companies Act 2006,
with which we comply on a voluntary basis. We have chosen
to use “tonnes/million US$ revenue” as this metric is the most
representative across the entire business.
Our combined scope 1 and scope 2 greenhouse gas emissions
Tonnes of carbon emissions (000 tCO2e)
285
264
281
Breakdown of the greenhouse gas emissions
(000 tCO2e)
Year
2013
2014
2015
Greenhouse gas intensity
tCO2e per million US$ revenue
44.9
42.4
41.0
2013
2014
2015
Scope 1
Scope 2
253
242
260
32
22
21
2013
2014
2015
In 2015, we participated in the first phase of the UK Government’s
Energy Savings Opportunity Scheme (ESOS), and a qualified Lead
Assessor was appointed to ensure compliance with the criteria.
We encourage all of our employees and subcontractors to report
even the smallest of oil spills. During the year, we experienced a
10% reduction in the total number of spills. Most of these occurred
onshore and involved less than one barrel of hydrocarbon (or
saltwater with traces of oil), and had a minimal environmental impact.
Regrettably, we experienced 41 hydrocarbon spills involving
more than one barrel. One of these took place in Malaysia and
one in Oman, with all of the others occurring in Mexico and
Romania. In each case, the appropriate spill-response measures
were implemented and a full investigation was conducted.
To improve further the way we respond to spills, we developed
an Oil Spill Response Plan self-assessment tool, drawing on
the international guidelines and recommendations published
by IPIECA (the global oil and gas industry association for
environmental and social issues), ARPEL (the regional association
of oil, gas and biofuels sector companies in Latin America and
the Caribbean), the International Oil Spill Conference (IOSC),
and the International Union for Conservation of Nature (IUCN).
This tool enables our teams to evaluate their spill response plans
and identify opportunities for improvement.
Continuing improvements in our energy efficiency
For many years, energy efficiency has been an area of focus for
the Company, as indicated by a large number of local initiatives.
During 2015, we gave the subject more prominence by including
it in the Policy Vision of our Environment Policy – which is intended
to guide all our activities.
Our commitment is demonstrated through the way that our teams
often go beyond client requirements as they seek to optimise the
energy efficiency of the facilities we design, develop and operate.
Examples include:
• Our operations team at the Santuario field in Mexico identified
the potential to use a low energy Electric Submersible Pump
(ESP) system for pumping crude oil. This newly installed system
consumes around 30% less energy than its predecessor
and has the potential to save 1,120Mwh of power per annum.
• For the analyser package at the Mina Abdulla Refinery project
for the Kuwait National Petroleum Company, our design team
saw an opportunity to exceed the client’s original energy
efficiency specifications. By optimising the number and
positioning of analysers used in the project, the new design
could reduce the associated cooling requirements. This is set
to save the equivalent of 2,372Mwh of energy per annum.
• At a construction project for the Kuwait Oil Company, our design
teams convinced the client to accept several finished grade
levels for the pipe racks (instead of the original plan of achieving
a single finished grade level). In doing so, they eliminated the
need to dispose of 442,000 cubic metres of soil offsite, thereby
avoiding thousands of truck trips and saving the associated fuel.
Finding new ways to reduce our environmental footprint
We continue to raise awareness of environmental issues among
our employees, and encourage them to implement local initiatives.
Examples from 2015 include:
• We introduced smart printing solutions among the 4,000
employees based at our offices in Sharjah, Abu Dhabi, Aberdeen
and London. By deploying sophisticated new printers and
software, which default to double-sided, black and white printing,
we have reduced the use of paper and toner by more than 18%.
• At our Pánuco site in Mexico, the local team stopped using a
solvent-based oil conditioning compound and replaced it with a
plant-based equivalent (derived from the locally grown species
Jatropha Curcas). As well as being safer and more environmentally
friendly, the new compound has superior viscosity reduction
capabilities, which has reduced operational costs and enhanced
pipeline delivery capabilities by 50%.
• At the Reggane Nord Development project in Algeria, our teams
worked with local communities to devise and implement an
innovative waste management programme. This involved the
segregation of waste, at source, using a colour-coded system,
and enlisting locally-based companies to assist with its removal
and recycling. As part of the programme, 60 of the colour-coded
waste bins have also been donated to local schools, and Petrofac
has provided training to pupils on responsible waste management.
Petrofac Annual report and accounts 2015 / 65
Strategic report
Corporate responsibility continued
Ethics
‘Ethical’ is one of the six Petrofac values.
Our Code of Conduct (the Code) sets out our
expectations of everyone who works for and
with Petrofac. We aim to make all employees and
third parties who work with and for us aware of the
Code and its content. If anyone is concerned that
the Code may have been breached, we encourage
them to report their suspicions without fear of
retaliation – and there are several ways to do so.
In order to achieve our business ambitions, it is important for
Petrofac to be and to be seen as an ethical Company.
We therefore aim to make all of our employees and partners aware
of our commitment to ethical behaviour, and we continue to improve
the scope and reach of our compliance programme.
Giving clear guidance to employees and business partners
The Code gives explicit guidance to our employees and business
partners. Using clear, easy-to-follow language, it provides a series
of examples of the types of behaviour we expect of those who
work with and for Petrofac. It also states clearly the types of
behaviour that would constitute a violation of our ‘Ethical’ value.
The Code was last reviewed in 2013. Printed copies were
subsequently distributed to all employees and it is routinely
provided to all new employees and newly contracted third parties.
By the close of 2015, more than 23,000 copies had been distributed.
For 2016, we plan a further review of the Code, to ensure that
it reflects new legislation. In particular, we plan to provide new
guidance on anti-money laundering, trade sanctions and the
UK’s Modern Day Slavery Act.
Embedding the Code across our business
During 2015, we continued to draw attention to the Code
and its requirements.
For example, all employees and contractors are expected to
complete an e-learning programme that explains the Code’s
principles through a range of everyday examples.
The process began in 2014 with the launch of a web-based
compliance portal that can be accessed via any connected
device (such as a PC or tablet) by both Petrofac employees,
contractors and, at our invitation, third parties who want to
do business with us. During 2015, a further 2,000 employees
completed the e-learning programme, bringing the total number
to more than 16,000.
Updating our Standard for the Prevention of Bribery
and Corruption
In 2015 we updated our Standard for the Prevention of Bribery
and Corruption (the Standard), and introduced several
new safeguards.
The Standard is now more explicit in its language, has fewer
exceptions, explains when such exceptions may apply, simplifies
existing compliance processes and mandates competitive
tendering processes across the Group. It also incorporates a new
due diligence procedure and mandatory completion of e-learning
and related training.
The launch commenced in 2015 with face-to-face discussions
with our most senior managers. As we continue the rollout in 2016,
our focus will be to reach managers in the higher risk positions,
from a compliance perspective. The completion of the associated
e-learning course will be required amongst more than 3,000
employees and selected third parties.
Enhancing our certification process
Whilst following the Code is an obligation of all employees and
contractors, upholding the Code and being alert to suspected
breaches is a key accountability of all Petrofac managers – from
first-level supervisors through to our executive leadership team.
In 2015, we continued to refine our Code of Conduct Certification
process – an annual exercise that provides the opportunity for
all managers to raise any possible Code violations that may have
occurred in the preceding 12 months.
66 / Petrofac Annual report and accounts 2015
Employees can access the web-based compliance portal
and Code e-learning programme via any connected device.
In 2015, some 2,500 managers were required to confirm that they
had read and understood the Code and observed its requirements
in all of their business dealings. Again, we use a web-based
system to make the process accessible, and to track participation
levels – which is usually close to 100%.
Leaders required to certify compliance
with the Code
2,500
Employees who completed the Code
e-learning training in 2015
2,000
16,000 since 2014
During the year, we tightened up a number of questions, making
them more rigorous, such as mandating the disclosure of any
possible conflicts of interest. For this certification cycle we plan
to implement a process whereby employees who do not have
a valid reason for non-certification, will see a reduction in their
bonus entitlement.
Speaking Up about any breaches of the Code
We encourage everyone involved with Petrofac to raise any concerns
regarding unethical behaviour, or any questions regarding the Code.
Furthermore, we have and implement a non-retaliatory policy against
those who raise issues of concern in good faith.
Reports can be made to line managers or their supervisors,
or to the HR, legal or compliance teams. We also draw attention
to Speak Up – our multi-language phone, online and email service,
which enables any employee or third party to report suspected
breaches of the Code.
In 2015, 49 suspected breaches were reported to Speak Up,
each of which was assessed independently and, where warranted,
investigated or are in the process of being investigated. All confirmed
violations are reported annually to the Audit Committee. Individuals
who are found to be in breach of the Code may have their employment
terminated. As a result of feedback from many investigations
we plan to refine our Investigation Guidelines, bringing a more
consistent approach to investigations that take place locally,
and also more oversight to the way we scrutinise any suspected
breaches of the Code and communicate outcomes.
Screening third party suppliers and business partners
We continue to refine the way that we screen our third party
suppliers – allowing us to assess their level of technical, financial
and reputational strength, and enabling us to mitigate the risks
that they may pose to Petrofac.
In 2015, for example, we piloted an online Due Diligence tool which
gives Petrofac better visibility of the compliance related risks that
third parties may represent to us and allows for timely mitigation
steps to be adopted where appropriate. The interactive process,
to be adopted across the Company in 2016, comprises a series
of questionnaires and external assessments and puts the onus
on potential suppliers to confirm that their ethical standards are
consistent with our own.
Petrofac Annual report and accounts 2015 / 67
Strategic report Chairman’s introduction
Rijnhard van Tets
Non-executive Chairman
The development of the
Company’s governance
framework has been
extremely important and,
throughout this report, there
are examples of how we
are endeavouring to attain
our corporate goals whilst
underpinning our core values.
2015 objectives and highlights
• Execution – both in terms of strategic implementation and operational delivery
• Risk management – following a change to the Committee structure
the Board increased its direct oversight of enterprise risks impacting
the Company to ensure our internal control framework remains robust
• Project delivery – greater oversight, especially in the current
unpredictable industry environment
• Succession planning – ensuring we have the right people in the right
roles throughout the organisation to enable us to strive towards our goal
of operational excellence
• Board effectiveness – to understand the benefits of performance
evaluations in order to seek continuous improvement
• Stakeholder engagement – to understand the views of all stakeholders,
particularly those of our shareholders
Priorities for 2016
• Strategy execution – to ensure we are able to guide the Company
back to its core strengths
• Risk management – will continue to be a significant area of focus for
the Board and executive management, ensuring the lessons learnt have
been fully incorporated and understood throughout the organisation
• Succession planning – will remain key to ensure all changes are
managed effectively and any weaknesses or gaps identified
• Stakeholder engagement – openly engaging with stakeholders
to understand their views and discuss any areas of concern
68 / Petrofac Annual report and accounts 2015
Dear shareholder
Whilst 2015 continued to be operationally
challenging for Petrofac, the Board took the
opportunity to reinforce the risk management
culture, which is a key discipline for the
whole Group.
Following Stefano Cao’s departure
from the Board in April, we reviewed the
existing governance structure and decided
to return direct ownership of enterprise
risk management oversight to the Board.
Rather than continue with a separate Board
Risk Committee, amendments were made
to the Audit Committee‘s terms of reference
in order for it to assume full oversight of
our internal control and risk management
processes, thereby enabling this Committee
to provide the necessary Board assurances.
As a result of the substantial further losses
experienced on the Laggan-Tormore project,
during the year, the Board commissioned
an independent review by KPMG of cost
controls on that project as well as reviewing
other key projects within OEC and risk
management systems in general. This
extensive analysis provided an in-depth
evaluation, highlighting areas which will
inform the Company’s risk assurance
framework going forward.
I am pleased to report that, after detailed
search processes conducted during
2015, we will announce the appointment
of two new Non-executive Directors on
24 February 2016. Andrea Abt and George
Pierson will join the Board in May 2016,
subject to shareholder approval, and the
Board very much looks forward to working
with them. Further details are set out on
page 83.
The development of the Company’s
governance framework remains extremely
important and we will continue to strive
towards attaining our corporate goals whilst
underpinning our values and focusing on
our core strengths as we look to the future.
Rijnhard van Tets
Chairman
23 February 2016
Corporate Governance
compliance
With a premium listing on the London
Stock Exchange, Petrofac is required
under the UKLA Listing Rules to comply
with the provisions of the UK Corporate
Governance Code 2014 (UK Code),
copies of which are publicly available at
www.frc.org.uk. The UK Code sets out
18 main principles of good governance
in relation to leadership, effectiveness,
accountability, remuneration and relations
with shareholders, with responsibility
for compliance resting with the Board.
The UK Code requires the Board to
acknowledge its responsibility for ensuring
the Annual Report, when taken as a whole,
is fair, balanced and understandable, so
that shareholders are provided with the
necessary information to assess Company
position, performance and strategy.
This governance report, including the
reports from the Nominations, Audit and
Remuneration Committees, describes how
the Company has applied each of the UK
Code principles and provisions during the
period under review.
It is the Board’s opinion that, for the year
ended 31 December 2015, the Company
has been fully compliant with each of the
principles and provisions of the UK Code.
The Company’s auditors, Ernst & Young
LLP (EY), are required to review whether
or not the corporate governance report
reflects the Company’s compliance with
the principles of the UK Code specified
for their review by the UKLA Listing
Rules and to report if it does not reflect
such compliance. No such report of
non-compliance has been made.
Related pages
Our strategic review
p20
Group Financial statements
p108
Corporate structure and framework
The Board is assisted by three committees, each of which is responsible for reviewing
and overseeing activities within its particular terms of reference (copies of which are
available on the Company’s website, www.petrofac.com). At each scheduled Board
meeting, the chairman of each committee provides a summary of any committee
meeting held since the previous Board meeting, with the minutes of all committee
meetings circulated to the Board, when appropriate. Individual reports from each
committee chairman for 2015 are provided on pages 82 to 106. In addition to these
Board committees, the Company has a number of executive management committees
which are involved in the day-to-day operational management of Petrofac and have
been established to consider various issues and matters for recommendation to the
Board and its committees.
Corporate structure/framework
Shareholders
Elect the external
auditors
Elect the Directors
Ongoing dialogue
Board
Provides leadership and direction for the Group. Sets overall strategy
and oversees its implementation. Ensures appropriate systems and processes
are in place to monitor and manage Group risk. Responsible for financial
performance and corporate governance.
Audit Committee
Reviews and monitors the
integrity of the Company’s
financial statements, reporting
processes, financial and
regulatory compliance;
the systems of internal
control and risk management,
including viability assessment;
and the external and internal
audit processes.
Remuneration
Committee
Reviews and agrees
remuneration policy.
Determines individual
compensation levels
for Executive Directors
and members of senior
management. Ensures
incentives are appropriate
to encourage performance
and provide alignment
with shareholders.
Nominations
Committee
Reviews the structure,
size and composition of
the Board. Takes primary
responsibility for Director
succession and for the
Group’s succession
planning processes.
Committee report on pages
84 to 89
Committee report on pages
90 to 106
Committee report on pages
82 to 83
Executive Management
Responsible for day-to-day operational management, the communication
and implementation of strategic decisions, administrative matters and matters
for recommendation to the Board and its Committees, underpinned by
a number of management committees:
Executive Committee
Chief Executive Committee
Disclosure Committee
Group Risk Committee
Treasury Committee
Guarantee Committee
Petrofac Annual report and accounts 2015 / 69
Governance
Directors’ information
Rijnhard van Tets
Non-executive
Chairman
Ayman Asfari1
Group Chief
Executive
Marwan Chedid
Group Chief
Operating Officer
Tim Weller
Chief Financial
Officer
Appointed
May 2007
May 2011 as Senior
Independent Director
August 2014 as Chairman
Board Committees
Chairman of the Nominations
Committee
Key strengths
Extensive financial background,
with solid international board and
senior management experience.
Excellent experience of governance
and audit committees.
Experience
General partner of Laaken Asset
Management NV. Advised the
managing board of ABN AMRO
between 2002 and 2007, having
previously served as a managing
board member for 12 years.
External appointments
Non-executive chairman of
Euronext Amsterdam NV, Euronext
NV and BNP Paribas OBAM NV.
Appointed
January 2012
January 2016 as Group COO
Board Committees
None
Key strengths
Thorough knowledge of the oil
and gas sector and contracting
environments. Solid commercial,
operational and engineering
experience. Excellent understanding
of growing a business.
Experience
Joined Petrofac in 1992 when
the business was first established
in Sharjah. Previously worked
for CCC, a major construction
contractor based in the Gulf
and the Middle East. Appointed
as COO of the Engineering &
Construction International business
in 2007 and became MD of
Engineering & Construction
Ventures in 2009. Appointed as
chief executive of ECOM in 2012
and most recently appointed as
Group Chief Operating Officer
with effect from 1 January 2016.
External appointments
Member of the board of trustees
of the University of Balamand.
Appointed
October 2011
Board Committees
None
Key strengths
Wide-ranging financial
management experience, including
strategic and financial planning,
cost control and capital efficiencies.
Experience of major systems
implementation. External
stakeholder communications
and management experience.
Experience
Joined Petrofac in September
2011 from Cable & Wireless
Worldwide, where he had been
chief financial officer until July
2011. A Fellow of the Institute of
Chartered Accountants in England
and Wales with a degree in
Engineering Science, he started
his career with KPMG. Held chief
financial officer roles with United
Utilities Group PLC, RWE Thames
Water Limited and Innogy Holdings
PLC (now RWE npower Holdings
PLC). He also served as a
non-executive director of BBC
Worldwide until March 2013.
External appointments
Non-executive director of the
Carbon Trust and G4S plc.
Appointed
January 2002
Board Committees
Member of the Nominations
Committee
Key strengths
Distinguished record with strong
operational leadership skills and
international focus. Extensive
business development skills, a
wealth of oil industry knowledge
and a clear strategic vision.
Entrepreneurial track record.
Experience
Joined the Group in 1991 to
establish Petrofac International,
of which he was CEO. In 2005,
led the successful initial public
listing of the Company, valuing the
business at £0.8 billion. Has more
than 35 years’ experience in the oil
and gas industry. Formerly worked as
MD of a major civil and mechanical
construction business in Oman.
External appointments
Founder and chairman of the
Asfari Foundation. Member of the
board of trustees of the American
University of Beirut. Business
Ambassador for the UK Prime
Minister. Member of the board of
trustees for the Carnegie Endowment
for International Peace. Fellow of
the Royal Academy of Engineering.
Member of the Chatham House
Senior Panel of Advisors.
1 Mr Asfari is a British citizen; however he
is Syrian born and has dual nationality.
As at the date of this report:
Board tenure
5 years or more
3-5 years
1-2 years
Less than 1 year
70 / Petrofac Annual report and accounts 2015
Executive and Non-executive Director balance
Non-executive Chairman
Executive Directors
3
Non-executive Directors
1
4
3
1
1
3
Thomas Thune
Andersen
Senior Independent
Director
Matthias Bichsel
Non-executive
Director
Kathleen Hogenson
Non-executive
Director
René Médori
Non-executive
Director
Appointed
May 2010
August 2014 as Senior
Independent Director
Board Committees
Chairman of the Remuneration
Committee and member of the
Audit and Nominations Committees
Key strengths
Wide-ranging international
experience with broad knowledge
of the energy industry and markets.
Proven track record executing
growth strategies and mobilising
and developing organisations,
with strong HSE experience.
Extensive knowledge at board
and senior management level
from both an executive and
non-executive standpoint.
Experience
Spent 32 years at the A.P. Møller-
Mærsk Group, ending as CEO and
president of Mærsk’s oil and gas
company. Served on Mærsk’s main
board and its executive committee
for four years. Was a non-executive
director of SSE plc until July 2014.
Has a board portfolio across
companies in the energy and
critical infrastructure sectors.
External appointments
Chairman of the Lloyd’s Register
Group and board of trustees for
the Lloyds Foundation. Chairman
of DeepOcean Group and of
Dong Energy A/S. Vice Chairman
of VKR Holding.
Appointed
May 2015
Appointed
August 2013
Appointed
January 2012
Board Committees
Member of the Audit, Nominations
and Remuneration Committees
Board Committees
Member of the Audit, Nominations
and Remuneration Committees
Key strengths
Over 35 years’ experience in
the oil and gas industry. Extensive
commercial and strategic
knowledge. Deep understanding
of operational and project
management, as well as
technology management.
Experience
Stepped down from the executive
committee of Royal Dutch Shell plc
at the end of 2014. Held a number
of roles over his 34 year career
with Shell, including director of
Petroleum Development Oman;
MD of deepwater services in
Houston; executive vice president
global exploration and executive
vice president technical, of Shell
Upstream. Ran Shell’s Project and
Technology business from 2009.
External appointments
Vice-chairman of Sulzer AG.
Non-executive director of Canadian
Utilities Limited and South Pole
Group. Member of the advisory
board of Chrysalix Energy
Venture Capital and of Highgate
Capital Management.
Key strengths
Over 30 years’ experience in
the oil and gas industry, with
particular expertise in reservoir
management and subsurface
engineering. Entrepreneurial track
record. Extensive commercial
and strategic knowledge and
proven operational leadership
with an excellent understanding
of growing a business.
Experience
President and CEO of Zone
Energy LLC, a company she
founded in 2009 which focuses
on the acquisition, development
and sale of oil and gas properties.
From 2001 to 2007 was CEO
of Santos USA Corporation,
responsible for Santos Americas
and Europe. Has held a number
of senior roles at Santos Ltd,
Unocal Corporation and Maxus
Energy Corporation.
External appointments
President and CEO of Zone Oil
& Gas LLC. Director of Parallel
Petroleum LLC and trustee of the
Society of Exploration Geophysicists.
Board Committees
Chairman of the Audit Committee
and member of the Nominations
Committee
Key strengths
Extensive and current international
financial experience, with knowledge
of balance sheet strengthening
opportunities and financing
arrangements. Well-established
knowledge of governance and
regulatory matters and a good
understanding of operational
and strategic management.
Experience
Finance director of Anglo American
plc since September 2005. From
June 2000 to May 2005 was group
finance director of The BOC Group
plc. Until June 2012, was a non-
executive director of SSE plc.
External appointments
Executive director of Anglo American
plc and non-executive director of
De Beers and Anglo Platinum Limited.
Gender diversity
(Women as a percentage of the total)
Board*
Group
Senior management
Graduates
* Excluding the Chairman
14%
13%
6%
20%
Board skill set 2015
Oil and gas experience
Engineering
Finance
International experience
Regulatory and governance
HSE
Operational/strategic management
75%
63%
38%
100%
50%
63%
100%
Petrofac Annual report and accounts 2015 / 71
As at the date of this report:
Governance
Our leadership team
Paolo Bigi
Regional Managing Director,
Engineering & Construction
Responsibility
Joined Petrofac in 2015 as Executive
Vice President for Business
Management. In January 2016 he
was appointed Regional MD for the
onshore portfolio of the Engineering
& Construction business. His
responsibilities include all Petrofac’s
onshore operations in the United
Arab Emirates, Saudi Arabia,
Algeria and Asia.
Previous experience
Paolo has a career extending over
almost 30 years. He spent 23 years
with Tecnimont where he was EVP
and Deputy Chief Executive Officer.
More recently Paolo worked with
Borealis as EVP and also spent five
years with Techint Engineering &
Construction (European sector)
as its CEO.
Sunder Kalyanam
Regional Managing Director,
Engineering & Construction
Responsibility
Sunder has worked at Petrofac
for 23 years and has held a range
of positions within the Company.
In January 2016 he was promoted
from Executive Vice President
to the position of Regional MD,
Engineering & Construction. His
responsibilities cover all Petrofac’s
onshore operations in Kuwait,
Iraq and Oman.
Previous experience
Sunder’s 30 years of experience
have been gathered in an EPC and
engineering consultancy environment
covering multiple aspects of
engineering design and project
management, of oil and gas,
refinery and petrochemical projects.
Yves Inbona
Managing Director, Offshore
Capital Projects
Responsibility
Joined Petrofac in June 2012 as
MD of our Offshore Capital Projects
business. He is responsible for
turnkey delivery of offshore platforms,
floaters and pipelines in shallow
and deep-water worldwide. He has
extensive expertise in the offshore
sector, having more than 30 years
of industry experience.
Previous experience
During his time as chief operating
officer of Saipem SpA, Yves
managed the offshore business,
which was the most profitable
of all Saipem’s business units.
He speaks seven languages
and is a graduate engineer from
Ecole Centrale de Paris.
Craig Muir
Group Managing Director,
Engineering & Production
Services
Responsibility
Joined Petrofac in 2012 as MD of
Engineering & Consulting Services,
where his responsibilities included
the effective management and
execution of Petrofac’s engineering
service centres in Woking, India,
Malaysia, Indonesia, Houston,
Algeria and Nigeria, as well as
our subsidiary businesses, KW
Subsea, TNEI and Plant Asset
Management. In January 2016
Craig was appointed Group
Managing Director for Engineering
& Production Services, which
includes responsibility for all
Petrofac’s reimbursable services,
both onshore and offshore.
This incorporates operations
and maintenance; engineering,
procurement and construction
management; engineering; training
and all consultancy services.
Previous experience
Before joining Petrofac, Craig
held the position of executive vice
president within growth regions
covering the Middle East, North
Africa and CIS for AMEC, based
in Abu Dhabi. Prior to AMEC, he
held numerous roles working in
the oilfield service sector including
those with KBR, Brown & Root
and AOC International. He has
worked in the North Sea, in the
Middle East, and in Asia Pacific.
Walter Thain
Managing Director,
Engineering & Production
Services (West)
Responsibility
Walter has 18 years of service
with Petrofac. He has held key roles
in the UK and the UAE including:
Vice President Operations; Vice
President, Sales & Marketing,
Training Services; Senior Vice
President, OPO and MD, OPO.
In January 2016, he was appointed
MD for Engineering & Production
Services (West). In this role he
is accountable for growth and
regional delivery across engineering,
operations and training services
within Europe, North Africa and
the Americas, together with the
global delivery of Petrofac’s
consultancy services including
asset management, well engineering
and subsea pipeline engineering.
Previous experience
Walter is a Chartered Engineer
with more than 25 years’ industry
experience. Prior to joining
Petrofac he held senior engineering
and leadership positions with
McDermott Engineering, delivering
both brownfield and greenfield
engineering projects.
72 / Petrofac Annual report and accounts 2015
Rob Jewkes
Chief Operating Officer,
Integrated Energy Services
Responsibility
Joined Petrofac in January 2004 to
build a Europe-based engineering
services business in Woking, UK,
which now forms part of Petrofac’s
Engineering & Production Services
business. In 2009, he was appointed
MD of Developments within the
IES division, with responsibility for
leveraging our engineering and
project management capability
through Risk Service Contracts
and Equity Upstream Investments.
In January 2014, Rob assumed
the role of Chief Operating Officer,
IES, with full responsibility for the
IES business portfolio.
Previous experience
Rob has over 35 years’
experience in the oil and gas
industry. Prior to joining Petrofac,
he served as chief executive
officer of Clough Engineering,
the main operating company of
the Australian engineering group
Clough Limited. He holds a degree
in Civil Engineering from the
University of Western Australia.
ES Sathyanarayanan
Managing Director,
Technical Services
Responsibility
Since joining Petrofac in 1995,
Sathy’s career has covered many
operational roles including systems
engineer, engineering management,
project management, and project
director. His role has also included
that of project sponsor and head
of country operations for Iraq.
As Managing Director for Technical
Services, he is responsible for
all engineering resources for
Petrofac’s projects, including
Petrofac’s three Indian offices
in Mumbai, Chennai and Delhi.
Previous experience
His early experience was gained
spending a number of years as a
specialist mechanical engineer and
systems engineer. Sathy has more
than 28 years of experience in the
oil and gas sector.
Mary Hitchon
Group Director of Legal,
Secretarial and
Compliance Services
Responsibility
Joining Petrofac in October 2005
shortly after the IPO, Mary had
responsibility for the Group’s
governance and listing rule compliance
framework. Over the last 10 years
she has built a company secretarial
department and developed processes
and procedures commensurate
with a listed entity. She was
appointed as Group Director of
Legal, Secretarial and Compliance
Services in January 2015 and now
has responsibility for all key aspects
of legal, regulatory and governance
compliance across the Group.
Previous experience
Mary is a Fellow of the Institute of
Chartered Secretaries with more
than 20 years’ experience in a UK
listed environment. Previously she
worked at TBI plc, the AXA group
and Savills plc.
Christopher McDonald
Group Head of Business
Development
Responsibility
Joined Petrofac’s business
development function in early 2011
and progressed to Executive Vice
President. In January 2016 he was
appointed Group Head of Business
Development with responsibility
for delivery of all new sales.
Previous experience
With more than 25 years of
international experience in the oil
and gas sector, Chris has previously
worked with companies including
Halliburton/KBR and also served
on the board of M W Kellogg Ltd.
Cathy McNulty
Group Director
of Human Resources
Responsibility
Joined Petrofac in February 2014
as Group HR Director and has
overall responsibility for advising on
all people aspects of the business.
This includes developing the people
strategy to support the Company
in achieving its strategic ambitions,
focusing on succession planning,
talent management, leadership
development, compensation and
benefits, key hires, performance
culture and employee engagement.
She partners with the business
leaders to build the strengths and
capabilities needed to meet the
changing demands of our markets
and environments.
Previous experience
Has more than 25 years of
experience in HR, and has held
a number of senior roles, most
recently with Arup, the international
consulting and engineering group,
and Hewlett Packard.
Corporate Governance report
Leadership
Board organisation
Our Chairman is responsible for leading the
Board and ensuring its effectiveness, whilst
maintaining a clear structure that permits
the Board to both challenge and support
management. It is very important that all
Directors see the Chairman as a fair and
impartial individual. The relationships
between the Chairman and the Group
Chief Executive and the Senior Independent
Director (SID) are of particular importance,
as these two individuals represent the
views of management and Non-executive
Directors, respectively.
Ayman Asfari, as Group Chief Executive,
is responsible for the day-to-day
management of the Group and for the
design and execution of company strategy.
He is supported by his fellow Executive
Directors and by his senior management
team whose details are outlined on page
72. Regular private meetings between the
Chairman and Group Chief Executive are
held, allowing matters to be discussed both
before and after they are considered by
the Board. This enables them to reach a
mutual understanding of each other’s views,
especially in matters where initially they may
not be in agreement.
Thomas Thune Andersen, as SID, is available
to shareholders to answer any questions or
concerns which cannot be addressed by
either the Chairman or the Group Chief
Executive and is also available to marshal
the opinions and views of the Non-executive
Directors. The Chairman and SID maintain
regular contact between scheduled Board
meetings and time is also set aside at each
meeting for the Chairman to meet with
the Non-executive Directors without the
presence of management.
The combination of these meetings ensures
that the Chairman is equally informed
about the views of both management and
Non-executive Directors and this assists
him in setting Board meeting agendas and
ensuring all Directors contribute during
meetings through their individual and
collective experience, challenge and support.
Each of the Directors has varied career
histories and considerable effort has been
taken to ensure that the Board has the
right balance of skills, diversity and industry
expertise. Our Non-executive Directors
are encouraged to share their skills and
experience and each is well-positioned
to support management, whilst providing
constructive challenge. We are also
fortunate that many of our Directors are
able to bring their experience of the oil
and gas industry to the boardroom.
Board composition and roles
At the date of this report, the Board has
eight Directors comprising the Chairman,
four Non-executive Directors and three
Executive Directors. Full biographies of
each of our Directors in office are shown
on pages 70 and 71 and are also included
in the 2016 Notice of Annual General
Meeting (AGM). As recommended by
the UK Code, the Company has clearly
defined areas of responsibility, as set
out opposite:
Position
Chairman
Group Chief
Executive
Role
• Leads the Board and facilitates the effective contribution of all Directors
• Ensures effective communication with shareholders
• Ensures effective communication flows between Directors
• Ensures effective Board governance
• Implements strategy and objectives
• Develops manageable goals and priorities
• Leads and motivates management teams
• Develops proposals to present to the Board on all areas reserved
for its judgement
• Develops Group policies for approval by the Board and ensures
implementation
Senior
Independent
Director
• Acts as a sounding board and confidant to the Chairman
• Available to shareholders to answer questions which cannot be
addressed by the Chairman or Group Chief Executive
• Meets with other Directors to appraise the Chairman’s performance,
and on such other occasions as deemed appropriate
• Acts as an intermediary for other independent Directors
Non-executive
Directors
• Support executive management whilst providing constructive challenge
• Monitor the delivery of strategy within the risk management
framework set by the Board
• Bring sound judgement and objectivity to the Board’s decision
Group Director of
Legal, Secretarial
& Compliance
Services
making process
• Share skills and experience
• Acts as Secretary to the Board and its Committees
• Assists in and coordinates the Board evaluation process
• Ensures the Board is kept informed and is consulted on all matters
reserved to it and that papers and other information are delivered
in a timely manner
• Ensures the Board is kept informed on governance matters,
providing advice through the Chairman
• Available to individual Directors in respect of Board procedures
and provides general support and advice
Petrofac Annual report and accounts 2015 / 73
Governance Corporate Governance report continued
Board activity during 2015
The Board has a schedule of matters
reserved to it for formal decision, a copy
of which is available on our website.
While we recognise that there are a
number of topics for which all boards
should take responsibility, this year the
Board concentrated on the following
key areas, in support of the Company’s
strategic objectives, which were
underpinned by our core values.
How the Board spent its time during
the year
(%)
How the Audit Committee spent its time
during the year
(%)
7
21
10
39
13
30
44
15
5
8
5
3
Financial performance/reporting
Internal control and risk management systems
Governance, inc. shareholder engagement
Code of Conduct/Whistleblowing
Risk management and internal controls
Tax update
Leadership and people development,
inc. succession
External Audit, including non-audit
services review
Strategic matters
Project approvals
Financial reporting
Governance/Other
Strategic matters
• Formal strategy review days with management, including updates at each meeting
• Business presentations on strategic opportunities
• Risks and opportunities associated with our OCP strategy
• Future initiatives relating to IES business, including Mexican contract migrations
• Business restructuring
How the Nominations Committee spent its time
during the year
(%)
15
18
Financial performance/reporting
• Extensively considered the Group’s financial performance, in light of key contract positions
12
as well as the effect of the declining oil price
• Approved the budget and five-year plan and reviewed monthly reports on performance
against budget and forecast
• Reviewed the Company’s financial reporting obligations
• Reviewed reports on the financial position of the Group, including treasury management
Leadership and people development, including succession
• Meetings held with executive management throughout the year
• Discussed Board succession planning and composition, including a review of committee
structures, following changes to the Board membership
• Reviewed the development of talent within the Group, including succession planning for
55
Board composition
Succession planning
Governance/Other
Search for Directors
senior roles
• Consideration of the impact of the Group reorganisation
Risk management and internal controls
• Extensive review of the Laggan-Tormore project and lessons learnt
• Reviewed contract controls by KPMG and the impact on financial results
• Deep dives on key projects to understand fully any risk management and control matters
• Regularly reviewed significant enterprise risks, including those associated with HSSEIA and
cyber security
Project approvals
• In accordance with our delegated authority framework, a number of contracts and other
matters requiring Board approval were considered during the year. Whilst many of these
projects are still within the bidding stage, further details of projects approved and
announced during the year can be found on pages 4 and 5
Governance, including shareholder engagement
• Discussed the Board evaluation process
• Regularly reviewed reports from brokers and had an in-depth presentation from
our house brokers
• Reviewed shareholder feedback from meetings held with the Group Chief Executive,
Chief Financial Officer and the Chairman
• Reviewed reports on regulatory and governance matters impacting the organisation
How the Remuneration Committee spent its time
during the year
(%)
20
10
10
7
53
2015 remuneration arrangements,
including grant of awards
Review of external environment
2016 remuneration review
Governance/Other
Review of share plans and
performance conditions
74 / Petrofac Annual report and accounts 2015
Board meetings
The Board meets face-to-face at least six
times each year at scheduled meetings,
held over a two-day period. The Board also
meets on an ad hoc telephonic basis, to
address items of business which arise and
cannot be held over until the next planned
meeting. Dedicated strategy days, as well
as site visits, also form part of our annual
programme of events. As a company
incorporated in Jersey under the
Companies (Jersey) Law 1991, at least
half of our Board meetings are held in
Jersey each year. At those meetings which
are held outside Jersey, the Board is given
the opportunity to meet with employees,
customers, suppliers and partners, as it
is felt this allows the Board to gain a
wider understanding of Petrofac.
Each year, members of operational and
functional management, one and two tiers
below director level, are invited to attend
and present at certain Board and Committee
meetings, which serves to enhance their
knowledge of the business and allows
the Board to see the implementation of
agreed strategy in action. It is felt these
presentations also enable Directors to
deepen their understanding of Company
culture at a local level, and gain an
awareness of specific nuances which
may not always be obvious within written
reports. Management are also given the
opportunity to meet the Directors informally
during the year and we feel these meetings
are valuable for personal development.
Arrangements are also made for the
Non-executive Directors to meet with
and speak to a group of graduates at the
Petrofac Academy while they are in Sharjah.
Independent
Physical Board
meetings attended
(eligible to attend)
Ad-hoc telephonic
Board meetings – usually
held at short notice
and attendance must
take place outside of UK4
Director
Rijnhard van Tets
Thomas Thune Andersen
Matthias Bichsel1
Kathleen Hogenson
René Médori
Ayman Asfari
Marwan Chedid
Tim Weller
Former Directors
Stefano Cao2
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
6 (6)
6 (6)
3 (3)
6 (6)
6 (6)
6 (6)
6 (6)
6 (6)
2 (2)
Roxanne Decyk3
Yes
1 Matthias Bichsel joined the Board on 14 May 2015.
2 Stefano Cao stepped down from the Board on 29 April 2015.
3 Roxanne Decyk stepped down from the Board on 14 May 2015.
4 Directors may join meetings in an advisory capacity and, on such occasions, are neither included in the quorum
3 (3)
of the meeting nor eligible to vote on any matter requiring a formal decision.
2
1
2
3
1
1
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Related pages
Our strategic review
p20
Group financial statements
p108
Board appointment and selection
The Company has a formal, rigorous and
transparent selection procedure for the
appointment of new Directors and Board
composition is considered very carefully
by the Nominations Committee, whose
membership is set out on page 82. As
a result, significant time and effort are
invested when appointing new Board
members to ensure that the right balance
and mix of directors, taking into account
experience, skills and diversity, can be
achieved. Care is taken to establish the
existing commitments of all Non-executive
Directors, who, on appointment, are each
made aware of the need to allocate sufficient
time to the Company to discharge their
responsibilities effectively. In the event that
a Director’s external commitments change
once appointed, they are required to make
the Board aware as soon as practicable
so that any potential conflict of interest,
time commitment challenge or residency
status issue can be considered. A detailed
report on the activities of the Nominations
Committee is provided on pages 82 to 83.
Active debate is encouraged during
meetings before any Board decisions
are taken, with all Directors encouraged
to be open and forthright in their approach.
We believe this boardroom culture helps
to forge strong working relationships whilst
enabling our Directors to engage fully with
the Company and allowing them to make
their best possible contribution.
Re-appointment of Directors
In line with the UK Code, all Directors seek
re-appointment by shareholders at each
AGM. In addition, the terms and conditions
of appointment of all Directors are available
for inspection by anyone at our registered
office in Jersey and at our corporate services
office in London. They are also made
available for inspection during the 30 minutes
prior to the start of our AGM each year.
All Executive Directors have rolling service
contracts and details of the provisions set
out in these are detailed in the Remuneration
Policy, which can be accessed at
www.petrofac.com/remuneration.
Petrofac Annual report and accounts 2015 / 75
Governance Corporate Governance report continued
Effectiveness
Role of the Board
The UK Companies Act 2006 sets out
a number of general duties to which all
directors should adhere. As a Jersey
incorporated company, Petrofac is not
required to comply with this legislation,
nevertheless, our Directors are informed
by UK practice and in any event, act in
good faith to promote the long-term
success of the Company for the benefit
of our stakeholders. As a unitary Board,
each of our Directors shares equal
responsibility for decisions taken, with
Directors being collectively responsible
for the strategic direction of the Company.
The Board has been structured to ensure
that no single individual can dominate the
decision-making processes and we believe
all Directors are able to work together in an
atmosphere of openness, trust and mutual
respect. It is felt that having an effective
working relationship between our Executive
and Non-executive Directors provides a
robust governance framework, which is
essential for the progression of the
Company’s strategic aims.
Information and support
A tailored approach to developing agendas
is adopted for each Board meeting, with
the majority of each agenda comprising
non-recurring items, such as strategic
matters or project specific and investment
related opportunities. Processes have been
put in place to ensure the Board receives
appropriate information at the correct time
and, whilst some agenda items are brought
to the Board on the basis of a six or
12-month rolling programme, operational
and financial reports from the Group Chief
Executive and Chief Financial Officer are
standing items which are reviewed and
discussed at each meeting. We believe this
allows Directors to engage effectively and
encourages scrutiny and constructive
debate during each meeting, with Directors
able to seek clarification from management
where required. In addition, all Directors
have access to independent external advice
where they require further information in
order to discharge their responsibilities.
As part of our commitment to best practice,
and as recommended by the UK Code,
we endeavour to dispatch papers in a timely
manner, usually one week prior to each
meeting. Papers are provided electronically
through a dedicated secure application,
giving Directors instant access to papers,
as well as additional reference documentation.
Director development and training
The Company is committed to providing
continuing personal development training
opportunities. We do not run an extensive
programme of ‘one-size-fits all’ training.
Instead, each Director is encouraged to
pursue an individually tailored development
programme throughout the year, and to
attend any relevant external seminars run
by professional advisers where the content
is considered to be relevant.
During 2015, various offices and site
visits were accommodated, along with a
mixture of formal seminars led by external
advisers. In addition, an externally facilitated
training session on forthcoming corporate
governance changes was provided to
the Audit Committee in November. This
session was attended by Committee
members, as well as all other Directors
and members of executive management.
It centred on the impact of regulatory and
financial developments on the Group over
the coming years, with particular focus
given to the effect of three key items:
risk management and viability reporting;
mandatory audit firm rotation; and non-audit
services restrictions.
Directors were also encouraged, and in
some cases required, to complete the
Company’s eLearning training modules.
These included modules on the Company’s
Code of Conduct, the Share Dealing Code,
Anti-Bribery and Corruption and Health
and Safety Training. Training records for
Directors are maintained and these are
reviewed during the annual evaluation
process. Over the course of this year,
over 210 hours of training were recorded.
Director induction
Individually tailored induction programmes
are prepared for each new appointment to
the Board. It is felt this is the best approach
as it allows the Company to account for
differing requirements and to concentrate
on key focus areas to ensure that the
relevant Director is fully prepared for their
new role, while taking their background
and experience into consideration. The
induction process is intended to be a broad
introduction to the Group, so all new
appointees spend time with each of the
Executive Directors as well as senior
members of operational and functional
management, both individually and
collectively, to be briefed on Group strategy
and to gain a deeper understanding
of the Company at an operational level.
A comprehensive induction pack is
provided to each new Director, which
contains a wide range of materials including
Board and committee dates for the next
two years, copies of minutes from the
previous year, the delegation of authority
matrix, copies of Group policies, the
Schedule of Matters reserved to the Board,
Committee Terms of Reference, Code of
Conduct and copies of prior years’ reports
and accounts. Site visits and trips to
operational centres are actively
encouraged. Each new Director also
attends a compulsory presentation led
by our external legal advisers on the role
and responsibilities of being a UK-listed
company director and, depending on which
committees they will join, presentations
from the Group auditors and remuneration
consultants are given.
Matthias Bichsel joined the Board in May
2015 and details of his formal induction
programme are set out opposite.
76 / Petrofac Annual report and accounts 2015
Name and position
Matthias Bichsel, Non-executive Director
Joined the Board
May 2015
Strengths
• Detailed operational and project
management experience in oil and gas
industry
• Extensive international experience
• Broad understanding of industry from a
client’s perspective
Focus areas
• Increase knowledge of Petrofac
• Understand UK governance framework
including board committee activities and
obligations
• Meet with senior management teams
Overview of induction programme
• Met and received detailed presentations
from Group functional heads (May – October)
• Met and received detailed presentations
from Business MDs (May – October)
• Meetings with key advisers, including
corporate lawyers and brokers (May)
• Meeting with remuneration consultants
ahead of joining Remuneration
Committee (May)
• Meeting with audit partners, ahead of
joining Audit Committee (May)
• Site visit to Sohar Refinery in Oman
with the Board (October)
Dealing with potential conflicts
of interest
As far as is possible, all Directors
endeavour to avoid conflicts of interest with
the Company. However, processes and
procedures are in place in the event that
any such potential conflicts arise during a
term of appointment. On these occasions,
Directors are required to identify and declare
any actual or potential conflicts of interest,
whether matter-specific or situational, with
notifications required to be made by the
Director concerned prior to, or at, a Board
meeting. All Directors have a duty to update
the whole Board of any changes in personal
circumstances. The Company’s Articles
of Association permit the Board to
authorise conflicts which can be limited
in scope. During the year, all conflict
management procedures were adhered
to, and managed and reported effectively.
As previously reported, in August 2014
Thomas Thune Andersen was appointed
as Chairman of Dong Energy A/S, which is
a junior member of the client consortium
on our Laggan-Tormore project. Following
continued commercial discussions on this
project during the year and the increased
level of ongoing review of the contract,
Thomas has continued to absent himself
from all Board and Committee discussions
relating to this project; has not received
any papers on the contract; and minutes
circulated to him have been redacted.
As a result, it is felt that Thomas’s
effectiveness as a Director of Petrofac
has not been compromised.
Deeds of indemnity
In accordance with our Articles of
Association and to the maximum extent
permitted by Jersey law, all Directors and
Officers of Petrofac Limited are provided
with deeds of indemnity in respect of
liabilities which may be incurred as a result
of their office. In addition, Petrofac has
appropriate insurance coverage regarding
legal action which may be brought against
its Directors and Officers. Neither the
Company’s indemnities nor insurance
would provide any cover where a Director
or Officer was found to have acted
fraudulently or dishonestly.
Board visit to Sohar
Every year our Board aims to visit a
Petrofac site in conjunction with one of its
scheduled meetings. This provides
valuable insight into our projects and gives
Directors the opportunity to meet our local
teams, enabling the Board to see
first-hand some of the issues that our
employees deal with every day.
In October 2015, the Board and senior
management visited the Sohar refinery in
Oman. During this trip, they met with site
management, employees and graduates;
took a tour of the site; and received
presentations on both Petrofac’s presence
in Oman as well as project cost control
and risk management. This was an
interesting visit for the Board as the project
is mid-construction, so the site was
extremely busy and enabled those in
attendance to see a number of different
aspects of project execution and delivery,
as well as HSE matters in practice.
Petrofac Annual report and accounts 2015 / 77
Governance Corporate Governance report continued
Improvement areas previously identified:
Theme
Area for improvement
Action undertaken
Strategy
Risk
management
Succession
planning
2015 review:
Theme
Strategy
A specific strategy section now included
within each CEO report.
Ahead of each strategy day, each Director
is contacted for feedback after receipt of
pre-reading documentation to enable better
time management during the meeting.
Greater oversight of the work of the Group
Risk Committee provided, with more time
spent by the Board reviewing enterprise risks
and mitigations set out in the Company’s
Key Risk Report (KRR). Delegated authority
matrix updated to ensure Board and
management are appropriately reviewing
and approving projects.
A specific session on succession planning
built into the Board calendar and greater
oversight given to talent management.
More regular and
rigorous updates
on strategy
execution
Development of
non-financial key
performance
indicators
Enhanced
enterprise risk
identification and
financial risk
assessments in
relation to projects
subject to Board
approval
Improved oversight
of ongoing project
execution
Increased focus
on succession
planning for
both the Board
and management
Area for improvement
Board strategy day to include a free-ranging discussion on the
implications for the industry in the event that oil is subject to a more
prolonged period of lower prices.
External speakers to attend meetings to provide broader industry
wide perspectives.
Risk
management
Group risk management processes to be developed further to
ensure they remain operationally effective thereby enabling the
Board to improve its assessment and control of strategic risks.
Succession
planning
Greater exposure to the second tier of management to assess
that the talent pipeline is being developed appropriately.
Continuing to ensure suitable mix and composition on the Board.
Evaluation of Board effectiveness
The Board continually strives to improve its
effectiveness, understanding the benefits
of annual performance evaluations for
the Board as a whole, its Committees and
for Directors on an individual basis. It is
recognised that the performance evaluation
process presents an opportunity to enhance
overall board effectiveness and our Directors
believe the process provides a valuable
opportunity for continuous improvement,
highlighting any recognised strengths or
identifying any weaknesses. Following
completion of an externally facilitated
evaluation in 2013, the Chairman has led
internal review processes during both 2014
and 2015, aiming to be as rigorous and
objective as possible. One-to-one interviews
with each Director and the Secretary
to the Board have been held each year,
helping the Chairman recognise individual
performance and contribution, while
identifying further development opportunities,
both individually and for the Board as a whole.
The outcome of the internal evaluation
processes has been positive and, following
completion of the review exercise in 2015,
the Board is satisfied that it is operating
effectively with each Director performing well
in respect of their roles on the Board and its
Committees. The results of the most recent
evaluation process were presented to the
Board in January 2016. In compliance with
the UK Code, the evaluation exercise to be
carried out during 2016 will be externally
facilitated and details will be provided to
shareholders in next year’s Annual Report.
It is recognised that the Chairman’s
effectiveness is also vital to that of the
Board. Accordingly, led by Thomas Thune
Andersen as SID, a review was carried out
in respect of Rijnhard van Tets. Thomas
consulted with each of the other Directors
for input and feedback on Rijnhard’s
performance during the year. The outcome
of the review was reported back to the
Chairman and it was further confirmed
to the Board that Rijnhard’s Board
leadership continued to be effective.
78 / Petrofac Annual report and accounts 2015
Accountability
Risk management and internal
control systems
The Board is responsible for monitoring
and reviewing the effectiveness of Petrofac’s
risk management and internal control
systems. Throughout the year, the Board
and the Audit Committee received regular
reports from members of management
with responsibility for the Group’s material
enterprise risks, as well as from the internal
and external auditors to assist in the annual
assessment of the effectiveness of the
Group’s risk management and internal
control systems. The KRR, which identifies
the principal risks facing the Company
and evaluates the likelihood of their
incidence and their impact on the Group
if they were to materialise, is maintained
and this allows the Board to assess
and monitor the existence and likely
effectiveness of the actions that are
planned to manage and mitigate such risks
in order to avoid or reduce the impact of
the underlying risk. The process of risk
identification is both top-down and
bottom-up which ensures management
are able to review and challenge impacts
and mitigations at each level of the
organisation and address the risks for
which they are organisationally responsible.
To facilitate the year-end process, the Audit
Committee completed a detailed review of
processes in order that formal assurance on
the robustness, integrity and effectiveness
of the Group’s internal controls and the
Group’s risk management systems in
relation to the Group’s principal risks,
including those which may threaten the
Company’s strategy, business model,
future performance, solvency and liquidity,
could be given to the Board. The changes
in processes implemented during the year,
which are further detailed on pages 86 and
87, enabled the Board to take a view on
whether or not the Group has sound risk
management and internal control systems
in place.
Other than the significant control weaknesses
identified and the mitigating actions taken
in relation to the Laggan-Tormore project
(further described on page 86), the Board i
s satisfied that sound risk management
and internal control systems have been in
place across the Group throughout 2015
and as at the date when the 2015 financial
statements were approved.
Petrofac also seeks to ensure that a sound
system of internal control, based on the
Group’s policies and guidelines, is in place
in all material associates and joint ventures.
As with all companies, our systems of
internal control and risk management are
designed to identify, mitigate and manage
rather than eliminate business risk and can
only ever provide reasonable, and not
absolute, assurance against material
misstatement or loss.
A detailed report on the activities of the Audit
Committee is provided on pages 84 to 89.
Delivery of our goals
As detailed within the Strategic Report,
Petrofac’s strategy and business plan
set out the Group’s priorities which are
designed to increase shareholder value
over the medium to long-term. Five-year
business plans, setting financial targets
for the Company and incorporating
risk analysis as a matter of course,
are submitted to the Board annually for
approval. The Group formally measures
performance against these strategic goals
and financial targets quarterly, with each
Business Unit reporting its operational
progress monthly. At each Board meeting,
a full update on business operations is
provided, highlighting and discussing any
possible impediments to the delivery of
our Group goals and noting all significant
health, safety and security matters.
The Board also receives comprehensive
financial reports from our Chief Financial
Officer, thus ensuring the Board is
kept informed of the Group’s financial
performance for the year to date, as
compared with the year’s budget or the
latest revised forecast, with full explanations
for any variances. We continue to develop
a broader set of financial and non-financial
key performance indicators, which we
believe should assist us in monitoring the
delivery of our goals.
Related pages
Our strategic review
p20
Group financial statements
p108
Code of Conduct and
Whistleblowing
The Audit Committee is responsible for
reviewing the adequacy and effectiveness
of the Group’s compliance activities, which
include the Company’s Code of Conduct
and whistleblowing policy. Further details
of our Code of Conduct, including our
whistleblowing facility, are provided on
page 67. In accordance with the Code
of Conduct, any alleged breaches, both
of a financial and non-financial nature,
are reported to the Audit Committee.
There were no such incidents involving
the override of any major internal controls
as set out in the Code of Conduct reported
during 2015.
Security
During the course of the year, the Audit
Committee also considered and discussed
global security risks in light of both oil price
volatility and increased international security
threats. Particular focus was given to the
changing security landscape in the Group’s
key jurisdictions, as detailed on page 55.
Actions to manage and mitigate security
risks were undertaken to assist in providing
assurance that the Board is kept informed
of any significant changes within our
core markets.
UK Listing Rule 9.8.4R Disclosures
There are no disclosures required to be
made under UK Listing Rule 9.8.4R.
Remuneration
Directors’ remuneration
All remuneration matters, including terms
of appointment, for the Chairman,
Executive Directors and key members
of senior management are determined
by the Remuneration Committee, whose
membership is set out on page 90.
Responsibility for setting the remuneration
payable to the Non-executive Directors
lies with the full Board, albeit independent
external advice is taken. Non-executive
Director fees are reviewed each year and
further details are provided on page 99.
A detailed report on the activities of the
Remuneration Committee is provided on
pages 90 to 106.
Petrofac Annual report and accounts 2015 / 79
Governance Corporate Governance report continued
Meetings held with shareholders by country
3
16
34
209*
UK
US and Canada
Europe
Other
* Meetings held by teleconference with US investors
included in UK numbers.
Shareholder splits – by holding
36%
64%
Retail
Institutional
Shareholder splits – by territory
14%
12%
49%
25%
UK
US and Canada
Rest of Europe
Rest of world
Relations with shareholders
Shareholder engagement
The Board acknowledges its responsibility
to promote the success of Petrofac for its
many stakeholders, however, the principal
focus remains with our shareholders.
The opportunity to engage openly with
shareholders is welcomed as it is believed
that effective dialogue to understand
shareholders’ views is very important.
Shareholder sentiment has continued to
be an area of Board discussion during
the year, especially given changes to our
earnings expectations and the resulting
impact on our share price.
A programme of meetings with both
existing and potential shareholders is
scheduled each year by our Investor
Relations team. This programme includes
meetings as well as question and answer
sessions with stakeholders following the
publication of our full and half year results,
along with presentations to institutional
investors and research analysts. In addition,
management arranges calls and meetings
with these groups usually following the
release of trading updates to the market.
2015 shareholder meeting
calendar
Month
January
February
March
April
May
June
July
August
September
October
November
December
Number of shareholder
meetings held
2
13
including Full Year Results
Live webcast of analyst/
investor presentation
(replay available on our
website)
44
29
27
22
including trading update
5
12
including Half Year Results
Live webcast of analyst/
investor presentation
(replay available on our
website)
44
32
19
13
including trading update
Over 50% of meetings held were attended
by the Chairman, Group Chief Executive,
and/or the Chief Financial Officer.
The Chairman takes overall responsibility
for ensuring the views of shareholders are
communicated to the Board and, in 2015,
met with nine of our largest institutional
investors, who together hold approximately
30% of Petrofac’s shares. During these
meetings a number of issues were discussed,
including the operating environment and
market pressures impacting the Company;
governance matters in general and
succession planning in particular; and
strategic and operational performance,
including concerns about recent execution
issues. Our Non-executive Directors also
engage with our shareholders as and when
required and this year the Chairman and
the Audit Committee Chairman both met
with Standard Life to discuss a variety of
matters, including control processes and
changes implemented as a result of
recently reported issues.
The Group Chief Executive and Chief
Financial Officer maintain a regular dialogue
with our institutional shareholders through
a programme of one-to-one and other
meetings throughout the year, which focus
on operational matters.
Our Investor Relations team acts as a focal
point for contact with investors throughout
the year and brokers’ research notes are
regularly circulated to Directors. A formal
brokers’ report is circulated to the Board
in advance of each meeting. This year a
representative from one of our corporate
brokers, Goldman Sachs, also attended
one of our Board meetings to provide
a thorough update on market sentiment,
including areas of potential shareholder
concern in relation to the Company.
80 / Petrofac Annual report and accounts 2015
Annual General Meeting (AGM)
Full details of this year’s AGM, which will
be held in London, are set out in the Notice
of Meeting which accompanies this report
and which is also available on our website.
As a matter of good practice, all resolutions
will be conducted on a poll and the results
will be announced to the market as soon as
possible after the meeting. All shareholders
are invited to attend the Company’s AGM
at which they have the opportunity to put
questions to the Board and meet with all
Directors. Shareholders who are unable
to attend the AGM are invited to email
questions in advance at agmquestions@
petrofac.com.
I look forward to seeing as many of you as
possible this year when my colleagues and
I will be available to answer your questions.
Rijnhard van Tets
Chairman
23 February 2016
Shareholder communications
Considerable emphasis is placed on
communications with shareholders,
whether they are institutional shareholders
or private shareholders. Accordingly,
financial reports and shareholder documents,
regulatory market announcements, together
with recorded interviews, are available on
our website, which we hope encourages
shareholders to become more informed
investors. In addition, our full-year
and half-year results presentations by
Ayman Asfari, Tim Weller and other
executives to our institutional investors
and analysts are broadcast live and
accordingly may be followed by all
shareholders via our website.
On 24 February 2016, when we issue
our full year results in London each of our
Executive Directors, as well as members of
senior management, will be in attendance
to answer questions on our business
performance and strategic outlook.
Our major shareholders
In accordance with the FCA’s Disclosure
and Transparency Rules (DTR 5), as at
31 December 2015 the Company had
received notification of the following
material interests in voting rights over the
Company’s issued ordinary share capital
(including qualifying financial instruments):
Number of
ordinary shares
Percentage of
issued share
capital
62,958,426
18.20%
27,123,822
7.84%
21,885,097
6.33%
20,776,437
6.01%
Ayman Asfari
and family
Maroun Semaan
and family
Standard Life
Investments Ltd
Deutsche
Bank AG
At the date of this report, all notifications
remained as set out above, with the
exception of Deutsche Bank AG, whose
holding is 19,954,955 shares, which equates
to 5.77% of the issued share capital.
Petrofac Annual report and accounts 2015 / 81
Governance Nominations Committee report
Rijnhard van Tets
Chairman of the Nominations Committee
Role of the Committee
• Regularly reviews the composition and structure of the Board
and its Committees.
• Identifies and recommends for Board approval suitable
candidates to be appointed to the Board.
• Considers succession planning processes for the Group as
well as specific succession plans for Directors and other senior
executives taking into account diversity, experience,
knowledge and skills.
Terms of reference
The Committee reviewed its terms of reference during the year.
Copies are available on our website.
Membership and attendance at meetings
held in 2015
Meetings attended
(eligible to attend)
6 (6)
6 (6)
6 (6)
3 (3)
2 (2)
3 (3)
6 (6)
6 (6)
Members
Rijnhard van Tets
Thomas Thune Andersen
Ayman Asfari
Matthias Bichsel1
Stefano Cao2
Roxanne Decyk3
Kathleen Hogenson
René Médori
1 Matthias Bichsel joined the Committee on 14 May 2015
2 Stefano Cao stepped down from the Committee on 29 April 2015
3 Roxanne Decyk stepped down from the Committee on 14 May 2015
82 / Petrofac Annual report and accounts 2015
Dear shareholder
2015 was, once again, a busy year for the Committee. Board and
senior management succession planning has been a key focus,
along with the composition of the Board and its committees.
The Committee has also taken an active role in reviewing employee
talent, both in our core businesses as well as within the functions,
thus ensuring the Company continues to invest in its employees
to build a talent pipeline for the Company’s long-term success.
2015 changes
As a result of the Board changes which took effect in 2014,
and reflecting our process of ensuring that the Board membership
is appropriately refreshed, we initiated a search for a new Non-
executive Director at the end of 2014. Working with Korn Ferry,
an executive search firm with whom we have no other relationship,
to identify potential candidates with international and relevant industry
experience, we were delighted to welcome Matthias Bichsel to the
Board as a Non-executive Director in May 2015. Matthias has over
35 years’ relevant experience, ending his executive career at Royal
Dutch Shell plc as director of projects & technology. He has brought
an extensive understanding of project management within the
oil and gas industry but from the client’s perspective, which is
especially valuable, given that many of our clients are currently
facing a particularly challenging time. In addition, of course, he also
brings a valuable insight into the oil and gas industry in general.
As we noted in last year’s report, Roxanne Decyk stepped down
from the Board at our 2015 AGM in May. This was as a result of
her US commitments significantly increasing to the extent that she
was concerned that she could not give sufficient time to discharge
her Petrofac responsibilities. Unexpectedly in April 2015, Stefano
Cao also stepped down from the Board ahead of his appointment
as chief executive officer of Saipem SpA. Roxanne and Stefano
each contributed significantly to the Board during their respective
tenures and we wish them both well for the future.
We have previously expressed the view that Non-executive
Directors should serve no longer than two three-year terms.
Nevertheless, the Committee made the decision that, in light
of the number of recent Board changes, not all of which were
anticipated, it would recommend to the Board that Thomas
continue on the Board as Senior Independent Director in order
to provide continuity on the Board and within our Committees.
I am delighted that Thomas has agreed, subject to shareholder
approval, to extend his stay on the Board.
Committee structures
As a result of Stefano’s departure from the Board in April 2015,
the Committee reviewed the remit and membership of the Board
Risk Committee, of which he had been chairman. After significant
debate, it was agreed that the Board Risk Committee would be
incorporated into the Audit Committee with immediate effect,
and that oversight of the Group’s enterprise risks would be exercised
predominantly by the Board. The terms of reference of the Audit
Committee were amended accordingly to enable it to take ownership
of all aspects of internal control and risk management.
Related pages
Directors’ information
p70
Following the Board changes effected during 2015, the Committee
took the opportunity to review the composition of each Board
Committee and a number of changes were recommended.
Details of current memberships are disclosed within the individual
reports of each Committee.
2015 focus
Board succession planning continued to be a key focus for the
Committee and, once again, more than 50% of its time was spent
discussing various matters in relation to succession during the
year. A breakdown of how the Committee spent its time during
2015 is set out on page 74. The Committee is very aware of its
responsibilities in relation to Board and senior management
succession plans to ensure that unforeseen changes are managed
effectively and efficiently, without disruption to the Group’s strategy
or day-to-day operations.
The Committee also gave focus to the Group’s functional
capability, following changes implemented during the year by
management to ensure the organisation was being managed
effectively. The Committee was keen to ensure the organisation
had the most appropriate individuals in the right roles to implement
effective internal controls. Consideration was also given to the
internal Group reorganisation which was implemented at the
end of the year and, as a result, the Committee is keen to meet
with newly appointed managers during the course of 2016.
2016 plans
A formal procedure for selecting and recruiting Board members
is in place and extensive consideration is given to identifying the
capabilities required of potential candidates, taking into account
the balance of existing skills, knowledge, experience and diversity
on the Board. Following the departure of both Stefano and Roxanne
from the Board, we initiated further searches for two new Non-
executive Directors during 2015. Working once again with Korn
Ferry, a number of potential candidates with international and
relevant industry experience were identified and we are delighted
to be in a position to recommend to shareholders two new
Non-executive Director appointments at our forthcoming AGM:
Andrea Abt and George Pierson. Andrea spent her executive
career with Siemens AG where she held a number of varied
leadership positions. She brings an extensive understanding
of supply chain management and has deep knowledge of the
broader industrial sector, as well as being familiar with the UK
governance regime. George is the former CEO of Parsons
Brinckerhoff, the American multinational design and engineering
firm. His engineering and managerial experience will be valuable,
as will his understanding of the contractual arrangements by
which our business is governed, given the current commercial
environment in which we are working. The Board committee
compositions will be reviewed by the Committee following these
new appointments.
Diversity
Details of our current gender diversity statistics are set out on
page 71. Whilst we achieved our published target of women
on the Board at the start of 2015, our progress was unfortunately
hampered when Roxanne Decyk stepped down from the Board
in May. The appointment of Andrea Abt with effect from May 2016
will, however, help to mitigate the gender imbalance which still
exists, and although consideration will be given to the appointment
of another female Director during 2016, the Committee is keen to
ensure that any future appointments are filled by the best available
candidates for the role, irrespective of gender.
Petrofac believes that diversity is wider than simply gender and,
irrespective of background or gender, we recruit on merit and aim
to hire the best candidates with the widest range of skills and
experience. With over 80 nationalities employed within Petrofac,
we consider that our business benefits greatly from a varied
employee base which is essential for ensuring the Company’s
long-term success. The Committee recognises nevertheless that,
across the Group, a gender imbalance remains. However, despite
engineering continuing to be a predominantly male-dominated
profession, we are proud that approximately 18% of our graduate
recruits during 2015 were female, demonstrating our ongoing
commitment to build diversity from the bottom up. Whilst we may
not yet have many women in senior engineering roles, we are
committed to building and developing our female talent pipeline,
but recognise that this takes time.
Talent management
Our current framework for performance and talent management
allows us to identify clearly critical roles and gaps which, in turn,
informs the succession planning process. Where any weaknesses
or development opportunities are identified on an individual
basis, action plans and bespoke training opportunities have been
developed to ensure that high-calibre employees have the required
skills and knowledge to become our future leaders. The Committee
took an active role during 2015, reviewing with the HR function,
the Group’s top 850 executives. Using a matrix structure to
categorise these individuals has enabled individual development
programmes to be progressed and has given greater insight into
the Company’s succession planning process. The development
of key performance indicators to enable management to assess
progress in relation to the delivery of succession plans continues.
The Committee’s oversight of talent management is an ongoing
activity and, in January 2016, a more detailed review, focusing on
emerging talent was undertaken; with further work planned to take
place during the course of the year.
Rijnhard van Tets
Chairman of the Nominations Committee
23 February 2016
Petrofac Annual report and accounts 2015 / 83
Governance Audit Committee report
René Médori
Chairman of the Audit Committee
Role of the Committee
• Monitors the integrity of the Company’s financial statements
and reviews significant financial reporting judgements.
• Reviews the effectiveness of risk management and internal
control systems, including viability statements, and provides
assurance to the Board.
• Monitors and reviews the effectiveness of the Group’s internal
audit function.
Principal matters considered during the year
by the Audit and Board Risk Committees:
January 2015
• Ernst & Young (EY) regulatory update on auditor rotation
and independence
• Key Risk Report (KRR) and risk management systems
• Strategic risks related to the Petrofac JSD6000 vessel
• Treasury report including policy review
• Group HSSE framework and HSE performance at third party locations
• Compliance update including 2015 plan and whistleblowing report
• Reviews the effectiveness of the external audit process and
independence of the external auditors.
February 2015
• Approves the remuneration and terms of engagement of the
external auditors and makes recommendations to the Board
regarding their re-appointment.
• Develops and implements the non-audit services policy.
• Advises the Board on how it has discharged its responsibilities
and considers whether the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable.
• Internal control framework assurance
• Internal audit full year report and draft 2015 plan
• EY full year report including letters of representation
• Hydrocarbon reserves assessment; long term contracting
and impairment reports; and financial counterparty limits
• 2014 results and announcement, including all relevant reports
• Final dividend consideration
• Non-audit services transactions and fees
• Code of Conduct certification and related party transaction reports
May 2015
Terms of reference
Terms of reference setting out the role and responsibilities of the
Committee were reviewed during the year. Amendments were
made to widen the Committee’s remit following the disbandment
of the Board Risk Committee and to incorporate Committee
membership changes. Copies are available on our website.
• KRR and risk management systems including examination
of principal risks
• Insurance programme renewal update
• Security and compliance reports
• Approval of appointment of KPMG to review cost controls in
relation to the Laggan-Tormore project and assess the internal
control framework in the OEC lump-sum contract portfolio
Membership and attendance at meetings
held during 2015
Members1
René Médori2
Thomas Thune Andersen
Matthias Bichsel3
Meetings attended (eligible)
5 (5)
5 (5)
2 (2)
5 (5)
Kathleen Hogenson
1 All members of the Committee are considered independent in accordance
with the UK Corporate Governance Code (UK Code).
2 René Médori is considered to have recent and relevant financial experience in
compliance with the UK Code.
3 Matthias Bichsel joined the Committee on 14 May 2015.
In addition, a Board Risk Committee meeting was held in January
2015 under our previous governance structure. This was attended
by all Committee members. An ad hoc telephonic meeting of the
Committee was also held at short notice in May 2015, which was
attended by René Médori and Matthias Bichsel.
84 / Petrofac Annual report and accounts 2015
August 2015
• Outcome of KPMG reviews
• Internal audit progress report
• EY half year report and audit planning report for the full year
• Investment and impairment reports regarding the carrying value of
IES assets; and appropriateness of Company’s accounting policies
• 2015 half year results and announcement, including all relevant reports
• Dividend policy review and interim dividend payment
• Annual review of external auditors’ independence and effectiveness
• Revised terms of reference
November 2015
• Internal audit progress report and draft 2016 plan
• EY external audit progress report including changes to scope
• Accounting issues review ahead of year end
• Regulatory and governance update and KRR review
• The Company’s compliance with its tax and whistleblowing obligations
• Treasury and security updates
Dear shareholder
As has been previously reported, 2015 continued to be a
challenging year for Petrofac, not least because of the operational
and execution issues on key projects but also as a result of the
tougher external environment in general. Throughout the year,
the Committee continued to support the Board in its response
to key concerns.
In April 2015, Stefano Cao stepped down from the Board. As a
consequence, the Board took the opportunity to review its Board
committee structures and decided to incorporate the Board Risk
Committee into the Audit Committee. As a result of this change,
the remit of the Audit Committee was widened to encompass all
aspects of risk management and internal control systems, whilst
the Board retained its responsibility for oversight of the Group’s
principal risks. On his appointment in May 2015, Matthias Bichsel
joined the Committee. All members of the Committee have a wide
range of business experience across various industries which
allows us to work effectively and challenge management.
During the course of the year, at the Board’s request, the
Committee focused its attention on reviewing aspects of the
Group’s internal control and risk management processes. This
followed the further unanticipated losses on the Laggan-Tormore
project announced in April 2015. To this end, an independent
review by KPMG was commissioned. The review comprised two
phases and further details relating to the assessment of the cost
controls on the Laggan-Tormore project and the considerations
in respect of the potential restatement of the 2014 financial
statements are set out in the report on page 86. KPMG also
undertook a review of the Group’s internal control framework
in the lump-sum OEC contract portfolio more broadly and
suggested certain improvements.
Separately, management undertook a review of the operational
control failings on the Laggan-Tormore project and the OEC
operational control framework in general, focusing on execution
issues and how lessons learnt had been implemented. As a
result, the Committee agreed that the ability to identify, assess
and understand risks in a timely manner had progressed, allowing
effective mitigation of risks when necessary and greater visibility
over critical events. It is expected that these lessons learnt will
now provide greater assurance and oversight of risk throughout
the organisation.
Other matters considered by the Committee during the year are
detailed in the following report.
In considering the financial statements for 2015, the Committee
concentrated on revenue and margin recognition for significant
OEC contracts, together with the carrying value of IES assets
in light of the current low oil price. The Committee concluded
that management had adopted an appropriate approach in all
significant areas. As part of the Committee’s year-end review,
it also conducted a robust assessment of the principal risks
facing the Company, as detailed on pages 30 to 33, including
those that may threaten the Company’s strategy, business model,
future performance, solvency and liquidity.
As part of the year-end process, the Committee reported to the
Board in February 2016 that aside from the findings in relation
to the Laggan-Tormore project discussed above, which have
been mitigated prior to the approval of the Accounts, the Group
continues to operate a sound system of controls and, when taken
as a whole, it considers the Annual Report and Accounts to be
fair, balanced and understandable, providing shareholders with
the necessary information to assess the Group’s position and
performance, business model and strategy.
Along with continuing to monitor and review the effectiveness
of the Group’s risk management and internal control framework,
the Committee’s priorities for 2016 are as follows:
• Review of revenue and cost recognition in respect
of key contracts
• Effective identification of business environment risks
and their mitigation
• Ensuring that the provisions of the UK Code are met
in relation to risk management and internal controls
• Review of taxation matters in light of the enhanced global
reporting environment
Key issues discussed by the Committee are reported to the
Board after each scheduled meeting and this practice will
continue, thus ensuring any significant matters are considered
and addressed appropriately.
René Médori
Chairman of the Audit Committee
23 February 2016
Petrofac Annual report and accounts 2015 / 85
Governance
Audit Committee report continued
Activities during the year
The Committee assists the Board in the effective discharge of
its responsibilities for financial reporting, internal control and risk
management. As set out in our Directors’ statements on page 107,
Directors are responsible for the preparation of Group financial
statements, in accordance with International Financial Reporting
Standards (IFRS). The Group has an internal control and risk
management framework in place, which includes policies and
procedures to ensure that adequate accounting records are
maintained and transactions are accurately recorded. This ensures
that the Company’s financial reports, including the financial reporting
process, and communications to the market give a clear and
balanced assessment of the Company’s position. In addition to
the matters considered during the year, as set out on page 84,
the Committee also reviewed the 2015 full year results and this
Annual Report and Accounts, at the beginning of 2016.
Internal controls and risk management
The Board maintains oversight for enterprise risk and, in particular,
establishes the Company’s risk appetite. It identifies and conducts
a robust assessment of principal risks facing the Company and
their connection to viability. Following the disbandment of the
Board Risk Committee in May 2015, responsibility for monitoring
and reviewing the integrity and effectiveness of the Group’s
overall systems of risk management and internal controls, in
accordance with the requirements of the FRC’s Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting, was delegated to the Committee. The Committee’s
remit was therefore broadened to consider strategic, financial,
operational, and compliance controls, rather than principally
focusing on the Company’s financial controls. As a result of this
extended remit, the Committee now provides the Board with wider
assurance that the risk management and internal control systems,
as a whole, are sufficiently robust to mitigate the principal risks.
The effectiveness of our risk management and internal controls
is founded on our enterprise risk management (ERM) and internal
control frameworks. Our ERM framework is based upon BS ISO
31000:2009, with our internal control assurance being provided
in accordance with the revised COSO framework. Following the
introduction of the revised UK Code and FRC guidance, we
made a number of enhancements to align our methodologies
for identifying, evaluating and managing risk during the course of
the year. Our risk management systems are continually evolving,
with operational processes becoming more systematised by
moving risks into our Petrofac Enterprise Risk Management
System (PERMS) database. The KRR identifies the principal
risks facing the Group and includes heatmap analysis. It is part
of the framework for determining risk and risk appetite and is
a live document which highlights recent movements in exposure,
thereby allowing the Committee to recognise and review the
mitigation and/or management of new or changing risks. This
report was considered at both Committee and Board level
throughout the year and further details are included within the
Strategic Report on pages 26 to 29.
Major internal control themes were considered at each meeting,
with particular attention given by the Committee to any weaknesses
identified and the need for a systematic approach to be taken
for managing risk. As well as regular reports from the Group
Head of Enterprise Risk, further reports were provided by
senior management and comprised deep-dives into the
effectiveness of health and safety processes including at third
party locations, strategic risks related to the Petrofac JSD6000,
financial counterparty risk assessments, compliance contraventions,
security, and information technology. These reports, together
with other sources of information, have provided a balanced
assessment of the principal risks and the effectiveness of the
systems of internal control.
Any control failings or weaknesses identified are discussed in
these reports (including, for example, Laggan-Tormore related
matters, compliance issues or whistleblowing statistics), along
with the underlying reasons, the impact that they have had
on the Company, and the actions being taken to rectify them.
When reviewing these individual reports, the Committee
considered how effectively risks have been identified; how they
have been mitigated and managed; whether actions are being
taken promptly to remedy any failings or weaknesses; and
whether the causes of the failing or weakness have indicated
poor decision-taking or a need for more extensive monitoring
or a reassessment of process effectiveness.
In May 2015, as part of an internal lessons learnt analysis following
the identification of potential significant control weaknesses, the
Committee appointed KPMG to carry out an independent review,
specifically related to the Laggan–Tormore project. The review
focused on project management and cost estimation processes
with a view to assessing whether the financial statements for
2014 should be re-stated to reflect some or all of the incremental
losses incurred on the project during 2015. As a result of the
losses incurred, intense scrutiny has been given to whether the
process for ongoing management and cost estimation in respect
of this and other lump-sum projects was sufficiently robust.
The Committee carefully considered the extensive analysis by
KPMG and, after hearing the views of both EY and management,
recommended to the Board that there should be no restatement
of the 2014 financial statements.
The KPMG review also considered the adequacy of the Company’s
internal control framework by reviewing a representative sample
of other lump-sum contracts in the OEC portfolio. The Committee
discussed the control weaknesses highlighted by both KPMG
and management, who had conducted a separate review at the
request of the Committee. The Committee concluded that the
processes associated with Laggan-Tormore, while representing
a significant control weakness on this particular project, were
not indicative of wider systematic failings within the portfolio but
arose due to a number of shortcomings, principally an inability
to understand and cost the risks associated with lump-sum
construction execution within the UK.
86 / Petrofac Annual report and accounts 2015
Management have implemented a number of improvements to
its procedures and controls in light of the issues identified and
the Committee is satisfied that lessons had been learnt which
are now being implemented across the wider Group.
Assurance
At the year end, formal assurance was provided to the Board
that effective governance, risk management and internal control
processes were in place, as required by the UK Code, to ensure
that the Group would continue to be viable for at least the
next three years. This assurance covered all material controls,
including strategic, financial, operational and compliance controls.
Treasury
During the year, the Committee reviewed the financial risks
associated with liquidity, commodity price risk and associated
hedging options, and foreign exchange rate risk. In addition,
following the disbandment of the Board Risk Committee, the
Board delegated the authority to the Committee to consider and,
if thought fit, amend the Company’s suite of treasury policies as
set out in the Company’s Sovereign and Financial Market Risk
policy (SFMR) (a copy of which is available at www.petrofac.com).
In their review of the SFMR policy, the Committee considered
the level of the Company’s financial counterparty risk exposures
and agreed that the existing policies remained appropriate.
The Committee took comfort that the Group Treasury team
actively monitors all credit exposures with each financial
institution and noted that progress was being made on the
implementation of an updated Treasury Management System.
Insurance Programme
Given the scale and nature of the Group’s activities, Petrofac
continued to develop its global insurance programme coverage
during 2015 by strengthening its relationship with the Group’s
insurance brokers and advisers. Following work instigated in 2014,
further claims scenario workshops were carried out during 2015
within OEC and OPO, in conjunction with our insurers, brokers and
loss adjusters. The principal objective was to stress-test the existing
policies in order to provide assurance that the Group’s insurance
arrangements remain “fit for purpose” and that the insurance
programme is able to respond as expected in the event of a loss.
Policy limits, deductibles and wording are reviewed each year
at programme renewal to ensure that the optimum mix of policy
coverage and competitive terms are in place. As a result of the
claims workshops, wording enhancements were incorporated
into policies. Further developments in our programme are
expected during 2016 following a full market-testing exercise
for our major policies.
Internal audit
To assist the Committee in monitoring and reviewing the integrity
of the Group’s risk management and internal control systems,
the Group Head of Internal Audit attends each meeting, where his
reports are considered and discussed in detail. This, along with
reports from the external auditors, provides the Committee with
oversight and assurance that the Group’s risk management and
internal control processes are operating effectively. Additionally,
the Committee also meets separately with the Group Head of
Internal Audit in advance of the full and half year results without
executive management being present to discuss, among
other matters, management’s responsiveness to internal audit
recommendations and the effectiveness of the internal audit
process. The Group Head of Internal Audit also has direct access
to the Committee Chairman and meets with the external auditors
whenever required.
The Company’s annual internal audit plan was considered and
approved by the Committee in February 2015. This was developed
taking into account the outcomes of the previous year’s report, the
external audit environment and discussions held with the Committee
and senior management to ensure alignment with the Group’s risk
appetite and business needs. In approving the plan, the Committee
gave consideration to the Company’s principal risks and whether
the plan’s geographic coverage was appropriate. Summary
progress reports were provided at each subsequent meeting,
detailing key findings of audits undertaken in the period under
review. When significant areas of concern were highlighted by
the reports, the Committee challenged management and, where
required, action plans to address any matters raised were agreed,
with follow-up reviews arranged. Any required revisions to the plan
were considered and approved by the Committee during the year.
During 2015, 98 internal audit assignments were carried out.
Weaknesses identified included subcontractor management
procedures, project cost controls and scheduling on certain OEC
projects, financial and operational controls in remote or smaller
entities and IT procedures regarding the ERP system in different
business units. These findings were carefully considered by
the Committee, with management given direction to ensure
the necessary steps were taken to mitigate any arising issues.
Following on from the work initiated in 2013, further fraud risk
assessment exercises within the OPO business and in IES
Mexico were completed during 2015. At the end of each
assessment, the Committee was provided with a full review
and given updates on the controls implementation process.
Petrofac Annual report and accounts 2015 / 87
Governance Audit Committee report continued
Significant judgements
The Committee’s role is to assess whether the judgements or estimations made by management in preparing the accounts are reasonable
and appropriate. Set out below are what we consider to be the most significant accounting areas which required a high level of judgement
or estimation during the year and how these were addressed:
Focus area
Revenue and
margin recognition –
including ECOM
long term contracts
and IES contractual
arrangements
See note 2 for
further information
Why this area is significant
The quantification and timing of the
recognition of revenue and profit
earned from all contracts, including
fixed-price engineering,
procurement and construction,
operations & maintenance and
IES arrangements is an important
driver of the reported business
performance of the Group.
Impairment and fair
value changes in IES
assets and JSD6000
See note 2 for
further information
With extreme recent volatility in
commodity prices and project
delivery issues arising on IES
projects it is important to assess
regularly the appropriate carrying
values of the investment portfolio
through a robust impairment
testing process, particularly as the
potential amounts involved are
material to the Group’s reported net
income and balance sheet position.
In addition, the cancellation of the
JSD6000 shipyard construction
contract poses a risk to the
recoverable value of the vessel.
Role of the Committee
Conclusion
The Committee concluded that
the quantification and timing of
revenue and margin recognition
continues to be in line with IFRS
requirements but it will continue to
monitor this situation going forward.
The Committee was satisfied that
the results of the detailed asset
impairment testing were reasonable
and ensured that appropriate
impairment and fair value
adjustments were recorded in
the Annual Report and Accounts.
The Committee reviewed the reasonableness of
judgements made regarding the cost to complete
estimates, the timing of recognition of variation
orders and the adequacy of contingency provisions
to mitigate contract specific risks for projects
significantly behind schedule. Consideration was
also given to the assessments made in relation to
the recognition of liquidated damage provisions
and to the impact of certain larger contracts
being entered into as part of consortiums.
The Committee held discussions with
Executive Directors and received regular internal
audit reports into the operating effectiveness of
internal controls relevant to these judgements.
The external auditors challenged management
on the revenue recognition amounts and reported
their findings to the Committee.
IES impairment test results were presented to
the full Board at the year end and at the half year.
These tests were based on rigorous assessments
performed by the IES finance team and checked
by the external auditors and were subsequently
reviewed in detail by the Committee. Discussions
in relation to the future plans in respect of the
Group’s deepwater strategy were also held to
determine the appropriate assumptions taken in
relation to the JSD6000 vessel. The impact in
particular of the negative oil price movement and
its effect on asset impairment testing was
considered as part of the year-end review process
together with any changes in forecast production
levels, operating expenditure and capital
expenditure for each of the IES assets.
Taxation
See note 2 for
further information
Laggan-Tormore
considerations
See note 2 for
further information
The wide geographical spread of
the Group’s operations and the
increasingly complex nature of local
tax rules in different jurisdictions
increases the risk of misstatement
of tax charges and management
needs to make a number of difficult
judgements around tax exposures
given the commercial structure of
individual contracts.
The tax positions within the Group were
reviewed by the Committee to ensure that the
Group’s effective tax rate, tax provisions and the
recognition of deferred tax assets and liabilities
continue to be appropriate. Taxation issues
were discussed with senior management and
a report outlining key tax issues was reviewed.
The external auditor also reported to the
Committee on the findings of their audit of
the Group’s tax charge and provisions.
The Committee were satisfied
that Group tax issues were being
efficiently monitored and dealt with
appropriately, but recent significant
changes in the global tax landscape
mean that the Company must
continue to work on its ability to
respond quickly to the enhanced
global reporting requirements over
the next few years.
In light of the challenges faced
in determining the losses on the
Laggan-Tormore contract, it was
imperative that appropriate
consideration was given to
accounting for the project, careful
scrutiny given to key judgements,
and for potential internal control
weaknesses to be identified
and mitigated.
The Committee commissioned KPMG to carry
out a review of the circumstances leading to the
market announcement in April 2015, with a view
to identifying issues from the Laggan-Tormore
contract as they related to incremental losses and
their potential effect on the prior year. The KPMG
review also considered the Group’s internal controls
in respect of the Laggan-Tormore project and in the
lump-sum OEC contract portfolio more broadly.
The Committee also received management reports
highlighting key judgements made in relation to
liquidated damages and costs-to-complete.
The Committee concluded that
weaknesses in internal controls
in respect of the project subsisted
up to and including 2015, but noted
that management have implemented
a number of mitigation actions and
assigned further resources to mitigate
the risk of further misstatements
both in relation to this and other
contracts. The Committee was also
satisfied that the key judgements
adopted at year-end were appropriate.
88 / Petrofac Annual report and accounts 2015
External auditors
Ernst & Young LLP (EY), the Company’s auditors since initial
listing in October 2005, provided the Committee with reports and
advice throughout the year. The Committee remains satisfied as
to the auditors’ effectiveness and, in making this assessment,
had due regard to their expertise and understanding of the Group,
their resourcing capabilities, culture, independence and objectivity.
In addition, the Committee took into account its own interaction
with EY, the preparatory steps taken by EY in advance of scheduled
meetings, and the observations of executive management.
The Committee met with the auditors without management present
to discuss any significant issues, not least the conduct of the audit,
in advance of the full and half year results. In addition, the Committee
Chairman has regular contact with the lead audit partner outside of
formal Committee meetings, not only to discuss formal agenda items
for upcoming meetings, but also to review any other significant matters.
Each year, EY set out their proposed audit strategy and scope to
ensure that the audit is aligned with the Committee’s expectations.
This is done with due regard to identification and assessment of
business and financial statement risks which could impact the
audit and continuing developments within the Group. In 2015, this
included the additional losses recognised on the Laggan-Tormore
project, arising from an increased cost-to-complete estimate, and
progression of commercial negotiations on the IES assets. Where
changes to the audit scope have occurred during the year, the
Committee has been encouraged by the auditors’ interaction with
the Committee Chairman and management to ensure no adverse
impact occurs to the overall audit process. At year end, a report
was provided to the Committee detailing areas of audit risk, the
findings of which were reviewed and considered by the Committee.
Audit tender
The UK Competition and Markets Authority’s (CMA) Statutory
Audit Services Order (Order) states, amongst other matters,
that FTSE 350 listed companies should put their external audit
contract out to public tender at least every 10 years. During the
year, the Committee gave consideration to this legislation, as
well as to the UK Code and the EU’s audit legislation, which will
become effective from June 2016. It has been agreed that the
Company’s audit contract will be put to competitive tender during
2016, with a view to appointing an external auditor for the year
ended 31 December 2017. The Committee believes that such
a competitive tender exercise will be in the best interests of
shareholders as it will ensure continuing scrutiny and objectivity
of the audit. This tender process is earlier than originally reported,
as it was previously proposed to tender the audit after the end
of our current audit partner tenure in 2018. The Committee will
report on how this exercise was undertaken and its outcome
in next year’s report. In addition, the Committee confirms
compliance with the provisions of the CMA Order.
Non-audit services
To safeguard the objectivity of our external auditors and to ensure
the independence of the audit is not compromised, the Company
has a non-audit services policy that provides clear definitions of
services that our external auditors may and may not undertake.
To ensure compliance with this policy, the Committee regularly
reviews the Group’s cumulative non-audit spend and, furthermore,
gives prior approval to the appointment of EY should the nature or
size of the proposed work require it. Taking into account reports
from both management and EY, the Committee is satisfied that
EY’s objectivity and independence has not been impaired by any
non-audit work undertaken by them during the year. In addition,
EY has confirmed that it was compliant with APB Ethical Standards
in relation to the audit engagement.
There were no breaches in 2015 of the US$300,000 non-audit
threshold requiring prior approval by the Committee. During the
year, the Committee also reiterated the importance of ensuring the
non-audit fee remained below 50% of the total audit fee and the
non-audit spend for the year, as a percentage of the overall audit
fee, was 31.6% (2014: 21%). The majority of these costs relate to
the use of EY in certain jurisdictions, mainly in North Africa, the
Middle East and Central Asia, to provide advice and in-country
tax compliance services. It is felt that, given EY’s knowledge of
the Group and their presence in these regions, they continue to
be the most appropriate provider of this work. Details of the fees
in respect of audit and non-audit related services can be found
on page 136 and in note 4e to the financial statements.
The amended UK and EU audit legislation will introduce increased
restrictions on audit firms providing certain non-audit services from
June 2016. These restrictions will be considered by the Committee
along with the Mandatory Auditor Rotation rules to ensure that the
successful tender candidate is independent upon commencement
of any new audit engagement. The Committee, however, considers
that the existing policy remains appropriate and fit-for-purpose
but will revisit the policy during 2016 in light of the new regulations.
This exercise will be reported on in next year’s Annual Report.
The current policy, a copy of which can be found on the Company’s
website, is summarised below.
Non-audit services policy
• The external auditors are automatically prohibited from carrying
out work which might impair their objectivity.
• The Chief Financial Officer (CFO) will seek approval from the
Committee before appointing the external auditors to carry
out a piece of non-audit work where:
– the fee is above US$300,000; or
– total non-audit fees for the year are approaching
50% of the annual audit fee; or
– the external auditors would ordinarily be prohibited
from carrying out the work under the Company’s
non-audit services policy, but not prohibited under
Ethical Standard 5, and the CFO wants to appoint
them due to exceptional circumstances.
• The CFO may appoint the external auditor to do other types
of non-audit work as listed in the policy.
Petrofac Annual report and accounts 2015 / 89
Governance Directors’ remuneration report
Thomas Thune Andersen
Chairman of the
Remuneration Committee
Role of the Committee
• Determine and agree with the Board the broad policy and
framework for the remuneration of Executive Directors, the
Chairman and certain senior managers. Review the continued
appropriateness and relevance of the Remuneration Policy.
• Ensure that incentives are appropriate to encourage enhanced
performance and provide alignment with long-term shareholder
value. Approve the design of, and determine the targets for,
performance related pay schemes.
• Review the design of all share incentive plans before
approval by the Board and shareholders. Monitor the
application of the rules of such schemes and the overall
aggregate amount of the awards.
• Determine the remuneration of all Executive Directors, the
Chairman and certain senior managers within the agreed
policy, taking into account remuneration trends across the
Company and remuneration practices in other peer companies.
• Maintain contact with principal stakeholders, as required,
on matters relating to remuneration.
Terms of reference
The Committee reviewed its terms of reference during the
year. No amendments were made other than those needed
to ensure they remained consistent with the current UK
Corporate Governance Code (UK Code). Copies are available
on our website.
How to use this report
This report has been divided into two sections:
Annual Report on Remuneration
Looking backwards
This section provides details of how the Company’s
Remuneration Policy was implemented during 2015.
Within the report we have used different colours
to differentiate between:
• Fixed elements of remuneration; and
• Variable elements of remuneration
See pages 92 to 98 for more details.
Looking forward
This section provides details on how the Company will implement
our Remuneration Policy in 2016.
See pages 98 to 99 for more details.
Policy Report
Looking forward
This section contains a table showing the details of the Company’s
approved Remuneration Policy and accompanying notes.
Membership and attendance (eligible)
at meetings held in 2015
The full policy is available on www.petrofac.com/remuneration.
See pages 101 to 106 for more details.
Meetings attendance
(eligible)
4 (4)
2 (2)
2 (2)
2 (2)
2 (2)
Members
Thomas Thune Andersen
Matthias Bichsel1
Kathleen Hogenson2
Members who left during the year
Stefano Cao3
Roxanne Decyk4
1 Matthias Bichsel joined the Committee on 14 May 2015
2 Kathleen Hogenson joined the Committee on 14 May 2015
3 Stefano Cao stepped down from the Committee on 29 April 2015
4 Roxanne Decyk stepped down from the Committee on 14 May 2015
90 / Petrofac Annual report and accounts 2015
Related pages
Our strategic review
p20
Dear shareholder
On behalf of the Board and as Chairman of the Remuneration
Committee, I am pleased to present the Directors’ Remuneration
Report for the year ended 31 December 2015, which is split
into two parts:
• Our Annual Report on Remuneration, which outlines how our
Remuneration Policy was implemented in 2015, and how we
intend to apply it in 2016. This will be subject to an advisory
vote at the 2016 Annual General Meeting (AGM).
• A summary of our Policy. This section contains a summary
of the Policy that was approved by shareholders at the 2014
AGM and is for information only.
2015 business context
As has been articulated elsewhere in this report, 2015 marked
a year in which the Company refocused on its core strengths.
Like the rest of the sector, Petrofac has had to adapt to challenging
market conditions, but the Committee considers that the business
is well-positioned for the future, with a record year-end order
backlog, a robust pipeline of opportunities and excellent visibility
of future revenues.
Ultimately though, our financial performance in 2015 was
significantly impacted by two difficult projects. As a result
of losses on the Laggan-Tormore project, earnings fell short
of our expectations at the start of the year. The Company also
recognised impairments in respect of IES and the Greater Stella
Area project in particular, reducing overall Group earnings to
a loss of US$349 million.
Despite these disappointments, the remainder of the core ECOM
business continued to perform well. In addition, there were a number
of positives from a financial perspective. As highlighted above, we
finished the year with a record order backlog of US$20.7 billion, an
increase of US$1.8 billion during the year. We also made effective
progress on reducing our cost base, increased the cash which we
generated from our operations for the second year in succession,
and our underlying net margin remains at sector-leading levels.
It is also pleasing that 2015 marked the second successive
year in which there has been an overall improvement in HSSEIA
performance, with zero fatalities and continued improvement against
our Lost Time Injury and Recordable Injury Frequency metrics.
Remuneration outcomes for 2015
The Committee made changes to the annual bonus framework
for 2015, with the intention of ensuring greater transparency in
our outcomes and increasing the proportion of the bonus which is
dependent on financial performance. Under this framework, 60% of
the bonus is dependent on the achievement of Group financial targets,
with the remaining 40% subject to a balanced scorecard comprised
of key health and safety, operational, strategic and individual objectives.
The Committee reviewed the Group’s financial performance during
2015, as well as the achievements of the Executive Directors against
the targets under their balanced scorecards. Whilst a number of
the financial and balanced scorecard targets were achieved by the
Group Chief Executive, he proposed that he should not be considered
for a bonus in respect of 2015. The Committee accepted this proposal.
The other two Executive Directors, Marwan Chedid and Tim Weller,
received pay-outs of 32% and 33% of maximum, respectively.
G
o
v
e
r
n
a
n
c
e
The performance period for the 2013 Performance Share Plan
(PSP) cycle ended on 31 December 2015. Based on performance
against the three-year relative TSR and EPS targets, the awards
lapsed in full, resulting in zero payout.
Remuneration in 2016
For 2016, there will be no increase in salary for our two UK-based
Executive Directors, which represents the second consecutive
year for which these individuals’ salaries have been frozen.
Marwan Chedid, our UAE-based Executive Director, was promoted
to Group Chief Operating Officer on 1 January 2016 and, to reflect
the increased scope of this role, he received a salary increase of
10%, effective from that date. Salary increases in our wider UAE
population were in the region of 3%.
There will be no increase in the cash allowance for our UK-based
Executive Directors, whilst that for Marwan Chedid has been
increased by US$7,200 (3%), with effect from 1 January 2016.
This reflects the increase in the general cost of living in the UAE.
Following the changes which were made to our annual bonus
framework last year, we will be operating the same framework
for 2016. The maximum opportunity remains at 200% of base
salary, with performance measured against financial targets (60%)
and a balanced scorecard of key health and safety, operational,
strategic and individual objectives (40%).
The Committee has considered the EPS targets for the 2016 cycle
of the PSP. Given the current challenging environment, and taking
into account internal and external forecasts for the business, for
the 2016 awards only, we are proposing to adjust the performance
targets, such that threshold vesting will require EPS growth of
0.0% p.a., with target vesting at 2.5% p.a. and maximum vesting
at 7.5% p.a. (from a pre-Laggan-Tormore 2015 EPS base-year
figure of 129.41 c/s). The Committee considers that these represent
stretching targets when viewed in the context of current performance
expectations and the volatility within the sector at this time.
Looking forward
Our current Policy was approved by shareholders at the 2014 AGM.
As such, 2016 will be the last year for which this applies and we
expect to be seeking approval for a new Policy at our 2017 AGM.
Our intention at this time is to carry out a broad review of the
remuneration arrangements for our Executive Directors, with a
view to ensuring that any new Policy remains appropriate for the
prevailing business and market environment. If material changes
are proposed we will consult with major shareholders in advance.
The Committee values all feedback from shareholders, and hopes
to receive your support at the forthcoming AGM.
Thomas Thune Andersen
Chairman of the Remuneration Committee
23 February 2016
Petrofac Annual report and accounts 2015 / 91
Directors’ remuneration report continued
Annual Report on Remuneration
Looking backwards
The information presented from this section, until the relevant note on page 96, represents the audited section of this report.
Single figure of remuneration
The following table sets out the total remuneration for Executive Directors and Non-executive Directors for the year ended 31 December 2015,
with prior year figures also shown. All figures are presented in USD.
Director
Executive Directors
Ayman Asfari1
Marwan Chedid
Tim Weller1
Non-executive Directors5
Rijnhard van Tets
Thomas Thune Andersen
Matthias Bichsel2
Kathleen Hogenson
René Médori1
Former Directors
Stefano Cao3
Roxanne Decyk4
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
Base salary/
fees
(a)
US$’000
Taxable
benefits
(b)
US$’000
Cash in lieu of
pension (and
other benefits)
(c)
US$’000
Post-
employment
benefit
(d)
US$’000
Annual
bonus
(e)
US$’000
Long-term
incentives
(f)
US$’000
995
1,071
623
605
704
758
442
234
148
133
65
–
102
108
125
133
41
133
38
108
60
59
6
6
1
2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
107
115
239
230
107
115
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
52
50
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
400
600
459
453
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
US$’000
1,162
1,245
1,320
1,491
1,271
1,328
442
234
148
133
65
–
102
108
125
133
41
133
38
108
Notes to the table
1 UK-based Directors are paid in sterling. Amounts have been translated to US dollars based on the prevailing rate at the date of payment or award with the exception
of the bonus amounts, which have been translated using the average exchange rate for 2015 of £1:US$1.53125.
2 Matthias Bichsel was appointed as a Director on 14 May 2015. The 2015 figure reflects the period from this date to 31 December 2015.
3 Stefano Cao ceased to be a Director from 29 April 2015.
4 Roxanne Decyk ceased to be a Director from 14 May 2015.
5 Non-executive Directors receive a basic fee of £67,000 per annum and additional fees of £15,000 per annum for acting as either the Chairman of a Board Committee or
as the Senior Independent Director. Rijnhard van Tets, as Chairman, receives a fee of £290,000 per annum. These fees were last reviewed in August 2015. Amounts have
been translated to US dollars based on the prevailing rate at the date of payment.
Further notes to the table – methodology
(a) Salary and fees – the cash paid in respect of 2015.
(b) Benefits – the taxable value of all benefits paid in respect of 2015. UK-resident Executive Directors receive private health insurance, life assurance and long-term disability
insurance. Ayman Asfari’s benefits primarily relate to the employment of a personal assistant who is partly engaged in support of the administration of his personal affairs.
Marwan Chedid receives similar benefits to UK-resident Executive Directors and in addition receives other typical expatriate benefits, such as return flights to his permanent
home.
(c) Cash in lieu of pension and other benefits – UK-resident Executive Directors receive a cash allowance in place of benefits including, but not limited to, car allowances and
pension contributions. Directors do not receive pension contributions from the Company. Marwan Chedid receives a cash allowance in respect of housing, utilities and
transport, in line with local market practice.
(d) Post-employment benefit – all non-UAE national employees, including Directors working in the UAE, are required by local statute to receive an end of service indemnity
payment. These sums, based on years of service and salary, will be paid by the Company only on termination of the individual’s employment from the UAE. The total amount
retained as at 31 December 2015 in respect of Marwan Chedid is US$1,140,056.
(e) Annual bonus – cash bonus paid in respect of 2015. Ayman Asfari proposed that he should not receive a bonus for 2015 and the Committee endorsed his proposal.
(f) Long-term incentives – as a result of the performance over the period 2013–2015, the 2013 Performance Share Plan will lapse in full on 19 March 2016.
92 / Petrofac Annual report and accounts 2015
Related pages
Our strategic review
p20
Group financial statements
p108
Additional disclosures in respect of the single figure table
Benefits
The single figure table on page 92 sets out the total amount of benefits received by each Executive Director during 2015. The table
below provides an overview of the most significant components of the relevant benefits.
Director
Ayman Asfari
Marwan Chedid
Provision of
personal assistant
US$58,688
Housing
and transport
–
–
US$239,196
Annual bonus
As set out in last year’s report, the Committee implemented a new annual bonus framework for 2015. This framework is intended to
ensure an increased transparency of outcomes, in line with best practice developments. We also took the opportunity to increase the
proportion of the bonus which is dependent on financial performance, such that this comprised 60% of the bonus framework for 2015.
The Committee considered the Group’s performance during 2015 against the measures and targets under the new framework.
Our financial performance in 2015 was significantly impacted by two difficult projects, Laggan-Tormore and the Greater Stella Area. As a
result, earnings fell short of our expectations at the start of the year resulting in no pay-out under either the Group Net Income or Group
ROCE target. In terms of the other measures, the Company continued to attract significant new orders, leading to a record year-end order
backlog and a broadly on-target pay-out under this measure. We also increased the cash which we generated from our operations for the
second year in succession and this contributed towards a maximum pay-out under this element.
As a result of this financial performance, the table below sets out the outcomes for the Executive Directors against our financial targets:
Measure
Group Net Income
Group Order Intake
Group Free Cash Flow
Group ROCE
Total (financial elements)
25%
15%
10%
10%
60%
Weighting
Threshold
Target
Maximum
Performance
US$417m
US$6.0bn
US$485m
US$8.9bn
US$553m
US$10.0bn
US$8.6bn
(US$629m)
(US$472m)
(US$315m)
US$271m1
14.1%
15.7%
17.3%
3.0%
Actual 2015
outcome
US$9m
As a %of maximum
1 Cash flow from operating and investing activities net of proceeds from disposal of subsidiary.
Pay-out as %
of maximum
0%
48%
100%
0%
17%
29%
As the table highlights, our financial performance resulted in a pay-out against the annual bonus financial measures of 29% of maximum
(34% of salary). The remainder of the annual bonus (40%) is subject to a balanced scorecard of measures, aligned with our business plan
and key corporate objectives. The scorecard captures key health & safety, operational, strategic and individual objectives. The scorecard
ensures that the Committee considers not only the financial achievements which were delivered but also the wider health of the Company,
safeguarding future years’ performance, and the manner and behaviours by which our performance has been delivered.
Notable achievements under the balanced scorecard include:
• Strong safety performance, with zero fatalities during the year and continued improvement in our Lost Time Injury Frequency and
Recordable Injury Frequency rates;
• Organisational restructuring exercise and associated cost saving targets achieved, as announced to the market in December 2015; and
• Delivery of a number of key operational project milestones.
The table below provides an overview of the annual bonuses received by each Executive Director, based on performance against the
financial metrics and their individual performance against their balanced scorecards:
Financial
element
(60%)
–
Performance
Balanced
scorecard
element
(40%)
–
Overall
–
2015
annual bonus
–
29% of maximum
37% of maximum
32% of maximum
US$400,000
29% of maximum
39% of maximum
33% of maximum
£300,000
As a % of
base salary
–
64%
65%
Ayman Asfari1
Marwan Chedid
Tim Weller
1 Ayman Asfari proposed that he not be considered for a bonus in respect of 2015.
Petrofac Annual report and accounts 2015 / 93
Governance Directors’ remuneration report continued
Performance Share Plan
The performance conditions for the 2013 award are set out below. These targets were not achieved and, as a result, the award has
lapsed in full.
a) 50% of the award – three-year relative TSR performance
against a sectorial peer group (the ‘Index’)
b) 50% of the award – three-year EPS growth
Three-year Petrofac TSR performance
Percentage of TSR element vesting
EPS growth per annum
Percentage of EPS element vesting
Less than the Index
Equal to the Index
25% out-performance of the Index
0%
10% or less
30%
15%
100%
20% or more
0%
30%
100%
Straight-line vesting operates between these points.
Straight-line vesting operates between these points.
The peer group for the 2013 award is set out below:
Aker Solutions
AMEC
Saipem
Schlumberger
The table below provides an overview of Petrofac’s performance
against the 2013 PSP award targets and resulting vesting:
Actual performance
Vesting as % of
element
Chicago Bridge & Iron Co.
SNC-Lavalin Group
Relative TSR Under-performance of the Index by 30%
Fluor Corporation
Foster Wheeler
Halliburton
JGC
Maire Tecnimont
Technip
Tecnicas Reunidas
Wood Group (John)
WorleyParsons
EPS growth
Total vesting
-75.7% per annum
0%
0%
0%
Scheme interests awarded during the financial year
Performance Share Plan awards
As outlined in the policy table on page 104, PSP awards are granted over Petrofac shares representing an opportunity to receive
ordinary shares if performance conditions are met over the relevant three year period. The number of shares under award is determined
by reference to a percentage of base salary. Details of the actual number of shares granted are set out on page 95. The following table
provides details of the awards made under the PSP on 6 March 2015. Performance for these awards is measured over the three
financial years from 1 January 2015 to 31 December 2017.
Maximum
vesting
(% of face
value)
End of
performance
period
100% 31-Dec-17
Ayman Asfari
Marwan Chedid
Tim Weller
Type of award
Face value
Performance
shares
£1,299,995
£821,230
£919,998
Face value
(% of salary)
200%
200%
200%
Threshold vesting
(% of face value)
For TSR element (50% of award)
30% of face value
For EPS element (50% of award)
0% of face value
Awards were made based on a share price of 880.60 pence, and the face values shown have been calculated on this basis. This share price represents the five-day average
share price up to 6 March 2015.
The Committee reviewed targets in early 2015 by reference to a number of internal and external reference points to ensure that they
are positioned at a level which it considers appropriate and stretching in the context of the business strategy and earnings expectations
for the next three years, whilst ensuring that they do not drive unacceptable levels of risk and encourage inappropriate behaviours.
There was no change to the EPS targets for the 2015 awards from those adopted for the 2014 awards, which were as follows:
EPS growth per annum
Percentage of EPS element vesting
7.5% or less
10%
15% or more
0%
30%
100%
The TSR peer group used for this award is the same as outlined above, save that Maire Tecnimont is replaced by Baker Hughes as per
the 2014 awards, FosterWheeler has been removed from the group on account of its acquisition by AMEC (which has become AMEC
FosterWheeler), and Jacobs Engineering has been added as a new constituent to retain a consistent number of companies.
The TSR outperformance requirements and associated vesting schedule remain unchanged from those adopted for prior year awards.
94 / Petrofac Annual report and accounts 2015
Share Incentive Plan awards
UK-based Executive Directors are eligible to participate in HMRC-approved all-employee share plans on the same basis as other
eligible employees. During 2015, Tim Weller participated in the Share Incentive Plan (SIP) and purchased 181 shares.
Payments for loss of office
Stefano Cao and Roxanne Decyk ceased to be Directors from 29 April 2015 and 14 May 2015 respectively and no payment for loss
of office was made to either individual.
Statement of Directors’ shareholding and share interests
Directors’ shareholdings held during the year and as at 31 December 2015 and share ownership guidelines
Following discussions with shareholders in relation to the VCP in 2012, the Committee introduced a shareholding requirement of 300%
of base salary over a period of five years from the date of appointment for those Executive Directors participating in the plan. At this time,
there is no Executive Director with more than five years’ service who is yet to meet the guidelines. Nevertheless, in view of the recent
out-turns of the VCP and PSP, the Committee took the decision during 2015 to extend this time period for Executive Directors and will
keep this position under review going forward. Ayman Asfari was not a participant in the VCP and was therefore not subject to the formal
shareholding requirement. In any event, Ayman already had a substantial shareholding interest in the Company, significantly in excess of
the required levels.
Until the relevant shareholding guidelines have been met, Executive Directors are encouraged to retain vested shares earned under
the Company’s incentive plans. Unvested share awards are not taken into account when considering an Executive Director’s progress
towards the shareholding requirements.
Shareholding requirements and the number of shares held by Directors during the year and as at 31 December 2015 are set out in the
table below:
Directors’ interests in shares as at 31 December 2015
Shareholding requirement
as a % of salary
(Target – % achieved)
Shares owned outright
at 31 December 2015
(or at the date of leaving)
Interests in share incentive
schemes, awarded subject
to performance conditions
at 31 December 2015
Shares owned outright
at 31 December 2014
Director
Ayman Asfari1
Marwan Chedid2
Tim Weller2
Thomas Thune Andersen
Matthias Bichsel
Kathleen Hogenson
René Médori
Rijnhard van Tets
Former Director
Stefano Cao4
No formal shareholding
requirement
300% (1004%)
300% (56%)
–
–
–
–
–
–
62,958,426
1,540,092
97,2913
4,000
–
–
–
100,000
–
335,620
203,610
235,433
–
–
–
–
–
–
62,958,426
1,393,092
77,110
4,000
–
–
–
100,000
–
Roxanne Decyk5
1 Although Ayman Asfari does not have formal shareholding requirements, he substantially exceeds the shareholding requirement set for the other Executive Directors.
2 Marwan Chedid and Tim Weller are expected to build up a shareholding of three times salary over a period of five years from appointment. Whilst at this time, Tim Weller has
yet to meet the shareholding requirement fully, he has taken steps to acquire shares since his appointment. Marwan Chedid’s shareholding requirement has been met in full.
For the purposes of determining Executive Director shareholdings, the individual’s salary and the share price as at 31 December 2015 of 796 pence has been used.
5,804
5,804
–
–
3 Includes shares purchased through the SIP totalling 501 shares as at 31 December 2015.
4 Stefano Cao ceased to be a Director from 29 April 2015.
5 Roxanne Decyk ceased to be a Director from 14 May 2015. The shares owned outright reflect the position at the date she stepped down from the Board.
Petrofac Annual report and accounts 2015 / 95
Governance Directors’ remuneration report continued
Share interests – share awards at 31 December 2015
Share awards held at the year end, including awards of shares made during 2015, to Executive Directors are given in the table below:
Director and date of grant
Plan
Number of shares
under award at
31 December 20141
Shares
granted
in year
Dividend shares
granted in year2
Shares
lapsed
in year
Shares
vested
in year
Total number of shares
under award at
31 December 2015
Dates from
which shares
ordinarily vest
Ayman Asfari
19 March 2012
24 May 2013
19 March 2014
6 March 2015
Marwan Chedid
19 March 2012
24 May 2013
19 March 2014
6 March 2015
Tim Weller
19 March 2012
24 May 2013
19 March 2014
6 March 2015
PSP
PSP
PSP
PSP
PSP
PSP
PSP
PSP
PSP
PSP
PSP
PSP
76,965
85,061
87,451
–
–
–
–
147,626
–
76,9653
4,114
4,229
7,139
–
–
–
50,518
50,730
50,230
–
–
–
–
93,258
–
50,5183
2,453
2,429
4,510
–
–
–
43,292
59,264
60,835
–
–
–
–
104,474
–
43,2923
2,866
2,942
5,052
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
19 March 2015
89,1754
19 March 2016
91,680
6 March 2017
154,765
6 March 2018
335,620
–
19 March 2015
53,1834
19 March 2016
52,659
97,768
203,610
6 March 2017
6 March 2018
–
19 March 2015
62,1304
19 March 2016
63,777
6 March 2017
109,526
6 March 2018
235,433
1 The award amounts disclosed under the PSP are the maximum number that may vest if all performance conditions attached to the awards are satisfied in full.
2 Dividends awarded on shares granted under the share plans are reinvested to purchase further shares.
3 Following the end of the three-year performance period in respect of the March 2012 PSP award, the performance conditions were not satisfied and the award lapsed in full.
4 Shares awarded on 24 May 2013 did not satisfy performance conditions and therefore no awards will vest on 19 March 2016.
Share interests – share options
Share options held at the year end by Executive Directors are given in the table below:
Director and date of grant
Marwan Chedid1
18 May 2012
18 May 2012
18 May 2012
Tim Weller1
18 May 2012
18 May 2012
18 May 2012
Plan
VCP
VCP
VCP
VCP
VCP
VCP
Exercise
price
(p)
Number
of options
awarded
Shares lapsed
Total number
of options at
in year
31 December 2015
Dates from which
ordinarily
exercisable
1710.28
1710.28
1710.28
112,910
112,910
112,910
1710.28
1710.28
1710.28
46,726
46,726
46,726
–
–
–
–
–
–
112,910
18 May 2016
112,910
18 May 2017
112,910
18 May 2018
338,730
46,726
18 May 2016
46,726
18 May 2017
46,726
18 May 2018
140,178
1 The share options granted under the VCP did not satisfy performance conditions and therefore all shares will lapse.
This represents the end of the audited section of the report.
96 / Petrofac Annual report and accounts 2015
Historical TSR performance and Group Chief Executive remuneration outcomes
The chart below compares the TSR performance of the Company over the past seven years with the TSR of the FTSE 250 Index.
This index has been chosen because it is a recognised equity market index of which Petrofac has been a member since December 2014.
The table below the chart summarises the CEO single figure for total remuneration, annual bonus payouts and LTIP vesting levels as a
percentage of maximum opportunity over this period.
TSR chart – one month average basis
600
500
400
300
200
100
0
n
o
0
0
1
o
t
d
e
s
a
b
e
r
(
R
S
T
)
9
0
0
2
y
r
a
u
n
a
J
1
2009
2010
2011
2012
2013
2014
2015
2016
Petrofac
FTSE 250
Source: Datastream
Group Chief Executive
Group Chief Executive single figure
of remuneration (US$’000)
Annual bonus payout
(as a % of maximum opportunity)
PSP vesting out-turn
(as a % of maximum opportunity)
2009
3,501
2010
4,889
2011
6,088
2012
4,663
100%
100%
75%
81%
100%
100%
100%
100%
2013
2,658
59%
13%
2014
1,245
0%
0%
2015
1,162
0%
0%
Percentage change in remuneration of the Group Chief Executive
The table below illustrates the increase in salary, benefits (excluding cash allowance in lieu of pension) and annual bonus for the Group
Chief Executive and that of a representative group of the Company’s employees. For these purposes, we have used all UK-based
employees as the comparator group, as this represents the most appropriate comparator group for reward purposes for our UK-based
Group Chief Executive.
Group Chief Executive
0%1
1%2
% change in base salary
2015/2014
% change in benefits
(excluding cash allowance in lieu of pension)
2015/2014
% change in annual bonus
2015/2014
N/A3
All UK-based employees
1 Base salary is paid in sterling but translated into US dollars based on the prevailing rate at the date of payment (as set out on page 92).
2 The increase relates solely to remuneration paid to Mr Asfari’s personal assistant who is partly engaged in support of the administration of his personal affairs
0%
0%
-50%
and on which he incurs a taxable benefit. Further details are set out on page 93.
3 The Group Chief Executive proposed that he should not be considered for a bonus in both 2014 and 2015 and the Committee accepted these proposals.
Petrofac Annual report and accounts 2015 / 97
Governance
Directors’ remuneration report continued
Relative importance of the spend on pay
The chart below illustrates the change in total remuneration,
dividends paid and net profit from 2014 to 2015.
The figures presented have been calculated on the following bases:
• Dividends – dividends paid in respect of the financial year.
• Net profit – our reported net profit in respect of the financial
year. This is a key performance indicator for the Company.
The Committee therefore believes it is the most direct reflection
of our underlying financial performance.
• Total remuneration – represents total salaries paid to all
Group employees in respect of the financial year (see page 136
of the report for an explanation as to how this value is calculated).
Note that this includes social security costs, benefit and pension
costs and share-based payment expenses.
Spend in respect of the financial year chart 2014 compared with
2015 Dividends, Net profit and Total remuneration.
Spend in respect of the financial year
US$m
2014
2015
Looking forward to 2016
Implementation of Remuneration Policy in 2016
This section provides an overview of how the Committee is
proposing to implement our Remuneration Policy in 2016.
Base salary
In determining salary increases for 2016, the Committee took into
account a number of factors, including the level of salary increases
in the wider workforce, internal and external positioning and the
general economic climate.
For 2016, there will be no increase in salary for our two UK-based
Executive Directors. This represents the second consecutive year
for which these individuals’ salaries have been frozen. Marwan
Chedid, our UAE-based Executive Director, was promoted to
Group Chief Operating Officer on 1 January 2016 and, to reflect
the increased scope of this role, he received a salary increase of
10%, effective from this date. Salary increases in our wider UAE
population were in the region of 3%.
The table below shows base salaries for 2016:
3.2%
1,338
1,296
Ayman Asfari
Marwan Chedid
Tim Weller
2016 basic salary
2015 basic salary
£650,000
£650,000
US$685,500
US$623,150
£460,000
£460,000
581
-0.4%
226
227
-98.5%
9
Dividends
Net profit*
Total remuneration
*Before exceptional items and certain re-measurements
Benefits
The Committee sets benefits in line with our policy set out on page
101 and detailed on our website. There are no changes proposed
to the benefit framework in 2016.
Cash allowance in lieu of pension and car allowance
No increase in cash allowance is proposed for UK-based
Executive Directors. The cash allowance for Marwan Chedid, a
UAE based Executive Director, has been increased by US$7,200
(3%) with effect from 1 January 2016. This reflects an increase in
line with inflation in the UAE.
The table below shows cash allowances for 2016.
Ayman Asfari
Marwan Chedid
Tim Weller
2016 cash allowance
in lieu of pension
2015 cash allowance
in lieu of pension
£70,000
£70,000
US$246,400
US$239,200
£70,000
£70,000
98 / Petrofac Annual report and accounts 2015
Related pages
Our strategic review
p20
Group financial statements
p108
Annual bonus
The maximum annual bonus opportunity for Executive Directors
will remain at 200% of base salary in 2016.
As detailed elsewhere in this report, the Committee implemented
a new annual bonus framework last year, with the intention
of ensuring increased transparency of outcomes and greater
emphasis on financial performance. The same framework will be
used for 2016. The table below sets out the financial elements,
which comprise 60% of the total annual bonus:
Comparator group (the Index)
Aker
Solutions
Fluor
Corp
AMEC
FosterWheeler Halliburton
Baker Hughes
Jacobs
Engineering
Chicago
Bridge & Iron
JGC
Corp
Saipem
Schlumberger
Tecnicas
Reunidas
Wood Group
(John)
SNC-Lavalin
WorleyParsons
Technip
Measure
Weighting in total bonus
Vesting schedule
Financial measures Group Net Income
Group Order Intake
Group Free Cash Flow
Group ROCE
25%
15%
10%
10%
The remainder of the annual bonus, 40%, will be based upon a balanced
scorecard, providing the Committee with the ability to consider not only
financial achievements, but also the wider health of the Company
and the manner and behaviours by which our performance has
been delivered. The scorecard includes measures related to health
and safety, operational, strategic and individual objectives.
At this stage, the Committee considers that the annual bonus
targets for 2016 remain commercially sensitive. However, as
seen on page 93, this year we have provided full disclosure
of the financial targets for the 2015 annual bonus and would
currently intend to provide the same level of disclosure next year.
The annual bonus is subject to clawback provisions.
Performance Share Plan
The usual maximum PSP award for Executive Directors is 200%
of base salary (awards up to 300% of base salary can be made
in exceptional circumstances). For 2016, it is proposed that all
Executive Directors will receive an award of 200% of base salary.
There are no changes to the performance measures used for
the 2016 PSP awards, although we have taken the opportunity
to adjust the EPS targets to reflect growth forecasts from our 2015
base year. Awards will be based on three-year performance
against the following measures:
• 50% – Relative TSR performance against a sectoral peer group
• 50% – Compound annual EPS growth
1) TSR element
There are no changes proposed to the comparator group or the
degree of out-performance required, which are both set out below
for reference.
Three-year performance against the Index
Vesting as a % of maximum
Performance equal to the Index
25% out-performance of the Index
Straight-line vesting between the points above
30%
100%
2) EPS element
The remaining 50% of the 2016 PSP award will be subject to a
three-year EPS performance condition.
To reflect the current challenging environment, the Committee
has taken the opportunity to realign the EPS targets for the 2016
awards with internal and external performance forecasts for the
Company. As such, we have adjusted the targets as set out in
the table below. The Committee considers that these represent
stretching targets and significant payouts will only be available
for delivery of strong three-year performance.
EPS growth
0% per annum
2.5% per annum
7.5% per annum
Vesting as a % of maximum
0%
30%
100%
Straight-line vesting between each of the points above
These growth rates will be measured from a pre-Laggan-Tormore
EPS figure for 2015 of 129.41 cents per share, which the Committee
considers provides a more appropriate base-year figure from which
to measure our forward-looking growth aspirations. It is our intention
to review the EPS target range when we submit a new remuneration
policy for shareholder approval next year.
PSP awards are subject to malus and clawback provisions.
Non-executive Director remuneration
The table below shows the Non-executive Director current fee
structure which is unchanged from 2015:
Chairman of the Board fee
Basic Non-executive Director fee
Board Committee Chairman fee
Senior Independent Director fee
2016 fees
£290,000
£67,000
£15,000
£15,000
There are no fees paid for membership of Board Committees.
Petrofac Annual report and accounts 2015 / 99
Governance Directors’ remuneration report continued
Consideration by the Directors of matters
relating to Directors’ remuneration
Support for the Committee
During the year, the Committee received independent advice
on executive remuneration matters from Deloitte LLP (Deloitte).
Deloitte were formally appointed as advisers by the Committee
in October 2005, following a recommendation from the
Non-executive Chairman at the time. Deloitte is a member
of the Remuneration Consultants Group and, as such,
voluntarily operates under the code of conduct in relation
to executive remuneration consulting in the UK.
The Committee has reviewed the advice provided by Deloitte during
the year and is satisfied that it has been objective and independent.
Total fees received by Deloitte in relation to the remuneration advice
provided to the Committee during 2015 amounted to £97,035
based on the required time commitment. During 2015, Deloitte
also provided other tax and financial advisory services and a
secondee who assisted in routine internal finance functions.
The individuals listed in the table below, none of whom were
Committee members, materially assisted the Committee in
considering executive remuneration and attended at least part
of one meeting by invitation during the year:
Attendee
Position
Comments
Rijnhard van Tets
Chairman of Board
Ayman Asfari
Cathy McNulty
Group Chief Executive
Group Director of HR
Mary Hitchon
Secretary to the Board
Carol Arrowsmith
Bill Cohen
Deloitte LLP
Deloitte LLP
To provide
context for
matters under
discussion
Secretary to
Committee
Adviser
Adviser
None of the individuals attended part of any meeting in which their
own compensation was discussed.
Governance
The Board and the Committee consider that, throughout 2015
and up to the date of this report, the Company has complied
with the provisions of the UK Code relating to Directors’
remuneration. In addition, the guidelines issued by the Investment
Association (IA) and the Pensions and Lifetime Savings Association
(PLSA) have been noted. The Committee endeavours to consider
executive remuneration matters in the context of alignment with
risk management and, during the year, had oversight of any
related factors to be taken into consideration. The Committee
believes that the remuneration arrangements in place do not
raise any health and safety, environmental, social or ethical
issues, nor inadvertently motivate irresponsible behaviour.
External board appointments
Executive Directors are normally entitled to accept one non-
executive appointment outside the Company with the consent
of the Board. Any fees received may be retained by the Director.
As at the date of this report, Tim Weller is a non-executive director
with The Carbon Trust and G4S plc, for which he received £17,000
and £79,375 respectively in fees during the year.
Shareholder voting
The table below outlines the result of the advisory vote on the 2014
Directors’ Remuneration Report received at the 2015 AGM.
Annual Report on Remuneration
Number of votes cast
(excluding abstentions)
251,062,093
For
Against
Abstentions
250,283,790
778,303
2,174,932
99.69%
0.31%
The Committee is pleased to note that over 99% of shareholder
votes approved the 2014 Directors’ Remuneration Report. Since
our listing in October 2005, we have received at least 95% support
for the Directors’ Remuneration Report at all AGMs (excluding
abstentions) and the Committee would like to take this opportunity
to thank shareholders for their support over this period.
The table below outlines the result of the advisory vote on the 2013
Policy Report received at the AGM held on 15 May 2014.
Remuneration Policy Report
Number of votes cast
(excluding abstentions)
226,175,875
For
Against
Abstentions
175,228,016
50,947,859
26,723,606
77.47%
22.53%
The Company submitted its Remuneration Policy Report to
shareholders as an advisory resolution at the 2014 AGM. As the
Company does not benefit from the statutory protections of the UK
Companies Act 2006, some of the provisions set out in the regulations
were therefore not fully adopted, which resulted, we believe, in the
slightly lower votes in favour of the resolution. Consultation with
key institutions took place during 2014 and the Company is aware
of the matters raised. The Committee intends to keep these
concerns under consideration when our policy is next reviewed.
Availability of documentation
Service contracts and letters of appointment for all Directors are
available for inspection by any person at our registered office in
Jersey and at our corporate services office in London. They will
also be available for inspection during the 30 minutes prior to the
start of our AGM to be held in London in May 2016.
Annual General Meeting
As set out in my statement on page 91, with consideration to the
new remuneration reporting regulations, our Annual Report on
Remuneration will be subject to an advisory shareholder vote at
the AGM to be held on 19 May 2016.
On behalf of the Board
Thomas Thune Andersen
Chairman of the Remuneration Committee
23 February 2016
100 / Petrofac Annual report and accounts 2015
Policy report
Looking forward
Our Directors’ Remuneration Policy (the ‘Policy’) was approved by shareholders at the AGM held on 15 May 2014 for a period of
up to three years. In order to provide the context in which individual remuneration decisions have been made during the year, the
approved policy table, and notes to the table, have been included below. The full Remuneration Policy, as approved, is available at
www.petrofac.com/remuneration. The policy for Executive Directors is designed in line with the remuneration philosophy and principles
that underpin remuneration for the wider Group and all our reward arrangements are built around common objectives and principles.
As a Jersey-incorporated company, Petrofac does not have the benefit of the statutory protections afforded by the UK Companies
Act 2006. While the Policy Report was not submitted as a binding resolution at the 2014 AGM, the Committee considers the vote of
shareholders to be binding in its application. However, if there is any inconsistency between the Company’s Policy Report (as approved
by shareholders) and any contractual entitlement or other right of a Director, the Company may be obliged to honour that existing
entitlement or right.
Fixed remuneration
Element/Purpose
and link to strategy
Salary
Core element
of remuneration,
paid for doing
the expected
day-to-day job
Benefits
Provide employees
with market
competitive benefits
Performance measures
• None
Operation
Maximum opportunity
• The Committee takes into consideration a
number of factors when setting salaries,
including (but not limited to):
– size and scope of the individual’s
responsibilities;
– the individual’s skills, experience and
performance;
– typical salary levels for comparable roles
within appropriate pay comparators; and
• Whilst there is no maximum salary level, any
increases will normally be broadly in line with
the wider employee population within the
relevant geographic area.
• Higher increases may be made under
certain circumstances, at the Committee’s
discretion. For example, this may include:
– increase in the scope and/or responsibility
of the individual’s role; and
– pay and conditions elsewhere in
– development of the individual within
the Group.
the role.
• Basic salaries are normally reviewed at the
• In addition, where an Executive Director
beginning of each year, with any change usually
being effective from 1 January.
has been appointed to the Board at a lower
than typical salary, larger increases may be
awarded to move them closer to market
practice as their experience develops.
• None
• Whilst no maximum level of benefits is
prescribed, they are generally set at an
appropriate market competitive level,
taking into account a number of factors,
which may include:
– the jurisdiction in which the individual
is based;
– the level of benefits provided for other
employees within the Group; and
– market practice for comparable roles
within appropriate pay comparators.
• The Committee keeps the benefit policy
and benefit levels under regular review.
• UK-based Executive Directors receive
benefits which typically may include
(but are not limited to) private health
insurance for the Executive Director and
their family, life assurance and long-term
disability insurance.
• UAE-based Executive Directors receive
similar benefits to UK-resident Executive
Directors and in addition receive other
typical expatriate benefits, which may
include (but are not limited to) children’s
education, return flights to their permanent
home and appropriate insurance
arrangements.
• Where Executive Directors are required to
relocate, the Committee may offer additional
expatriate benefits, if considered appropriate.
• UK-based Executive Directors are also
eligible to participate in any tax-approved
all employee share plans operated by the
Company on the same basis as other eligible
employees. Petrofac currently operates
a Share Incentive Plan in the UK.
Petrofac Annual report and accounts 2015 / 101
Governance Directors’ remuneration report continued
Element/Purpose
and link to strategy
Operation
Cash allowance in
lieu of pension and
other benefits
Provide employees
with an allowance
for benefits and
retirement planning
• UK-resident Executive Directors receive a
cash allowance in place of certain benefits
including, but not limited to, car allowances
and pension contributions.
• UAE-resident Executive Directors receive
a cash allowance in respect of housing,
utilities and transport, in line with local
market practice.
End of service
indemnity
Paid to UAE-based
Executive Directors
only, in order to
comply with local
UAE statute
• A statutory end of service payment is
due to all non-UAE national employees
working in the UAE at the end of their
contracted employment.
• The Company accrues an amount each
year in order to satisfy this indemnity
when it falls due.
Pension
No Executive Director
currently participates
in a formal pension
arrangement
• Executive Directors receive a cash allowance
in lieu of pension provision (see above).
• The Company operates defined contribution
pension arrangements across the Group.
In line with legal requirements, the Company
offers participation in the UK pension plan to
its UK-based Executive Directors. However,
both current UK-based Executive Directors
chose to opt out of these arrangements and,
as such, continue to receive a cash
allowance in lieu of pension provision.
Maximum opportunity
Performance measures
• Whilst there is no maximum level of cash
• None
allowance prescribed, in general, the levels
provided are intended to be broadly market
typical for role and geographic location.
• The levels of cash allowance provided are
kept under regular review by the Committee.
• Normally, in determining any increase to
cash allowances, the Committee will have
regard to the rate of increase in the cost of
living in the local market and other
appropriate indicators.
• The statutory payment is based on the
• None
individual’s number of years of service and
salary level at the time of their departure.
• None
• Although both current UK-based Executive
Directors have opted to receive a cash
allowance in lieu of pension provision,
this position is kept under review.
• As the Committee would want to conduct a
thorough review prior to Executive Directors
joining a Group pension arrangement,
it would not be appropriate to provide a
maximum level of pension provision at this
time. However, if this did occur, the level of
provision would typically be dependent on
seniority, the cost of the arrangements,
market practice and pension practice
elsewhere in the Group.
102 / Petrofac Annual report and accounts 2015
Operation
Maximum opportunity
Performance measures
Variable remuneration
Element/Purpose
and link to strategy
Annual bonus
Incentivise delivery of
the business plan on
an annual basis
Rewards performance
against key
performance indicators
which are critical to
the delivery of our
business strategy
• Delivery in cash.
• Awards based on performance
in the relevant financial year.
• Performance measures are
set annually and pay-out
levels are determined by the
Committee after the year end,
based on performance against
those targets.
• Maximum bonus opportunity
• The precise bonus targets are set by the
of 200% of basic salary.
Committee each year, taking into account
a number of internal and external reference
points, including the Company’s key strategic
objectives for the year.
• When setting these targets, the Committee
ensures that they are appropriately stretching
in the context of the business plan and that
there is an appropriate balance between
incentivising Executive Directors to meet
financial targets for the year and to deliver
specific non-financial, strategic, operational
and personal goals. This balance allows the
Committee to effectively reward performance
against the key elements of our strategy.
• Measures used typically include (but are not
limited to):
– HSE and integrity measures;
– financial measures;
– Group and/or business service line
strategic and operational performance
measures; and
– people-related measures.
• Normally, each of these measures will
have a broadly equal weighting but the
Committee will keep this under review on
an annual basis.
• Typically, 30% of the maximum opportunity
is paid for ‘threshold’ performance, i.e. the
minimum level of performance which results
in a payment.
Share Incentive
Plan1 (SIP)
Encourage long-term
shareholding and to
align the interests of
UK employees with
shareholders
• Participants may invest
gross salary to purchase
ordinary shares.
• The Company does not make
awards of Matching, Free or
Dividend Shares under the SIP.
• None
• Participants may invest up to
the prescribed HMRC limits
in operation which is currently
£1,800 gross salary per
tax year.
1 The Committee may, in the event of any variation of the Company’s share capital, demerger, delisting, or other event which may affect the value of awards, adjust or amend
the terms of awards in accordance with the rules of the relevant share plan. In the case of the SIP, any required changes may be subject to HMRC approval.
Petrofac Annual report and accounts 2015 / 103
Governance Directors’ remuneration report continued
Element/Purpose
and link to strategy
Performance
Share Plan1
Incentivise Executive
performance over the
longer term
Rewards the
delivery of targets
linked to the long-term
strategy of the business,
and the creation of
shareholder value over
the longer term
Operation
Maximum opportunity
Performance measures
• Award levels are determined
by reference to individual
performance prior to grant.
• Vesting of awards is dependent
on achievement of stretching
three-year performance targets.
• At vesting, the Committee
considers if the Company’s
TSR is a genuine reflection
of the underlying Company
performance and may reduce
or cancel the portion of award
subject to TSR if it considers
it appropriate.
• Awards are normally made in
the form of conditional share
awards, but may be awarded
in other forms if appropriate
(such as nil cost options).
Awards may also be satisfied
in cash.
• Additional shares are accrued
in lieu of dividends and paid
on any shares which vest.
• The Committee may adjust or
amend the terms of the awards
in accordance with the plan
rules.
• New PSP rules were approved
by shareholders at the 2014
AGM. All PSP awards now
incorporate malus and clawback
provisions, such that the
Committee may reduce or
cancel unvested awards or
require repayment of amounts
already paid out at any time up
to the second anniversary of the
vesting date of the relevant
award, in a number of specific
circumstances, including:
– material misstatement of
financial results;
– material failure of risk
management;
– material breach of any
relevant health and safety or
environment regulations; and
– serious reputational damage
to the Company (or any
Group member).
• The maximum award that
can be granted in respect
of a financial year of the
Company under the PSP is
200% of basic salary (or in
circumstances which the
Committee deems to be
exceptional, awards up to
300% of base salary can
be granted).
• Awards vest based on three-year
performance against a combination of
financial and share price performance
measures. The ultimate goal of the
Company’s strategy is to provide long-term
sustainable returns to shareholders. The
Committee strives to do this by aligning
the performance measures under the PSP
with the long-term strategy of the Company
and considers that strong performance
under the chosen measures should result
in sustainable value creation:
– financial measure – to reflect the financial
performance of our business and a direct
and focused measure of Company
success. The Committee sets targets to
be appropriately stretching, with regard
to a number of internal and external
reference points.
– share price performance measure –
a measure of the ultimate delivery of
shareholder returns. This promotes
alignment between Executive Director
reward and the shareholder experience.
Targets are set with reference to wider
market practice and positioned at a level
which the Committee considers to
represent stretching performance.
• Normally the weighting would be split equally
across these two measures.
• For ‘threshold’ levels of performance under
the financial performance measure, 0% of the
award vests, increasing to 100% of the award
for maximum performance.
• For ‘threshold’ levels of performance
under the share price performance measure,
30% of the award vests, increasing to 100%
of the award for maximum performance.
• The Committee sets targets each year,
achievement of which it considers would
represent stretching performance in the
context of the business plan.
• The Committee may amend the performance
conditions applicable to an award if events
happen which cause the Committee to
consider that it fails to fulfil its original
purpose and would not be materially less
difficult to secure.
1 The Committee may, in the event of any variation of the Company’s share capital, demerger, delisting, or other event which may affect the value of awards, adjust or amend
the terms of awards in accordance with the rules of the relevant share plan. In the case of the SIP, any required changes may be subject to HMRC approval.
104 / Petrofac Annual report and accounts 2015
Related pages
Our strategic review
p20
Directors’ information
p70
Notes to the policy table
Legacy matters
The Committee can make remuneration payments and payments for loss of office outside of the Policy set out above, where the
terms of the payment were agreed before the Policy came into effect, or at a time when the relevant individual was not a Director of the
Company (provided that, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director
of the Company). This includes the exercise of any discretion available to the Committee in connection with such payments. For these
purposes, payments include the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the
terms of the payment are agreed at the time the award is granted.
In relation to the Company’s recruitment policy for new appointments to the Board, full details of which are available at
www.petrofac.com/remuneration, the Committee will have regard to the best interests of both Petrofac and its shareholders
when agreeing remuneration arrangements and remains conscious of the need to pay no more than is necessary, particularly when
determining buy-out arrangements.
Non-executive Directors
Element/Purpose
and link to strategy
Operation
Opportunity
Performance measures
Non-executive
Director (NED) fees
Core element of
remuneration, paid
for fulfilling the
relevant role
• NEDs receive a basic annual fee (paid
• Current fee levels can be found in the Annual
• None
quarterly) in respect of their Board duties.
Report on Remuneration on page 99.
• Fees are set at a level which is considered
appropriate to attract and retain the calibre
of individual required by the Company.
• Fee levels are normally set by reference to
the level of fees paid to NEDs serving on
boards of similarly sized, UK-listed
companies and the size, responsibility
and time commitment required of the role.
• The Company’s Articles of Association
provide that the total aggregate
remuneration paid to the Chairman and
NEDs will be within the limits set by
shareholders. The current aggregate limit
of £1 million was approved by shareholders
at the 2011 AGM.
• Further fees are paid to NEDs
in respect of chairmanship of Board
Committees and as Senior Independent
Director. No fees are paid for membership
of a Board committee.
• The Non-executive Chairman receives an
all-inclusive fee for the role.
• The remuneration of the Non-executive
Chairman is set by the Remuneration
Committee.
• The Board as a whole is responsible for
determining NED fees. These fees are the
sole element of NED remuneration. NEDs
are not eligible for annual bonus, share
incentives, pensions or other benefits.
• Fees are typically reviewed annually.
• Expenses incurred in the performance
of duties for the Company may be
reimbursed or paid for directly by the
Company, as appropriate, including any
tax due on the payments.
Minor amendments
The Committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative
purposes or to take account of a change in legislation) without obtaining shareholder approval for that amendment.
Petrofac Annual report and accounts 2015 / 105
Governance Directors’ remuneration report continued
Illustration of the Remuneration Policy
Petrofac’s remuneration arrangements have been designed to
ensure that a significant proportion of pay is dependent on the
delivery of stretching short and long-term performance targets,
aligned with the creation of sustainable shareholder value. The
Committee considers the level of remuneration that may be
received under different performance outcomes to ensure that
this is appropriate in the context of the performance delivered
and the value added for shareholders.
The charts opposite provide illustrative values of the remuneration
package in 2016 for Executive Directors under three assumed
performance scenarios:
Assumed performance
Assumptions used
Fixed pay
All performance
scenarios
Variable pay Minimum
performance
Performance in line
with expectations
Maximum
performance
• Consists of total
fixed pay, including
base salary and
cash allowance (as at
1 January 2016) and
benefits (as received
during 2015)
• No pay-out under the
annual cash bonus
• No vesting under the
Performance Share Plan
• 50% of the maximum
pay-out under the
annual cash bonus
(i.e. 100% of salary)
• 30% vesting under
the Performance
Share Plan
(i.e. 60% of salary)
• 100% of the maximum
pay-out under the
annual cash bonus
(i.e. 200% of salary)
• 100% vesting under the
Performance Share Plan
(i.e. 200% of salary)
1 We have used a maximum PSP award opportunity of 200% of base salary,
in line with the usual maximum award under the plan rules. Please note that in
circumstances which the Committee deems to be exceptional, awards up to
300% of base salary may be made.
Performance Share Plan awards have been shown at face
value, with no share price growth or discount rate assumptions.
All-employee share plans have been excluded, as have any
legacy awards held by Executive Directors. For UK-based
Executive Directors who are paid in sterling, amounts have been
translated to US dollars based on the average exchange rate
for 2015 of £1:US$1.53125.
These charts provide illustrative values of the remuneration
package in 2016. Actual outcomes may differ from those shown:
Group Chief Executive – Ayman Asfari
All figures expressed as a % of total
Salary
Benefits
Cash Allowance
US$000
US$995
US$60
US$107
Fixed remuneration US$1,162
PSP
Annual bonus
Fixed remuneration
US$5,143
39%
39%
US$2,755
22%
36%
US$1,162
100%
42%
22%
Below
threshold
Target Maximum
Group Chief Operating Officer – Marwan Chedid
All figures expressed as a % of total
Salary
Benefits
Cash Allowance
US$000
US$685
US$6
US$246
Fixed remuneration US$937
PSP
Annual bonus
Fixed remuneration
Chief Financial Officer – Tim Weller
All figures expressed as a % of total
Salary
Benefits
Cash Allowance
US$000
US$704
US$1
US$107
Fixed remuneration US$812
PSP
Annual bonus
Fixed remuneration
US$3,677
37%
37%
26%
US$2,033
20%
34%
46%
Target Maximum
US$937
100%
Below
threshold
US$3,630
39%
39%
22%
US$1,940
22%
36%
42%
Target Maximum
US$812
100%
Below
threshold
106 / Petrofac Annual report and accounts 2015
Directors’ statements
Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and
the Financial Statements in accordance with applicable law and
regulations. The Directors have chosen to prepare the financial
statements in accordance with International Financial Reporting
Standards (IFRS). The Directors are also responsible for the
preparation of the Directors’ remuneration report, which they
have chosen to prepare, being under no obligation to do so under
Jersey law. The Directors are also responsible for the preparation
of the corporate governance report under the Listing Rules.
Jersey Company law (the ‘Law’) requires the Directors to prepare
financial statements for each financial period in accordance with
generally accepted accounting principles. The financial statements
are required by law to give a true and fair view of the state of affairs
of the Company at the period end and of the profit or loss of the
Company for the period then ended. In preparing these financial
statements, the Directors should:
• Select suitable accounting policies and then apply
them consistently
• Make judgements and estimates that are reasonable
• Specify which generally accepted accounting principles
have been adopted in their preparation and
• Prepare the financial statements on a going concern basis
unless it is inappropriate to presume that the Company will
continue in business
The Directors are responsible for keeping proper accounting
records which are sufficient to show and explain the Company’s
transactions and to disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements prepared by the Company comply
with the requirements of the Law. They are also responsible for
safeguarding the assets of the Group and Company and hence
for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in Jersey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Directors’ approach
The Board’s objective is to present a fair, balanced and
understandable assessment of the Company’s position and
prospects, particularly in the Annual Report, Half year results
announcement and other published documents and reports to
regulators. The Board has established an Audit Committee to
assist with this obligation.
Going concern
The Company’s business activities, together with the factors likely
to affect its future development, performance and position are
set out in the Strategic Report on pages 14 to 23. The financial
position of the Company, its cash flows, liquidity position and
borrowing facilities are described in the financial review on pages
46 to 49. In addition, note 31 to the financial statements includes
the Company’s objectives, policies and processes for managing
its capital; its financial risk management objectives; details of its
financial instruments and hedging activities; and its exposures to
credit risk and liquidity risk.
The Company has considerable financial resources together
with long-term contracts with a number of customers and
suppliers across different geographic areas and industries.
As a consequence, the Directors believe that the Company is well
placed to manage its business risks successfully. The Directors
have a reasonable expectation that the Company has adequate
resources to continue in operational existence for the foreseeable
future. Thus they continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
Responsibility statement under the Disclosure
and Transparency Rules
Each of the Directors listed on pages 70 and 71 confirms that,
to the best of their knowledge:
• The Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Company’s
performance, business model and strategy;
• The financial statements, prepared in accordance with IFRS,
give a true and fair view of the assets, liabilities, financial position
and profit of the Company and the undertakings included in the
consolidation taken as a whole; and
• The Strategic Report contained on pages 1 to 67 includes a fair
view of the development and performance of the business and
the position of the Company and the undertakings included in
the consolidation taken as a whole, together with a description
of the principal risks and uncertainties that they face.
By order of the Board
Tim Weller
Chief Financial Officer
Petrofac Annual report and accounts 2015 / 107
Governance GROUP
FINANCIAL
STATEMENTS
109
117
118
119
120
121
122
Independent auditor’s report to
the members of Petrofac Limited
Consolidated income statement
Consolidated statement of other
comprehensive income
Consolidated statement
of financial position
Consolidated statement
of cash flows
Consolidated statement
of changes in equity
Notes to the consolidated
financial statements
108 / Petrofac Annual report and accounts 2015
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Independent auditor’s report to the members of Petrofac Limited
This report is made solely to the Company’s members, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991
and engagement letter dated 9 November 2015.
Our opinion on the financial statements
In our opinion Petrofac Limited’s financial statements (the “financial statements”):
• give a true and fair view of the state of the Group and of the Parent Company’s affairs as at 31 December 2015 and of the Group’s
loss and Parent Company’s profit for the year then ended;
• have been properly prepared in accordance with International Financial Reporting Standards (IFRSs); and
• have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991.
Opinion on other matters requested by the Group and Company
In our opinion:
• the information given in the Strategic Report set out on pages 26 to 29 and the Governance Report set out on page 79 and pages 86
to 87 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital
structures is consistent with the financial statements;
• the information given in the Strategic Report is consistent with the Group financial statements; and
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the basis of preparation
as described therein.
What we have audited
We have audited the financial statements of Petrofac Limited which comprise:
Group
Parent company
Consolidated income statement for the year then ended
Company income statement for the year then ended
Consolidated statement of financial position as at 31 December 2015 Company statement of financial position as at 31 December 2015
Consolidated statement of other comprehensive income
for the year then ended
Company statement of other comprehensive income
for the year then ended
Consolidated statement of changes in equity for the year then ended Company statement of changes in equity for the year then ended
Consolidated statement of cash flows for the year then ended
Company statement of cash flows for the year then ended
Related notes 1 to 32 to the financial statements
Related notes 1 to 21 to the financial statements
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs.
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Petrofac Annual report and accounts 2015 / 109
Financial statements Independent auditor’s report to the members of Petrofac Limited continued
Our assessment of risk of material misstatement
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy,
the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed
the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express
any opinion on these individual areas.
What we concluded to the
Audit Committee
We concluded that revenue
and margin recognised in the
year is materially correct on
the basis of our procedures
performed both at group and
by component audit teams.
Risk
Our response to the risk
Revenue and margin recognition –
including ECOM long term contracts
Refer to the Audit Committee Report
(page 88); Accounting policies (page 123
and 131); and Note 4 of the Consolidated
financial statements (page 136)
ECOM
Accounting for ECOM long term contracts
requires significant management judgement
and estimation which increases the risk of
bias or error.
Significant management judgement is
required in recognising revenue on
fixed-price engineering, procurement and
construction contracts and estimation is
applied in recognising variation orders,
project costs-to-complete and provisions for
liquidated damages. These judgements are
also subject to the risk of management
override of controls in place.
For operation and maintenance contracts
based on achievement of KPI’s, there is
estimation involved in the assessment of the
appropriate timing of revenue recognition.
IES
The complex and material nature of
arrangements that exist in IES increases the
likelihood and magnitude of potential
statement in revenue recognition.
Significant management judgement and
precision is required to accurately recognise
revenue on the different commercial assets.
The component audit team based in the UAE with close
oversight from the primary audit engagement team performed
the following:
• The appropriate recognition and timing of variation orders (VOs).
We verified whether VOs recognised in revenue met the conditions
prescribed under IAS 11. We discussed the judgements made
in the timing of VOs being recognised. For assessed VOs still in
negotiation for a significant period of time, we discussed with
and challenged management on the likelihood of client approval
and obtained representations where necessary.
• The potential for liquidated damages. We analysed projects
behind schedule and discussed with management the likelihood
of the liquidated damages claims being levied. We obtained
correspondence with clients and verified the consistency of
application across contracts.
• The adequacy of contingency provisions. We verified whether
provision releases were recognised in line with Group accounting
policy. We analysed contingency movements throughout the life of
the contract and through discussion, challenged individual project
directors on whether remaining contingency is sufficient to cover
residual risks on the project.
• Determination of the percentage of completion. We obtained
an understanding of milestones agreed with the customers
and systems in place to split the contracts into their component
parts. We analysed the impact of VOs in establishing
completion percentage.
• Assessment of costs-to-complete. We tested controls around the
cost estimation process, tested the historical accuracy of previous
forecasts and discussed with project directors and cost
controllers. We also verified that costs were correctly accrued at
period end and costs-to-complete accurately reflected productivity
and latest rates. Particular focus was placed on the Laggan-
Tormore contract.
• Accounting for consortium contracts. We obtained material contracts,
tested the timing of revenue recognised and verified that correct
joint arrangement accounting was applied. We investigated any
legal disputes between consortium partners.
• Contracts based on KPIs. We discussed management’s
estimation of milestones and KPIs achieved and verified whether
revenue was recognised in the correct period.
• IES contracts – Where applicable, we reconciled barrels lifted per
entitlement to revenue recognised on these assets. For tariff based
remuneration structures, we vouched monthly revenue to the
production data reports which determine revenue under the
contract. For the risk services contract, we tested the related
operating expenditure for the year which determines the revenue
recognised on the operating phase of the contract.
110 / Petrofac Annual report and accounts 2015
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Risk
Our response to the risk
What we concluded to the
Audit Committee
We concluded that the results
of impairment and fair value
re-measurements in respect
of IES assets and the JSD6000
are complete and accurate
and that the carrying values
presented at 31 December
2015 are materially correct.
The primary audit team performed audit procedures on financial
models for assets accounted at fair value and for those IES assets
where impairment indications existed.
We obtained the respective discounted cash flow models and
tested key assumptions.
• We compared forecast oil and gas price curves with the market
data, and tested for reasonableness the longer term oil and
gas prices;
• We compared planned future operating and capital expenditure
and production profiles with those used in prior periods and met
with Company reserves assurance personnel to understand
the key cost and reserve assumptions used;
• We used an internal EY valuation specialist to assist with our
consideration of the discount rate;
• We identified key judgements in respect of the outcome of
commercial negotiations and discussed with management
and corroborated with written communication.
We discussed with management and understood the future plans
related to resuming construction of the JSD6000 and corroborated
to recent documentation.
We utilised taxation specialists in our London team to identify
jurisdictions to be included in audit scope. We also involved
local tax specialists in the relevant jurisdictions where we deemed
it necessary.
We identified and discussed tax exposures estimated by
management, obtained the risk analysis associated with these
exposures along with claims or assessments made by tax
authorities to date.
We also tested the calculation and disclosure of current and
deferred tax to ensure compliance with local tax rules and the
Group’s accounting policies.
We corroborated management’s assessment of the likelihood
of the realisation of deferred tax balances by analysing future
business performance.
We concluded that
management’s judgements
in relation to current and
deferred income tax balances
were sound and resulted
in a materially correct
presentation in the Group
financial statements.
Potential impairment and fair value
change of IES assets and JSD6000
Refer to the Audit Committee Report
(page 88); Accounting policies (page 128);
and Note 5 of the Consolidated financial
statements (page 138)
IES assets
The low oil price environment has a
significant impact on the current and
future financial performance of IES. It also
influences the level of investment in the
industry and demand for Petrofac services.
The oil price is a key assumption in the oil
and gas assets impairment testing and
financial asset revaluations.
In addition, the IES business has not met
its stretching growth targets and in some
cases has not performed in line with the
initial investment case. This has impacted
the recoverable amount of assets within
the business. Operational challenges on
certain IES projects have resulted in IES
performance being weaker than forecast.
JSD6000
Petrofac has terminated the construction
contract for JSD6000 and is appraising
proposals for an alternative shipyard,
which poses a risk that the value of the
vessel may not be recoverable if the
project does not proceed.
Taxation
Refer to the Audit Committee Report
(page 88); Accounting policies (page 132);
and Note 7 of the Consolidated financial
statements (page 139)
The wide geographical spread of the
Group’s operations, the complexity of
application of local tax rules in many
different jurisdictions and transfer pricing
risks affecting the allocation of income
and costs charged between jurisdictions
and businesses increase the risk of
misstatement of tax balances.
The assessment of tax exposures by
management requires judgement given
the structure of individual contracts and the
increasing activity of tax authorities in the
jurisdictions in which Petrofac operates.
Furthermore, the recognition of deferred tax
assets and liabilities needs to be performed
regularly to ensure that any changes in local
tax laws and profitability of associated
contracts are appropriately considered.
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Petrofac Annual report and accounts 2015 / 111
Financial statements Independent auditor’s report to the members of Petrofac Limited continued
What we concluded to the
Audit Committee
We reported to the Committee
at the August 2015 interim
review that we were satisfied
on qualitative and quantitative
grounds, and after taking into
account the level of disclosures
made in the interim and full
year financial statements, that
no restatement was necessary.
We updated this analysis and
reached the same conclusion
as at 31 December 2015.
We reported that we concur
with the Group’s disclosures
in relation to the significant
weakness in internal controls
relating to this contract.
In respect of liquidated damages,
we are satisfied that judgement
not to book a provision has
been based on appropriate
analysis and is reasonable
in the circumstances.
We have completed our
planned procedures on the
costs-to-complete and are
satisfied that the basis upon
which the contract losses have
been calculated was rigorous
and these losses are materially
stated at 31 December 2015.
Risk
Our response to the risk
Potential prior year adjustment
We discussed and evaluated management’s quantitative and
qualitative analysis of amounts relating to prior periods and, whilst
judgemental, we considered that assessment to be reasonable.
The estimated impact on profit before tax in the prior period was
4.5% to 9.5% before exceptional items. Further, we assessed the
following qualitative factors:
• The total losses on Laggan-Tormore, which at 31 December 2015
exceed US$600m
• Impact on prior year net assets of 2.8%
• The lack of impact on banking covenants, management
remuneration, and historical trends and
• The level of disclosure made by the Company in the interim
and full year financial statements
After considering carefully the nature and the quantum of the
estimated amounts relating to prior period, and qualitative
significance of the adjustment, we concurred with the directors
that these amounts, whilst significant, were not material and the
prior period financial statements did not require restating.
The estimated impact on prior periods has been charged to
the income statement in the current period and the Group has
separately identified losses on this contract as a separate item.
We concurred with this accounting treatment and with the detailed
disclosures made in the financial statements about the impact
of the misstatement on the prior periods’ financial statements.
Internal controls
We concur with the Company that there existed a significant
deficiency in internal controls intended to mitigate material
misstatements on the Laggan-Tormore contract. We have
considered the mitigating actions taken and have assigned
further resources to ensure these actions appropriately reduce
the risk of further misstatements on this contract.
Costs-to-complete
We have also assigned further resources to audit, in detail, the
costs-to-complete on this contract at year end. This includes
obtaining detailed schedules, challenging key elements to the costs,
including expected recoveries, reconciliation of vendor statements
and holding discussions with senior management to corroborate
the assumptions made.
Liquidated damages
We have discussed the likelihood of being levied with liquidated
damages with senior management and the Audit Committee,
and obtained supporting evidence for this judgement.
Laggan-Tormore related matters
Refer to the Audit Committee Report
(page 88) and Note 2 of the Consolidated
financial statements (page 125)
Potential prior year restatement
The Board commissioned KPMG to carry
out a review of the circumstances leading
up to the 19 April 2015 market update on
the Laggan-Tormore project with a view
to identifying the issues for consideration
relating to the incremental losses and their
effect on the prior year.
The Group has stated in its financial statements
that its losses on Laggan-Tormore recognised
in the prior year were understated by
between US$27m and US$57m after tax.
The Directors have concluded that no
restatement of the 2014 reported results
is required. In reaching this conclusion,
the Directors considered the quantum
of the prior year overstatement of profit
in conjunction with relevant qualitative
considerations. These are further explained
in note 2 to the financial statements.
Internal controls
In light of the challenges faced by the
Company in concluding on the appropriate
recognition of losses on the Laggan-Tormore
contract, it was identified that this may
represent a significant deficiency in
internal controls. The Audit Committee
has concluded that such a deficiency
existed in 2015 and has implemented
mitigating actions in the 2015 year end
reporting process.
Costs-to-complete
As the contract is nearing completion at year
end, and in light of the control weaknesses
above, there is a heightened risk of material
misstatement in determining the remaining
costs-to-complete of the project at year end.
Liquidated damages
The Group has made a significant judgement
in determining whether potential liquidated
damages arising from contract delays will
be successfully pursued by the customer,
and no provision has been recorded in
the current year.
112 / Petrofac Annual report and accounts 2015
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In the prior year, our auditor’s report included a risk of material misstatement in relation to initial recognition and determination of subsequent
accounting at inception for contracts in the Integrated Energy Services segment of the business. In the current year, this risk has been
removed because no new contracts have been entered into during 2015 which require determination of initial accounting.
In the prior year, our auditor’s report included a risk of material misstatement in relation to revenue and margin recognition related to
ECOM contracts only. In the current year, this revenue recognition risk has been expanded and now also includes revenue recognition
of existing IES contracts. Due to the decreased level of materiality in the current year, IES contracts have a relatively greater significance
to the financial statements.
In the current year, we have also included a risk of potential impairment of the JSD6000 vessel due to the termination of the shipyard
contract for this vessel in October.
The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for
each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into
account size, risk profile, the organisation of the group and effectiveness of group-wide controls, changes in the business environment
and other factors when assessing the level of work to be performed at each entity.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage
of significant accounts in the financial statements, we selected 13 components covering entities within Jersey, Malaysia, Mexico,
United Kingdom, Tunisia and the United Arab Emirates, which represent the principal business units within the Group.
Of the 13 components selected, we performed an audit of the complete financial information of 8 components (“full scope
components”) which were selected based on their size or risk characteristics. For another 2 components (“specific scope components”),
we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest
impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. For 1
component (“review scope component”), we primarily performed analytical procedures and inquiries of management. For the remaining
2 components (“specified procedures scope components”) we performed procedures on fixed assets and financial assets balances
only. The audit scope for specified procedures are those where we perform procedures that address only specific account assertions
rather than the account balance as a whole.
The reporting components where we performed full scope audit procedures accounted for 89% (2014: 95%) of the Group’s profit before
tax, Laggan-Tormore related losses and exceptional items, 90% (2014: 65%) of the Group’s revenue and 89% (2014: 76%) of the Group’s
total assets. The audit scope of specific scope components did not include testing of all significant accounts of the component but will
have contributed to the coverage of significant accounts tested for the Group. For the current year, the specific scope components
accounted for 3% (2014: 24%) of the Group’s revenue.
Of the remaining components that together represent 11% of the Group’s Profit before tax, Laggan Tormore related losses and
exceptional items none are individually greater than 6% of the Group for this metric. For these components, we performed other
procedures, including assessing and testing management’s group wide controls. We also performed analytical review on a component
basis and tested consolidation journals to identify the existence of, and respond to, any further risks of misstatement that could have
been material to the Group financial statements.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
Profit before tax, Laggan Tormore related losses
and exceptional items (%)
Revenue (%)
16
(5)
3 7
Total assets (%)
2
9
89
90
89
Full scope components
Specific scope components
Other procedures
Full scope components
Specific scope components
Other procedures
Full scope components
Specific scope components
Other procedures
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Petrofac Annual report and accounts 2015 / 113
Financial statements Independent auditor’s report to the members of Petrofac Limited continued
Changes from the prior year
Our scope allocation in the current year is broadly consistent with 2014 in terms of overall coverage of the Group and the number of
full and specific scope entities. However we have made some changes in the identity of components subject to full and specific scope
audit procedures. Changes in our scope since the 2014 audit included moving the OPO business in the United Kingdom from a
specific scope to a full audit scope component due to its higher proportional contribution to the Group in the current year. In light
of decreased materiality, to ensure appropriate coverage of group audit risk related to revenue recognition from a quantitative and
qualitative perspective the OPO Iraq business has been brought into scope as a specific scope component for revenue and cost
of sales (and related balance sheet accounts) in the current year.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the
components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating
under our instruction. Audit procedures were performed on the 8 full scope components by our component audit teams in Dubai (4),
Malaysia (2), Mexico (1) and Aberdeen (1). For the 2 specific scope and 2 specified procedures scope components, where the work
was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient
audit evidence had been obtained as a basis for our opinion on the Group as a whole.
The Group audit team continued to follow a programme of planned visits that has been designed to ensure that a senior member of
the team visits each of the full audit scope locations at least once a year. During the current year’s audit cycle, visits were undertaken
by the primary audit team (including a primary team audit partner) to the component teams in the United Arab Emirates (4 full scope
and 1 specific scope component), Malaysia (2 full scope components) and Mexico (1 full scope component). The Global Team Planning
Event was held in London with representatives of the teams from Aberdeen, United Arab Emirates, Mexico and Malaysia all attending.
Dependent on the timing of our visits, these involved discussion of the audit approach with the component team and any issues arising
from their work, consideration of the approach to revenue recognition, reviewing key working papers, attending the audit planning meeting
and attending the audit closing meeting, including the discussion of fraud and error. In concluding the year end audit the primary team
visited the main operating and finance location in Sharjah, UAE to perform the audit of the consolidation and financial statements and to
interact closely with the local team. The primary team interacted regularly with the component teams where appropriate during various
stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together
with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements.
Our application of materiality
The scope of our work is influenced by materiality. We apply the concept of materiality in planning and performing the audit, in evaluating
the effect of identified misstatements on the audit and in forming our audit opinion.
Materiality
For the purposes of determining whether the financial statements are free from material misstatement, we define materiality as the
magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic
decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be US$25m (2014: US$30m), which represented 5% (2014: 5%) of adjusted profit before tax.
We believe that adjusting for the items described below provides us with a consistent year on year basis for determining materiality and
is appropriate in the light of the volatile market conditions, driven by the extended decline in oil prices and exceptional cost overruns on
Laggan-Tormore contract. For 2015, these non-recurring items related to exceptional items and certain re-measurements of US$355m
(refer to Note 5 of the financial statements) and Laggan-Tormore relates losses of US$480m (refer to Note 3 of the financial statements).
These two items are subject to a combination of full scope audit procedures and specified procedures.
Starting basis
Reported pre-tax (loss)/profit – US$(335)m (2014: US$171m)
Adjustments
• Exceptional items increase basis by US$835m (2014: US$429m)
• Laggan-Tormore relates losses – US$480m
• Exceptional items and certain re-measurements – US$355m
Materiality
• Totals US$500m (2014: US$600m)
• Materiality of US$25m (2014: US$30m) (5% of materaility basis)
114 / Petrofac Annual report and accounts 2015
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Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was
that performance materiality was 50% (2014: 50%) of our planning materiality, namely US$12.5m (2014: US$15m). We have set
performance materiality at this percentage due to our past experience of the audit that indicate a higher risk of misstatements, both
corrected and uncorrected.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken
based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative
scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the
current year, the range of performance materiality allocated to components was US$2.5m to US$10.0m (2014: US$3.8m to US$10.7m).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$1.25m (2014:
US$1.5m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting
on qualitative grounds. Reclassification differences are only reported to the Audit Committee where the difference exceeds 2% of the
applicable primary financial statement line items.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other
relevant qualitative considerations in forming our opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors;
nd the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual
Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently
materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit.
If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on page 107, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion
on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
In addition the Company has also instructed us to:
• report as to whether the information given in the Corporate Governance Statement with respect to internal control and risk management
systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements;
• report whether the information given in the Strategic Report is consistent with the Group financial statements;
• report whether the section of the Directors’ Remuneration Report that is described as audited has been properly prepared in
accordance with the basis of preparation described therein; and
• review the Directors’ statement in relation to going concern as set out on page 107, and longer-term viability, as set out on page 29
which for a premium listed UK incorporated company is specified for review by the Listing Rules of the Financial Conduct Authority.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
21-Independent-auditors-report-p108-116-AN-070316.indd 115
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Petrofac Annual report and accounts 2015 / 115
Financial statements Independent auditor’s report to the members of Petrofac Limited continued
Matters on which we are required to report by exception
ISAs (UK and Ireland)
reporting
We are required to report to you if, in our opinion, financial and non-financial information
in the annual report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge
of the Group acquired in the course of performing our audit; or
• otherwise misleading.
In particular, we are required to report whether we have identified any inconsistencies between
our knowledge acquired in the course of performing the audit and the directors’ statement
that they consider the annual report and accounts taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the entity’s
performance, business model and strategy; and whether the annual report appropriately
addresses those matters that we communicated to the audit committee that we consider
should have been disclosed.
Under Companies (Jersey) Law 1991 we are required to report to you if, in our opinion:
• proper accounting records have not been kept by the parent company, or proper returns
adequate for our audit have not been received from branches not visited by us; or
• the parent company’s financial statements are not in agreement with the accounting records
and returns; or
• we have not received all the information and explanations we require for our audit.
The Company has voluntarily complied with, and has instructed us to review:
• the Directors’ statement in relation to going concern, set out on page 107, and longer-term
viability, set out on page 29. This statement is specified for review by the Listing Rules of the
Financial Conduct Authority for premium listed UK incorporated companies.
We are required to review:
• the part of the Corporate Governance Statement relating to the Company’s compliance
with the provisions of the UK Corporate Governance Code specified for our review.
Companies (Jersey)
Law 1991 reporting
Listing Rules review
requirements
We have no
exceptions
to report.
We have no
exceptions
to report.
We have no
exceptions
to report.
Statement on the Directors’ Assessment of the Principal Risks that Would Threaten the Solvency or Liquidity
of the Entity
ISAs (UK and Ireland)
reporting
We are required to give a statement as to whether we have anything material to add or to draw
attention to in relation to:
• the directors’ confirmation in the annual report that they have carried out a robust assessment
of the principal risks facing the entity, including those that would threaten its business model,
future performance, solvency or liquidity;
• the disclosures in the annual report that describe those risks and explain how they are being
managed or mitigated;
• the directors’ statement in the financial statements about whether they considered it appropriate
to adopt the going concern basis of accounting in preparing them, and their identification of any
material uncertainties to the entity’s ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements; and
• the directors’ explanation in the annual report as to how they have assessed the prospects of the
entity, over what period they have done so and why they consider that period to be appropriate,
and their statement as to whether they have a reasonable expectation that the entity will be able
to continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have
nothing material
to add or
to draw
attention to.
John Flaherty
for and on behalf of Ernst & Young LLP
London
23 February 2016
Notes:
1. The maintenance and integrity of the Petrofac Limited web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented
on the web site.
2. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
116 / Petrofac Annual report and accounts 2015
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117
Consolidated income statement
For the year ended 31 December 2015
Consolidated income statement
For the year ended 31 December 2015
Revenue
Cost of sales
Gross profit
Selling, general and administration
expenses
Exceptional items and certain re-
measurements
Other operating income
Other operating expenses
Profit/(loss) from operations before
tax and finance (costs)/income
Finance costs
Finance income
Share of profits/(losses) of
associates/joint ventures
Profit/(loss) before tax
Income tax (expense)/credit
Profit/(loss) for the year
Notes
4a
4b
4c
5
4f
4g
6
6
14
7a
Attributable to:
Petrofac Limited shareholders
Non-controlling interests
11
Earnings/(loss) per share (US cents)
on profit attributable
to Petrofac Limited shareholders
*Business
performance
US$m
6,844
(6,429)
415
(328)
–
24
(9)
102
(101)
9
10
20
(6)
14
9
5
14
Exceptional
items and certain
re-measurements
US$m
–
–
–
–
Total
2015
US$m
6,844
(6,429)
415
*Business
performance
US$m
6,241
(5,242)
999
(328)
(368)
(354)
(354)
–
–
(354)
–
–
(1)
(355)
(3)
(358)
(358)
–
(358)
24
(9)
(252)
(101)
9
9
(335)
(9)
(344)
(349)
5
(344)
–
95
(42)
684
(79)
22
7
634
(33)
601
581
20
601
Exceptional
items and certain
re-measurements
US$m
–
–
–
–
(463)
–
–
(463)
–
–
–
(463)
2
(461)
(461)
–
(461)
Total
2014
US$m
6,241
(5,242)
999
(368)
(463)
95
(42)
221
(79)
22
7
171
(31)
140
120
20
140
– Basic
– Diluted
8
8
2.65
2.65
(105.30)
(105.30)
(102.65)
(102.65)
170.38
168.99
(135.29)
(134.18)
35.09
34.81
* This measurement is shown by Petrofac as it is used as a means of measuring the underlying performance of the business, see note 2.
The attached notes 1 to 32 form part of these consolidated financial statements.
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Petrofac Annual report and accounts 2015 / 117
Financial statements
118
Consolidated statement of other comprehensive income
For the year ended 31 December 2015
Consolidated statement of other comprehensive income
For the year ended 31 December 2015
(Loss)/profit for the year
Other Comprehensive Income
Net gain on maturity of cash flow hedges recycled in the year
Net changes in fair value of derivatives and financial assets designated as cash flow hedges
Changes in fair value of available-for-sale financial asset
Foreign currency translation losses
Other comprehensive loss to be reclassified to consolidated income statement in subsequent periods
Total comprehensive (loss)/income for the year
Attributable to:
Petrofac Limited shareholders
Non-controlling interests
The attached notes 1 to 32 form part of these consolidated financial statements.
Notes
2015
US$m
(344)
2014
US$m
140
24
24
24
24
11
(11)
(47)
(16)
–
(74)
(418)
(415)
(3)
(418)
(14)
(21)
–
(22)
(57)
83
76
7
83
118 / Petrofac Annual report and accounts 2015
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119
Consolidated statement of financial position
At 31 December 2015
Consolidated statement of financial position
At 31 December 2015
Assets
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Investments in associates/joint ventures
Available-for-sale investment
Other financial assets
Income tax receivable
Deferred tax assets
Current assets
Inventories
Work in progress
Trade and other receivables
Due from related parties
Other financial assets
Income tax receivable
Cash and short-term deposits
Total assets
Equity and liabilities
Equity
Share capital
Share premium
Capital redemption reserve
Treasury shares
Other reserves
Retained earnings
Equity attributable to Petrofac Limited shareholders
Non-controlling interests
Total equity
Non-current liabilities
Interest-bearing loans and borrowings
Provisions
Other financial liabilities
Deferred tax liabilities
Current liabilities
Trade and other payables
Due to related parties
Interest-bearing loans and borrowings
Other financial liabilities
Income tax payable
Billings in excess of cost and estimated earnings
Accrued contract expenses
Total liabilities
Total equity and liabilities
Notes
2015
US$m
2014
US$m
10
12
13
14
15
16
7c
17
18
19
29
16
20
21
21
21
22
24
11
25
26
16
7c
27
29
25
16
18
30
1,775
1,698
80
107
74
169
752
8
80
115
186
71
185
790
9
34
3,045
3,088
13
1,794
2,124
2
455
10
1,104
5,502
8,547
7
4
11
(111)
(16)
1,335
1,230
2
1,232
16
1,602
2,783
2
435
18
986
5,842
8,930
7
4
11
(101)
31
1,909
1,861
10
1,871
1,270
1,710
331
659
141
273
756
151
2,401
2,890
2,510
2,670
1
520
336
113
201
1,233
4,914
7,315
8,547
3
9
317
105
265
800
4,169
7,059
8,930
The financial statements on pages 117 to 167 were approved by the Board of Directors on 23 February 2016 and signed on its behalf by Tim Weller –
Chief Financial Officer.
The attached notes 1 to 32 form part of these consolidated financial statements.
Petrofac Annual report and accounts 2015 / 119
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Financial statements
120
Consolidated statement of cash flows
For the year ended 31 December 2015
Consolidated statement of cash flows
For the year ended 31 December 2015
Notes
2015
US$m
2014
US$m
Operating activities
(Loss)/profit before tax
Exceptional items and certain re-measurements
Profit before tax, exceptional items and certain re-measurements
Adjustments to reconcile profit before tax, exceptional items and certain re-measurements to net cash flows:
Depreciation, amortisation and write off
Share-based payments
Difference between other long-term employment benefits paid and amounts recognised in the
income statement
Net finance expense
Gain arising from disposal of non-current asset
Provision for costs in excess of revenues on a contract
Share of profits of associates/joint ventures
Other non-cash items, net
5
4b, 4c
4d
26
6
4f
30
14
Working capital adjustments:
Trade and other receivables
Work in progress
Due from related parties
Inventories
Other current financial assets
Trade and other payables
Billings in excess of cost and estimated earnings
Accrued contract expenses
Due to related parties
Long-term receivables from customers
Other non-current items, net
Cash generated from operations
Restructuring, redundancy and migration costs paid
Interest paid
Income taxes paid, net
Net cash flows from operating activities
Investing activities
Purchase of property, plant and equipment
Payments for intangible oil and gas assets
Loan extended to an associate/investments in associate and joint ventures
Dividend received from associates/joint ventures
Loan in respect of the development of the Greater Stella Area
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of subsidiary, net of cash disposed
Proceeds from repayments of loans on disposal of subsidiary
Interest received
Net cash flows used in investing activities
Financing activities
Interest-bearing loans and borrowings obtained, net of debt acquisition cost
Repayment of interest-bearing loans and borrowings, including finance leases
Treasury shares purchased
Equity dividends paid, net
Net cash flows (used in)/from financing activities
Net increase in cash and cash equivalents
Net foreign exchange difference
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
The attached notes 1 to 32 form part of these consolidated financial statements.
120 / Petrofac Annual report and accounts 2015
16
16
13
14
14
16
4f
4f
22
20
(335)
355
20
200
23
15
92
(8)
48
(10)
(67)
313
605
(192)
(2)
3
55
(168)
(64)
367
(2)
915
(50)
(38)
827
(13)
(96)
(49)
669
(169)
(17)
(2)
8
(182)
2
41
–
1
(318)
171
463
634
244
22
8
57
(56)
27
(7)
(16)
913
(407)
(129)
26
–
131
441
11
(93)
(40)
853
(63)
–
790
–
(66)
(76)
648
(470)
(119)
(13)
10
(199)
2
39
220
2
(528)
985
(943)
(39)
(223)
(220)
131
(7)
977
1,101
1,696
(1,172)
(25)
(225)
274
394
(2)
585
977
22-Financials-Shareholder-p117-185-AN-070316.indd 120
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121
Consolidated statement of changes in equity
For the year ended 31 December 2015
Consolidated statement of changes in equity
For the year ended 31 December 2015
Attributable to Petrofac Limited shareholders
Issued
share
capital
US$m
Share
premium
US$m
Capital
redemption
reserve
US$m
*Treasury
shares
US$m
(note 22)
Other
reserves
US$m
(note 24)
Retained
earnings
US$m
Non-
controlling
interests
US$m
Total
US$m
Total
equity
US$m
Balance at 1 January 2015
(Loss)/profit for the year
Other comprehensive loss
Total comprehensive loss for the year
Share-based payments charge (note 23)
Shares vested during the year (note 22)
Transfer to reserve for share-based payments
(note 23)
Treasury shares purchased (note 22)
Income tax on share-based
payments reserve
Dividends (note 9)
Balance at 31 December 2015
7
–
–
–
–
–
–
–
–
–
7
4
–
–
–
–
–
–
–
–
–
4
11
(101)
31
1,909
1,861
10
1,871
–
–
–
–
–
–
–
–
–
–
–
–
–
29
–
(39)
–
–
–
(66)
(66)
23
(27)
23
–
–
–
(349)
–
(349)
–
(2)
–
–
–
(349)
(66)
(415)
23
–
23
(39)
–
(223)
(223)
11
(111)
(16)
1,335
1,230
5
(8)
(3)
–
–
–
–
–
(5)
2
(344)
(74)
(418)
23
–
23
(39)
–
(228)
1,232
Attributable to Petrofac Limited shareholders
Issued
share
capital
US$m
Share
premium
US$m
Capital
redemption
reserve
US$m
*Treasury
shares
US$m
(note 22)
Other
reserves
US$m
(note 24)
Retained
earnings
US$m
Non-
controlling
interests
US$m
Total
US$m
Total
equity
US$m
Balance at 1 January 2014
Profit for the year
Other comprehensive loss
Total comprehensive income for the year
Share-based payments charge (note 23)
Shares vested during the year (note 22)
Transfer to reserve for share-based payments
(note 23)
Treasury shares purchased (note 22)
Income tax on share-based
payments reserve
Dividends (note 9)
Balance at 31 December 2014
7
–
–
–
–
–
–
–
–
–
7
4
–
–
–
–
–
–
–
–
–
4
11
(110)
63
2,014
1,989
3
1,992
–
–
–
–
–
–
–
–
–
–
–
–
–
34
–
(25)
–
–
–
(44)
(44)
22
(33)
24
–
(1)
–
120
–
120
–
(1)
–
–
–
120
(44)
76
22
–
24
(25)
(1)
(224)
(224)
20
(13)
7
–
–
–
–
–
–
140
(57)
83
22
–
24
(25)
(1)
(224)
11
(101)
31
1,909
1,861
10
1,871
* Shares held by Petrofac Employee Benefit Trust and Petrofac Joint Venture Companies Employee Benefit Trust.
The attached notes 1 to 32 form part of these consolidated financial statements.
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Petrofac Annual report and accounts 2015 / 121
Financial statements
122
Notes to the consolidated financial statements
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
1 Corporate information
The consolidated financial statements of Petrofac Limited and its
subsidiaries (collectively, the Group) for the year ended 31 December
2015 were authorised for issue in accordance with a resolution of the
Directors on 23 February 2016.
Petrofac Limited (the ‘Company’) is a limited liability company registered
and domiciled in Jersey under the Companies (Jersey) Law 1991
and is the holding company for the international group of Petrofac
subsidiaries. The Company’s 31 December 2015 financial statements
are shown on pages 169 to 184. The Group’s principal activity is the
provision of services to the oil and gas production and processing
industry.
Information on the Group’s subsidiaries and joint ventures is contained in
note 32 to these consolidated financial statements. Information on other
related party relationships of the Group is provided in note 29.
2 Summary of significant accounting
policies
Basis of preparation
The consolidated financial statements of the Group have been prepared
in accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB)
and applicable requirements of Jersey law.
The consolidated financial statements have been prepared on a historical
cost basis, except for available-for-sale (AFS) financial assets, derivative
financial instruments, financial assets held at fair value through profit and
loss and contingent consideration that have been measured at fair value.
Certain items of inventory are carried at net realisable value. The
consolidated financial statements are presented in United States dollars
and all values are rounded to the nearest million (US$m), except when
otherwise indicated.
Basis of consolidation
The consolidated financial statements comprise the financial statements
of Petrofac Limited and its subsidiaries as at 31 December 2015. Control
is achieved when the Group is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those
returns through its power over the investee.
Generally, there is a presumption that a majority of voting rights result
in control. To support this presumption and when the Group has less
than a majority of the voting or similar rights of an investee, the Group
considers all relevant facts and circumstances in assessing whether
it has power over an investee, including:
• The contractual arrangement with the other vote holders
of the investee
• Rights arising from other contractual arrangements
• The Group’s voting rights and potential voting rights
The Group re-assesses whether or not it controls an investee if facts
and circumstances indicate that there are changes to one or more of the
three elements of control. Consolidation of a subsidiary begins when the
Group obtains control over the subsidiary and ceases when the Group
loses control of the subsidiary. Assets, liabilities, income and expenses
of a subsidiary acquired or disposed of during the year are included in
the statement of comprehensive income from the date the Group gains
control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income (OCI)
are attributed to the Petrofac Limited shareholders and to the non-
controlling interests, even if this results in the non-controlling interests
having a deficit balance. When necessary, adjustments are made to the
financial statements of subsidiaries to bring their accounting policies into
line with the Group’s accounting policies.
All intra-group assets and liabilities, equity, income, expenses and cash
flows relating to transactions between members of the Group are
eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss
of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognises the related
assets (including goodwill), liabilities, non-controlling interest and other
components of equity while any resultant gain or loss is recognised in
profit or loss. Any investment retained is recognised at fair value.
Presentation of results
Petrofac presents its results in the income statement to identify
separately the contribution of impairments, certain re-measurements,
restructuring and redundancy costs, contract migration costs and
material deferred tax movements arising due to foreign exchange
differences in jurisdictions where tax is computed based on the
functional currency of the country in order to provide readers with a clear
and consistent presentation of the underlying operating performance of
the Group’s ongoing business.
New standards and interpretations
The Group has adopted new and revised standards and interpretations
issued by the International Accounting Standards Board (IASB) and the
International Financial Reporting Interpretations Committee (IFRIC) of the
IASB that are relevant to its operations and effective for accounting
periods beginning on or after 1 January 2015.
Although these new standards and amendments apply for the first time
in 2015, they do not have a material impact on the consolidated financial
statements of the Group.
Standards issued but not yet effective
Standards issued but not yet effective up to the date of issuance of the
Group’s consolidated financial statements are listed below and include
only those standards and interpretations that are likely to have an impact
on the disclosures, financial position or performance of the Group at a
future date. The Group intends to adopt these standards when they
become effective.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9 Financial
Instruments that replaces IAS 39 Financial Instruments: Recognition and
Measurement and all previous versions of IFRS 9. IFRS 9 brings together
all three aspects of the accounting for financial instruments project:
classification and measurement, impairment and hedge accounting.
IFRS 9 is effective for annual periods beginning on or after 1 January
2018, with early application permitted. Except for hedge accounting,
retrospective application is required but providing comparative
information is not compulsory. For hedge accounting, the requirements
are generally applied prospectively, with some limited exceptions. The
adoption of IFRS 9 will have an effect on the classification and
measurement of the Group’s financial assets and financial liabilities. The
Group is currently assessing the impact of IFRS 9 and plans to adopt the
new standard on the required effective date.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and will supersede all current revenue
recognition requirements under IFRS (e.g. IAS 11 Construction
Contracts, IAS 18 Revenue and IFRIC 18 Transfers of Assets from
Customers). The new standard will be applied using a five-step model
and a core principle of recognising revenue at an amount that reflects
the consideration to which the entity expects to be entitled in exchange
for transferring goods or services to a customer. The principles in IFRS
15 are more prescriptive and provide a more structured approach to
measuring and recognising revenue. Either a full or modified
retrospective application is required for annual periods beginning on or
after 1 January 2018. Early adoption is permitted. The Group is currently
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assessing the impact of IFRS 15 and plans to adopt the new standard
on the required effective date.
Amendments to IFRS 11 Joint Arrangements: Accounting for
Acquisitions of Interests
The amendments to IFRS 11 require that a joint operator accounting for
the acquisition of an interest in a joint operation, in which the activity of
the joint operation constitutes a business, must apply the relevant IFRS 3
principles for business combinations accounting. The amendments also
clarify that a previously held interest in a joint operation is not re-
measured on the acquisition of an additional interest in the same joint
operation while joint control is retained. In addition, a scope exclusion
has been added to IFRS 11 to specify that the amendments do not
apply when the parties sharing joint control, including the reporting
entity, are under common control of the same ultimate controlling party.
The amendments apply to both the acquisition of the initial interest in a
joint operation and the acquisition of any additional interests in the same
joint operation and are prospectively effective for annual periods
beginning on or after 1 January 2016, with early adoption permitted.
These amendments are not expected to have any impact on the Group,
however they will be applied to any future transactions.
Amendments to IAS 16 and IAS 38: Clarification of Acceptable
Methods of Depreciation and Amortisation
The amendments clarify the principle in IAS 16 and IAS 38 that revenue
reflects a pattern of economic benefits that are generated from operating
a business (of which the asset is part) rather than the economic benefits
that are consumed through use of the asset. As a result, a revenue-
based method cannot be used to depreciate property, plant and
equipment and may only be used in very limited circumstances to
amortise intangible assets. The amendments are effective prospectively
for annual periods beginning on or after 1 January 2016, with early
adoption permitted. These amendments are expected to impact the
Group’s Production Enhancement Contracts (PECs) in Mexico, given
that the Group is in the process of migrating its current PECs to
Production Sharing Contracts in near future, therefore the impact is not
considered to be material.
Amendments to IFRS 10 and IAS 28: Sale or Contribution of
Assets between an Investor and its Associate or Joint Venture
The amendments address the conflict between IFRS 10 and IAS 28 in
dealing with the loss of control of a subsidiary that is sold or contributed
to an associate or joint venture. The amendments clarify that the gain or
loss resulting from the sale or contribution of assets that constitute a
business, as defined in IFRS 3, between an investor and its associate or
joint venture, is recognised in full. Any gain or loss resulting from the sale
or contribution of assets that do not constitute a business, however, is
recognised only to the extent of unrelated investors’ interests in the
associate or joint venture. These amendments must be applied
prospectively and are effective for annual periods beginning on or after 1
January 2016, with early adoption permitted. These amendments are not
expected to have any impact on the Group, however they will be applied
to any future transactions.
Significant accounting judgements and estimates
Judgements
In the process of applying the Group’s accounting policies, management
has made the following judgements, apart from those involving
estimations, which have the most significant effect on the amounts
recognised in the consolidated financial statements:
• Revenue recognition on fixed-price engineering, procurement
and construction contracts: the Group recognises revenue on fixed-
price engineering, procurement and construction contracts using the
percentage-of-completion method, based on surveys of work
performed. The Group has determined this basis of revenue
recognition is the best available measure of progress on such contracts
• Revenue recognition on consortium contracts: the Group recognises
its share of revenue and backlog revenue from contracts agreed as
part of a consortium. The Group uses the percentage-of-completion
method based on surveys of work performed to recognise revenue for
the period and then recognises their share of revenue and costs as per
the agreed consortium contractual arrangement. In selecting the
appropriate accounting treatment, the main considerations are:
(cid:1) Determination of whether the joint arrangement is a joint venture or
joint operation (though not directly related to revenue recognition this
element has a material impact on the presentation of revenue for
each project)
(cid:1) At what point can the revenues, costs and margin from this type of
service contract be estimated/reliably measured in accordance with
IAS 11; and
(cid:1) Whether there are any other remaining features unique to the
contract that are relevant to the assessment
In selecting the most relevant and reliable accounting policies for IES
contracts the main considerations are as follows:
• Determination of whether the joint arrangement is a joint venture or
joint operation; though not directly related to revenue recognition this
element has a material impact on the presentation of revenue for
each project
• Whether the multiple service elements under the contract should be
bifurcated such as construction phase followed by an operations and
maintenance stage
• Whether the Group has legal rights to the production output and
therefore is able to book reserves in respect of the project
• The nature and extent, if any, of volume and price financial exposures
under the terms of the contract
• The extent to which the Group’s capital investment is at risk and
the mechanism for recoverability under the terms of the contract
• At what point can the revenues from each type of contract
be estimated/reliably measured in accordance with IAS 18
• Whether there are any other remaining features unique to the contract
that are relevant to the assessment
Revenue recognition on Integrated Energy Services (IES) contracts:
• The Group assesses on a case by case basis the most appropriate
treatment for its various commercial structures which include Risk
Service Contracts, Production Enhancement Contracts and Equity
Upstream Investments including Production Sharing Contracts (see
accounting policies note on page 131 for further details)
Statement of financial position classification of Integrated Energy
Services (IES) contracts:
• The Group assesses on a case by case basis the most appropriate
balance sheet classification of its Risk Service Contracts, Production
Enhancement Contracts and Equity upstream investments (see
accounting policy notes on page 131)
• In selecting the most appropriate policies for IES contracts the main
judgements are as follows:
(cid:1) The Greater Stella Area (GSA) asset is treated in the consolidated
statement of financial position as a financial asset and measured
through profit and loss on the basis that there is currently a short-
term loan receivable from the consortium partners to fund Petrofac’s
share of the field development costs which cannot be converted to a
20% equity share in the GSA licence until the start of production
from the field and DECC approval for Petrofac to acquire this interest
in the asset. We believe this classification most accurately reflects
the risks borne throughout the development of GSA and allows
ongoing revaluation to its expected conversion value to property,
plant and equipment at the date Petrofac is formally recognised on
the licence
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Financial statements
124
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
• Deferred tax assets: the Group recognises deferred tax assets on all
applicable temporary differences where it is probable that future
taxable profits will be available for utilisation. This requires management
to make judgements and assumptions regarding the amount of
deferred tax that can be recognised based on the magnitude and
likelihood of future taxable profits. The carrying amount of deferred tax
assets at 31 December 2015 was US$80m (2014: US$34m)
• Contingent consideration: the Group assesses the amount of
consideration receivable on disposal of non-current assets which
requires the estimation of the fair value of additional consideration
receivable from third parties. Where it is considered probable that such
consideration is due to the Group, these amounts are recognised as
receivable. At 31 December 2015 US$nil was recognised as a due
receivable (2014: US$34m)
• Income tax: the Company and its subsidiaries are subject to routine tax
audits and also a process whereby tax computations are discussed
and agreed with the appropriate authorities. Whilst the ultimate
outcome of such tax audits and discussions cannot be determined
with certainty, management estimates the level of provisions required
for both current and deferred tax on the basis of professional advice
and the nature of current discussions with the tax authority concerned
• Recoverable value of property, plant and equipment, intangible oil
and gas assets, other intangible assets and other financial assets: the
Group determines at each reporting date whether there is any evidence
of indicators of impairment in the carrying value of its property, plant
and equipment, intangible oil and gas assets, other intangible assets
and other financial assets. Where indicators exist, an impairment test
is undertaken which requires management to estimate the recoverable
value of its assets which is initially based on its value in use. When
necessary, fair value less costs of disposal is estimated, for example
by reference to quoted market values, similar arm's length transactions
involving these assets or risk adjusted discounted cash flow models.
For certain oil and gas assets, where impairment triggers were
identified, the recoverable amounts for these assets were estimated
using fair value less costs of disposal discounted cash flow models. In
relation to impairment testing performed for the Mexican PEC assets
which have a combined carrying value of US$642m at 31 December
2015, assumptions were made in determining the expected outcome
of ongoing contractual negotiations in respect of the planned migration
to PSC type arrangements. These include the expected working
interest in the PSC and financial and fiscal terms achieved. The
determination of the recoverable amount of the JSD6000 under
construction involved assumptions in respect of the remaining capital
cost of the project, forecast market conditions, achievable market
share and the timing of re-commencement of construction. In 2015
there were pre-tax impairment charges and fair value re-measurements
of US$274m (2014: US$415m) post-tax US$254m (2014: US$413m)
which are explained in note 5. The key sources of estimation
uncertainty for these tests are consistent with those disclosed in notes
5 and 12
• Units of production depreciation: estimated proven plus probable
reserves are used in determining the depreciation of oil and gas assets
such that the depreciation charge is proportional to the depletion of the
remaining reserves over the shorter of: life of the field or the end of the
respective licence/concession period. These calculations require the
use of estimates including the amount of economically recoverable
reserves and future oil and gas capital expenditure
2 Summary of significant accounting
policies continued
(cid:1) The Mexican and Romanian PEC assets are classified as tangible oil
and gas assets in the consolidated statement of financial position as
they have direct exposure to variable field production levels, and
indirect exposure to changes in commodity prices. These exposures
impact the generation of cash from the assets and any financial
return thereon, including the risk of negative financial return. We
believe this classification is most appropriate due to the nature of
expenditure and it is aligned with our treatment in respect of PSC
type arrangements where the risk/reward profile is similar
(cid:1) The Berantai Risk Services contract (RSC) is treated as a financial
asset receivable in the consolidated statement of financial position
and measured at fair value through profit and loss – a designation
made at inception. This classification was selected as most
appropriate due to the lower exposure to risk as would typically be
the case for a greenfield hydrocarbon development. As such it was
determined that classification as property, plant and equipment was
not appropriate. We believe this designation also results in more
relevant information than the other financial asset categories, as it
recognises directly in the income statement any changes in value of
the project based on our performance against the key performance
indicators in the contract (see accounting policies on page 129)
Estimation uncertainty
The key assumptions concerning the future and other key sources of
estimation uncertainty at the statement of financial position date that
have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are
discussed below:
• Provisions for liquidated damages claims (LDs): the Group provides for
LD claims where there have been significant contract delays and it is
considered probable that the customer will successfully pursue such
a claim. This requires an estimate of the amount of LDs payable under
a claim which involves a number of management judgements and
assumptions regarding the amounts to recognise
• Project cost to complete estimates: at each reporting date the Group
is required to estimate costs to complete on fixed-price contracts.
Estimating costs to complete on such contracts requires the Group
to make estimates of future costs to be incurred, based on work to
be performed beyond the reporting date. This estimate will impact
revenues, cost of sales, work-in-progress, billings in excess of costs
and estimated earnings and accrued contract expenses
• Recognition of contract variation orders (VOs): the Group recognises
revenues and margins from VOs where it is considered probable that
they will be awarded by the customer and this requires management
to assess the likelihood of such an award being made by reference to
customer communications and other forms of documentary evidence
• Onerous contract provisions: the Group provides for future losses on
long-term contracts where it is considered probable that the contract
costs are likely to exceed revenues in future years. Estimating these
future losses involves a number of assumptions about the achievement
of contract performance targets and the likely levels of future cost
escalation over time. US$71m was outstanding at 31 December 2015
(2014: US$57m)
• Impairment of goodwill: the Group determines whether goodwill
is impaired at least on an annual basis. This requires an estimation of
the value in use of the cash-generating units to which the goodwill is
allocated. Estimating the value in use requires the Group to make an
estimate of the expected future cash flows from each cash-generating
unit and also to determine a suitable discount rate in order to calculate
the present value of those cash flows. The carrying amount of goodwill
at 31 December 2015 was US$80m (2014: US$115m) (note 12)
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• Decommissioning costs: the recognition and measurement of
decommissioning provisions involves the use of estimates and
assumptions which include the existence of an obligation to dismantle
and remove a facility or restore the site on which it is located, the
appropriate discount and inflation rates to use in determining the net
present value of the liability, the estimated costs of decommissioning
based on internal and external estimates and the payment dates for
expected decommissioning costs. As a result, actual costs could differ
from estimated cost estimates used to provide for decommissioning
obligations. The provision for decommissioning at 31 December 2015
of US$230m (2014: US$189m) represents management’s best
estimate of the present value of the future decommissioning
costs required
Potential prior year restatement of the Group's year end 31
December 2014 reported results
In the 31 December 2014 consolidated financial statements authorised
for issue on 25 February 2015, the Group recognised a loss in respect of
Laggan-Tormore of US$230m for the year ended 31 December 2014,
taking cumulative losses on the project to US$180m (given that an
amount of US$50m had been recognised as profits in respect of the
project in the years prior to 2014). The loss recorded in 2014 was based
on a total cost-to-complete forecast prepared by site management and
reviewed and approved by the senior OEC leadership team in January
2015.
On 19 April 2015, the Group announced an additional loss in respect of
Laggan-Tormore of US$195m based on a revised cost-to-complete
forecast reviewed by the Board on 18 April 2015.
Given the scale of these incremental losses and the proximity of the
timing of the market update to our year-end results announcement, the
Board has considered whether any of the incremental losses should
have been recognised at the time of the preparation of the 2014
accounts and be accounted for as a prior year adjustment. As a result,
the Board commissioned KPMG to carry out a review of the
circumstances leading up to the 19 April 2015 market update with a
view to identifying the issues for consideration relating to the incremental
losses.
The Audit Committee, on behalf of the Board, has evaluated the report
prepared by KPMG and considered management’s recommendation
with regard to the need to restate the Group’s 2014 results.
Management determined that the range of over-statement of 2014 profit
after tax is US$27m to US$57m. There is no effect on cash flows and
the balance sheet impact is immaterial. The Directors have concluded
that no restatement of the 2014 reported results is required. In reaching
this conclusion, the Directors considered the quantum of the prior year
overstatement of profit in conjunction with relevant qualitative
considerations. Specifically, the amount of the restatement is only a
component of total post-tax losses now incurred on the contract of
US$608m and in the context of these total contract losses the Directors
do not consider that correcting the prior year to reflect an earlier
recognition of this element of the contract loss is material to users of the
financial statements. The Directors also assessed the disclosures made
on Laggan-Tormore by the Group and the impact on each of the
Group’s financial highlights as reported for 2014 and in these
consolidated financial statements in reaching the conclusion.
Provision for potential liquidated damages claims (LDs) in respect
of the Laggan-Tormore contract
The Group provides for LD claims where there have been significant
contract delays and it is considered probable that the customer will
successfully pursue such a claim. This requires an estimate of the
amount of LDs contractually payable under a claim, and the likelihood
that any amount will be levied. This involves a number of management
judgements and assumptions regarding the appropriate amounts to
recognise.
The delay in commissioning the Laggan-Tormore plant in Shetland could
result in a claim for liquidated damages under the contract with our
client, Total. No provision has been recorded for any potential claim as
management believes that liquidated damages are not likely to be
claimed as the revised completion schedule has now been achieved and
the gas plant has been successfully handed over in line with our client’s
expectation.
Investment in associates and joint ventures
An associate is an entity over which the Group has significant influence.
Significant influence is the power to participate in the financial and
operating policy decisions of the investee, but is not control or joint
control over those policies.
A joint venture is a type of joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net assets of the
joint venture. A joint operation is a type of joint arrangement whereby
the parties that have joint control of the arrangement have rights to the
assets and obligations for the liabilities relating to the arrangement. Joint
control is the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require
unanimous consent of the parties sharing control.
The considerations made in determining significant influence or
joint control are similar to those necessary to determine control
over subsidiaries.
The Group’s investments in its associate and joint venture are accounted
for using the equity method.
Under the equity method, the investment in an associate or a joint
venture is initially recognised at cost. The carrying amount of the
investment is adjusted to recognise changes in the Group’s share of net
assets of the associate or joint venture since the acquisition date.
Goodwill relating to the associate or joint venture is included in the
carrying amount of the investment and is neither amortised nor
individually tested for impairment.
The consolidated income statement reflects the Group’s share of the
results of operations of the associate or joint venture. Any change in OCI
of those investees is presented as part of the Group’s OCI. In addition,
when there has been a change recognised directly in the equity of the
associate or joint venture, the Group recognises its share of any
changes, when applicable, in the statement of changes in equity. The
aggregate of the Group’s share of profit or loss of an associate and a
joint venture is shown on the face of the consolidated income statement
outside operating profit and represents profit or loss after tax and non-
controlling interests in the subsidiaries of the associate or joint venture.
Any unrealised gains and losses resulting from transactions between
the Group and the associate and joint venture are eliminated to the
extent of the interest in its associates and joint ventures.
The financial statements of the associate or joint venture are prepared for
the same reporting period as the Group. When necessary, adjustments
are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it
is necessary to recognise an impairment loss on its investment in its
associate or joint venture. At each reporting date, the Group determines
whether there is objective evidence that the investment in the associate
or joint venture is impaired. If there is such evidence, the Group
calculates the amount of impairment as the difference between the
recoverable amount of the associate or joint venture and its carrying
value and recognises any loss as an exceptional item in the consolidated
income statement.
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Financial statements
126
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
2 Summary of significant accounting
policies continued
Upon loss of significant influence over the associate or joint control over
the joint venture, the Group measures and recognises any retained
investment at its fair value. Any difference between the carrying amount
of the associate or joint venture upon loss of significant influence or joint
control and the fair value of the retained investment and proceeds from
disposal is recognised in the consolidated income statement.
Joint operations
The Group’s interests in joint operations are recognised in relation to its
interest in a joint operation’s:
• Assets, including its share of any assets held jointly
• Liabilities, including its share of any liabilities incurred jointly
• Revenue from the sale of its share of the output arising from
the joint operation
• Share of the revenue from the sale of the output by the
joint operation
• Expenses, including its share of any expenses incurred jointly
Under joint operations, the expenses that the Group incurs and its
share of the revenue earned is recognised in the consolidated income
statement. Assets controlled by the Group and liabilities incurred by it
are recognised in the consolidated statement of financial position.
Foreign currency translation
The Group’s consolidated financial statements are presented in US
dollars, which is also the parent company’s functional currency. For each
entity, the Group determines the functional currency and items included
in the financial statements of each entity are measured using that
functional currency. The Group uses the direct method of consolidation
and on disposal of a foreign operation, the gain or loss that is reclassified
to profit or loss reflects the amount that arises from using this method.
Transactions and balances
Transactions in foreign currencies are initially recorded by the Group’s
entities at their respective functional currency spot rates at the date the
transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are
translated at the functional currency spot rates of exchange at the
reporting date.
Differences arising on settlement or translation of monetary items are
recognised in profit or loss with the exception of monetary items that are
designated as part of the hedge of the Group’s net investment of a
foreign operation. These are recognised in OCI until the net investment is
disposed of, at which time the cumulative amount is reclassified to profit
or loss. Tax charges and credits attributable to exchange differences on
those monetary items are also recorded in OCI.
Non-monetary items that are measured in terms of historical cost in a
foreign currency are translated using the exchange rates at the dates of
the initial transactions. Non-monetary items measured at fair value in a
foreign currency are translated using the exchange rates at the date
when the fair value is determined. The gain or loss arising on translation
of non-monetary items measured at fair value is treated in line with the
recognition of the gain or loss on the change in fair value of the item (i.e.,
translation differences on items whose fair value gain or loss is
recognised in OCI or profit or loss are also recognised in OCI or profit or
loss, respectively).
Group companies
On consolidation, the assets and liabilities of foreign operations are
translated into United States dollars at the rate of exchange prevailing at
the reporting date and their statements of profit or loss are translated at
exchange rates prevailing at the dates of the transactions. The exchange
differences arising on translation for consolidation are recognised in OCI.
On disposal of a foreign operation, the component of OCI relating to that
particular foreign operation is recognised in the consolidated income
statement.
Any goodwill arising on the acquisition of a foreign operation and any fair
value adjustments to the carrying amounts of assets and liabilities arising
on the acquisition are treated as assets and liabilities of the foreign
operation and translated at the spot rate of exchange at the reporting
date.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and any impairment in value. Cost comprises the purchase
price or construction cost and any costs directly attributable to making
that asset capable of operating as intended. The purchase price or
construction cost is the aggregate amount paid and the fair value
of any other consideration given to acquire the asset. Depreciation is
provided on a straight-line basis, other than on oil and gas assets, at the
following rates:
10% – 12.5%
Oil and gas facilities
Plant and equipment
4% – 33%
Buildings and leasehold improvements 5% – 33%
Office furniture and equipment
Vehicles
(or lease term if shorter)
25% – 50%
20% – 33%
Tangible oil and gas assets are depreciated, on a field-by-field basis,
using the unit-of-production method based on entitlement to proven
and probable reserves, taking account of estimated future development
expenditure relating to those reserves; refer to page 45 for life of
these fields.
Each asset’s estimated useful life, residual value and method
of depreciation are reviewed and adjusted if appropriate at each financial
year end.
No depreciation is charged on land or assets under construction.
The carrying amount of an item of property, plant and equipment
is derecognised on disposal or when no future economic benefits are
expected from its use or disposal. The gain or loss arising from the
de-recognition of an item of property, plant and equipment is included
in the consolidated income statement when the item is derecognised.
Gains are not classified as revenue.
Non-current assets held for sale
Non-current assets or disposal groups are classified as held for
sale when it is expected that the carrying amount of an asset will
be recovered principally through sale rather than continuing use.
Assets are not depreciated when classified as held for sale.
Borrowing costs
Borrowing costs directly attributable to the construction of qualifying
assets, which are assets that necessarily take a substantial period
of time to prepare for their intended use, are added to the cost of those
assets, until such time as the assets are substantially ready for their
intended use. All other borrowing costs are recognised as interest
payable in the consolidated income statement in the period in which
they are incurred.
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Business combinations and goodwill
Business combinations are accounted for using the acquisition
method. The cost of an acquisition is measured as the aggregate of the
consideration transferred measured at acquisition date fair value and
the amount of any non-controlling interests in the acquiree. For each
business combination, the Group elects whether to measure the non-
controlling interests in the acquiree at fair value or at the proportionate
share of the acquiree’s identifiable net assets. Acquisition-related costs
are expensed as incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets
and liabilities assumed for appropriate classification and designation
in accordance with the contractual terms, economic circumstances
and pertinent conditions as at the acquisition date. This includes the
separation of embedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, any previously held
equity interest is re-measured at its acquisition date fair value and any
resulting gain or loss is recognised in the consolidated income
statement.
Goodwill is initially measured at cost, being the excess of the aggregate
of the consideration transferred and the amount recognised for non-
controlling interests, and any previous interest held, over the net fair
value of the identifiable assets acquired and liabilities assumed. If the
fair value of the net assets acquired is in excess of the aggregate
consideration transferred, the Group reassesses whether it has correctly
identified all of the assets acquired and all of the liabilities assumed and
reviews the procedures used to measure the amounts to be recognised
at the acquisition date. If the reassessment still results in an excess of
the fair value of net assets acquired over the aggregate consideration
transferred, then the gain is recognised in the consolidated income
statement.
Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill is reviewed for impairment
annually or more frequently if events or changes in circumstances
indicate that such carrying value may be impaired.
All transaction costs associated with business combinations are charged
to the consolidated income statement in the year of such combination.
For the purpose of impairment testing, goodwill acquired is allocated to
the cash-generating units that are expected to benefit from the synergies
of the combination. Each unit or units to which goodwill is allocated
represents the lowest level within the Group at which the goodwill
is monitored for internal management purposes and is not larger
than an operating segment determined in accordance with IFRS 8
‘Operating Segments’.
Impairment is determined by assessing the recoverable amount of
the cash-generating units to which the goodwill relates. Where the
recoverable amount of the cash-generating units is less than the carrying
amount of the cash-generating units and related goodwill, an impairment
loss is recognised.
Where goodwill has been allocated to cash-generating units and part of
the operation within those units is disposed of, the goodwill associated
with the operation disposed of is included in the carrying amount of
the operation when determining the gain or loss on disposal of the
operation. Goodwill disposed of in this circumstance is measured based
on the relative values of the operation disposed of and the value portion
of the cash-generating units retained.
Contingent consideration payable on a business combination
When, as part of a business combination, the Group defers a
proportion of the total purchase consideration payable for an acquisition,
the amount provided for is the acquisition date fair value of the
consideration. The unwinding of the discount element is recognised
as a finance cost in the consolidated income statement. Changes in
estimated contingent consideration payable on acquisition are
recognised in the consolidated income statement unless they are
measurement period adjustments which arise as a result of additional
information obtained after the acquisition date about the facts and
circumstances existing at the acquisition date, which are adjusted
against carried goodwill. Contingent consideration that is classified
as equity is not re-measured and subsequent settlement is accounted
for within equity.
Intangible assets – non oil and gas assets
Intangible assets acquired in a business combination are initially
measured at cost being their fair values at the date of acquisition and
are recognised separately from goodwill where the asset is separable
or arises from a contractual or other legal right and its fair value can be
measured reliably. After initial recognition, intangible assets are carried
at cost less accumulated amortisation and any accumulated impairment
losses. Intangible assets with a finite life are amortised over their useful
economic life using a straight-line method unless a better method
reflecting the pattern in which the asset’s future economic benefits are
expected to be consumed can be determined. The amortisation charge
in respect of intangible assets is included in the selling, general and
administration expenses line of the consolidated income statement.
The expected useful lives of assets are reviewed on an annual basis.
Any change in the useful life or pattern of consumption of the intangible
asset is treated as a change in accounting estimate and is accounted for
prospectively by changing the amortisation period or method. Intangible
assets are tested for impairment whenever there is an indication
that the asset may be impaired.
Oil and gas assets
Capitalised costs
The Group’s activities in relation to oil and gas assets are limited
to assets in the evaluation, development and production phases.
Oil and gas evaluation and development expenditure is accounted
for using the successful efforts method of accounting.
Evaluation expenditures
Expenditure directly associated with evaluation (or appraisal) activities
is capitalised as an intangible oil and gas asset. Such costs include the
costs of acquiring an interest, appraisal well drilling costs, payments to
contractors and an appropriate share of directly attributable overheads
incurred during the evaluation phase. For such appraisal activity, which
may require drilling of further wells, costs continue to be carried as an
asset whilst related hydrocarbons are considered capable of commercial
development. Such costs are subject to technical, commercial and
management review to confirm the continued intent to develop, or
otherwise extract value. When this is no longer the case, the costs are
written-off in the income statement. When such assets are declared part
of a commercial development, related costs are transferred to tangible oil
and gas assets. All intangible oil and gas assets are assessed for any
impairment prior to transfer and any impairment loss is recognised in the
consolidated income statement.
Development expenditures
Expenditures relating to development of assets which includes the
construction, installation and completion of infrastructure facilities such
as platforms, pipelines and vessels are capitalised within property, plant
and equipment as oil and gas facilities. Expenditures relating to the
drilling and completion of production wells are capitalised within
property, plant and equipment as oil and gas assets.
Changes in unit-of-production factors
Changes in factors which affect unit-of-production calculations are
dealt with prospectively in accordance with the treatment of changes
in accounting estimates, not by immediate adjustment of prior
years’ amounts.
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Financial statements
128
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
2 Summary of significant accounting
policies continued
Decommissioning
Provision for future decommissioning costs is made in full when
the Group has an obligation to dismantle and remove a facility
or an item of plant and to restore the site on which it is located,
and when a reasonable estimate of that liability can be made.
The amount recognised is the present value of the estimated future
expenditure. An amount equivalent to the discounted initial provision for
decommissioning costs is capitalised and amortised over the life of the
underlying asset on a unit-of-production basis over proven and probable
reserves. Any change in the present value of the estimated expenditure
is reflected as an adjustment to the provision and the oil and gas asset.
The unwinding of the discount applied to future decommissioning
provisions is included under finance costs in the consolidated
income statement.
Impairment of assets (excluding goodwill)
At each statement of financial position date, the Group reviews
the carrying amounts of its tangible and intangible assets to assess
whether there is an indication that those assets may be impaired. If any
such indication exists, the Group makes an estimate of the asset’s
recoverable amount. An asset’s recoverable amount is the higher of its
fair value less costs of disposal and its value in use. In assessing value
in use, the estimated future cash flows attributable to the asset are
discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the
risks specific to the asset. Fair value less costs of disposal is based on
the risk-adjusted discounted cash flow models and includes value
attributable to contingent resources. A post-tax discount rate is used
in such calculations.
If the recoverable amount of an asset is estimated to be less than its
carrying amount, the carrying amount of the asset is reduced to its
recoverable amount. An impairment loss is recognised immediately in the
consolidated income statement, unless the relevant asset is carried at a
revalued amount, in which case the impairment loss is treated as a
revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of
the asset is increased to the revised estimate of its recoverable amount,
but so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been
recognised for the asset in prior years. A reversal of an impairment loss
is recognised immediately in the consolidated income statement, unless
the relevant asset is carried at a revalued amount, in which case the
reversal of the impairment is treated as a revaluation increase.
Inventories
Inventories are valued at the lower of cost and net realisable value. Net
realisable value is the estimated selling price in the ordinary course of
business, less estimated costs of completion and the estimated costs
necessary to make the sale. Cost comprises purchase price, cost of
production, transportation and other directly allocable expenses. Costs
of inventories, other than raw materials, are determined using the first-in-
first-out method. Costs of raw materials are determined using the
weighted average method.
Work in progress and billings in excess of cost and
estimated earnings
Fixed price lump sum engineering, procurement and construction
contracts are presented in the statement of financial position as follows:
• For each contract, the accumulated cost incurred, as well as
the estimated earnings recognised at the contract’s percentage
of completion less provision for any anticipated losses, after deducting
the progress payments received or receivable from the customers, are
shown in current assets in the statement of financial position under
‘work in progress’
• Where the payments received or receivable for any contract exceed the
cost and estimated earnings less provision for any anticipated losses,
the excess is shown as ‘billings in excess of cost and estimated
earnings’ within current liabilities
Trade and other receivables
Trade receivables are recognised and carried at original invoice amount
less an allowance for any amounts estimated to be uncollectable.
An estimate for doubtful debts is made when there is objective evidence
that the collection of the full amount is no longer probable under the
terms of the original invoice. Impaired debts are derecognised when they
are assessed as uncollectable.
Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand
and short-term deposits with an original maturity of three months or less.
For the purpose of the cash flow statement, cash and cash equivalents
consists of cash and cash equivalents as defined above, net of
outstanding bank overdrafts.
Provisions
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events, it is probable that an
outflow of resources will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. If the time value
of money is material, provisions are discounted using a current pre-tax
rate that reflects, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the
passage of time is recognised in the consolidated income statement
as a finance cost.
Fair value measurement
The Group measures financial instruments, such as derivatives,
receivable from customer under Berantai RSC, available-for-sale financial
assets and amounts receivable in respect of the development of the
Greater Stella Area at fair value at each reporting date. Fair value related
disclosures for financial instruments are disclosed in note 16.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date. The fair value measurement is based on the
presumption that the transaction to sell the asset or transfer the liability
takes place either:
• In the principal market for the asset or liability, or
• In the absence of a principal market, in the most advantageous market
for the asset or liability
The principal or the most advantageous market must be accessible
by the Group.
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The fair value of an asset or a liability is measured using the assumptions
that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a
market participant's ability to generate economic benefits by using the
asset in its highest and best use or by selling it to another market
participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to measure fair
value, maximising the use of relevant observable inputs and minimising
the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in
the financial statements are categorised within the fair value hierarchy,
described as follows, based on the lowest level input that is significant
to the fair value measurement as a whole:
• Level 1 – Quoted (unadjusted) market prices in active markets for
identical assets or liabilities
• Level 2 – Valuation techniques for which the lowest level input that
is significant to the fair value measurement is directly or indirectly
observable
• Level 3 – Valuation techniques for which the lowest level input that
is significant to the fair value measurement is unobservable
For assets and liabilities that are recognised in the financial statements
on a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by re-assessing categorisation
(based on the lowest level input that is significant to the fair value
measurement as a whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined
classes of assets and liabilities on the basis of the nature, characteristics
and risks of the asset or liability and the level of the fair value hierarchy
as explained above.
Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as financial assets at
fair value through profit or loss, loans and receivables, held-to-maturity
investments, available-for-sale financial assets, or as derivatives
designated as hedging instruments in an effective hedge, as appropriate.
All financial assets are recognised initially at fair value plus, in the case
of financial assets not recorded at fair value through profit or loss,
transaction costs that are attributable to the acquisition of the financial
asset.
Subsequent measurement
For purposes of subsequent measurement financial assets are classified
in the following categories:
• Financial assets at fair value through profit or loss
• Loans and receivables
• Available-for-sale financial assets
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets
held for trading and financial assets designated upon initial recognition at
fair value through profit or loss. Financial assets are classified as held for
trading if they are acquired for the purpose of selling or repurchasing in
the near term. Derivatives, including separated embedded derivatives,
are also classified as held for trading unless they are designated as
effective hedging instruments as defined by IAS 39. Financial assets at
fair value through profit or loss are carried in the statement of financial
position at fair value with net changes in fair value reported in the
consolidated income statement.
The fair value changes to undesignated forward currency contracts are
reported within other operating income/expenses. The fair value changes
relating to the internal rate of return under the Berantai RSC receivable
are recognised as revenue whereas the unwinding of discount is
reported as finance income. Negative fair value changes on the Berantai
RSC as a result of changes in the expected recovery of the receivable
and negative fair value changes to the amounts receivable in respect of
the development of the Greater Stella Area are recorded as an expense
in the consolidated income statement (refer to note 5).
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. After
initial measurement, such financial assets are subsequently measured
at amortised cost using the effective interest rate (EIR) method, less
impairment. Amortised cost is calculated by taking into account any
discount or premium on acquisition and fees or costs that are an integral
part of the EIR. The EIR amortisation is included in finance income in the
consolidated income statement. This category generally applies to trade
and other receivables.
Available-for-sale (AFS) financial assets
AFS financial assets include equity investments. Equity investments
classified as AFS are those that are neither classified as held-for-trading
nor designated at fair value through profit or loss.
After initial measurement, AFS financial assets are subsequently
measured at fair value with unrealised gains or losses recognised in other
comprehensive income and credited in the available-for-sale reserve until
the investment is derecognised, at which time the cumulative gain or loss
is recognised in the consolidated income statement within other
operating income/expenses, or the investment is determined to be
impaired, when the cumulative loss is reclassified from the AFS reserve
to the consolidated income statement in other operating
income/expenses.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities
at fair value through profit or loss, loans and borrowings, payables, or as
derivatives designated as hedging instruments in an effective hedge, as
appropriate.
All financial liabilities are recognised initially at fair value and, in the case
of loans and borrowings and payables, net of directly attributable
transaction costs.
The Group’s financial liabilities include trade and other payables, loans
and borrowings including bank overdrafts, financial guarantee contracts
and derivative financial instruments.
Subsequent measurement
For purposes of subsequent measurement financial assets are classified
in the following categories:
• Financial liabilities at fair value through profit or loss
• Loans and borrowings
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Financial statements
130
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Pensions and other long-term employment benefits
The Group has various defined contribution pension schemes in
accordance with the local conditions and practices in the countries in
which it operates. The amount charged to the consolidated income
statement in respect of pension costs reflects the contributions payable
in the year. Differences between contributions payable during the year
and contributions actually paid are shown as either accrued liabilities
or prepaid assets in the statement of financial position.
The Group’s other long-term employment benefits are provided in
accordance with the labour laws of the countries in which the Group
operates, further details of which are given in note 26.
Share-based payment transactions
Employees (including Directors) of the Group receive remuneration in the
form of share-based payment transactions, whereby employees render
services in exchange for shares or rights over shares (‘equity-settled
transactions’).
Equity-settled transactions
The cost of equity-settled transactions with employees is measured
by reference to the fair value at the date on which they are granted.
In valuing equity-settled transactions, no account is taken of any service
or performance conditions, other than conditions linked to the price
of the shares of Petrofac Limited (‘market conditions’), if applicable.
The cost of equity-settled transactions is recognised, together with
a corresponding increase in equity, over the period in which the relevant
employees become fully entitled to the award (the ‘vesting period’).
The cumulative expense recognised for equity-settled transactions at
each reporting date until the vesting date reflects the extent to which the
vesting period has expired and the Group’s best estimate of the number
of equity instruments that will ultimately vest. The income statement
charge or credit for a period represents the movement in cumulative
expense recognised as at the beginning and end of that period.
No expense is recognised for awards that do not ultimately vest, except
for awards where vesting is conditional upon a market or non-vesting
condition, which are treated as vesting irrespective of whether or not
the market or non-vesting condition is satisfied, provided that all other
performance conditions and service conditions are satisfied. Equity
awards cancelled are treated as vesting immediately on the date of
cancellation, and any expense not recognised for the award at that
date is recognised in the consolidated income statement.
Petrofac Employee Benefit Trusts
The Petrofac Employee Benefit Trust and the Petrofac Joint Venture
Companies Employee Benefit Trust warehouse ordinary shares
purchased to satisfy various new share scheme awards made to the
employees of the Company and its joint venture partner employees,
which will be transferred to the members of the schemes on their
respective vesting dates subject to satisfying any performance
conditions of each scheme. The trusts continue to be included in the
Group financial statements under IFRS 10.
Treasury shares
For the purpose of making awards under the Group’s employee share
schemes, shares in the Company are purchased and held by the
Petrofac Employee Benefit Trust and the Petrofac Joint Venture
Companies Employee Benefit Trust. All these shares have been
classified in the statement of financial position as treasury shares within
equity. Shares vested during the year are satisfied with these shares.
2 Summary of significant accounting
policies continued
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial
liabilities held for trading and financial liabilities designated upon initial
recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for
the purpose of repurchasing in the near term. This category also includes
derivative financial instruments entered into by the Group that are not
designated as hedging instruments in hedge relationships as defined by
IAS 39. Separated embedded derivatives are also classified as held for
trading unless they are designated as effective hedging instruments.
Gains or losses on liabilities held for trading are recognised in the
statement of profit or loss.
Financial liabilities designated upon initial recognition at fair value through
profit or loss are designated at the initial date of recognition, and only if
the criteria in IAS 39 are satisfied. The Group has not designated any
financial liability as at fair value through profit or loss.
Loans and borrowings
This is the category most relevant to the Group. After initial recognition,
interest-bearing loans and borrowings are subsequently measured at
amortised cost using the EIR method. Gains and losses are recognised
in profit or loss when the liabilities are derecognised as well as through
the EIR amortisation process.
Amortised cost is calculated by taking into account any discount or
premium on acquisition and fees or costs that are an integral part of the
EIR. The EIR amortisation is included as finance costs in the statement of
profit or loss.
This category generally applies to interest-bearing loans and borrowings.
For more information, refer to note 25.
De-recognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable, a part of a financial asset)
is de-recognised where:
• The rights to receive cash flows from the asset have expired
• The Group retains the right to receive cash flows from the asset, but
has assumed an obligation to pay them in full without material delay
to a third party under a ‘pass-through’ arrangement; or
• The Group has transferred its rights to receive cash flows from the
asset and either (a) has transferred substantially all the risks and
rewards of the asset, or (b) has neither transferred nor retained
substantially all the risks and rewards of the asset, but has transferred
control of the asset
Financial liabilities
A financial liability is de-recognised when the obligation under the liability
is discharged or cancelled or expires.
If an existing financial liability is replaced by another from the same
lender, on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is treated
as a de-recognition of the original liability and the recognition of a new
liability such that the difference in the respective carrying amounts
together with any costs or fees incurred are recognised in the
consolidated income statement.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is
reported in the consolidated statement of financial position if there is a
currently enforceable legal right to offset the recognised amounts and
there is an intention to settle on a net basis, to realise the assets and
settle the liabilities simultaneously.
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Leases
The determination of whether an arrangement is or contains a lease
is based on the substance of the arrangement at inception date and
whether the fulfilment of the arrangement is dependent on the use
of a specific asset or assets or the arrangement conveys the right
to use the asset.
Revenues from fixed-price contracts are recognised on the percentage-
of-completion method, measured by milestones completed or earned
value once the outcome of a contract can be estimated reliably. In the
early stages of contract completion, when the outcome of a contract
cannot be estimated reliably, contract revenues are recognised only to
the extent of costs incurred that are expected to be recoverable.
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
Assets held under finance leases are recognised as non-current assets
of the Group at the lower of their fair value at the date of commencement
of the lease and the present value of the minimum lease payments.
These assets are depreciated on a straight-line basis over the shorter of
the useful life of the asset and the lease term. The corresponding liability
to the lessor is included in the consolidated statement of financial
position as a finance lease obligation. Lease payments are apportioned
between finance costs in the income statement and reduction of the
lease obligation so as to achieve a constant rate of interest on the
remaining balance of the liability.
The Group has entered into various operating leases the payments
for which are recognised as an expense in the consolidated income
statement on a straight-line basis over the lease terms.
Pre-contract/bid costs
Pre-contract/bid costs incurred are recognised as an expense until there
is a high probability that the contract will be awarded, after which all
further costs are recognised as assets and expensed over the life of
the contract.
Revenue recognition
Revenue is recognised to the extent that it is probable economic
benefits will flow to the Group and the revenue can be reliably measured.
The following specific recognition criteria also apply:
Onshore Engineering & Construction
Revenues from fixed-price lump-sum contracts are recognised using the
percentage-of-completion method, based on surveys of work performed
once the outcome of a contract can be estimated reliably. In the early
stages of contract completion, when the outcome of a contract cannot
be estimated reliably, contract revenues are recognised only to the
extent of costs incurred that are expected to be recoverable.
Revenues from cost-plus-fee contracts are recognised on the basis
of costs incurred during the year plus the fee earned measured by the
cost-to-cost method.
Revenues from reimbursable contracts are recognised in the period in
which the services are provided based on the agreed contract schedule
of rates.
Provision is made for all losses expected to arise on completion
of contracts entered into at the statement of financial position date,
whether or not work has commenced on these contracts.
Incentive payments are included in revenue when the contract
is sufficiently advanced that it is probable that the specified performance
standards will be met or exceeded and the amount of the incentive
payments can be measured reliably. Variation orders are only included
in revenue when it is probable they will be accepted and can be
measured reliably and claims are only included in revenue when
negotiations have reached an advanced stage such that it is probable
that the claim will be accepted and can be measured reliably.
Offshore Projects & Operations and Engineering & Consulting Services
Revenues from reimbursable contracts are recognised in the period in
which the services are provided based on the agreed contract schedule
of rates.
Incentive payments are included in revenue when the contract
is sufficiently advanced that it is probable that the specified performance
standards will be met or exceeded and the amount of the incentive
payments can be measured reliably. Claims are only included in revenue
when negotiations have reached an advanced stage such that it is
probable the claim will be accepted and can be measured reliably.
Integrated Energy Services
Equity Upstream Investments
Oil and gas revenues comprise the Group’s share of sales from the
processing or sale of hydrocarbons from the Group’s Equity Upstream
Investments on an entitlement basis, when the significant risks and
rewards of ownership have been passed to the buyer.
Production Enhancement Contracts
Revenue from production enhancement contracts is recognised based
on the volume of hydrocarbons produced in the period and the agreed
tariff and the reimbursement arrangement for costs incurred.
Risk Services Contract (RSC)
Revenue from the Risk Services Contract is recognised as follows:
• The construction services element of the RSC is accounted for using
a percentage-of-completion method at the end of the reporting period
measured on the basis of the extent of the schedule of work
completed to date. Due to uncertainties about the eventual financial
outcome of the construction work no margin is recognised in the early
stages of the construction and revenues are only recognised to the
extent of costs until the outcome can be estimated reliably
• The operation and management activities revenues/margins are
recognised on a proportionate basis over the life of the contract
on the basis of the level of operating expenditure incurred each year
• The total remuneration fee is a multiple of the estimated capital
expenditure (control budget agreed with the customer) with this
multiple designed to deliver the contractor’s internal rate of return
which is determined by the contractor’s performance against a matrix
of KPIs which include actual cost of field development vs control
budget set, the time taken to achieve first gas from the field and the
timing of final project completion
• Payment of cost recovery commences from first oil/gas in equal
quarterly instalments over seven years and payment of the
remuneration fee commences from the quarter following completion of
the construction phase of the project and concludes at the end of the
RSC term. These receivable amounts under the RSC are classified as
a financial asset at fair value through profit or loss as the contract is
managed and the performance evaluated by management on a fair
value basis. For measurement purposes, fair value principles are
applied to calculate the present value of earned remuneration under
the contract by discounting back to present value and then splitting
between due within one year and long-term receivables within other
financial assets (see note 16 on page 148)
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Financial statements
132
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
The fair value of forward currency contracts is calculated by reference
to current forward exchange rates for contracts with similar maturity
profiles. The fair value of oil price collar contracts is determined by
reference to market values for similar instruments.
For the purposes of hedge accounting, hedges are classified as:
• Fair value hedges when hedging the exposure to changes in the fair
value of a recognised asset or liability; or
• Cash flow hedges when hedging exposure to variability in cash flows
that is either attributable to a particular risk associated with a
recognised asset or liability or a highly probable forecast transaction
The Group formally designates and documents the relationship between
the hedging instrument and the hedged item at the inception of the
transaction, as well as its risk management objectives and strategy for
undertaking various hedge transactions. The documentation also
includes identification of the hedging instrument, the hedged item or
transaction, the nature of risk being hedged and how the Group will
assess the hedging instrument’s effectiveness in offsetting the exposure
to changes in the hedged item’s fair value or cash flows attributable to
the hedged risk. The Group also documents its assessment, both at
hedge inception and on an ongoing basis, of whether the derivatives that
are used in the hedging transactions are highly effective in offsetting
changes in fair values or cash flows of the hedged items.
The treatment of gains and losses arising from revaluing derivatives
designated as hedging instruments depends on the nature of the
hedging relationship, as follows:
Cash flow hedges
For cash flow hedges, the effective portion of the gain or loss on
the hedging instrument is recognised directly in other comprehensive
income in net unrealised gains/(losses) on derivatives, while the
ineffective portion is recognised in the consolidated income statement.
Amounts taken to other comprehensive income are transferred to the
consolidated income statement when the hedged transaction affects the
consolidated income statement.
If the hedging instrument expires or is sold, terminated or exercised
without replacement or rollover, or if its designation as a hedge is
revoked, any cumulative gain or loss previously recognised in other
comprehensive income remains separately in equity until the forecast
transaction occurs and affects the consolidated income statement.
When a forecast transaction is no longer expected to occur, the
cumulative gain or loss that was reported in other comprehensive
income is immediately transferred to the consolidated income statement.
Embedded derivatives
Contracts are assessed for the existence of embedded derivatives
at the date that the Group first becomes party to the contract,
with reassessment only if there is a change to the contract that
significantly modifies the cash flows. Embedded derivatives which are
not clearly and closely related to the underlying asset, liability
or transaction are separated and accounted for as
standalone derivatives.
2 Summary of significant accounting
policies continued
Income taxes
Income tax expense represents the sum of current income tax and
deferred tax.
Current income tax assets and liabilities for the current and prior periods
are measured at the amount expected to be recovered from, or paid to
the taxation authorities. Taxable profit differs from profit as reported in
the consolidated income statement because it excludes items of income
or expense that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. The Group’s liability
for current tax is calculated using tax rates that have been enacted or
substantively enacted by the statement of financial position date.
Deferred tax is recognised on all temporary differences at the statement
of financial position date between the carrying amounts of assets and
liabilities in the financial statements and the corresponding tax bases
used in the computation of taxable profit, with the following exceptions:
• Where the temporary difference arises from the initial recognition
of goodwill or of an asset or liability in a transaction that is not a
business combination that at the time of the transaction affects neither
accounting nor taxable profit or loss
• In respect of taxable temporary differences associated with
investments in subsidiaries, associates and joint ventures, where the
timing of reversal of the temporary differences can be controlled and it
is probable that the temporary differences will not reverse in the
foreseeable future; and
• Deferred tax assets are recognised only to the extent that it is probable
that a taxable profit will be available against which the deductible
temporary differences carried forward tax credits or tax losses can
be utilised
The carrying amount of deferred tax assets is reviewed at each
statement of financial position date and reduced to the extent that it is
no longer probable that sufficient taxable profit will be available to allow
all or part of the deferred tax assets to be utilised. Unrecognised
deferred tax assets are reassessed at each statement of financial
position date and are recognised to the extent that it has become
probable that future taxable profit will allow the deferred tax asset to
be recovered.
Deferred tax assets and liabilities are measured on an undiscounted
basis at the tax rates that are expected to apply when the asset is
realised or the liability is settled, based on tax rates and tax laws enacted
or substantively enacted at the statement of financial position date.
Current and deferred tax is charged or credited directly to other
comprehensive income or equity if it relates to items that are credited
or charged to, respectively, other comprehensive income or equity.
Otherwise, income tax is recognised in the consolidated income
statement.
Derivative financial instruments and hedging
The Group uses derivative financial instruments such as forward
currency contracts and oil price collars and forward contracts to hedge
its risks associated with foreign currency and oil price fluctuations.
Such derivative financial instruments are initially recognised at fair value
on the date on which a derivative contract is entered into and are
subsequently re-measured at fair value. Derivatives are carried as assets
when the fair value is positive and as liabilities when the fair value is
negative.
Any gains or losses arising from changes in the fair value of derivatives
that do not qualify for hedge accounting are taken to the consolidated
income statement.
132 / Petrofac Annual report and accounts 2015
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133
3 Segment information
The Group delivers its services through the four reporting segments set out below:
• Onshore Engineering & Construction which provides engineering, procurement and construction project execution services to the onshore oil
and gas industry
• Offshore Projects & Operations which provides offshore engineering, operations and maintenance onshore and offshore and engineering,
procurement and construction project execution services to the offshore oil and gas industry
• Engineering & Consulting Services which provides technical engineering, consultancy, conceptual design, front end engineering and design (FEED)
and project management consultancy (PMC) across all sectors including renewables
• Integrated Energy Services which co-invests with partners in oil and gas production, processing and transportation assets, provides production
improvement services under value aligned commercial structures and oil and gas related technical competency training and consultancy services
Management separately monitors the trading results of its four reporting segments for the purpose of making an assessment of their performance and
for making decisions about how resources are allocated. Interest costs and income arising from borrowings and cash balances which are not directly
attributable to individual operating segments are allocated to Corporate rather than allocated to individual segments. In addition, certain shareholder
services related overheads, intra-group financing and consolidation adjustments are managed at a corporate level and are not allocated to reporting
segments.
The presentation of the Group results below also separately identifies the effect of the Laggan-Tormore loss, asset impairments, certain re-
measurements, restructuring and redundancy costs, contract migration costs and material deferred tax movements arising due to foreign exchange
differences in jurisdictions where tax is computed based on the functional currency of the country. Results excluding these non-recurring items are
used by management and presented in order to provide readers with a clear and consistent presentation of the underlying operating performance of
the business.
The following tables represent revenue and profit information relating to the Group’s reporting segments for the year ended 31 December 2015.
Year ended 31 December 2015
Onshore
Engineering &
Construction
Offshore
Projects &
Operations
Engineering &
Consulting
Services
Integrated
Energy
Services
Corporate
& others
Consolidation
adjustments
& eliminations
Business
performance
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Exceptional
items and certain
re-measurements
US$m
Revenue
External sales
4,368
1,458
Inter-segment sales
15
26
Total revenue
4,383
1,484
502
213
715
516
15
531
Segment results
425
66
70
33
(480)
–
–
–
–
–
–
–
Total
US$m
6,844
–
6,844
–
–
–
7
–
(18)
–
6,844
(269)
(269)
–
6,844
–
–
–
(1)
600
(354)
246
–
–
(480)
(18)
–
(480)
–
(18)
(55)
66
70
33
(11)
(1)
102
(354)
(252)
–
–
–
(55)
(48)
49
(5)
1
–
–
67
1
–
–
(1)
–
–
69
(19)
–
–
10
(53)
8
(2)
7
–
–
–
(48)
1
(58)
4
–
–
–
–
–
(1)
–
–
–
10
(101)
9
20
(55)
49
(5)
(1)
–
–
9
(101)
9
(355)
(335)
(3)
(58)
–
–
49
(5)
(59)
68
50
5
(54)
(1)
9
(358)
(349)
Laggan-Tormore
loss
Unallocated
corporate costs
Profit/(loss) before
tax and finance
income/(costs)
Share of profits
/(losses) of
associates/joint
ventures
Finance costs
Finance income
Profit/(loss) before
income tax
Income tax
(expense)/credit
Laggan-Tormore
tax relief
Non-controlling
interests
Profit/(loss) for
the year
attributable to
Petrofac Limited
shareholders
22-Financials-Shareholder-p117-185-AN-070316.indd 133
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Petrofac Annual report and accounts 2015 / 133
Financial statements
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
3 Segment information continued
Onshore
Engineering &
Construction
Offshore
Projects &
Operations
Engineering &
Consulting
Services
Integrated
Energy
Services
Corporate
& others
Consolidation
adjustments
& eliminations
US$m
US$m
US$m
US$m
US$m
US$m
Total
US$m
Other segment information
Capital expenditures:
Property, plant and equipment
Intangible oil and gas assets
Charges:
Depreciation
Amortisation and write off
Exceptional items and certain re-measurements
Other long-term employment benefits
Share-based payments
Year ended 31 December 2014
35
–
46
–
5
20
15
121
–
7
–
24
1
3
6
–
9
–
–
–
1
95
10
124
4
326
1
2
3
–
9
–
–
–
2
–
–
1
–
–
–
–
Onshore
Engineering &
Construction
Offshore
Projects &
Operations
Engineering &
Consulting
Services
Integrated
Energy
Services
Corporate
& others
Consolidation
adjustments
& eliminations
Business
performance
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Integrated
Energy Services
exceptional
items and certain
re-measurements
US$m
Revenue
External sales
3,207
2,000
Inter-segment sales
34
9
Total revenue
3,241
2,009
276
161
437
768
14
782
Segment results
595
119
39
165
(200)
(30)
–
–
–
–
–
–
–
–
–
(4)
–
(11)
1(10)
(218)
(228)
6,241
–
6,241
–
–
–
211
925
(463)
462
–
–
(230)
–
(230)
(11)
–
(11)
260
10
196
4
355
22
23
Total
US$m
6,241
–
6,241
395
89
39
165
(15)
11
684
(463)
221
–
–
–
–
–
–
–
–
–
7
(25)
20
395
89
39
167
28
(28)
–
(20)
3
–
(6)
–
–
(36)
–
–
–
(54)
2
(67)
6
–
–
–
–
–
7
(79)
22
–
–
–
7
(79)
22
11
634
(463)
171
–
–
–
(36)
3
(20)
2
–
(34)
3
–
(20)
403
64
33
131
(61)
11
581
(461)
120
Laggan-Tormore
loss
Unallocated
corporate costs
Profit/(loss) before
tax and finance
income/(costs)
Share of profits of
associates/joint
ventures
Finance costs
Finance income
Profit/(loss) before
income tax
Income tax
(expense)/credit
Laggan-Tormore
tax relief
Non-controlling
interests
Profit/(loss) for
the year
attributable to
Petrofac Limited
shareholders
1 Negative elimination of external sales shown above of US$10m represents a Group adjustment to the overall project percentage of completion on the Laggan-Tormore
project as OEC and OPO are reflecting in their segment’s progress on their own respective shares of the total project scope.
2 Represents release of previously eliminated margin relating to West Desaru and Berantai vessel on disposal of subsidiary.
134 / Petrofac Annual report and accounts 2015
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135
Onshore
Engineering &
Construction
Offshore
Projects &
Operations
Engineering &
Consulting
Services
Integrated
Energy
Services
Corporate
& others
Consolidation
adjustments
& eliminations
US$m
US$m
US$m
US$m
US$m
US$m
Total
US$m
Other segment information
Capital expenditures:
Property, plant and equipment
Intangible oil and gas assets
Charges:
Depreciation
Amortisation and write off
Exceptional items and certain re-measurements
Other long-term employment benefits
Share-based payments
28
–
43
–
–
18
11
171
–
18
–
–
1
4
9
–
6
–
–
–
1
437
144
159
14
463
–
3
12
–
4
–
–
–
3
11
–
–
–
–
–
–
668
144
230
14
463
19
22
Geographical segments
The following tables present revenue from external customers based on their location and non-current assets by geographical segments for the years
ended 31 December 2015 and 2014.
Year ended 31 December 2015
Oman
US$m
United Arab
Emirates
US$m
Algeria
US$m
United
Kingdom
US$m
Kuwait
US$m
Malaysia
US$m
Saudi Arabia
US$m
Other
countries
US$m
Consolidated
US$m
Revenues
from external
customers
1,408
1,395
833
804
555
520
332
997
6,844
Non-current assets:
Property, plant and equipment
Intangible oil and gas assets
Other intangible assets
Goodwill
United
Kingdom
US$m
United Arab
Emirates
US$m
Mexico
US$m
Romania
US$m
Malaysia
US$m
Tunisia
US$m
Other
countries
US$m
Consolidated
US$m
34
11
4
48
426
–
–
29
489
–
17
–
–
–
–
–
736
74
–
3
52
1
–
–
38
1,775
–
–
–
86
21
80
Year ended 31 December 2014
United
Kingdom
United Arab
Emirates
US$m
US$m
Algeria
US$m
Malaysia
US$m
Oman
US$m
Kuwait
US$m
Saudi Arabia
US$m
Other
countries
US$m
Consolidated
US$m
Revenues
from external
customers
1,401
925
688
515
469
450
355
1,438
6,241
Non-current assets:
Property, plant and equipment
Intangible oil and gas assets
Other intangible assets
Goodwill
United
Kingdom
US$m
United Arab
Emirates
US$m
Mexico
US$m
Romania
US$m
Malaysia
US$m
Tunisia
US$m
Other
countries
US$m
Consolidated
US$m
54
11
7
67
299
–
–
44
421
–
23
–
–
–
–
–
800
135
–
3
61
9
–
–
63
1,698
1
–
1
156
30
115
Revenues disclosed in the above tables are based on where the project is located. Revenues representing greater than 10% of Group revenues arose
from two customers amounting to US$1,515m in the Onshore Engineering & Construction segment (2014: two customers, US$525m in the Onshore
Engineering & Construction segment and US$449m in the Offshore Projects & Operations segment).
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Petrofac Annual report and accounts 2015 / 135
Financial statements
136
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
4 Revenues and expenses
a. Revenue
Rendering of services
Sale of crude oil and gas
2015
US$m
6,700
144
6,844
2014
US$m
6,044
197
6,241
Included in revenues from rendering of services are Offshore Projects & Operations, Engineering & Consulting Services and Integrated Energy Services
revenues of a ‘pass-through’ nature with zero or low margins amounting to US$400m (2014: US$226m).The revenues are included as external
revenues of the Group since the risks and rewards associated with recognition are assumed by the Group.
b. Cost of sales
During 2015, included in cost of sales is depreciation charged on property, plant and equipment of US$168m (2014: US$210m) (note 10) and
intangible amortisation of US$1m (2014: US$2m other intangible amortisation and oil and gas intangible written off amounting to US$8m).
Also included in cost of sales are forward points and ineffective portions on derivatives designated as cash flow hedges and losses on undesignated
derivatives of US$3m (2014: US$10m).These amounts are an economic hedge of foreign exchange risk but do not meet the criteria within IAS 39 and
are most appropriately recorded in cost of sales.
c. Selling, general and administration expenses
Staff costs
Depreciation (note 10)
Amortisation (note 13)
Write off of intangible oil and gas assets (note 13)
Other operating expenses
Other operating expenses consist mainly of office, travel, legal and professional and contracting staff costs.
d. Staff costs
Total staff costs:
Wages and salaries
Social security costs
Defined contribution pension costs
Other long-term employee benefit costs (note 26)
Expense of share-based payments (note 23)
2015
US$m
2014
US$m
195
28
3
–
102
328
223
20
3
1
121
368
2015
US$m
2014
US$m
1,209
1,164
58
26
22
23
68
23
19
22
1,338
1,296
Of the US$1,338m (2014: US$1,296m) of staff costs shown above, US$1,143m (2014: US$1,073m) is included in cost of sales, with the remainder
in selling, general and administration expenses.
The average number of payrolled staff employed by the Group during the year was 16,635 (2014: 16,135).
e. Auditor’s remuneration
The Group paid the following amounts to its auditors in respect of the audit of the financial statements and for other services provided to the Group:
Group audit fee
Audit of accounts of subsidiaries
Others
2015
US$m
2014
US$m
2
2
1
5
2
1
1
4
Others include audit related assurance services of US$400,000 (2014: US$380,000), tax advisory services of US$430,000 (2014: US$210,000),
tax compliance services of US$290,000 (2014: US$240,000) and other non-audit services of US$50,000 (2014: US$40,000).
136 / Petrofac Annual report and accounts 2015
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137
f. Other operating income
Gain on disposal of non-current asset
Foreign exchange gains
Other income
2015
US$m
2014
US$m
8
2
14
24
56
30
9
95
Other income includes US$9m contractual break fee earned in Integrated Energy Services for exiting the Bowleven Etinde project and US$2m
representing income from sale of scrap on projects in Onshore Engineering and Construction (2014: US$5m receipt of liquidated damages from a
vendor for late delivery of a MOPU).
Disposal of non-current asset
On 13 August 2014, the Group sold 80% of the share capital of Petrofac FPSO Holding Limited which via its subsidiaries owns interests in the
FPSO Berantai, FPF3 (formerly Jasmine venture) and FPF5 (formerly Ocean Legend) to PetroFirst Infrastructure Holdings Limited for an initial cash
consideration of US$307m. At 31 December 2014, there was a further US$34m of contingent consideration payable and this together with the initial
consideration of US$307m resulted in the recognition of a total gain on disposal of US$56m in the IES segment in 2014, which included a fair value
gain of US$31m on initial recognition of the remaining 20% investment in associate.
During 2015, upon final completion of the disposal, the fair value of the consideration for 80% of the equity was increased by US$7m due to the receipt
of the pending investment approval by PetroFirst Infrastructure Holdings Limited. Consequently, a US$1m fair value gain was recognised on the
remaining 20% investment in associate. The consideration of US$41m was received in full by 31 December 2015.
The gain on disposal has been computed as follows:
Fair value of consideration for 80% of the equity received in cash
Proceeds from repayments of loans due from FPSO Holding Limited
Fair value of contingent consideration for 80% of the equity receivable at reporting date
Total consideration
Property, plant and equipment
Cash
Finance lease receivables
Trade and other receivables
Debt acquisition costs
Total book value of assets disposed
Berantai RSC project financing debt transferred
Trade and other payables
Total book value of liabilities disposed
Due to/due from related parties arising on disposal
Due from related parties
Due to related parties
Allocated goodwill written off (note 12)
Transaction costs
Fair value gain on initial recognition of remaining 20% investment in associate
Gain on disposal
2015
US$m
2014
US$m
7
–
7
–
7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
8
87
220
307
34
341
(31)
(48)
(336)
(16)
(3)
(434)
128
25
153
23
(40)
(17)
(15)
(3)
31
56
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Petrofac Annual report and accounts 2015 / 137
Financial statements
138
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
4 Revenues and expenses continued
g. Other operating expenses
Foreign exchange losses
Other expenses
2015
US$m
2014
US$m
4
5
9
39
3
42
Other expenses mainly comprise US$2m write-off of due from related party balances relating to Professional Mechanical Repair Services Company
and PetroFirst Infrastructure Limited.
5 Exceptional items and certain re-measurements
Impairment of assets including goodwill
Fair value re-measurements
Onerous leasehold property provisions and impairments
Group reorganisation costs
Others
Foreign exchange translation losses on deferred tax balances
Tax relief on exceptional items and certain re-measurements
Income statement charge for the year
2015
US$m
2014
US$m
95
214
15
17
14
355
25
(22)
3
358
172
261
–
–
30
463
–
(2)
(2)
461
Impairment of assets and fair value re-measurements
As a result of significantly lower commodity price expectations, the Group reviewed the carrying value of its PM304 oil and gas assets. The review was
carried out on a fair value less costs of disposal basis, which was calculated to be US$329m, using risk adjusted cash flow projections (a level 3
measurement) discounted at a post-tax rate of 9.0%. This resulted in a pre-tax impairment of US$53m (post-tax US$33m) which has been allocated
proportionately to intangible oil and gas assets and property, plant and equipment. Management has used forward curve oil prices of US$41 per barrel
for 2016, US$48 per barrel for 2017, US$65 per barrel for 2018, US$70 per barrel for 2019 and US$75 per barrel for 2020 and beyond. A 10%
decrease in commodity prices would result in an additional pre-tax impairment charge of US$87m (post-tax US$54m).
The Group has reviewed the carrying value of goodwill allocated to the IES portfolio in light of revised commodity price expectations and underlying
asset performance during the year. As a result of this review, a further impairment charge of US$33m (post-tax US$33m) has been recognised in
respect of IES goodwill (2014: US$18m post-tax US$18m).
As a result of a re-assessment of oil and gas forward prices, the Group revalued its loan receivable from Ithaca Energy in respect of the Greater Stella
Area in the UK. The revaluation exercise was carried out on a fair value basis using risk adjusted cash flow projections discounted at a post-tax rate of
9.0%. This resulted in a pre-tax reduction in fair value of the Greater Stella Area receivable of US$214m (post-tax US$214m) (2014: US$207m post-tax
US$207m) in the IES segment. In 2014, a revaluation charge to profit and loss of US$54m (post-tax US$44m) (2015: nil) was also recognised in
respect of Berantai RSC in Malaysia and warrants held over shares in Seven Energy International Limited) in the IES segment.
In 2014, US$172m of impairment charges related to the Ticleni Production Enhancement Contract in Romania (US$134m; post-tax US$137m), the
FPSO Opportunity and OML119 in Nigeria (US$20m; post-tax US$25m) and IES goodwill impairment (US$18m; post-tax US$18m).
Fair value less costs of disposal are determined by discounting the post-tax cash flows expected to be generated from oil and gas production net of
selling costs taking into account assumptions that market participants would typically use in estimating fair values. Post-tax cash flows are derived
from projected production profiles for each asset taking into account forward market commodity prices over the relevant period and, where external
forward prices are not available, the Group’s Board-approved five year business planning assumptions are used. As each field has different reservoir
characteristics and contractual terms the post-tax cash flows for each asset are calculated using individual economic models which include
assumptions around the amount of recoverable reserves, production costs, life of the field/licence period and the selling price of the commodities
produced.
Onerous leasehold property provision
US$15m of onerous leasehold property provision represents the write-off of US$6m of leasehold property improvements and the estimated future
costs of US$9m relating to vacant leasehold office buildings at Quattro House and Bridge View in Aberdeen, UK for which the leases expire in 2024
and 2026 respectively.
138 / Petrofac Annual report and accounts 2015
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139
Group reorganisation costs
During the last quarter of 2015, the Group undertook a major review of how the future organisation should be structured and the costs relating to this
exercise including staff redundancy costs, office closure costs and other restructuring type expenses amounted to US$17m (post-tax US$15m).
Taxation
US$25m of foreign exchange losses on the retranslation of deferred tax balances denominated in Malaysian Ringgits have been incurred during the
year in respect of IES’s oil and gas activities in Malaysia due to an approximate 25% weakening in the Malaysian local currency versus the US dollar.
6 Finance (costs)/income
Finance costs
Long-term borrowings
Finance leases
Unwinding of discount on provisions (note 26)
Total finance costs
Finance income
Bank interest
Unwinding of discount on long-term receivables from customers (note 16)
Total finance income
7 Income tax
a. Tax on ordinary activities
The major components of income tax expense are as follows:
Business
performance
Exceptional
items and certain
re-measurements
US$m
US$m
Total
2015
US$m
Business
performance
US$m
Exceptional
items and certain
re-measurements
US$m
Current income tax
Current income tax charge
Adjustments in respect of current income tax of
previous years
Deferred tax
Relating to origination and reversal of temporary
differences
Recognition of tax losses relating to prior years
Adjustments in respect of deferred tax of previous
years
Income tax expense/(credit) reported in the income
statement
Income tax reported in equity
Deferred tax related to items charged directly to
equity
Current income tax related to share schemes
Foreign exchange movements on translation
Income tax income reported in equity
69
(1)
(49)
5
(18)
6
(1)
–
1
–
(2)
–
5
–
–
3
–
–
–
–
67
(1)
(44)
5
(18)
9
(1)
–
1
–
108
(89)
16
(2)
–
33
2
(1)
–
1
–
–
(7)
5
–
(2)
–
–
–
–
The split of the Group’s tax charge between current and deferred tax varies from year to year depending largely on:
• the variance between tax provided on the percentage of completion of projects versus that paid on accrued income for engineering, procurement
and construction contracts; and
• the tax deductions available for expenditure on Risk Service Contracts and Production Enhancement Contracts (PECs), which are partially offset by
the creation of losses.
See 7c below for the impact on the movements in the year.
22-Financials-Shareholder-p117-185-AN-070316.indd 139
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Petrofac Annual report and accounts 2015 / 139
2015
US$m
2014
US$m
(48)
(49)
(4)
(101)
1
8
9
(54)
(19)
(6)
(79)
2
20
22
Total
2014
US$m
108
(89)
9
3
–
31
2
(1)
–
1
Financial statements
140
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
7 Income tax continued
b. Reconciliation of total tax charge
A reconciliation between the income tax expense and the product of accounting profit multiplied by the Company’s domestic tax rate is as follows:
Accounting profit before tax
At Jersey’s domestic income tax rate of 0% (2014: 0%)
Expected tax charge in higher rate jurisdictions
Expenditure not allowable for income tax purposes
Income not subject to tax
Adjustments in respect of previous years
Adjustments in respect of losses not previously
recognised/derecognised
Unrecognised tax losses
Other permanent differences
Effect of change in tax rates
At the effective income tax rate of negative 2.7%
(2014: 18.4%)
20
–
(33)
8
(3)
(19)
(4)
50
1
6
6
Business
performance
Exceptional
items and certain
re-measurements
US$m
US$m
Total
2015
US$m
Business
performance
US$m
634
–
69
15
–
(90)
(4)
39
4
–
Exceptional
items and certain
re-measurements
US$m
(463)
–
(38)
1
–
1
2
6
26
–
Total
2014
US$m
171
–
31
16
–
(89)
(2)
45
30
–
(355)
(335)
–
(31)
–
–
–
9
–
25
–
–
(64)
8
(3)
(19)
5
50
26
6
3
9
33
(2)
31
The Group's effective tax rate for the year ended 31 December 2015 is negative 2.7% (2014: 18.4%). The Group’s effective tax rate, excluding the
impact of impairments and certain re-measurements, for the year ended 31 December 2015 is 30.0% (2014: 5.2% tax charge).
A number of factors have impacted the effective tax rate, excluding the impact of impairments and certain re-measurements, this year, principally being
the net release of tax provisions held in respect of income taxes which is partially offset by the impact of tax losses created in the year for which the
realisation against future taxable profits is not probable.
In line with prior years, the effective tax rate is also driven by the mix of profits in the jurisdictions in which profits are earned.
From 1 April 2015, the main UK corporation tax rate reduced from 21% to 20%. Further reductions were announced in the UK budget on 8 July 2015
which will reduce the standard rate of UK corporation tax to 19% from 1 April 2017 and 18% from 1 April 2020. These changes in the UK rate were
substantively enacted prior to the reporting date and therefore the impact of the change is included within the current year charge.
From 1 January 2016, the main Malaysian rate of corporation tax will reduce by 1% to 24%. This change was substantively enacted prior to 31
December 2014. The impact of the change was included within the previous year tax charge.
c. Deferred tax
Deferred tax relates to the following:
Deferred tax liabilities
Fair value adjustment on acquisitions
Accelerated depreciation
Profit recognition
Overseas earnings
Other temporary differences
Gross deferred tax liabilities
Deferred tax assets
Losses available for offset
Decelerated depreciation for tax purposes
Share scheme
Profit recognition
Decommissioning
Other temporary differences
Gross deferred tax assets
Net deferred tax liability/deferred tax (credit)/charge
Of which:
Deferred tax assets
Deferred tax liabilities
140 / Petrofac Annual report and accounts 2015
Consolidated statement
of financial position
Consolidated income
statement
2015
US$m
2014
US$m
2015
US$m
2014
US$m
–
(48)
10
3
8
(66)
(2)
–
2
1
35
(1)
35
26
–
–
(15)
(1)
–
1
–
(33)
(57)
12
2
249
68
3
10
332
2
297
58
–
2
359
172
108
5
5
3
57
29
271
61
80
141
3
4
5
58
64
242
117
34
151
22-Financials-Shareholder-p117-185-AN-070316.indd 140
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141
Included within the net deferred tax asset are UK tax losses of US$305m (2014: US$40m). This represents the losses which are expected to be utilised
based on management’s projection of future taxable profits. As a result of the UK rate change noted in 7b, the effective tax rate on the loss utilisation
over this period is expected to be 18.5%.
d. Unrecognised tax losses and tax credits
Deferred income tax assets are recognised for tax loss carry forwards and tax credits to the extent that the realisation of the related tax benefit through
offset against future taxable profits is probable. The Group did not recognise deferred income tax assets of US$525m (2014: US$231m).
Expiration dates for tax losses
No earlier than 2020
No expiration date
Tax credits (no expiration date)
2015
US$m
2014
US$m
66
447
513
12
525
18
201
219
12
231
During 2015, the Group has not recognised any tax benefit from the utilisation of tax losses (2014: US$1m), no recognition of previously unrecognised
losses (2014: US$4m) and has derecognised tax losses from a prior period of US$5m (2014: US$2m).
8 Earnings per share
Basic earnings per share amounts are calculated by dividing the profit for the year attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the profit attributable to ordinary shareholders, after adjusting for any dilutive effect, by
the weighted average number of ordinary shares outstanding during the year, adjusted for the effects of ordinary shares granted under the employee
share award schemes which are held in trust.
The following reflects the income and share data used in calculating basic and diluted earnings per share:
Profit attributable to ordinary shareholders for basic and diluted earnings per share excluding exceptional
items and certain re-measurements
(Loss)/profit attributable to ordinary shareholders for basic and diluted earnings per share including exceptional
items and certain re-measurements
Weighted average number of ordinary shares for basic earnings per share
Effect of dilutive potential ordinary shares granted under share-based payment schemes1
Adjusted weighted average number of ordinary shares for diluted earnings per share
2015
US$m
2014
US$m
9
(349)
2015
Shares
million
340
–
340
581
120
2014
Shares
million
341
3
344
1 For the year ended 31 December 2015, potentially issuable ordinary shares under share-based payment schemes are excluded from the diluted earnings per ordinary
share calculation, as their inclusion would decrease the loss per ordinary share.
9 Dividends paid and proposed
Declared and paid during the year
Equity dividends on ordinary shares:
Final dividend for 2013: 43.80 cents per share
Interim dividend 2014: 22.00 cents per share
Final dividend for 2014: 43.80 cents per share
Interim dividend 2015: 22.00 cents per share
Proposed for approval at AGM
(not recognised as a liability as at 31 December)
Equity dividends on ordinary shares
Final dividend for 2015: 43.80 cents per share (2014: 43.80 cents per share)
2015
US$m
2014
US$m
–
–
149
74
223
149
75
–
–
224
2015
US$m
2014
US$m
152
152
Petrofac Annual report and accounts 2015 / 141
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07/03/2016 11:40
Financial statements
142
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
10 Property, plant and equipment
Oil and gas
assets
US$m
Oil and gas
facilities
Land, buildings
and leasehold
improvements
Plant and
equipment
US$m
US$m
US$m
Vehicles
US$m
Office
furniture
and
equipment
Assets
under
construction
US$m
US$m
828
172
–
264
5
(13)
448
225
(48)
–
–
–
1,256
625
97
–
73
–
–
(4)
–
–
–
–
1,426
621
(200)
(116)
(99)
–
–
–
(415)
(78)
(32)
–
–
–
(175)
(24)
(15)
17
–
–
(197)
(42)
(15)
–
–
–
343
28
(7)
–
13
(3)
374
4
(44)
–
34
(4)
364
(162)
(52)
–
6
(5)
2
(211)
(40)
(6)
44
2
30
15
–
–
3
(1)
47
–
(4)
–
8
(1)
50
(18)
(12)
(2)
–
–
1
(31)
(4)
–
2
(6)
1
23
2
(1)
–
–
–
24
2
(1)
–
–
–
183
26
(9)
–
(14)
(6)
180
15
(6)
–
8
(4)
25
193
(19)
(3)
–
1
–
–
(21)
(2)
–
1
–
–
(119)
(23)
–
8
5
3
(126)
(30)
–
6
6
1
29
200
–
–
(7)
–
222
146
–
–
(50)
–
318
–
–
(29)
–
–
–
(29)
–
–
–
–
–
Total
US$m
1,884
668
(65)
264
–
(23)
2,728
260
(55)
73
–
(9)
2,997
(693)
(230)
(145)
32
–
6
(1,030)
(196)
(53)
53
–
4
Cost
At 1 January 2014
Additions
Disposals
Transfer from intangible oil and gas
assets (note 13)
Transfers
Exchange difference
At 1 January 2015
Additions/(adjustments)
Disposals
Transfer from intangible oil and gas
assets (note 13)
Transfers
Exchange difference
At 31 December 2015
Depreciation & impairment
At 1 January 2014
Charge for the year
Charge for impairment (note 5)
Disposals
Transfers
Exchange difference
At 1 January 2015
Charge for the year
Charge for impairment (note 5)
Disposals
Transfers
Exchange difference
At 31 December 2015
Net carrying amount:
At 31 December 2015
At 31 December 2014
(525)
(254)
(211)
(38)
(22)
(143)
(29)
(1,222)
901
841
367
428
153
163
12
16
3
3
50
54
289
193
1,775
1,698
Additions to oil and gas assets mainly comprise Santuario, Magallanes and Arenque PECs of US$61m, Pánuco PEC of US$26m (2014: Santuario,
Magallanes and Arenque PECs of US$160m, and Pánuco PEC of US$12m) and US$18m relating to block PM304 in Malaysia which is offset by
change in estimates for decommissioning provision relating to block PM304 in Malaysia of US$8m.
Negative adjustment to oil and gas facilities represents a reduction due to a revised finance lease agreement with the lessor on an FPSO for block
PM304 in Malaysia. Additions to oil and gas facilities in 2014 mainly comprised an FPSO acquired under a finance lease for block PM304 in Malaysia of
US$184m, the upgrade of the FPF4 at a cost of US$5m and upgrade work on the Berantai vessel of US$10m.
Transfer from intangible oil and gas assets of US$73m comprises Cendor phase 2 field development costs on block PM304 in Malaysia (2014: field
development costs on block PM304 in Malaysia of US$236m and Ticleni PEC costs of US$28m).
Of the total charge for depreciation in the income statement, US$168m (2014: US$210m) is included in cost of sales and US$28m (2014: US$20m)
in selling, general and administration expenses.
Assets under construction mainly represent expenditures incurred in relation to construction of the JSD6000 installation vessel.
Interest capitalised on construction of JSD6000 installation vessel in 2015 amounted to US$2m (2014: US$nil).
142 / Petrofac Annual report and accounts 2015
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143
Included in ‘oil and gas facilities’, ‘land, buildings and leasehold improvements’ and ‘plant and equipment’ is property, plant and equipment under
finance lease agreements, for which net book values are as follows:
Net book value
At 1 January
Finance leased assets arising on disposal of subsidiary (note 4f)
Additions/(adjustments)
Depreciation
Exchange difference
At 31 December
2015
US$m
401
–
(4)
(46)
–
351
2014
US$m
19
215
197
(30)
–
401
Additions to finance leased assets in 2014 mainly comprised an FPSO acquired under a finance lease for block PM304 in Malaysia of US$184m.
11 Material partly-owned subsidiaries
Petrofac Emirates LLC is the only material partly-owned subsidiary in the Group and the proportion of the nominal value of issued shares controlled by
the Group is disclosed in note 32.
Movement of non-controlling interest in Petrofac Emirates LLC
2015
US$m
2014
US$m
At 1 January
Profit for the year
Net unrealised losses on derivatives
Dividend paid
At 31 December
The balance of non-controlling interests relate to other partly-owned subsidiaries that are not material to the Group.
Financial information of Petrofac Emirates LLC that has material non-controlling interests is provided below:
Summarised income statement
Revenue
Cost of sales
Gross profit
Selling, general and administration expenses
Finance income
Profit for the year
Attributable to non-controlling interest
Net unrealised (gains)/losses on derivatives
Net unrealised (losses)/gains on derivatives at 1 January
Movement during the year
Net unrealised losses on derivatives at 31 December
Attributable to non-controlling interest
Summarised statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Total equity
Attributable to non-controlling interest
Summarised cash flow information
Operating
Investing
Financing
12
5
(8)
(5)
4
2015
US$m
1,320
(1,247)
73
(56)
1
18
5
(52)
(31)
(83)
(21)
526
240
766
738
10
748
18
4
90
(65)
–
5
20
(13)
–
12
2014
US$m
848
(715)
133
(54)
–
79
20
23
(75)
(52)
(13)
604
200
804
745
10
755
49
12
133
(38)
–
Dividends of US$20m were declared during 2015, of which US$5m is attributable to non-controlling interest (2014: US$nil). These dividends were
adjusted against related party balances in the standalone books.
Petrofac Annual report and accounts 2015 / 143
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Financial statements
144
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
12 Goodwill
A summary of the movements in goodwill is presented below:
At 1 January
Impairment (note 5)
Goodwill written off on disposal of subsidiary (note 4f)
Exchange difference
At 31 December
2015
US$m
115
(33)
–
(2)
80
2014
US$m
155
(18)
(15)
(7)
115
Goodwill of US$33m (2014: US$18m) relating to the Integrated Energy Services cash-generating unit was impaired at 30 June 2015 (note 5).
Goodwill written off on disposal of subsidiary during 2014 related to the sale of 80% of the share capital of Petrofac FPSO Holding Limited to PetroFirst
Infrastructure Holdings Limited (note 4f).
Goodwill acquired through business combinations has been allocated to four groups of cash-generating units, for impairment testing as follows:
• Onshore Engineering & Construction
• Offshore Projects & Operations
• Engineering & Consulting Services
• Integrated Energy Services
These represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. The Group considers
cash-generating units to be individually significant where they represent greater than 25% of the total goodwill balance.
Onshore Engineering & Construction, Offshore Projects & Operations, Engineering & Consulting Services and Integrated Energy
Services cash-generating units
Recoverable amounts have been determined based on value in use calculations, using discounted pre-tax cash flow projections. Management have
adopted projection periods appropriate to each unit’s value in use. For Onshore Engineering & Construction, Offshore Projects & Operations and
Engineering & Consulting Services cash-generating units the cash flow projections are based on financial budgets approved by senior management
covering a five-year period.
For the Integrated Energy Services business the cash flows are based on economic models over the length of the contracted period for Production
Enhancement Contracts, Equity Upstream Investments and Risk Service Contracts. For other operations included in Integrated Energy Services, cash
flows are based on financial budgets approved by senior management covering a five-year period, extrapolated at a growth rate of 2.5% per annum.
Carrying amount of goodwill allocated to each group of cash-generating units
Onshore Engineering & Construction unit
Offshore Projects & Operations unit
Engineering & Consulting Services unit
Integrated Energy Services unit
2015
US$m
2014
US$m
29
26
25
–
80
29
28
24
34
115
Key assumptions used in value in use calculations for the Onshore Engineering & Construction, Offshore Projects & Operations and the
Engineering & Consulting Services units
Market share: the key management assumptions relate to continuing to maintain existing levels of business and grow organically in international
markets.
Discount rate: management has used a pre-tax discount rate of 11.6% per annum (2014: 11.6% per annum) derived from the estimated weighted
average cost of capital of the Group. A 100 basis point increase in the pre-tax discount rate to 12.6% would result in no additional impairment charges.
Key assumptions used in value in use calculations for the Integrated Energy Services unit at 30 June 2015
The following key assumptions were included in the value in use calculations at 30 June 2015 at which point in time the remaining amount of goodwill
of US$33m was fully impaired:
Market share: for the Training business which is within Integrated Energy Services, the key assumptions relate to management’s assessment of
maintaining the unit’s market share in the UK and developing further the business in international markets.
Capital expenditure: the Production Enhancement Contracts in the Integrated Energy Services unit require a minimum level of capital spend on the
projects in the initial years to meet contractual commitments. If the capital is not spent, a cash payment of the balance is required which does not
qualify for cost recovery. The level of capital spend assumed in the value in use calculation is that expected over the period of the budget based on the
current field development plans which assumes the minimum spend is met on each project and the contracts remain in force for the entire duration of
the project. For other equity upstream investments, the level of capital spend assumed is based on sanctioned field development plans and represents
the activities required to access commercial reserves.
144 / Petrofac Annual report and accounts 2015
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145
Reserve volumes and production profiles: management has used its internally developed economic models of reserves and production profiles as
inputs in to the value in use for the Production Enhancement Contracts, Risk Service Contracts and Equity Upstream Investments. These economic
models are revised annually as part of the preparation of the Group’s five year business plans which are approved by the Board. Management used
forward curve oil prices at 30 June 2015 of US$66 per barrel for the year to 30 June 2016, US$71 per barrel for the year to 30 June 2017 and US$80
per barrel for July to December 2017 and long-term planning prices of US$85 per barrel for 2018 and US$90 per barrel for 2019 and beyond to
determine reserve volumes (2014: US$61 per barrel for 2015 and US$69 per barrel for 2016, US$80 per barrel for 2017, US$85 per barrel for 2018
and US$90 per barrel for 2019 and beyond).
Growth rate: estimates are based on management’s assessment of market share having regard to macro-economic factors and the growth rates
experienced in the recent past in the markets in which the unit operates. A growth rate of 2.5% per annum has been applied for businesses within
the Integrated Energy Services cash-generating unit where the cash flows are not based on long-term contractual arrangements.
Discount rate: management has used a pre-tax discount rate of 11.6% per annum (2014: 11.6% per annum). The discount rate is derived from the
estimated weighted average cost of capital (WACC) of the Group and has been calculated using an estimated risk free rate of return adjusted for the
Group’s estimated equity market risk premium.
13 Intangible assets
Intangible oil and gas assets
Cost:
At 1 January
Additions
Assets related to increase in decommissioning provision (note 26)
Transfer to oil and gas assets (note 10)
Impairments (note 5)
Write off (note 4b and note 4c)
Net book value of intangible oil and gas assets at 31 December
Other intangible assets
Cost:
At 1 January
Impairments (note 5)
Transfer to receivables
Exchange difference
At 31 December
Accumulated amortisation:
At 1 January
Amortisation
Exchange difference
At 31 December
Net book value of other intangible assets at 31 December
Total intangible assets
2015
US$m
2014
US$m
156
10
–
(73)
(7)
–
86
53
–
(5)
–
48
(23)
(4)
–
(27)
21
107
290
97
47
(264)
(5)
(9)
156
60
(4)
–
(3)
53
(20)
(5)
2
(23)
30
186
Intangible oil and gas assets
Oil and gas assets (part of the Integrated Energy Services segment) additions comprise US$10m (2014: US$137m) of capitalised expenditure on the
Group’s assets in Malaysia.
There were investing cash outflows relating to capitalised intangible oil and gas assets of US$17m (2014: US$119m) in the current period arising from
pre-development activities.
Transfers within intangible oil and gas assets represent transfers to oil and gas assets relating to block PM304 in Malaysia of US$73m (2014:
US$236m and Ticleni PECs of US$28m) (note 10).
In 2014, the US$8m write off of intangible oil and gas assets was in respect of a dry well in Chergui and US$1m was in respect of Bowleven licence
costs written off.
Other intangible assets
Other intangible assets comprising project development expenditure, customer contracts, proprietary software and patent technology are being
amortised over their estimated economic useful life on a straight-line basis and the related amortisation charges included in cost of sales and selling,
general and administration expenses (note 4b and 4c).
22-Financials-Shareholder-p117-185-AN-070316.indd 145
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Petrofac Annual report and accounts 2015 / 145
Financial statements
146
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
14 Investments in associates/joint ventures
As at 1 January 2014
Loan made to Petrofac FPF1 Limited
Share of profits
Fair valuation gain on initial recognition of investment in associate (note 4f)
Transfer to available-for-sale investment (note 15)
Dividends received
As at 1 January 2015
Additions
Loan made to Petrofac FPF1 Limited
Share of profits
Fair valuation gain on initial recognition of investment in associate (note 4f)
Dividends received
As at 31 December 2015
Associates
US$m
210
13
4
31
(185)
(7)
66
–
1
7
1
(6)
69
Joint
ventures
US$m
5
–
3
–
–
(3)
5
1
–
2
–
(3)
5
Total
US$m
215
13
7
31
(185)
(10)
71
1
1
9
1
(9)
74
Dividends received include US$5m received from PetroFirst Infrastructure Limited, US$3m received from TTE Petrofac Limited and US$1m receivable
from PetroFirst Infrastructure Limited at 31 December 2015 (2014: US$7m received from PetroFirst infrastructure Limited and US$3m received from
TTE Petrofac Limited).
Included in share of profits is an impairment loss of US$1m relating to a reduction in scope of construction work at a training centre in Oman (note 5).
In 2014, fair value gain of US$31m represented the increase in fair value of the remaining 20% share in PetroFirst Infrastructure Limited post disposal
of 80% of the share capital of Petrofac FPSO Holding Limited (note 4f).
Associates
PetroFirst Infrastructure Limited
Petrofac FPF1 Limited
2015
US$m
2014
US$m
29
40
69
28
38
66
Interest in associates
Summarised financial information of PetroFirst Infrastructure Limited and Petrofac FPF1 Limited, based on their IFRS financial statements, and
reconciliation with the carrying amount of the investment in consolidated financial statements are set out below:
Revenue
Cost of sales
Gross profit
Selling, general and administration expenses
Finance (expense)/income, net
Profit
Group’s share of profit for the year
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Group’s share of net assets
Carrying amount of the investment
2015
US$m
2014
US$m
68
(17)
51
–
(14)
37
7
25
562
587
17
264
281
306
69
69
28
–
28
(8)
(6)
14
4
40
595
635
20
328
348
287
66
66
The associates had no contingent liabilities or capital commitments as at 31 December 2015 and 2014.
146 / Petrofac Annual report and accounts 2015
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147
14 Investments in associates/joint ventures continued
Interest in joint ventures
Summarised financial information of the joint ventures1, based on their IFRS financial statements, and reconciliation with the carrying amount of the
investment in consolidated financial statements are set out below:
Revenue
Cost of sales
Gross profit
Selling, general and administration expenses
Finance (expense)/income, net
Profit before income tax
Income tax
Profit
Group’s share of profit for the year
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Group’s share of net assets
Carrying amount of the investment
1 A list of these joint ventures is disclosed in note 32.
2015
US$m
25
(19)
2014
US$m
35
(26)
6
(1)
–
5
(1)
4
2
14
6
20
9
1
10
10
5
5
9
(2)
–
7
(1)
6
3
20
5
25
11
4
15
10
5
5
The joint ventures had no contingent liabilities or capital commitments as at 31 December 2015 and 2014. The joint ventures cannot distribute their
profits until they obtain consent from the venturers.
15 Available-for-sale investment
On 15 April 2014, Seven Energy secured additional equity capital that resulted in dilution of the Company’s interest in Seven Energy from 23.5% to
15.4%. Following the dilution of ownership interest, the Group did not exercise significant influence over the activities of Seven Energy and as a result
transferred the investment of US$185m from investment in associate to available-for-sale investment (note 14). During 2015, a reduction in fair value of
US$16m has been recognised in other comprehensive income through reserve for unrealised gains/(losses) on available-for-sale financial asset (2014:
US$nil).
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Petrofac Annual report and accounts 2015 / 147
Financial statements
148
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
16 Other financial assets and other financial liabilities
Other financial assets
Non-current
Receivable under the Berantai RSC
Receivable from joint venture partners
Classification
2015
US$m
2014
US$m
Fair value through profit and loss
Loans and receivables
Forward currency contracts designated as hedges (note 31)
Designated as cash flow hedges
Restricted cash
Current
Loans and receivables
Receivable under the Berantai RSC
Fair value through profit and loss
Receivable in respect of the development of the Greater Stella Area
Fair value through profit and loss
Receivable from joint venture partners
Forward currency contracts designated as hedges (note 31)
Forward currency contracts undesignated (note 31)
Oil derivative (note 31)
Restricted cash
Other financial liabilities
Non-current
Finance lease creditors (note 28)
Loans and receivables
Designated as cash flow hedges
Fair value through profit and loss
Designated as cash flow hedges
Loans and receivables
Loans and borrowings
Forward currency contracts designated as hedges (note 31)
Designated as cash flow hedges
Current
Finance lease creditors (note 28)
Contingent consideration payable
Forward currency contracts designated as hedges (note 31)
Forward currency contracts undesignated (note 31)
Oil derivative (note 31)
Interest payable
Loans and borrowings
Fair value through profit and loss
Designated as cash flow hedges
Fair value through profit and loss
Designated as cash flow hedges
Fair value through profit and loss
303
330
78
41
752
54
160
155
26
12
12
36
455
631
28
659
239
–
66
1
–
30
336
343
396
50
1
790
38
192
150
27
–
20
8
435
738
18
756
234
1
74
–
–
8
317
The long-term and short-term receivables under the Berantai RSC represent the discounted value of amounts due under the contract which are being
recovered over a six year period from 2013 in line with the contractual terms of the project.
The short-term receivable in respect of the development of the Greater Stella Area represents a loan made to the consortium partners to fund
Petrofac’s share of the development costs of the field.
The short-term and long-term receivable from joint venture partners represents the 70% gross up on the finance lease liability in respect of oil and gas
facilities relating to block PM304 in Malaysia that are included 100% in the Group’s consolidated statement of financial position. This treatment is
necessary to reflect the legal position of the Group as the contracting entity for this lease. The Group’s 30% share of this liability is US$208m (2014:
US$234m).
Restricted cash comprises deposits with financial institutions and joint venture partners securing various guarantees and performance bonds
associated with the Group’s trading activities (note 28).This cash will be released on the maturity of these guarantees and performance bonds.
148 / Petrofac Annual report and accounts 2015
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149
Fair value measurement
The following financial instruments are measured at fair value using the hierarchy below for determination and disclosure of their respective fair values:
Level 1: Unadjusted quoted prices in active markets for identical financial assets or liabilities
Level 2: Other valuation techniques where the inputs are based on significant observable factors
Level 3: Other valuation techniques where the inputs are based on significant unobservable market data
Set out below is a comparison of the carrying amounts and fair values of financial instruments as at:
Level
Carrying amount
Fair value
2015
US$m
2014
US$m
2015
US$m
2014
US$m
Financial assets
Cash and short-term deposits
Restricted cash
Available-for-sale investment
Receivable under Berantai RSC
Receivable in respect of the development of the Greater Stella Area
Oil derivative
Euro forward currency contracts – designated as cash flow hedge
Kuwaiti Dinar forward currency contracts – designated as cash flow hedge
Sterling forward currency contracts – designated as cash flow hedge
Sterling forward currency contracts – undesignated
Financial liabilities
Interest-bearing loans and borrowings
Senior notes
Term Loan
Revolving credit facility
Export Credit Agency Funding
Bank overdrafts
Finance lease creditors
Contingent consideration
Euro forward currency contracts – designated as cash flow hedge
Level 2
Level 2
Level 3
Level 3
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
Level 2
Malaysian Ringgit forward currency contracts – designated as cash flow hedge
Level 2
Sterling forward currency contracts – designated as cash flow hedge
Kuwaiti Dinar forward currency contracts – designated as cash flow hedge
Sterling forward currency contracts – undesignated
Level 2
Level 2
Level 2
1,104
77
169
357
160
12
99
3
2
12
745
499
530
13
3
870
–
72
18
3
1
1
986
9
185
381
192
20
77
–
–
–
743
498
469
–
9
972
1
91
–
1
–
–
1,104
77
169
357
160
12
99
3
2
12
750
500
540
17
3
870
–
72
18
3
1
1
986
9
185
381
192
20
77
–
–
–
750
500
475
–
9
972
1
91
–
1
–
–
The Group considers that the carrying amounts of trade and other receivables, work-in-progress, trade and other payables, other current and non-
current financial assets and liabilities approximate their fair values and are therefore excluded from the above table.
The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair values:
• The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings.
Derivatives valued using valuation techniques with market observable inputs are mainly foreign exchange forward contracts and oil derivatives.
Externally provided sources of quoted market prices have been used to determine the fair values of forward currency contracts, interest rate swaps
and oil derivatives.
• The fair values of long-term interest-bearing loans and borrowings and finance lease creditors are equivalent to their amortised costs determined as
the present value of discounted future cash flows using the effective interest rate.
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Petrofac Annual report and accounts 2015 / 149
Financial statements
150
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
16 Other financial assets and other financial liabilities continued
• The fair value of the receivable under Berantai RSC has been calculated using a discounted cash flow model. The valuation requires management to
make certain assumptions about unobservable inputs to the model; the oil price assumptions used are the same as disclosed in note 5 and other
significant unobservable inputs are disclosed in the table below:
Internal rate of return
Discount rate
2015
11.5%
6.0%
2014
11.5%
6.0%
Management regularly assesses a range of reasonably possible alternatives for those significant unobservable inputs and determines their impact on
the total fair value. The fair value of the receivable under Berantai RSC is only sensitive to a reasonable change in the internal rate of return and the
discount rate. The table below explains the impact on the fair value of the receivable as a result of changes to these inputs:
100 basis points decrease in the internal rate of return
100 basis points decrease in the discount rate
100 basis points increase in the discount rate
Reconciliation of fair value measurement of the receivable under Berantai RSC:
As at 1 January
Billings during the year
Fair value loss included in revenue
Fair value loss on contract receivables (note 5)
Unwinding of discount
Receipts during the year
As at 31 December
2015
US$m
(19)
2
(2)
2015
US$m
381
55
(4)
–
8
(83)
357
2014
US$m
(1)
2
(2)
2014
US$m
476
65
(3)
(43)
20
(134)
381
• The fair value of the available-for-sale investment in Seven Energy has been calculated using a discounted cash flow model. The oil price
assumptions used are the same as disclosed in note 5; the risk adjusted cash flow projections are discounted at a post-tax rate of 9.0%
The table below explains the impact on the fair value of the available-for-sale investment as a result of changes to these inputs:
10% decrease in the oil price (per barrel)
10% increase in the oil price (per barrel)
100 basis points decrease in the discount rate
100 basis points increase in the discount rate
Reconciliation of fair value measurement of the available-for-sale investment:
As at 1 January
Transferred from investment in associate
Fair value change (note 15)
As at 31 December
2015
US$m
2014
US$m
(3)
5
12
(9)
2015
US$m
185
–
(16)
169
(4)
4
14
(14)
2014
US$m
–
185
–
185
150 / Petrofac Annual report and accounts 2015
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151
• The fair value of the receivable in respect of the development of the Greater Stella Area has been calculated using a discounted cash flow model that
represents the value which management expects would be converted to oil and gas assets upon transfer of legal title of the licence on achieving first
oil. The oil price assumptions used are the same as disclosed in note 5; the risk adjusted cash flow projections are discounted at a post-tax rate of
9.0%.
The table below explains the impact on the fair value of the amounts receivable in respect of the development of the Greater Stella Area as a result of
changes to these inputs:
10% decrease in the oil price (per barrel)
10% increase in the oil price (per barrel)
10% decrease in the gas price (per mcf)
10% increase in the gas price (per mcf)
6 month delay in production
100 basis points decrease in the discount rate
100 basis points increase in the discount rate
Reconciliation of fair value measurement of the amounts receivable in respect of the development of the Greater Stella Area:
As at 1 January
Advances during the year to the partners
Fair value loss (note 5)
As at 31 December
17 Inventories
Crude oil
Stores and raw materials
Included in the consolidated income statement are costs of inventories expensed of US$106m (2013: US$43m).
18 Work in progress and billings in excess of cost and estimated earnings
Cost and estimated earnings
Less: billings
Work in progress
Billings
Less: cost and estimated earnings
Billings in excess of cost and estimated earnings
Total cost and estimated earnings
Total billings
2015
US$m
2014
US$m
(22)
22
(26)
27
(45)
16
(15)
2015
US$m
192
182
(214)
160
(29)
27
(30)
30
(8)
17
(19)
2014
US$m
200
199
(207)
192
2015
US$m
2014
US$m
4
9
13
3
13
16
2015
US$m
2014
US$m
19,517
15,892
(17,723)
(14,290)
1,794
1,602
1,589
(1,388)
201
5,638
(5,373)
265
20,905
21,265
19,312
19,928
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Petrofac Annual report and accounts 2015 / 151
Financial statements
152
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
19 Trade and other receivables
Trade receivables
Retentions receivables
Advances
Prepayments and deposits
Receivables from joint venture partners
Other receivables
2015
US$m
1,224
349
262
38
100
151
2014
US$m
1,680
344
275
47
196
241
2,124
2,783
Other receivables mainly consist of Value Added Tax recoverable of US$65m (2014: Value Added Tax recoverable of US$140m and US$34m
receivable from PetroFirst Infrastructure Holdings Limited relating to disposal of 80% of the share capital of Petrofac FPSO Holding Limited).
Trade receivables are non-interest bearing and are generally on 30 to 60 days’ terms. Trade receivables are reported net of provision for impairment.
The movements in the provision for impairment against trade receivables totalling US$1,236m (2014: US$1,684m) are as follows:
Specific
impairment
US$m
2015
General
impairment
US$m
2014
Total
US$m
Specific
impairment
General
impairment
US$m
US$m
At 1 January
Charge/(reversal) for the year
Amounts written off
At 31 December
At 31 December, the analysis of trade receivables is as follows:
Unimpaired
Impaired
Less: impairment provision
Net trade receivables 2015
Unimpaired
Impaired
Less: impairment provision
Net trade receivables 2014
Neither past
due nor
impaired
US$m
832
–
832
–
832
1,228
–
1,228
–
1,228
< 30
days
US$m
156
–
156
–
156
285
–
285
–
285
2
10
(1)
11
31–60
days
US$m
129
–
129
–
129
74
1
75
–
75
2
(1)
–
1
4
9
(1)
12
4
–
(2)
2
1
1
–
2
Number of days past due
61–90
days
US$m
91–120
days
US$m
121–360
days
US$m
> 360
days
US$m
18
–
18
–
18
15
1
16
–
16
12
6
18
(3)
15
21
1
22
–
22
46
9
55
(5)
50
37
4
41
(2)
39
22
6
28
(4)
24
15
2
17
(2)
15
Total
US$m
5
1
(2)
4
Total
US$m
1,215
21
1,236
(12)
1,224
1,675
9
1,684
(4)
1,680
The credit quality of trade receivables that are neither past due nor impaired is assessed by management with reference to externally prepared
customer credit reports and the historic payment track records of the counterparties.
Advances represent payments made to certain of the Group’s subcontractors for projects in progress, on which the related work had not been
performed at the statement of financial position date.
Receivables from joint venture partners are amounts recoverable from venture partners on the Block PM304, Berantai RSC and on consortium
contracts in the OEC segment.
All trade and other receivables are expected to be settled in cash.
Certain trade and other receivables will be settled in cash using currencies other than the reporting currency of the Group, and will be largely paid
in sterling, euros and Kuwaiti dinars.
152 / Petrofac Annual report and accounts 2015
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153
20 Cash and short-term deposits
Cash at bank and in hand
Short-term deposits
Total cash and bank balances
2015
US$m
1,102
2
1,104
2014
US$m
899
87
986
Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group,
and earn interest at respective short-term deposit rates. The fair value of cash and bank balances is US$1,104m (2014: US$986m).
For the purposes of the consolidated statement of cash flows, cash and cash equivalents comprise the following:
Cash at bank and in hand
Short-term deposits
Bank overdrafts (note 25)
21 Share capital
The share capital of the Company as at 31 December was as follows:
2015
US$m
1,102
2
(3)
1,101
2014
US$m
899
87
(9)
977
2015
US$m
2014
US$m
Authorised
750,000,000 ordinary shares of US$0.020 each (2014: 750,000,000 ordinary shares of US$0.020 each)
15
15
Issued and fully paid
345,912,747 ordinary shares of US$0.020 each (2014: 345,912,747 ordinary shares of US$0.020 each)
7
7
The movement in the number of issued and fully paid ordinary shares is as follows:
Ordinary shares:
Ordinary shares of US$ 0.020 each at 1 January 2014
Issued during the year
Ordinary shares of US$0.020 each at 1 January 2015
Ordinary shares of US$0.020 each at 31 December 2015
Number
345,912,747
–
345,912,747
345,912,747
The share capital comprises only one class of ordinary shares. The ordinary shares carry a voting right and the right to a dividend.
Share premium: The balance on the share premium account represents the amount received in excess of the nominal value of the ordinary shares.
Capital redemption reserve: The balance on the capital redemption reserve represents the aggregated nominal value of the ordinary shares
repurchased and cancelled.
22 Treasury shares
For the purpose of making awards under the Group’s employee share schemes, shares in the Company are purchased and held by the Petrofac
Employee Benefit Trust and the Petrofac Joint Venture Companies Employee Benefit Trust. All these shares have been classified in the statement of
financial position as treasury shares within equity.
The movements in total treasury shares are shown below:
At 1 January
Acquired during the year
Vested during the year
At 31 December
2015
2014
Number
US$m
Number
4,985,937
2,800,000
101 5,672,691
39 1,000,000
(1,770,417)
(29)
(1,686,754)
6,015,520
111 4,985,937
US$m
110
25
(34)
101
Shares vested during the year include dividend shares and 8% uplift adjustment made in respect of the EnQuest demerger of 105,365 shares
(2014: 102,514 shares).
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Petrofac Annual report and accounts 2015 / 153
Financial statements
154
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
23 Share-based payment plans
Performance Share Plan (PSP)
Under the PSP, share awards are granted to Executive Directors and a restricted number of other senior executives of the Group. The shares vest at
the end of three years subject to continued employment and the achievement of certain pre-defined market and non-market-based performance
conditions. The 50% market performance based part of these awards is dependent on the total shareholder return (TSR) of the Group compared with
an index composed of selected relevant companies. The fair value of the shares vesting under this portion of the award is determined by an
independent valuer using a Monte Carlo simulation model taking into account the terms and conditions of the plan rules and using the following
assumptions at the date of grant:
Expected share price volatility (based on median of
comparator Group’s three-year volatilities)
Share price correlation with comparator group
Risk-free interest rate
Expected life of share award
Fair value of TSR portion
2015
awards
2014
awards
22 Mar 2013
18 Apr 2013
24 May 2013
awards
awards
awards
2012
awards
28.5%
26.4%
0.7%
3 years
562p
32.7%
40.4%
1.2%
3 years
827p
34.6%
44.0%
0.4%
34.7%
44.3%
0.4%
33.9%
42.0%
0.5%
3 years
3 years
3 years
692p
492p
571p
38.0%
46.0%
0.4%
3 years
1,103p
The non-market-based condition governing the vesting of the remaining 50% of the total award is subject to achieving between 7.5% and 15%
earnings per share (EPS) growth targets over a three-year period. The fair values of the equity-settled award relating to the EPS part of the scheme are
estimated, based on the quoted closing market price per Company share at the date of grant with an assumed vesting rate per annum built into the
calculation (subsequently trued up at year end based on the actual leaver rate during the period from award date to year end) over the three-year
vesting period of the plan.
Deferred Bonus Share Plan (DBSP)
Under the DBSP selected employees are required to defer a proportion of their annual cash bonus into Company shares (‘Invested Award’). Following
such an award, the Company will generally grant the participant an additional award of a number of shares bearing a specified ratio to the number of
his or her invested shares (‘Matching Shares’), typically using a 1:1 ratio. Subject to a participant’s continued employment, invested and matching
share awards may either vest 100% on the third anniversary of grant; or alternatively, vest one-third on the first anniversary of the grant, one-third on
the second anniversary and the final proportion on the third anniversary.
At the year end the values of the bonuses settled by shares cannot be determined until the Remuneration Committee has approved the portion of the
employee bonuses to be settled in shares. Once the portion of the bonus to be settled in shares is determined, the final bonus liability to be settled in
shares is transferred to the reserve for share-based payments. The costs relating to the Matching Shares are recognised over the corresponding
vesting period and the fair values of the equity-settled Matching Shares granted to employees are based on the quoted closing market price at the
date of grant with the charge adjusted to reflect the expected vesting rate of the plan.
Share Incentive Plan (SIP)
All UK employees, including UK Executive Directors, are eligible to participate in the SIP. Employees may invest up to sterling £1,800 per tax year of
gross salary (or, if lower, 10% of salary) to purchase ordinary shares in the Company. There is no holding period for these shares.
Restricted Share Plan (RSP)
Under the RSP, selected employees are made grants of shares on an ad hoc basis. The RSP is used primarily, but not exclusively, to make awards to
individuals who join the Group part way through the year, having left accrued benefits with a previous employer. The fair values of the awards granted
under the RSP at various grant dates during the year are based on the quoted market price at the date of grant adjusted for an assumed vesting rate
over the relevant vesting period.
Value Creation Plan (VCP)
During 2012 the Company introduced a one-off Value Creation Plan (VCP) which is a share option scheme for Executive Directors and key senior
executives within the Company. VCP is a premium priced share option scheme with options granted with an exercise price set at a 10% premium to
the grant date price. Options will only vest to the extent of satisfying Group and divisional profit after tax targets, together with various other
performance underpins and risk/malus provisions that can be imposed at the discretion of the Remuneration Committee. The share options would vest
in equal tranches on the fourth, fifth and sixth anniversaries of the original grant date but may be exercised up to eight years from the date of grant.
The VCP share options were fair valued by an independent valuer using a Black-Scholes option pricing model taking into account the rules of the plan
and using the following key assumptions:
Share price at the date of grant
Exercise price
Expected lives of the award
Share price volatility
Share price dividend yield
Risk-free interest rates
Per share fair values
154 / Petrofac Annual report and accounts 2015
Tranche 1
Tranche 2
Tranche 3
1,555p
1,710p
6 years
41%
2.3%
1.1%
451p
1,555p
1,710p
6.5 years
41%
2.3%
1.2%
467p
1,555p
1,710p
7 years
41%
2.3%
1.3%
482p
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155
Share-based payment plans information
The details of the fair values and assumed vesting rates of the share-based payment plans are below:
22 Mar
PSP (EPS portion)
18 Apr
24 May
DBSP
RSP
Fair value
per share
Assumed
vesting rate
Fair value
per share
Assumed
vesting rate
Fair value
per share
Assumed
vesting rate
Fair value
per share
Assumed
vesting rate
Fair value
per share
Assumed
vesting rate
2015 awards
2014 awards
2013 awards
2012 awards
890p
1,376p
1,446p
1,705p
0.0%
0.0%
–
–
–
–
–
–
–
–
890p
94.1%
927p
95.0%
1,376p
84.3%
1,157p
0.0%
1,266p
0.0%
1,340p
0.0%
1,446p
79.0%
1,366p
0.0%
–
–
–
–
1,705p
83.2%
1,555p
96.7%
88.1%
70.6%
The following table shows the movements in the number of shares held under the share-based payment plans outstanding but not exercisable:
PSP
DBSP
RSP
VCP
Total
2015
Number
2014
Number
2015
*Number
2014
*Number
2015
Number
2014
Number
2015
Number
2014
Number
2015
Number
2014
Number
Outstanding at
1 January
1,139,931 1,315,870 3,822,196 3,708,306
357,363
538,874 1,354,828 1,701,150 6,674,318
7,264,200
Granted
during
the year
Vested during
the year
Forfeited
during
the year
775,188
406,830 3,460,960 2,226,630
67,719
82,591
–
(43,308)
(1,579,408)
(1,802,020)
(123,213)
(227,892)
–
–
– 4,303,867
2,716,051
–
(1,702,621)
(2,073,220)
(430,143)
(539,461)
(351,115)
(310,720)
(33,524)
(36,210)
(515,333)
(346,322)
(1,330,115)
(1,232,713)
Outstanding at
31 December 1,484,976 1,139,931 5,352,633 3,822,196
*Includes Invested and Matching Shares
268,345
357,363
839,495 1,354,828 7,945,449
6,674,318
The number of shares still outstanding but not exercisable at 31 December 2015 for each award is as follows:
PSP
DBSP
RSP
VCP
Total
2015
Number
2014
Number
2015
*Number
2014
*Number
2015
Number
2014
Number
2015
Number
2014
Number
2015
Number
2015 awards
735,364
– 3,235,692
–
67,719
–
2014 awards
368,627
401,931 1,391,665 2,034,728
68,273
82,591
2013 awards
380,985
413,763
725,276 1,191,476 119,035 170,189
–
–
–
– 4,038,775
– 1,828,565 2,519,250
– 1,225,296 1,775,428
2014
Number
–
2012 awards
2011 awards
2010 awards
–
–
–
324,237
–
–
–
–
–
595,992
13,318
65,239
839,495 1,354,828
852,813 2,340,296
–
–
–
–
20,565
18,779
–
–
–
–
–
–
20,565
18,779
Total awards
1,484,976 1,139,931 5,352,633 3,822,196 268,345 357,363
839,495 1,354,828 7,945,449 6,674,318
* Includes Invested and Matching Shares.
The average share price of the Company shares during 2015 was US$12.84 (sterling equivalent of £8.39) (2014: US$19.19 (sterling equivalent of
£11.65)).
The number of outstanding shares excludes the 8% uplift adjustment made in respect of the EnQuest demerger and dividend shares shown below:
PSP
DBSP
2015
Number
2014
Number
2015
*Number
–
–
318
2014
*Number
318
105,633
105,633
72,514
358,476
202,781
72,514
358,794
203,099
RSP
2015
Number
83
13,527
13,610
2014
Number
384
Total
2015
Number
401
2014
Number
702
14,873
477,636
290,168
15,257
478,037
290,870
EnQuest 8% uplift
Dividend shares
Outstanding at 31 December
* Includes Invested and Matching Shares.
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Petrofac Annual report and accounts 2015 / 155
Financial statements
156
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
23 Share-based payment plans continued
The charge in respect of share-based payment plans recognised in the consolidated income statement is as follows:
PSP
*DBSP
RSP
VCP
Total
2015
US$m
2014
US$m
2015
US$m
2014
US$m
2015
US$m
2014
US$m
2015
US$m
2014
US$m
2015
US$m
2014
US$m
Share-based payment
charge/(credit)
* Represents charge on Matching Shares only.
–
–
21
19
2
3
–
–
23
22
The Group has recognised a total charge of US$23m (2014: US$22m) in the consolidated income statement during the year relating to the above
employee share-based schemes (see note 4d) which has been transferred to the reserve for share-based payments along with US$23m of the bonus
liability accrued for the year ended 31 December 2014 which has been settled in shares granted during the year (2013 bonus of US$24m).
For further details on the above employee share-based payment schemes refer to pages 94 to 97, 99 and 103 to 104 of the Directors’ remuneration
report.
24 Other reserves
Balance at 1 January 2014
Foreign currency translation
Net gains on maturity of cash flow hedges recycled in the year
Net changes in fair value of derivatives and financial assets
designated as cash flow hedges
Share-based payments charge (note 23)
Transfer during the year (note 23)
Shares vested during the year
Deferred tax on share-based payments reserve
Balance at 31 December 2014
Attributable to:
Petrofac Limited shareholders
Non-controlling interests
Balance at 31 December 2014
Balance at 1 January 2015
Net gains on maturity of cash flow hedges recycled in the year
Net changes in fair value of derivatives and financial assets
designated as cash flow hedges
Changes in fair value of available-for-sale financial asset
Share-based payments charge (note 23)
Transfer during the year (note 23)
Shares vested during the year
Balance at 31 December 2015
Attributable to:
Petrofac Limited shareholders
Non-controlling interests
Balance at 31 December 2015
Net unrealised
(gains)/losses
on derivatives
US$m
Net unrealised
gains/(losses)
on available-for-
sale financial
asset
US$m
Foreign
currency
translation
Reserve for
share-based
payments
US$m
US$m
Total
US$m
28
–
(14)
(21)
–
–
–
–
(7)
6
(13)
(7)
(7)
(11)
(47)
–
–
–
–
(65)
(44)
(21)
(65)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(16)
–
–
–
(16)
(16)
–
(16)
(29)
(22)
–
–
–
–
–
–
(51)
(51)
–
(51)
(51)
–
–
–
–
–
–
(51)
(51)
–
(51)
64
–
–
–
22
24
(33)
(1)
76
76
–
76
76
–
–
–
23
23
(27)
95
95
–
95
63
(22)
(14)
(21)
22
24
(33)
(1)
18
31
(13)
18
18
(11)
(47)
(16)
23
23
(27)
(37)
(16)
(21)
(37)
Nature and purpose of other reserves
Net unrealised gains/(losses) on derivatives
The portion of gains or losses on cash flow hedging instruments that are determined to be effective hedges is included within this reserve net of
related deferred tax effects. When the hedged transaction occurs or is no longer forecast to occur, the gain or loss is transferred out of equity to the
consolidated income statement. Realised net gains amounting to US$11m (2014: US$14m net gain) relating to foreign currency forward contracts
and financial assets designated as cash flow hedges have been recognised in cost of sales.
The forward currency points element and ineffective portion of derivative financial instruments relating to forward currency contracts and gains on
undesignated derivatives amounting to US$3m (2014: US$10m) have been recognised in cost of sales.
156 / Petrofac Annual report and accounts 2015
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157
Net unrealised gains/(losses) on available-for-sale financial asset
This reserve records fair value changes on available-for-sale financial assets held by the Group, net of deferred tax effects. Realised gains and losses
on the sale of available-for-sale financial assets are recognised as other operating income or other operating expenses in the consolidated income
statement.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements in foreign
subsidiaries. It is also used to record exchange differences arising on monetary items that form part of the Group’s net investment in subsidiaries.
Reserve for share-based payments
The reserve for share-based payments is used to record the value of equity-settled share-based payments awarded to employees and transfers out
of this reserve are made upon vesting of the original share awards.
The transfer during the year reflects the transfer from accrued expenses within trade and other payables of the bonus liability relating to the year ended
2014 of US$23m (2013 bonus of US$24m) which has been voluntarily elected or mandatorily obliged to be settled in shares during the year (note 23).
25 Interest-bearing loans and borrowings
The Group had the following interest-bearing loans and borrowings outstanding:
31 December 2015
Actual interest rate %
31 December 2014
Actual interest rate %
Effective interest
rate %
Maturity1
2015
US$m
2014
US$m
Current
Bank overdrafts
(i)
US/UK LIBOR +
1.50%
US/UK LIBOR +
1.50%
US/UK LIBOR +
1.50%
on demand
Term Loan
(iii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85% August 2016
Export Credit Agency Funding
(v) US LIBOR + 1.50%
US LIBOR + 1.50% Refer note (v)
below
–
Non-current
Senior notes
Term Loan
(ii)
3.40%
3.40%
3.68%
3 years
(iii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85%
n/a
Revolving credit facility (RCF)
(iv) US LIBOR + 0.95% US LIBOR + 1.50% US LIBOR + 0.95%
5 years
Less:
Debt acquisition costs net of
accumulated amortisation and
effective interest rate adjustments
Discount on senior notes issuance
Total interest-bearing loans and borrowings
1 As at 31 December 2015.
Details of the Group’s interest-bearing loans and borrowings are as follows:
3
500
17
520
750
–
540
9
–
–
9
750
500
475
1,290
1,725
(18)
(2)
1,270
1,790
(13)
(2)
1,710
1,719
(i) Bank overdrafts
Bank overdrafts are drawn down in US dollars and sterling denominations to meet the Group’s working capital requirements. These are repayable
on demand.
(ii) Senior notes
Petrofac has an outstanding aggregate principal amount of US$750m Senior Notes due in 2018 (Notes). The Group pays interest on the Notes at an
annual rate equal to 3.40% of the outstanding principal amount. Interest on the Notes is payable semi-annually in arrears in April and October each
year. The Notes are senior unsecured obligations of the Company and will rank equally in right of payment with the Company’s other existing and
future unsecured and unsubordinated indebtedness. Petrofac International Ltd and Petrofac International (UAE) LLC irrevocably and unconditionally
guarantee, jointly and severally, the due and prompt payment of all amounts at any time becoming due and payable in respect of the Notes. The
Guarantees are senior unsecured obligations of each Guarantor and will rank equally in right of payment with all existing and future senior unsecured
and unsubordinated obligations of each Guarantor.
(iii) Term Loan
On 31 August 2014, Petrofac entered into a US$500m two year term loan facility with a syndicate of five international banks. The facility, which
matures on 31 August 2016, is unsecured and is subject to two financial covenants relating to leverage and interest cover. Prior to 31 December 2015,
the Term Loan lenders granted a waiver of the leverage covenant for the year ending 31 December 2015 as a result of which Petrofac was in
compliance with its financial covenant obligations for that period. The loan was fully drawn as of 31 December 2015 (31 December 2014: US$500m).
Interest is payable on the facility at US LIBOR + 0.85%.
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Financial statements
158
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
25 Interest-bearing loans and borrowings continued
(iv) Revolving Credit Facility
Petrofac has a US$1,200m five year committed revolving credit facility with a syndicate of international banks, which is available for general corporate
purposes. The facility, which was signed on 11 September 2012, was amended and extended in June 2015 and will now mature on 2 June 2020. The
facility is unsecured and is subject to two financial covenants relating to leverage and interest cover. Prior to 31 December 2015, the facility lenders
granted a waiver of the leverage covenant for the year ending 31 December 2015 as a result of which Petrofac was in compliance with its financial
covenant obligations for that period. As at 31 December 2015, US$540m was drawn under this facility (31 December 2014: US$475m).
Interest is payable on the drawn balance of the facility at US LIBOR + 0.95% and in addition utilisation fees are payable depending on the level of
utilisation.
(v) Export Credit Agency funding
On 26 February 2015, Petrofac entered into a US$58m, 14 year term loan facility guaranteed by the Italian Export Credit Agency SACE. On 30 July
2015, Petrofac entered into a US$108m term loan facility guaranteed by the UK Export Credit Agency UKEF, on substantially the same terms as the
SACE facility. The two facilities are linked to the procurement of certain goods and services from Italian and UK exporters, respectively, in connection
with the construction of the Petrofac JSD6000 vessel. Repayment of the loans was intended to commence from the date of delivery of the vessel.
Following the termination of the vessel construction contract, the facilities are not currently available for drawing and Petrofac is in discussions with the
two Export Credit Agencies to amend the facilities and agree a revised date for the commencement of repayments. Petrofac cannot be certain that
these discussions will result in agreement with the two ECAs, in which case the facilities will be terminated and no further drawings will be made. As at
31 December 2015, US$17m was drawn under the SACE facility (31 December 2014: US$nil). No drawings have been made under the UKEF facility.
26 Provisions
At 1 January 2014
Additions during the year
Paid in the year
Exchange difference
Unwinding of discount
At 1 January 2015
Additions during the year
Paid in the year
Revision of estimates
Unwinding of discount
At 31 December 2015
Other long-term
employment
benefits provision
Provision for
decommissioning
Other
provisions
US$m
US$m
US$m
Total
US$m
71
19
(11)
–
–
79
22
(7)
–
–
94
136
47
–
–
6
189
45
–
(8)
4
230
6
–
–
(1)
–
5
2
–
–
–
7
213
66
(11)
(1)
6
273
69
(7)
(8)
4
331
Other long-term employment benefits provision
Labour laws in the United Arab Emirates require employers to provide for other long-term employment benefits. These benefits are payable to
employees on being transferred to another jurisdiction or on cessation of employment based on their final salary and number of years’ service. All
amounts are unfunded. The long-term employment benefits provision is based on an internally produced end of service benefits valuation model with
the key underlying assumptions being as follows:
Average number of years of future service
Average annual % salary increases
Discount factor
Senior employees are those earning a base of salary of over US$96,000 per annum.
Discount factor used is the local Dubai five-year Sukuk rate.
Senior
employees
Other
employees
5
6%
5%
3
4%
5%
Provision for decommissioning
The decommissioning provision primarily relates to the Group’s obligation for the removal of facilities and restoration of the sites at the PM304 field in
Malaysia, Chergui in Tunisia and Santuario, Magallanes, Arenque and Pánuco Production Enhancement Contracts in Mexico. Additions during the year
of US$40m were in relation to Santuario, Magallanes, Arenque and Pánuco Production Enhancement Contracts in Mexico. The liability is discounted at
the rate of 4.28% on PM304 (2014: 4.28%), 6.0% on Chergui (2014: 6.00%) and 6.18% on Santuario, Magallanes, Arenque and Pánuco Production
Enhancement Contracts (2014: 5.38%). The unwinding of the discount is classified as a finance cost (note 6).The Group estimates that the
cash outflows against these provisions will arise in 2026 on PM304, 2031 on Chergui, 2033 on Santuario and Magallanes, 2040 on Arenque and 2039
on Pánuco Production Enhancement Contracts.
Other provisions
This represents amounts set aside to cover claims against the Group which will be settled via the captive insurance company Jermyn Insurance
Company Limited.
158 / Petrofac Annual report and accounts 2015
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159
27 Trade and other payables
Trade payables
Advances received from customers
Accrued expenses
Other taxes payable
Other payables
2015
US$m
485
1,102
772
34
117
2014
US$m
564
975
921
46
164
2,510
2,670
Advances received from customers represent payments received for contracts on which the related work had not been performed at the statement
of financial position date.
Other payables mainly consist of retentions held against subcontractors of US$71m (2014: US$78m) and amounts payable to joint venture partners of
US$23m (2014: US$35m).
Certain trade and other payables will be settled in currencies other than the reporting currency of the Group, mainly in sterling, euros and Kuwaiti dinars.
28 Commitments and contingencies
Commitments
In the normal course of business the Group will obtain surety bonds, letters of credit and guarantees, which are contractually required to secure
performance, advance payment or in lieu of retentions being withheld. Some of these facilities are secured by issue of corporate guarantees by
the Company in favour of the issuing banks.
At 31 December 2015, the Group had letters of credit of US$7m (2014: US$10m) and outstanding letters of guarantee, including performance,
advance payments and bid bonds of US$4,974m (2014: US$4,211m) against which the Group had pledged or restricted cash balances of,
in aggregate, US$37m (2014: US$9m).
At 31 December 2015, the Group had outstanding forward exchange contracts amounting to US$3,592m (2014: US$2,276m). These commitments
consist of future obligations either to acquire or to sell designated amounts of foreign currency at agreed rates and value dates (note 31).
Leases
The Group has financial commitments in respect of non-cancellable operating leases for office space and equipment. These non-cancellable leases
have remaining non-cancellable lease terms of between one and 17 years and, for certain property leases, are subject to renegotiation at various
intervals as specified in the lease agreements. The future minimum rental commitments under these non-cancellable leases are as follows:
Within one year
After one year but not more than five years
More than five years
2015
US$m
2014
US$m
29
56
60
145
25
69
74
168
Included in the above are commitments relating to the lease of office buildings in Aberdeen, United Kingdom of US$86m (2014: US$115m).
Minimum lease payments recognised as an operating lease expense during the year amounted to US$47m (2014: US$44m).
Long-term finance lease commitments are as follows:
Oil and gas facilities and plant and equipment
The commitments are as follows:
Within one year
After one year but not more than five years
More than five years
Future
minimum
lease
payments
Finance cost
US$m
US$m
Present value
US$m
350
653
233
1,236
111
203
52
366
239
450
181
870
The finance leased assets mainly comprise oil and gas facilities in Berantai RSC and Block PM304 in Malaysia and the lease term for these leases
range between four to nine years. The above finance lease commitments include 70% gross up of US$485m (2014: US$546m) on finance leases in
respect of oil and gas facilities relating to block PM304 in Malaysia, which is necessary to reflect the legal position of the Group as the contracting
entity for these leases.
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Petrofac Annual report and accounts 2015 / 159
Financial statements
160
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
160
Notes to the consolidated financial statements continued
28 Commitments and contingencies continued
Capital commitments
At 31 December 2015, the Group had capital commitments of US$500m (2014: US$1,034m) excluding the above lease commitments.
Included in the US$500m of commitments are:
28 Commitments and contingencies continued
Capital commitments
At 31 December 2015, the Group had capital commitments of US$500m (2014: US$1,034m) excluding the above lease commitments.
Included in the US$500m of commitments are:
Building of the Petrofac JSD6000 installation vessel
Production Enhancement Contracts in Mexico
Further appraisal and development of wells as part of Block PM304 in Malaysia
Costs in respect of Ithaca Greater Stella Field development in the North Sea
Commitments in respect of the construction of a new training centre in Oman
2015
US$m
93
3
240
164
–
2014
US$m
Building of the Petrofac JSD6000 installation vessel
392
Production Enhancement Contracts in Mexico
229
Further appraisal and development of wells as part of Block PM304 in Malaysia
192
Costs in respect of Ithaca Greater Stella Field development in the North Sea
193
Commitments in respect of the construction of a new training centre in Oman
28
29 Related party transactions
The consolidated financial statements include the financial statements of Petrofac Limited and the subsidiaries listed in note 32. Petrofac Limited is the
ultimate parent entity of the Group.
29 Related party transactions
The consolidated financial statements include the financial statements of Petrofac Limited and the subsidiaries listed in note 32. Petrofac Limited is the
ultimate parent entity of the Group.
The following table provides the total amount of transactions which have been entered into with related parties:
The following table provides the total amount of transactions which have been entered into with related parties:
Joint ventures
Associates
Key management personnel interests
Sales to
related
parties
US$m
Purchases
from
related parties
US$m
Amounts
owed
by related
parties
US$m
2015
2014
2015
2014
2015
2014
–
–
–
–
–
–
–
–
–
–
–
–
–
1
2
1
–
–
All sales to and purchases from joint ventures are made at normal market prices and the pricing policies and terms of these transactions are approved
by the Group’s management.
All related party balances will be settled in cash.
All related party balances will be settled in cash.
Compensation of key management personnel
The following details remuneration of key management personnel of the Group comprising Executive and Non-executive Directors of the Company
and other senior personnel. Further information relating to the individual Directors is provided in the Directors’ remuneration report on pages 90 to 106.
Short-term employee benefits
Share-based payments
Fees paid to Non-executive Directors
30 Accrued contract expenses
Accrued contract expenses
Reserve for contract losses
2015
US$m
9
1
1
11
2015
US$m
1,162
71
1,233
2014
US$m
Short-term employee benefits
12
Share-based payments
3
Fees paid to Non-executive Directors
1
16
30 Accrued contract expenses
2014
US$m
Accrued contract expenses
743
Reserve for contract losses
57
800
Amounts
owed
to related
parties
US$m
Joint ventures
–
3
Associates
1
–
Key management personnel interests
–
Sales to
Purchases
related
parties
US$m
from
by related
related parties
US$m
parties
US$m
Amounts
owed
Amounts
owed
to related
parties
US$m
2015
2014
2015
2014
2015
2014
–
–
–
–
–
–
–
–
–
–
–
–
–
All sales to and purchases from joint ventures are made at normal market prices and the pricing policies and terms of these transactions are approved
by the Group’s management.
Compensation of key management personnel
The following details remuneration of key management personnel of the Group comprising Executive and Non-executive Directors of the Company
and other senior personnel. Further information relating to the individual Directors is provided in the Directors’ remuneration report on pages 90 to 106.
The 2015 reserve for contract losses includes provision to cover costs in excess of revenues on the Laggan-Tormore contract of US$48m (2014:
US$27m) and provision for an onerous contract of US$12m relating to Ticleni Production Enhancement Contract in Romania of which US$6m has
been provided during the year (2014: US$30m).
In 2015, an onerous contract provision of US$2m in relation to a reduction in scope of construction work at a training centre in Oman has been
recognised in IES segment and an onerous leasehold property provision of US$9m relating to vacant leasehold office buildings at Quattro House and
Bridge View in Aberdeen, UK for which their leases expire in 2024 and 2026 respectively has been recognised in Offshore Projects & Operations (note
5).
The 2015 reserve for contract losses includes provision to cover costs in excess of revenues on the Laggan-Tormore contract of US$48m (2014:
US$27m) and provision for an onerous contract of US$12m relating to Ticleni Production Enhancement Contract in Romania of which US$6m has
been provided during the year (2014: US$30m).
In 2015, an onerous contract provision of US$2m in relation to a reduction in scope of construction work at a training centre in Oman has been
recognised in IES segment and an onerous leasehold property provision of US$9m relating to vacant leasehold office buildings at Quattro House and
Bridge View in Aberdeen, UK for which their leases expire in 2024 and 2026 respectively has been recognised in Offshore Projects & Operations (note
5).
2015
US$m
2014
US$m
93
3
240
164
–
392
229
192
193
28
–
1
2
1
–
–
9
1
1
11
–
3
1
–
–
–
12
3
1
16
2015
US$m
2014
US$m
2015
US$m
1,162
71
1,233
2014
US$m
743
57
800
160 / Petrofac Annual report and accounts 2015
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161
31 Risk management and financial instruments
Risk management objectives and policies
The Group’s principal financial assets and liabilities, other than derivatives, comprise available-for-sale financial assets, trade and other receivables,
amounts due from/to related parties, cash and short-term deposits, work-in-progress, interest-bearing loans and borrowings, trade and other payables
and contingent consideration.
The Group’s activities expose it to various financial risks particularly associated with interest rate risk on its variable rate cash and short-term deposits,
loans and borrowings and foreign currency risk on conducting business in currencies other than reporting currency as well as translation of the assets
and liabilities of foreign operations to the reporting currency. These risks are managed from time to time by using a combination of various derivative
instruments, principally forward currency contracts in line with the Group’s hedging policies. The Group has a policy not to enter into speculative
trading of financial derivatives.
The Board of Directors of the Company has established an Audit Committee to help identify, evaluate and manage the significant financial risks faced
by the Group and their activities are discussed in detail on pages 84 to 89.
The other main risks besides interest rate and foreign currency risk arising from the Group’s financial instruments are credit risk, liquidity risk and
commodity price risk and the policies relating to these risks are discussed in detail below:
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of the Group’s interest-bearing financial liabilities and
assets.
The Group’s exposure to market risk arising from changes in interest rates relates primarily to the Group’s long-term variable rate debt obligations
and its cash and bank balances. The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debt. The Group’s cash and
bank balances are at floating rates of interest.
Interest rate sensitivity analysis
The impact on the Group’s pre-tax profit and equity due to a reasonably possible change in interest rates on loans and borrowings at the reporting
date is demonstrated in the table below. The analysis assumes that all other variables remain constant.
31 December 2015
31 December 2014
Pre-tax profit
Equity
100 basis
point
increase
US$m
100 basis
point
decrease
100 basis
point
increase
US$m
US$m
100 basis
point
decrease
US$m
(7)
(9)
7
9
–
–
–
–
The following table reflects the maturity profile of these financial liabilities and assets that are subject to interest rate risk:
Year ended 31 December 2015
Financial liabilities
Floating rates
Bank overdrafts (note 25)
Term loans (note 25)
Export Credit Agency funding (note 25)
Financial assets
Floating rates
Cash and short-term deposits (note 20)
Restricted cash balances (note 16)
Within
1 year
US$m
1–2
years
US$m
2–3
years
US$m
3–4
years
US$m
4–5
years
US$m
More than
5 years
US$m
3
500
17
520
1,104
36
1,140
–
–
–
–
–
–
–
–
–
–
–
–
41
41
–
–
–
–
–
–
–
–
540
–
540
–
–
–
–
–
–
–
–
–
–
Total
US$m
3
1,040
17
1,060
1,104
77
1,181
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Petrofac Annual report and accounts 2015 / 161
Financial statements
162
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
31 Risk management and financial instruments continued
Year ended 31 December 2014
Financial liabilities
Floating rates
Bank overdrafts (note 25)
Term loans (note 25)
Financial assets
Floating rates
Cash and short-term deposits (note 20)
Restricted cash balances (note 16)
Within
1 year
US$m
1–2
years
US$m
2–3
years
US$m
3–4
years
US$m
4–5
years
US$m
More than
5 years
US$m
Total
US$m
9
–
9
986
8
994
–
500
500
–
1
1
–
475
475
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9
975
984
986
9
995
Financial liabilities in the above table are disclosed gross of debt acquisition costs, effective interest rate adjustments and discount on senior notes of
US$20m (2014: US$15m).
Interest on financial instruments classified as floating rate is re-priced at intervals of less than one year. The other financial instruments of the Group that
are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.
Foreign currency risk
The Group is exposed to foreign currency risk on sales, purchases, and translation of assets and liabilities that are in a currency other than the
functional currency of its operating units. The Group is also exposed to the translation of the functional currencies of its units to the US dollar reporting
currency of the Group. The following table summarises the percentage of foreign currency denominated revenues, costs, financial assets and financial
liabilities, expressed in US dollar terms, of the Group totals.
Revenues
Costs
Current financial assets
Non-current financial assets
Current financial liabilities
Non-current financial liabilities
2015
% of foreign
currency
denominated
items
19.4%
47.8%
18.0%
0.0%
24.9%
0.0%
2014
% of foreign
currency
denominated
items
26.5%
56.5%
33.6%
0.0%
36.4%
1.3%
The Group uses forward currency contracts to manage the currency exposure on transactions significant to its operations. It is the Group’s policy not
to enter into forward contracts until a highly probable forecast transaction is in place and to negotiate the terms of the derivative instruments used for
hedging to match the terms of the hedged item to maximise hedge effectiveness.
Foreign currency sensitivity analysis
The income statements of foreign operations are translated into the reporting currency using a weighted average exchange rate of conversion. Foreign
currency monetary items are translated using the closing rate at the reporting date. Revenues and costs in currencies other than the functional
currency of an operating unit are recorded at the prevailing rate at the date of the transaction. The following significant exchange rates applied during
the year in relation to US dollars:
Sterling
Kuwaiti dinar
Euro
2015
2014
Average rate Closing rate Average rate Closing rate
1.53
3.32
1.11
1.47
3.29
1.09
1.65
3.51
1.33
1.55
3.42
1.21
The following table summarises the impact on the Group’s pre-tax profit and equity (due to change in the fair value of monetary assets, liabilities and
derivative instruments) of a reasonably possible change in US dollar exchange rates with respect to different currencies:
31 December 2015
31 December 2014
162 / Petrofac Annual report and accounts 2015
Pre-tax profit
Equity
+10% US
dollar rate
increase
−10% US
dollar rate
decrease
+10% US
dollar rate
increase
US$m
US$m
US$m
−10% US
dollar rate
decrease
US$m
(24)
(9)
24
9
53
85
(53)
(85)
22-Financials-Shareholder-p117-185-AN-070316.indd 162
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163
Derivative instruments designated as cash flow hedges
At 31 December, the Group had foreign exchange forward contracts as follows:
Euro purchases
Sterling purchases/(sales)
Kuwaiti dinar sales
Saudi Riyal purchases
Malaysia Ringgit purchases
Yen sales
Contract value
2015
US$m
997
(225)
(1,095)
38
115
(3)
2014
US$m
643
(394)
(313)
–
–
(3)
Fair value (undesignated)
Fair value (designated)
Net unrealised gain/(loss)
2015
US$m
2014
US$m
2015
US$m
–
11
–
–
–
–
11
–
–
–
–
–
–
–
27
(1)
2
–
(18)
–
10
2014
US$m
(14)
(1)
–
–
–
–
(15)
2015
US$m
(31)
(10)
8
–
(22)
–
(55)
2014
US$m
(22)
(3)
–
–
–
–
(25)
The above foreign exchange contracts mature and will affect income between January 2016 and June 2019 (2014: between January 2015 and June
2019).
At 31 December 2015, the Group had cash and short-term deposits designated as cash flow hedges with net unrealised losses of US$3m
(2014: US$2m loss) as follows:
Euro cash and short-term deposits
Fair value
Net unrealised gain/(loss)
2015
US$m
17
2014
US$m
22
2015
US$m
(3)
2014
US$m
(2)
During 2015, changes in fair value loss of US$64m (2014: gains US$50m) relating to these derivative instruments and financial assets were taken to
equity and losses of US$13m (2014: US$8m gain) were recycled from equity into cost of sales in the income statement. The forward points and
ineffective portions of the above foreign exchange forward contracts and loss on undesignated derivatives of US$3m (2014: US$10m) were recognised
in the income statement (note 4b).
Commodity price risk – oil prices
The Group is exposed to the impact of changes in oil and gas prices on its revenues and profits generated from sales of crude oil and gas.
The Group’s policy is to manage its exposure to the impact of changes in oil and gas prices using derivative instruments, primarily swaps and collars.
Hedging is only undertaken once sufficiently reliable and regular long-term forecast production data is available.
During the year the Group entered into various crude oil swaps hedging oil production of 754,097 barrels (bbl) (2014: 608,999 bbl) with maturities
ranging from May 2016 to September 2016. In addition, fuel oil swaps were also entered into for hedging gas production of 39,292 metric tonnes (MT)
(2014: 46,260MT) with maturities from May 2016 to September 2016.
The fair value of oil derivatives at 31 December 2015 was an asset of US$12m (2014: US$20m asset) with net unrealised gains deferred in equity of
US$12m (2014: US$20m gain). During the year, US$24m gain (2014: US$6m gain) was recycled from equity into the consolidated income statement
on the occurrence of the hedged transactions and a gain in the fair value recognised in equity of US$17m (2014: US$27m gain).
The following table summarises the impact on the Group’s pre-tax profit and equity (due to a change in the fair value of oil derivative instruments and
the underlifting asset/overlifting liability) of a reasonably possible change in the oil price:
31 December 2015
31 December 2014
Pre-tax profit
Equity
+30
US$/bbl
increase
−30
US$/bbl
decrease
US$m
US$m
+30
US$/bbl
increase
US$m
−30
US$/bbl
decrease
US$m
–
–
–
–
(24)
(18)
24
18
For sensitivity relating to the impact of changes in the oil price on other financial assets, refer to pages 150 and 151.
Credit risk
The Group trades only with recognised, creditworthy third parties. Business Unit Risk Review Committees (BURRC) evaluate the creditworthiness of
each individual third-party at the time of entering into new contracts. Limits have been placed on the approval authority of the BURRC above which the
approval of the Board of Directors of the Company is required. Receivable balances are monitored on an ongoing basis with appropriate follow-up
action taken where necessary. At 31 December 2015, the Group’s five largest customers accounted for 46.5% of outstanding trade receivables,
retention receivables, work in progress, receivable under Berantai RSC and receivable in respect of the development of the Greater Stella Area (2014:
48.7%).
With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, short and long-term
receivables from customers (including the Berantai RSC and Greater Stella Area projects), available-for-sale financial assets and certain derivative
instruments, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of
these instruments.
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Petrofac Annual report and accounts 2015 / 163
Financial statements
164
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
31 Risk management and financial instruments continued
Liquidity risk
The Group’s objective is to ensure sufficient liquidity is available to support future growth. Our strategy includes the provision of financial capital and the
potential impact on the Group’s capital structure is reviewed regularly. The Group is not exposed to any external capital constraints. The maturity
profiles of the Group’s financial liabilities at 31 December are as follows:
Year ended 31 December 2015
Financial liabilities
Interest-bearing loans and borrowings
Finance lease creditors
Trade and other payables (excluding
advances from customers and other
taxes payable)
Due to related parties
Derivative instruments
Interest payments
Year ended 31 December 2014
Financial liabilities
Interest-bearing loans and borrowings
Finance lease creditors
Trade and other payables (excluding
advances from customers and other
taxes payable)
Due to related parties
Contingent consideration
Derivative instruments
Interest payments
6 months
or less US$m
6–12
months
US$m
1–2
years
US$m
2–5
years
US$m
More than
5 years US$m
Contractual
undiscounted
cash flows
US$m
Carrying
amount
US$m
20
237
500
113
–
214
1,290
439
–
233
1,810
1,236
1,790
870
1,323
1
53
24
51
–
14
23
–
–
21
29
–
–
7
33
–
–
–
–
1,658
701
264
1,769
233
1,374
1,374
1
95
109
4,625
1
95
–
4,130
6 months
or less
US$m
6–12
months
US$m
1–2
years
US$m
2–5
years
US$m
More than
5 years
US$m
Contractual
undiscounted
cash flows
US$m
Carrying
amount
US$m
9
225
–
118
500
243
1,225
542
–
326
1,734
1,454
1,719
972
1,307
342
3
–
47
25
–
1
24
25
1,616
510
–
–
–
13
49
805
–
–
–
8
62
1,837
–
–
–
–
–
1,649
1,649
3
1
92
161
3
1
92
–
326
5,094
4,436
The Group uses various funded facilities provided by banks and its own financial assets to fund the above mentioned financial liabilities.
Capital management
The Group’s policy is to maintain a healthy capital base to sustain future growth and maximise shareholder value.
The Group seeks to optimise shareholder returns by maintaining a balance between debt and equity attributable to Petrofac Limited shareholders
(capital) and monitors the efficiency of its capital structure on a regular basis. The gearing ratio and return on shareholders’ equity is as follows:
Cash and short-term deposits
Interest-bearing loans and borrowings (A)
Net debt (B)
Equity attributable to Petrofac Limited shareholders (C)
(Loss)/profit for the year attributable to Petrofac Limited shareholders (D)
Gross gearing ratio (A/C)
Net gearing ratio (B/C)
Shareholders’ return on investment (D/C)
2015
US$m
1,104
(1,790)
(686)
1,230
(349)
145.5%
55.8%
(28.4%)
2014
US$m
986
(1,719)
(733)
1,861
120
92.4%
39.4%
6.4%
164 / Petrofac Annual report and accounts 2015
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165
32 Subsidiaries and joint arrangements
At 31 December 2015, the Group had investments in the following active subsidiaries and joint arrangements:
Name of company
Active subsidiaries
Petrofac Algeria EURL
Petrofac (Cyprus) Limited
Eclipse Petroleum Technology Limited
K W Limited
Oilennium Limited
Petrofac (Malaysia-PM304) Limited
Petrofac Contracting Limited
Petrofac Engineering Limited
Petrofac Services Limited
Petrofac UK Holdings Limited
The New Energy Industries Limited
TNEI Services Limited
Caltec Limited
Petrofac Energy Developments UK Limited
Petrofac Deutschland GmbH
Jermyn Insurance Company Limited
Petrofac Engineering India Private Limited
Petrofac Engineering Services India Private Limited
Petrofac Information Services Private Limited
PT. Petrofac IKPT International
Petrofac Integrated Energy Services Limited
Monsoon Shipmanagement Limited
Petrofac Energy Developments (Ohanet) Jersey Limited
Petrofac Energy Developments International Limited
Petrofac Facilities Management International Limited
Petrofac FPF004 Limited
Petrofac GSA Limited
Petrofac International Ltd
Petrofac Offshore Management Limited
Petrofac Platform Management Services Limited
Petrofac Training International Limited
Petroleum Facilities E & C Limited
Petrofac (JSD 6000) Limited
Petrofac E&C Sdn Bhd
Petrofac Energy Developments Sdn Bhd
Petrofac Engineering Services (Malaysia) Sdn Bhd
PFMAP Sdn Bhd
SPD Well Engineering Sdn Bhd
Country of incorporation
2015
2014
Proportion of nominal
value of issued shares
controlled by the Group
Algeria
Cyprus
England
England
England
England
England
England
England
England
England
England
England
England
Germany
Guernsey
India
India
India
Indonesia
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Malaysia
Malaysia
Malaysia
Malaysia
Malaysia
100
100
100
100
100
100
100
100
1100
1100
100
100
100
1100
100
1100
100
100
100
51
1100
–
100
1100
1100
100
100
1100
100
100
1100
1100
100
100
100
70
100
100
100
100
100
100
100
100
100
100
1100
1100
100
100
100
1100
100
1100
100
100
100
51
1100
100
100
1100
1100
100
100
1100
100
100
1100
1100
100
100
100
70
100
100
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Petrofac Annual report and accounts 2015 / 165
Financial statements
166
Notes to the consolidated financial statements continued
For the year ended 31 December 2015
Notes to the consolidated financial statements continued
32 Subsidiaries and joint arrangements continued
Country of incorporation
2015
2014
Proportion of nominal
value of issued shares
controlled by the Group
Mexico
Mexico
Mexico
Mexico
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Nigeria
Nigeria
Norway
Norway
Oman
Romania
Russia
Russia
Russia
Saudi Arabia
Scotland
Scotland
Scotland
Scotland
Scotland
Scotland
Scotland
Scotland
Scotland
Singapore
Singapore
United Arab Emirates
United Arab Emirates
United Arab Emirates
United Arab Emirates
United Arab Emirates
United States
United States
United States
British Virgin Islands
100
100
100
100
–
100
100
100
100
100
100
100
100
100
100
100
240
100
100
100
100
250
100
100
100
100
100
100
100
100
100
100
100
100
1100
100
75
100
100
100
249
100
1100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
240
100
100
100
100
250
100
100
100
100
100
100
100
100
100
100
100
100
1100
100
75
100
100
100
249
100
1100
100
100
Name of company
Active subsidiaries continued
H&L/SPD Americas S. de R.L.
Petrofac Mexico SA de CV
Petrofac Mexico Servicios SA de CV
Operadora de Campos del Noreste S.A. de C.V.
Petrofac Global Employment B.V.
Petrofac Kazakhstan B.V.
Petrofac Mexico Holdings B.V.
Petrofac Netherlands Cooperatief U.A.
Petrofac Netherlands Holdings B.V.
Petrofac Treasury B.V.
PTS B.V.
Petrofac Kazakhstan Ventures B.V.
Petrofac Nigeria B.V.
Petrofac Norge B.V.
Petrofac Oman B.V.
Petrofac Energy Services Nigeria Limited
Petrofac International (Nigeria) Limited
Petrofac Holdings AS
Petrofac Norge AS
Petrofac E&C Oman LLC
Petrofac Solutions & Facilities Support S.R.L
PKT Technical Services Ltd
PKT Training Services Ltd
Sakhalin Technical Training Centre
Petrofac Saudi Arabia Company Limited
Atlantic Resourcing Limited
Petrofac Facilities Management Group Limited
Petrofac Facilities Management Limited
Petrofac Training Limited
Scotvalve Services Limited
SPD Limited
Stephen Gillespie Consultants Limited
Petrofac Training Group Limited
Petrofac Training Holdings Limited
Petrofac South East Asia Pte Ltd
Petrofac Training Institute Pte Limited
Petrofac Emirates LLC (note 11)
Petrofac E&C International Limited
Petrofac FZE
Petrofac International (UAE) LLC
SPD LLC
Petrofac Energy Developments (Ohanet) LLC
Petrofac Inc.
Petrofac Training Inc.
SPD Group Limited
166 / Petrofac Annual report and accounts 2015
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167
Name of joint arrangement
Joint Arrangements
Joint ventures
Costain Petrofac Limited
TTE Petrofac Limited
Principal activities
Country of
incorporation
Proportion of nominal
value of issued shares
controlled by the Group
2015
2014
Engineering, procurement and construction
management services
England
Operation and management of a training
centre
Jersey
China Petroleum Petrofac Engineering Services
Cooperatif U.A.
Consultancy for Petroleum and chemical
engineering
Netherlands
Takatuf Petrofac Oman LLC
Professional Mechanical Repair Services Company
Construction, operation and management
of a training centre
Oman
Operation of service centre providing
mechanical services to oil and gas industry
Saudi Arabia
Joint operations
PetroAlfa Servicios Integrados de Energia SAPI de CV
Services to oil and gas industry
Petro-SPM Integrated Services S.A. de C.V.
Production enhancement for Pánuco
Mexico
Mexico
Bechtel Petrofac JV
NGL 4 JV
Petrofac/Black & Veatch JV
Petrofac/Bonatti JV
Petrofac/Daelim JV
Petrofac/ETAP JV
PM304 JV
Berantai JV
Engineering, procurement and construction
management of a project in UAE
Unincorporated
EPC for a project in UAE
Unincorporated
Tendering and execution of a project in
Kazakhstan
EPC for a project in Algeria
EPC for a project in Oman
Oil and gas exploration and production from
Chergui concession
Oil and gas exploration and production in
Malaysia
Oil and gas exploration and production in
Malaysia
Unincorporated
Unincorporated
Unincorporated
Unincorporated
Unincorporated
Unincorporated
Petrofac/Samsung/CB&I CFP
EPC for a project in Kuwait
Unincorporated
Please note that only active companies are shown in the above tables. All dormant companies have been omitted.
1 Directly held by Petrofac Limited.
2 Companies consolidated as subsidiaries on the basis of control.
50
50
49
40
50
350
450
535
545
580
570
550
545
530
551
547
50
50
49
40
50
350
450
515
545
580
570
550
545
530
551
547
3 Joint arrangement classified as joint operation on the basis of contractual arrangement, whereby the activities of the arrangement are primarily designed for the provision of
output to the venturers, this indicates that the venturers have rights to substantially all the economic benefits of the assets of the arrangement.
4 Joint arrangement classified as joint operation on the basis of contractual arrangement between the joint venturers to be jointly and severally liable for performance under
Pánuco ISC.
5 The unincorporated arrangement between the venturers is a joint arrangement as, contractually, all the decisions about the relevant activities require unanimous consent
by the venturers and all unincorporated joint arrangements are included in the Group’s results as joint operations.
The Company’s interest in joint ventures is disclosed on page 147.
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Petrofac Annual report and accounts 2015 / 167
Financial statements
COMPANY
FINANCIAL
STATEMENTS
169 Company income statement
169
Company statement of other
comprehensive income
Company statement of financial position
Company statement of cash flows
Company statement of changes in equity
Notes to the Company financial statements
170
171
172
173
168 / Petrofac Annual report and accounts 2015
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169
Company income statement
169
For the year ended 31 December 2015
Company statement of financial position
At 31 December 2015
Company statement of financial position
At 31 December 2015
Revenue
General and administration expenses
Other operating income
Revenue
Other operating expenses
General and administration expenses
Profit before tax and finance (costs)/income
Other operating income
Finance costs
Other operating expenses
Finance income
Profit before tax and finance (costs)/income
Profit before tax
Finance costs
Income tax expense
Finance income
Profit for the year
Profit before tax
Income tax expense
Profit for the year
Company statement of other comprehensive income
For the year ended 31 December 2015
Company statement of other comprehensive income
Company statement of other comprehensive income
For the year ended 31 December 2015
For the year ended 31 December 2015
Profit for the year
Other comprehensive loss
Changes in fair value of available-for-sale financial asset (note11)
Profit for the year
Total comprehensive income for the year
Other comprehensive loss
Changes in fair value of available-for-sale financial asset (note11)
The attached notes 1 to 21 form part of these Company financial statements.
Total comprehensive income for the year
The attached notes 1 to 21 form part of these Company financial statements.
Notes
3
4
Notes
5
3
6
4
5
7
6
7
7
7
2015
US$m
1,324
2015
(17)
US$m
7
1,324
(769)
(17)
545
7
(39)
(769)
14
545
520
(39)
–
14
520
520
–
520
2014
US$m
398
2014
(13)
US$m
128
398
(277)
(13)
236
128
(46)
(277)
21
236
211
(46)
–
21
211
211
–
211
2015
US$m
520
2015
US$m
(16)
520
504
(16)
504
2014
US$m
211
2014
US$m
–
211
211
–
211
22-Financials-Shareholder-p117-185-AN-070316.indd 169
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Petrofac Annual report and accounts 2015 / 169
Financial statements
170
Company statement of financial position
At 31 December 2015
Company statement of financial position
At 31 December 2015
Assets
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Available-for-sale investment
Other non-current assets
Current assets
Trade and other receivables
Amounts due from subsidiaries
Other financial assets
Cash and short-term deposits
Total assets
Equity and liabilities
Equity attributable to Petrofac Limited shareholders
Share capital
Share premium
Capital redemption reserve
Treasury shares
Other reserves
Retained earnings
Total equity
Non-current liabilities
Interest-bearing loans and borrowings
Long-term employee benefit provisions
Current liabilities
Interest-bearing loans and borrowings
Trade and other payables
Other financial liabilities
Amounts due to subsidiaries
Total liabilities
Total equity and liabilities
Notes
2015
US$m
2014
US$m
9
11
12
18
13
21
14
17
17
18
12
1
389
169
10
569
–
219
185
7
411
1
36
1,685
1,345
14
4
1,704
2,273
–
48
1,429
1,840
7
4
11
(111)
73
682
666
740
1
741
517
1
19
329
866
7
4
11
(101)
70
387
378
1,242
1
1,243
–
1
13
205
219
1,607
2,273
1,462
1,840
The financial statements on pages 169 to 184 were approved by the Board of Directors on 23 February 2016 and signed on its behalf by
Tim Weller – Chief Financial Officer.
The attached notes 1 to 21 form part of these Company financial statements.
170 / Petrofac Annual report and accounts 2015
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171
Company statement of cash flows
For the year ended 31 December 2015
Company statement of cash flows
For the year ended 31 December 2015
Operating activities
Profit before tax
Adjustments for:
Net finance expense
Reduction in valuation of share warrants
Gain on disposal
Gain on de-recognition of investment in an associate
Provision for doubtful debts on amounts due from subsidiaries, net
Impairment of Investment in a subsidiary
Other non-cash items, net
Operating profit before working capital changes
Amounts due from subsidiaries
Trade and other receivables
Trade and other payables
Amounts due to subsidiaries
Cash generated from/(used in) operations
Interest paid
Net cash flows generated from/(used in) operating activities
Investing activities
Investment in a subsidiary
Proceeds from disposal of subsidiary, net of transaction costs
Purchase of property, plant and equipment
Repayment of investment by subsidiaries
Interest received
Net cash flows (used in)/generated from investing activities
Financing activities
Interest bearing loans and borrowings obtained, net of debt acquisition cost
Debt financing fees paid relating to Group borrowings
Treasury shares purchased
Equity dividends paid*
Net cash flows (used in)/generated from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
* Dividend payments have been made by both the Company and subsidiary entities.
The attached notes 1 to 21 form part of these Company financial statements.
Notes
2015
US$m
2014
US$m
520
211
7
6
25
–
5 (7)
5 –
6
6
465
294
(7)
1,290
(740)
–
–
118
668
(36)
632
(464)
41
(1)
–
–
25
11
(118)
(9)
254
–
(3)
371
(516)
(1)
(1)
(345)
(492)
(45)
(537)
–
84
–
88
21
(424)
193
12
(5)
(39)
(220)
(252)
(44)
48
4
498
–
(25)
(221)
252
(92)
140
48
9
5
9
14
13
22-Financials-Shareholder-p117-185-AN-070316.indd 171
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Petrofac Annual report and accounts 2015 / 171
Financial statements
172
Company statement of changes in equity
For the year ended 31 December 2015
Company statement of changes in equity
For the year ended 31 December 2015
Issued
share
capital
US$m
(note 21)
Share
premium
US$m
Capital
redemption
reserve
US$m
*Treasury
shares
US$m
(note 14)
Other
reserves
US$m
(note 15)
Retained
earnings
US$m
Total
equity
US$m
Balance at 1 January 2014
Net profit for the year
Other comprehensive income
Total comprehensive income
Shares vested during the year
Treasury shares purchased (note 14)
Transfer to reserve for share-based payments
Dividends (note 8)
Balance at 1 January 2015
Net profit for the year
Other comprehensive loss
Total comprehensive income for the year
Shares vested during the year
Treasury shares purchased (note 14)
Transfer to reserve for share-based payments
Dividends (note 8)
Balance at 31 December 2015
7
–
–
–
–
–
–
–
7
–
–
–
–
–
–
–
7
4
–
–
–
–
–
–
–
4
–
–
–
–
–
–
–
4
11
(110)
–
–
–
–
–
–
–
–
–
–
34
(25)
–
–
11
(101)
–
–
–
–
–
–
–
–
–
(39)
–
–
11
(111)
57
–
–
–
(33)
–
46
–
70
–
(16)
–
46
–
73
401
211
–
211
(1)
–
–
370
211
–
211
–
(25)
46
(224)
(224)
387
520
–
(2)
–
–
(223)
682
378
520
(16)
504
–
(39)
46
(223)
666
–
(16)
520
29
(27)
*Shares held by Petrofac Employee Benefit Trust and Petrofac Joint Venture Companies Employee Benefit Trust.
The attached notes 1 to 21 form part of these Company financial statements.
172 / Petrofac Annual report and accounts 2015
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173
Notes to the Company financial statements
For the year ended 31 December 2015
1 Corporate information
The financial statements of Petrofac Limited (the ‘Company’) referred to
as the Company financial statements for the year ended 31 December
2015 were authorised for issue in accordance with a resolution of the
Directors on 23 February 2016.
Petrofac Limited is a limited liability company registered in Jersey under
the Companies (Jersey) Law 1991 and is the holding company for the
international Group of Petrofac subsidiaries (together the ‘Group’). The
Group’s principal activity is the provision of facilities solutions to the oil
and gas production and processing industry.
2 Summary of significant accounting
policies
Basis of preparation
The separate financial statements have been prepared on a historical cost
basis, except for derivative financial instruments and available-for-sale
financial investments that have been measured at fair value. The
functional and presentation currency of the separate financial statements
is US dollars and all values in the separate financial statements are
rounded to the nearest million (US$m) except where otherwise stated.
Statement of compliance
The separate financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) and applicable
requirements of Jersey law.
New standards and interpretations
The Company has adopted new and revised standards and
interpretations issued by the International Accounting Standards Board
(IASB) and the International Financial Reporting Interpretations Committee
(IFRIC) of the IASB that are relevant to its operations and effective for
accounting periods beginning on or after 1 January 2015.
Although these new standards and amendments apply for the first time in
2015, they do not have a material impact on the financial statements of
the Company.
Standards issued but not yet effective
Standards issued but not yet effective up to the date of issuance of the
Company’s financial statements are listed below and include only those
standards and interpretations that are likely to have an impact on the
disclosures, financial position or performance of the Company at a future
date. The Company intends to adopt these standards when they become
effective.
Amendments to IAS 27: Equity Method in Separate Financial
Statements
The amendments will allow entities to use the equity method to account
for investments in subsidiaries, joint ventures and associates in their
separate financial statements. Entities already applying IFRS and electing
to change to the equity method in their separate financial statements will
have to apply that change retrospectively. The amendments are effective
for annual periods beginning on or after 1 January 2016, with early
adoption permitted. These amendments will not have any impact on the
Company’s financial statements, since the Company will continue to
account for its investments in subsidiaries, joint ventures and associates
at cost.
Investments in subsidiaries
Investments in subsidiaries are stated at cost less any provision
for impairment.
Investments in associates
Investments in associates are stated at cost less any provision
for impairment.
Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as financial assets at
fair value through profit or loss, loans and receivables, held-to-maturity
investments, available-for-sale financial assets, or as derivatives
designated as hedging instruments in an effective hedge, as appropriate.
All financial assets are recognised initially at fair value plus, in the case
of financial assets not recorded at fair value through profit or loss,
transaction costs that are attributable to the acquisition of the financial
asset.
Subsequent measurement
For purposes of subsequent measurement financial assets are classified
in the following categories:
• Financial assets at fair value through profit or loss
• Loans and receivables
• Available-for-sale financial assets
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets
held for trading and financial assets designated upon initial recognition at
fair value through profit or loss. Financial assets are classified as held for
trading if they are acquired for the purpose of selling or repurchasing in
the near term. Derivatives, including separated embedded derivatives, are
also classified as held for trading unless they are designated as effective
hedging instruments as defined by IAS 39.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. After
initial measurement, such financial assets are subsequently measured
at amortised cost using the effective interest rate (EIR) method, less
impairment. Amortised cost is calculated by taking into account any
discount or premium on acquisition and fees or costs that are an integral
part of the EIR. The EIR amortisation is included in finance income in the
income statement. This category generally applies to trade and other
receivables and amounts due from subsidiaries.
Available-for-sale (AFS) financial assets
AFS financial assets include equity investments. Equity investments
classified as AFS are those that are neither classified as held-for-trading
nor designated at fair value through profit or loss.
After initial measurement, AFS financial assets are subsequently
measured at fair value with unrealised gains or losses recognised in other
comprehensive income and credited in the available-for-sale reserve until
the investment is derecognised, at which time the cumulative gain or loss
is recognised in the income statement within other operating
income/expenses, or the investment is determined to be impaired,
when the cumulative loss is reclassified from the AFS reserve to the
income statement in other operating income/expenses.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities
at fair value through profit or loss, loans and borrowings, payables, or as
derivatives designated as hedging instruments in an effective hedge, as
appropriate.
All financial liabilities are recognised initially at fair value and, in the case of
loans and borrowings and payables, net of directly attributable
transaction costs.
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Petrofac Annual report and accounts 2015 / 173
Financial statements
174
Notes to the Company financial statements continued
For the year ended 31 December 2015
Notes to the Company financial statements
For the year ended 31 December 2015
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by
reference to the fair value at the date on which they are granted. In
valuing equity-settled transactions, no account is taken of any service or
performance conditions, other than conditions linked to the price of the
shares of Petrofac Limited (‘market conditions’), if applicable.
The cost of equity-settled transactions is recognised, together with
a corresponding increase in equity, over the period in which the relevant
employees become fully entitled to the award (the ‘vesting period’). The
cumulative expense recognised for equity-settled transactions at each
reporting date until the vesting date reflects the extent to which the
vesting period has expired and the Group’s best estimate of the number
of equity instruments that will ultimately vest. The income statement
charge or credit for a period represents the movement in cumulative
expense recognised as at the beginning and end of that period.
No expense is recognised for awards that do not ultimately vest, except
for awards where vesting is conditional upon a market or non-vesting
condition, which are treated as vesting irrespective of whether or not the
market or non-vesting condition is satisfied, provided that all other
performance conditions are satisfied. Equity awards cancelled are treated
as vesting immediately on the date of cancellation, and any expense not
recognised for the award at that date is recognised in the income
statement.
The Company operates a number of share award schemes on behalf
of the employees of the Group which are described in detail in note 23
of the consolidated financial statements of the Group.
The reserve for share-based payments is used to record the value
of equity-settled share-based payments awarded to employees and
transfers out of this reserve are made upon vesting of the original share
awards. The share-based payments charges pertaining to fellow Group
companies are recharged to them and shown as investment in
subsidiaries. Subsequently they are transferred to due from subsidiaries
and settled in cash.
Significant accounting estimates
Sources of estimation uncertainty
The key assumptions concerning the future and other key sources of
estimation uncertainty at the statement of financial position date, that
have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are
discussed below:
• Recoverable value of investments in subsidiaries and provision for
losses on amounts due from subsidiaries: the Company determines at
each reporting date whether there is any evidence of indicators of
impairment in the carrying value of its investments in subsidiaries.
Where indicators exist, an impairment test is undertaken which requires
management to estimate the recoverable value of its assets which is
based on its value in use. The value in use calculation is based on
management’s business planning process which involves assumptions
relating to future profitability, discount rate and inflation. A similar
exercise is undertaken to determine the recoverability of amounts due
from subsidiaries, after initially assessing the net assets of the
subsidiary. The carrying value of investments in and amounts due from
subsidiaries was US$389m and US$1,685m respectively (2014:
US$219m and US$1,345m respectively).
2 Summary of significant accounting
policies continued
The Company’s financial liabilities include trade and other payables, loans
and borrowings, amounts due to subsidiaries and derivative financial
instruments.
Subsequent measurement
For purposes of subsequent measurement financial assets are classified
in the following categories:
• Financial liabilities at fair value through profit or loss
• Loans and borrowings
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial
liabilities held for trading and financial liabilities designated upon initial
recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for
the purpose of repurchasing in the near term. This category also includes
derivative financial instruments entered into by the Company that are not
designated as hedging instruments in hedge relationships as defined by
IAS 39. Separated embedded derivatives are also classified as held for
trading unless they are designated as effective hedging instruments.
Gains or losses on liabilities held for trading are recognised in the
statement of profit or loss.
Financial liabilities designated upon initial recognition at fair value through
profit or loss are designated at the initial date of recognition, and only if
the criteria in IAS 39 are satisfied.
Loans and borrowings
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortised cost using the effective interest rate
(EIR) method. Gains and losses are recognised in profit or loss when the
liabilities are derecognised as well as through the EIR amortisation
process.
Amortised cost is calculated by taking into account any discount or
premium on acquisition and fees or costs that are an integral part of the
EIR. The EIR amortisation is included as finance costs in the statement of
profit or loss.
This category generally applies to interest-bearing loans and borrowings.
For more information, refer to note 17.
Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand
and short-term deposits with an original maturity of three months or less.
For the purpose of the cash flow statement, cash and cash equivalents
consists of cash and cash equivalents as defined above, net of any
outstanding bank overdrafts.
Employee Benefit Trusts
The Petrofac Employee Benefit Trust and the Petrofac Joint
Venture Companies Employee Benefit Trust (EBTs) are treated as
extensions of the activities of the Company and accordingly the Company
financial statements include all transactions and balances of the EBTs
except for transaction and balances between the Company and
the EBTs.
Share-based payment transactions
Employees (including Directors) of the Group receive remuneration in the
form of share-based payment transactions, whereby employees render
services in exchange for shares or rights over shares (‘equity-settled
transactions’).
174 / Petrofac Annual report and accounts 2015
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175
3 Revenues
Dividends from subsidiaries and associates are recognised when the right to receive payment is established.
Dividend income from subsidiaries
Dividend income from associates (note 10)
4 General and administration expenses
Staff costs
Other operating expenses
2015
US$m
1,318
6
1,324
2014
US$m
391
7
398
2015
US$m
2014
US$m
10
7
17
8
5
13
Included in other operating expenses above is auditor’s remuneration of US$74,075 (2014: US$76,480) related to the fee for the audit of the parent
company financial statements. It excludes fees in relation to the audit of the Group financial statements, which are borne by Petrofac Services Limited.
5 Other operating income
Gain on disposal – 80% share capital of Petrofac FPSO Holding Limited
Gain on derecognition of investment in an associate
Share-based payment credit
2015
US$m
7
–
–
7
2014
US$m
118
9
1
128
On 13 August 2014, the Company sold 80% of the share capital of Petrofac FPSO Holding Limited which via its subsidiaries owns interests in the
FPSO Berantai, FPF3 (formerly Jasmine venture) and FPF5 (formerly Ocean Legend) to PetroFirst Infrastructure Holdings Limited for an initial
consideration of US$87m. The transaction costs were US$3m. At 31 December 2014, there was a further US$34m of deferred consideration payable
and this together with the initial consideration of US$84m (net of transaction costs of US$3m) resulted in the recognition of a total gain on disposal of
US$118m.
During 2015, upon final completion of the disposal, the fair value of the consideration for 80% of the equity was increased by US$7m due to the receipt
of the pending investment approval by PetroFirst Infrastructure Holdings Limited. The consideration of US$41m was received in full by 31 December
2015.
6 Other operating expenses
Decrease in Seven Energy warrant valuation
Revolving credit facility, senior notes and term loan acquisition cost amortisation
Exchange loss
Provision for doubtful debts on amounts due from subsidiaries, net
Impairment of investment in a subsidiary (note 9)
Others
2015
US$m
2014
US$m
–
5
1
465
294
4
769
11
4
5
254
–
3
277
Amounts due from subsidiaries provided for during the year mainly comprise US$224m relating to Petrofac GSA Limited, US$147m relating to Petrofac
Facilities Management Limited and US$46m relating to Petrofac UK Holdings Limited (2014: US$207m relating to Petrofac GSA Limited and US$15m
relating to Petrofac FPF004 Limited).
As a result of significantly lower commodity price expectations, the revaluation of the Greater Stella asset (refer to note 5 of the Group’s consolidated
financial statements), and the losses incurred on the Laggan-Tormore contract, the Company undertook a review for impairment of its investments in
subsidiaries and recoverability of amounts due from subsidiaries. The review was carried out on a value in use basis discounted at a pre-tax rate of
11.6%. This resulted in an impairment of US$294m (2014: US$nil), and a provision for doubtful debts of US$465m (2014: US$254m). Impairment of
investments in a subsidiary during the year has been recorded against the investment held by the Company in Petrofac UK Holdings Limited, reducing
its carrying amount to recoverable amount of US$328m.
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Petrofac Annual report and accounts 2015 / 175
Financial statements
176
Notes to the Company financial statements continued
For the year ended 31 December 2015
Notes to the Company financial statements continued
7 Finance (costs)/income
Finance costs
Long-term borrowings
On amounts due to subsidiaries
Total finance costs
Finance income
On amounts due from subsidiaries
Total finance income
8 Dividends paid and proposed
Declared and paid during the year
Equity dividends on ordinary shares:
Final dividend for 2013: 43.80 cents per share
Interim dividend 2014: 22.00 cents per share
Final dividend for 2014: 43.80 cents per share
Interim dividend 2015: 22.00 cents per share
2015
US$m
2014
US$m
(35)
(4)
(39)
14
14
(45)
(1)
(46)
21
21
2015
US$m
2014
US$m
–
–
149
74
223
149
75
–
–
224
2015
US$m
2014
US$m
Proposed for approval at AGM (not recognised as a liability as at 31 December)
Equity dividends on ordinary shares
Final dividend for 2015: 43.80 cents per share (2014: 43.80 cents per share)
152
152
9 Investments in subsidiaries
At 1 January
Investment made in/(repaid by) subsidiaries
Impairment of investment in a subsidiary (note 6)
Invested bonus in Deferred Bonus Share Plan (DBSP) charged to subsidiaries
Receipt of invested bonus in DBSP from subsidiaries
Share-based payment amounts receivable from subsidiaries
Transferred to due from subsidiaries
As at 31 December
2015
US$m
219
464
(294)
23
(23)
23
(23)
389
2014
US$m
307
(88)
–
25
(25)
22
(22)
219
176 / Petrofac Annual report and accounts 2015
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177
At 31 December 2015, the Company had investments in the following active subsidiaries:
Name of company
Trading subsidiaries
Petrofac Energy Developments UK Limited
Petrofac Services Limited
Petrofac UK Holdings Limited
Jermyn Insurance Company Limited
Petrofac International Limited
Petrofac Energy Developments International Limited
Petrofac Facilities Management International Limited
Petrofac Integrated Energy Services Limited
Petrofac Training International Limited
Petroleum Facilities E & C Limited
Petrofac South East Asia Pte Limited
Petrofac Inc.
10 Investment in associate
At 1 January
Gain on derecognition of investment in an associate (note 5)
Transfer to available-for-sale investment (note 11)
At 31 December
Country of incorporation
2015
2014
Proportion of nominal value of issued
shares controlled by the Company
England
England
England
Guernsey
Jersey
Jersey
Jersey
Jersey
Jersey
Jersey
Singapore
USA
100
100
100
100
100
100
100
100
100
100
99
100
100
100
100
100
100
100
100
100
100
100
99
100
2015
US$m
2014
US$m
–
–
–
–
176
9
(185)
–
The investment in PetroFirst Infrastructure Holdings Limited is accounted for at cost by the Company. The historic cost of the investment is US$nil at
31 December 2015 (2014: US$nil). Dividends from PetroFirst during 2015 amounted to US$5m (2014: US$7m) received in cash and US$1m (2014:
US$nil) receivable at 31 December 2015 (note 3).
11 Available-for-sale investment
On 15 April 2014, Seven Energy secured additional equity capital that resulted in dilution of the Company’s interest in Seven Energy from 23.5% to
15.4%. Following the dilution of ownership interest, the Group did not exercise significant influence over the activities of Seven Energy and as a result
transferred the investment of US$185m from investment in associate to available-for-sale investment. During 2015, a reduction in fair value of US$16m
has been recognised in other comprehensive income through reserve for unrealised gains/(losses) on available-for-sale financial asset (2014: US$nil).
12 Amounts due from/due to subsidiaries
Amounts due from/due to subsidiaries comprise both interest and non-interest bearing short-term loans provided to/received from subsidiaries listed
in note 9.
13 Cash and short-term deposits
Cash at bank and in hand
The fair value of cash and bank balances is US$4m (2014: US$48m).
2015
US$m
4
2014
US$m
48
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Petrofac Annual report and accounts 2015 / 177
Financial statements
178
Notes to the Company financial statements continued
For the year ended 31 December 2015
Notes to the Company financial statements continued
14 Treasury shares
For the purpose of making awards under the Group’s employee share schemes, shares in the Company are purchased and held by the Petrofac
Employee Benefit Trust and the Petrofac Joint Venture Companies Employee Benefit Trust. All these shares have been classified in the statement of
financial position as treasury shares within equity.
The movements in total treasury shares are shown below:
At 1 January
Acquired during the year
Vested during the year
At 31 December
15 Other reserves
Balance at 1 January 2014
Shares vested during the year
Transfer to reserve for share-based payments
Balance at 1 January 2015
Changes in fair value of available-for-sale financial asset
Shares vested during the year
Transfer to reserve for share-based payments
Balance at 31 December 2015
2015
2014
Number
US$m
Number
4,985,937
2,800,000
(1,770,417)
6,015,520
101
5,672,691
39
1,000,000
(29)
(1,686,754)
111
4,985,937
US$m
110
25
(34)
101
Net unrealised
gains/(losses)
on available-for-
sale financial
asset
US$m
Reserve for
share-
based
payments
US$m
–
–
57
(33)
Total
US$m
57
(33)
–
46
46
–
(16)
70
–
70
(16)
–
(27)
(27)
–
46
46
(16)
89
73
Nature and purpose of other reserves
Net unrealised gains/(losses) on available-for-sale financial asset
This reserve records fair value changes on available-for-sale financial assets held by the Company.
Reserve for share-based payments
The reserve for share-based payments is used to record the value of equity-settled share-based payments awarded to employees and transfers out
of this reserve are made upon vesting of the original share awards. The transfer during the year into share-based payments reserve of US$46m (2014:
US$46m) is the charge for share-based payments awards by the Company to its own employees as well as employees of subsidiaries, including bonus
amounts converted into shares.
16 Share-based payment plans
Share based payment charge
Share-based payment plan information is disclosed in note 23 of the consolidated financial statements of the Group. The following table shows
the movements in the number of shares held under the Group employee schemes for the employees of the Company:
Outstanding at 1 January 2014
Granted during the year
Transferred to subsidiaries
Vested during the year
Forfeited during the year
Outstanding at 1 January 2015
Granted during the year
Transferred from subsidiaries
Transferred to subsidiaries
Vested during the year
Forfeited during the year
Outstanding but not exercisable at 31 December 2015
178 / Petrofac Annual report and accounts 2015
Deferred
Bonus Share
Plan Number
Performance
Share Plan
Number
34,754
23,238
3,070
92,105
7,918
–
(24,256)
(6,764)
(8,654)
(53,620)
28,152
22,406
39,639
8,460
640
(220)
–
–
(12,619)
–
(1,313)
(28,324)
37,046
19,775
22-Financials-Shareholder-p117-185-AN-070316.indd 178
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179
Year ended 31 December 2015
Made up of following awards:
2013
2014
2015
Year ended 31 December 2014
Made up of following awards:
2012
2013
2014
Deferred Bonus
Share Plan Number
Performance
Share Plan
Number
3,812
11,620
21,614
37,046
6,292
5,023
8,460
19,775
Deferred Bonus
Performance
Share Plan
Share Plan Number
Number
2,846
7,730
17,576
28,152
28,324
6,292
5,023
39,639
17 Interest-bearing loans and borrowings
The Group had the following interest-bearing loans and borrowings outstanding:
31 December 2015
Actual interest rate %
31 December 2014
Actual interest rate %
Effective interest
rate %
Maturity1
2015
US$m
2014
US$m
Current
Term Loan
(ii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85% August 2016
Export Credit Agency Funding
(iii) US LIBOR + 1.50%
– US LIBOR + 1.50%
Refer note
(iii) below
(i)
3.40%
3.40%
3.68%
3 years
(ii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85%
n/a
Non-current
Senior notes
Term Loan
Less:
Debt acquisition costs net of
accumulated amortisation and
effective interest rate adjustments
Discount on senior notes issuance
Total interest-bearing loans and borrowings
1 As at 31 December 2015.
Details of the Company’s interest-bearing loans and borrowings are as follows:
500
17
517
750
–
750
–
–
–
750
500
1,250
(8)
(2)
740
1,257
(6)
(2)
1,242
1,242
(i) Senior notes
Petrofac has an outstanding aggregate principal amount of US$750m Senior Notes due in 2018 (Notes). The Group pays interest on the Notes at an
annual rate equal to 3.40% of the outstanding principal amount. Interest on the Notes is payable semi-annually in arrears in April and October each
year. The Notes are senior unsecured obligations of the Company and will rank equally in right of payment with the Company’s other existing and
future unsecured and unsubordinated indebtedness. Petrofac International Limited and Petrofac International (UAE) LLC irrevocably and unconditionally
guarantee, jointly and severally, the due and prompt payment of all amounts at any time becoming due and payable in respect of the Notes. The
Guarantees are senior unsecured obligations of each Guarantor and will rank equally in right of payment with all existing and future senior unsecured
and unsubordinated obligations of each Guarantor.
22-Financials-Shareholder-p117-185-AN-070316.indd 179
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Petrofac Annual report and accounts 2015 / 179
Financial statements
180
Notes to the Company financial statements continued
For the year ended 31 December 2015
Notes to the Company financial statements continued
17 Interest-bearing loans and borrowings continued
(ii) Term Loan
On 31 August 2014, Petrofac entered into a US$500m two year term loan facility with a syndicate of five international banks. The facility, which
matures on 31 August 2016, is unsecured and is subject to two financial covenants relating to leverage and interest cover. Prior to 31 December 2015,
the Term Loan lenders granted a waiver of the leverage covenant for the year ending 31 December 2015 as a result of which Petrofac was in
compliance with its financial covenant obligations for that period. The loan was fully drawn as of 31 December 2015 (31 December 2014: US$500m).
Interest is payable on the facility at US LIBOR + 0.85%.
(iii) Export Credit Agency funding
On 26 February 2015, Petrofac entered into a US$58m, 14 year term loan facility guaranteed by the Italian Export Credit Agency SACE. On 30 July
2015, Petrofac entered into a US$108m term loan facility guaranteed by the UK Export Credit Agency UKEF, on substantially the same terms as the
SACE facility. The two facilities are linked to the procurement of certain goods and services from Italian and UK exporters, respectively, in connection
with the construction of the Petrofac JSD6000 vessel. Repayment of the loans was intended to commence from the date of delivery of the vessel.
Following the termination of the vessel construction contract, the facilities are not currently available for drawing and Petrofac is in discussions with the
two Export Credit Agencies to amend the facilities and agree a revised date for the commencement of repayments. Petrofac cannot be certain that
these discussions will result in agreement with the two ECAs, in which case the facilities will be terminated and no further drawings will be made. As at
31 December 2015, US$17m was drawn under the SACE facility (31 December 2014: US$nil). No drawings have been made under the UKEF facility.
18 Other financial assets and other financial liabilities
Other financial assets
Forward currency contracts
Other financial liabilities
Forward currency contracts
Interest payable
2015
US$m
14
2014
US$m
–
13
6
19
6
7
13
Fair value measurement
The following financial instruments are measured at fair value using the hierarchy below for determination and disclosure of their respective fair values:
Level 1: Unadjusted quoted prices in active markets for identical financial assets or liabilities
Level 2: Other valuation techniques where the inputs are based on significant observation factors
Level 3: Other valuation techniques where the inputs are based on significant unobservable market data
The fair value of the Company’s financial instruments and their carrying amounts included within the Company’s statement of financial position are set
out below:
Financial assets
Available-for-sale investment (note 11)
Forward currency contracts
Cash and short-term deposits (note 13)
Financial liabilities
Interest-bearing loans and borrowings (note 17)
Forward currency contracts
Carrying amount
Fair value
Level
2015
US$m
2014
US$m
2015
US$m
2014
US$m
Level 3
Level 2
Level 2
169
14
4
185
–
48
169
14
4
185
–
48
Level 2
1,257
1,242
1,267
1,250
Level 2
13
6
13
6
The Company considers that the carrying amounts of trade and other receivables, amounts due from/due to subsidiaries, trade and other payables
and other current financial liabilities approximate their fair values and are therefore excluded from the above table.
The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.
The assumptions about unobservable inputs relating to available-for-sale investment and the impact on the fair values of the available-for-sale
investment as a result of changes to these inputs are disclosed in note 16 to the Group’s consolidated financial statements.
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181
19 Risk management and financial instruments
Risk management objectives and policies
The Company’s principal financial assets and liabilities are amounts due from and due to subsidiaries, available-for-sale investment, cash and short-
term deposits and interest-bearing loans and borrowings.
The Company’s activities expose it to various financial risks particularly associated with interest rate risks on its external variable rate loans and
borrowings. The Company has a policy not to enter into speculative trading of financial derivatives.
The other main risks besides interest rate are foreign currency risk, credit risk and liquidity risk and the policies relating to these risks are discussed
in detail below:
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of the Company’s interest-bearing financial liabilities and
assets. The Company does not hedge its exposure on its interest-bearing funding to/from subsidiaries.
Interest rate sensitivity analysis
The impact on the Company’s pre-tax profit and equity due to a reasonably possible change in interest rates is demonstrated in the table below.
The analysis assumes that all other variables remain constant.
31 December 2015
31 December 2014
Pre-tax profit
Equity
100 basis
point
increase
100 basis
point
decrease
100 basis
point
increase
US$m
US$m
US$m
100 basis
point
decrease
US$m
2
1
(2)
(1)
–
–
–
–
The following table reflects the maturity profile of interest bearing financial assets and liabilities that are subject to interest rate risk:
Year ended 31 December 2015
Financial liabilities
Floating rates
Term loan
Export Credit Agency Funding
Amount due to subsidiaries (interest-bearing)
Financial assets
Floating rates
Cash and short-term deposits (note 13)
Amount due from subsidiaries
(interest-bearing)
Within 1
year
US$m
1–2
years
US$m
2–3
years
US$m
3–4
years
US$m
4–5
years
US$m
More than
5 years
US$m
Total
US$m
500
17
324
841
4
1,190
1,194
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
500
17
324
841
4
1,190
1,194
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Petrofac Annual report and accounts 2015 / 181
Financial statements
182
Notes to the Company financial statements continued
For the year ended 31 December 2015
Notes to the Company financial statements continued
19 Risk management and financial instruments continued
Year ended 31 December 2014
Financial liabilities
Floating rates
Term loan
Amount due to subsidiaries (interest-bearing)
Financial assets
Floating rates
Cash and short-term deposits (note 13)
Amount due from subsidiaries
(interest-bearing)
Within 1
year
US$m
1–2
years
US$m
2–3
years
US$m
3–4
years
US$m
4–5
years
US$m
More than
5 years
US$m
Total
US$m
–
201
201
48
562
610
500
–
500
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
500
201
701
48
562
610
Financial liabilities in the above table are disclosed gross of debt acquisition costs and effective interest rate adjustments of US$10m (2014: US$8m).
Interest on financial instruments classified as floating rate is repriced at intervals of less than one year.
Foreign currency risk
Almost all of the financial assets and liabilities of the Company are denominated in US dollars. The foreign currency exposure at 31 December 2015 is
limited to sterling £190m with an equivalent value of US$280m (2014: sterling £315m equivalent US$487m).
The following table summarises the impact on the Company’s pre-tax profit and equity (due to change in the fair value of monetary assets, liabilities
and derivative instruments) of a reasonably possible change in US dollar exchange rates with respect to different currencies:
31 December 2015
31 December 2014
Pre-tax profit
Equity
+10% US dollar
rate increase
US$m
28
49
–10% US dollar
rate decrease
US$m
+10% US dollar
rate increase
US$m
–10% US dollar
rate decrease
US$m
(28)
(49)
–
–
–
–
At 31 December 2015, the Company had foreign exchange forward contracts as follows:
Sterling (purchases)
Euro (sales)
Contract value
Fair value (undesignated)
2015
US$m
410
(254)
2014
US$m
(491)
94
2015
US$m
2014
US$m
14
(13)
1
–
(6)
(6)
The above foreign exchange contracts mature and will affect income between January 2016 and August 2018 (2014: between January 2015 and July
2016).
Credit risk
The Company’s principal financial assets are cash and short-term deposits and amounts due from subsidiaries.
The Company manages its credit risk in relation to cash and short-term deposits by only depositing cash with financial institutions that have high credit
ratings provided by international credit rating agencies.
Liquidity risk
The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of term loans and senior notes to reduce
its exposure to liquidity risk.
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183
The maturity profiles of the Company’s financial liabilities at 31 December 2015 are as follows:
Year ended 31 December 2015
Financial liabilities
Interest-bearing loans and borrowings
Trade and other payables
Amounts due to subsidiaries
Interest payments
Derivative instruments
Year ended 31 December 2014
Financial liabilities
Interest-bearing loans and borrowings
Trade and other payables
Amounts due to subsidiaries
Interest payments
Derivative instruments
6 months
or less
US$m
6–12
months
US$m
1–2
years
US$m
2–5
years
US$m
More than
5 years
US$m
Contractual
undiscounted
cash flows
US$m
Carrying
amount
US$m
17
1
–
16
11
45
500
–
329
14
2
845
–
–
–
26
–
26
750
–
–
21
–
771
–
–
–
–
–
–
1,267
1,257
1
329
77
13
1
329
–
13
1,687
1,600
6 months
or less
US$m
6–12
months
US$m
1–2
years
US$m
2–5
years
US$m
More than
5 years
US$m
Contractual
undiscounted
cash flows
US$m
Carrying
amount
US$m
–
1
–
18
2
21
–
–
205
18
2
225
500
750
–
–
35
2
–
–
48
–
537
798
–
–
–
–
–
–
1,250
1,242
1
205
119
6
1
205
–
6
1,581
1,454
The Company uses various funded facilities provided by banks and its own financial assets to fund the above mentioned financial liabilities.
Capital management
The Company’s policy is to maintain a healthy capital (equity) base using a combination of external and internal financing to support its activities as the
holding company for the Group.
The Company’s gearing ratio is as follows:
Cash and short-term deposits (note 13)
Interest-bearing loans and borrowings (A) (note 17)
Net (debt) (B)
Total equity (C)
Gross gearing ratio (A/C)
Net gearing ratio (B/C)
2015
US$m
4
(1,257)
(1,253)
666
2014
US$m
48
(1,242)
(1,194)
378
188.7%
328.6%
188.1%
315.9%
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Petrofac Annual report and accounts 2015 / 183
Financial statements
184
Notes to the Company financial statements continued
For the year ended 31 December 2015
Notes to the Company financial statements continued
20 Related party transactions
The Company’s related parties consist of its subsidiaries and the transactions and amounts due to/due from them are either of funding or investing
nature (note 9). The remuneration paid by the Company to its Non-executive Directors was US$1m (2014: US$1m). The Company is also re-charged
a portion of the key management personnel cost by one of its subsidiaries. The amount recharged during the year was US$1m (2014: US$1m).
For further details of the full amount of key management personnel costs refer to the Group’s consolidated financial statements. The Company is listed
as a guarantor of the Revolving Credit Facility obtained by a wholly owned subsidiary.
21 Share capital
The movements in share capital are disclosed in note 21 to the consolidated financial statements of the Group.
184 / Petrofac Annual report and accounts 2015
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Shareholder information
as at December 2015
Registrar
Capita Registrars (Jersey) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Corporate Brokers
Goldman Sachs
Peterborough Court
133 Fleet Street
London EC4A 2BB
JP Morgan Cazenove
25 Bank Street
Canary Wharf
London E14 5JP
Legal Advisers to the Company
Freshfields Bruckhaus Deringer LLP
65 Fleet Street
London EC4Y 1HS
Company Secretary and registered office
Elian Corporate Services (Jersey) Limited
44 Esplanade
St Helier
Jersey JE4 9WG
Auditors
Ernst & Young LLP
1 More London Place
London SE1 2AF
Corporate and Financial PR
Tulchan Communications Group
85 Fleet Street
London EC4Y 1AE
Stock Exchange Listing
Petrofac shares are listed on the London Stock Exchange
using code ‘PFC.L’.
Financial Calendar*
19 May 2016
27 May 2016
30 August 2016
October 2016
* Dates are based on current expectations.
Annual General Meeting
Final dividend payment
Half Year Results announcement
Interim dividend payment
Copies of all announcements will be available on the Company’s
website at www.petrofac.com following their release.
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Petrofac Annual report and accounts 2015 / 185
Glossary
A
AGM
Annual General Meeting
AIRB
Asset Integrity Review Board
Appraisal Well
A well drilled into a discovered accumulation to provide data necessary
to define a Field Development Plan for the accumulation
B
Backlog
Backlog consists of the estimated revenue attributable to the uncompleted
portion of lump-sum engineering, procurement and construction
contracts and variation orders plus, with regard to engineering, operations,
maintenance and Integrated Energy Services contracts, the estimated
revenue attributable to the lesser of the remaining term of the contract
and five years. Backlog will not be booked on Integrated Energy Services
contracts where the Group has entitlement to reserves. The Group uses
this key performance indicator as a measure of the visibility of future
earnings. Backlog is not an audited measure
Barrel
A unit of volume measurement used for petroleum
bbl
One barrel of oil
Block
A subdivision of an underground petroleum reservoir, by a resource owner,
for the purposes of licensing and administering exploration, appraisal and
production of resources, by oil and gas companies
boe
Barrel of oil equivalent
bpd
Barrel per day
Brownfield Development
Further investment in a mature field, to enhance its production capacity,
thereby increasing recovery and extending field life
C
Capex
Capital expenditure
CIS
Commonwealth of Independent States
Cost plus KPIs
A reimbursable contract which includes an incentive income linked to the
successful delivery of key performance indicators (KPIs)
CPECC
China Petroleum Engineering & Construction Corporation
CPPES
China Petroleum Petrofac Engineering Services
CR
Corporate responsibility
D
DBSP
Deferred Bonus Share Plan
DECC
Department of Energy and Climate Change (UK)
Decommissioning
The re-use, recycling and disposal of redundant oil and gas facilities
Downstream
The downstream sector commonly refers to the refining of petroleum
crude oil and the processing and purifying of raw natural gas, as well as
the marketing and distribution of products derived from crude oil and
natural gas
Duty Holder
A contracting model under which Petrofac provides a complete managed
service, covering production and maintenance work, both offshore
and onshore, to reduce the costs of operating and to extend the life
of the facilities
E
EBITDA
Calculated as profit before tax and net finance income, but after our share
of profits/losses from associates (as per the consolidated income statement),
adjusted to add back charges for depreciation and amortisation (as per
note 3 to the financial statements)
EBT
Employee Benefit Trust
ECS
Engineering & Consulting Services. This service line is Petrofac’s centre
of technical engineering excellence, delivering early-stage engineering
studies, including conceptual and front-end engineering and design work,
across onshore and offshore oil and gas fields
ECOM
Engineering, Construction, Operations & Maintenance, one of two
divisions, which designs and builds oil and gas facilities and operates,
manages and maintains them on behalf of Petrofac’s customers
EPC
Engineering, Procurement and Construction
EPCIC
Engineering, Procurement, Construction, Installation and Commissioning
EPCI
Engineering, Procurement, Construction and Installation
EPS
Earnings per share
ExCom
Executive Committee
F
FEED
Front End Engineering and Design
Field Development Plan (FDP)
A document setting out the manner in which a hydrocarbon discovery
is to be developed and operated
FPSO
Floating Production, Storage and Offloading vessel
FPF
Floating Production Facility
G
Gas field
A field containing natural gas but no oil
Greenfield development
Development of a new field
186 / Petrofac Annual report and accounts 2015
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H
Hydrocarbon
A compound containing only the elements hydrogen and carbon
– can be solid, liquid or gas
HSE
Health & Safety Executive (UK)
HSSEIA
Health, safety, security, environment and integrity assurance
I
IAS
International Accounting Standards
IFRS
International Financial Reporting Standards
IOC
International oil company
IES
Integrated Energy Services. The IES division harnesses Petrofac’s existing
service capabilities and delivers them on an integrated basis to resource
holders with the aim of supporting the development of their oil and gas
resources, enhancing production from their mature reservoirs and helping
them to build national capability
K
KPI
Key performance indicator
L
LNG
Liquefied natural gas
Lump-sum turnkey project
An agreement in which a contractor designs, constructs, and manages a
project until it is ready to be handed over to the customer and operation
can begin immediately
LTI
Lost time injury
M
MENA
Middle East and North Africa region
mm boe
Million barrels of oil equivalents
mmscfd
Million standard cubic feet per day
MOPU
Mobile offshore production unit
MOU
Memorandum of understanding
N
NOC
National oil company
O
OCP
Offshore Capital Projects. A service line which specialises in offshore
engineering, procurement, installation and construction services for
greenfield projects
OEC
Onshore Engineering & Construction. A service line, which delivers
onshore engineering, procurement and construction projects
OECD
Organisation for Economic Cooperation and Development
Oil field
A geographic area under which an oil reservoir lies
OPEC
Organisation of Petroleum Exporting Countries
OPO
Offshore Projects & Operations. A service line which specialises in
offshore engineering and construction services, for brownfield projects,
and the provision of operations and maintenance support, on and offshore
P
PEC
Production Enhancement Contract is where Petrofac is paid a tariff per
barrel for oil and gas production and therefore has no commodity price
exposure. PECs are appropriate for mature fields which have a long
production history
PMC
Project Management Contractor – managing an external construction
contractor to manage construction of a facility
PSC
Production Sharing Contract
PSP
Performance Share Plan
R
Reimbursable services
Where the cost of Petrofac’s services are reimbursed by the customer plus
an agreed margin
RI
Recordable injury
ROCE
Return on capital employed
RSC
Risk Service Contract is where Petrofac develops, operates and maintains
a field, while the resource holder retains ownership and control of its reserves
RSP
Restricted Share Plan
S
SIP
Share Incentive Plan
SURF
Subsea Umbilicals, Risers and Flowlines
T
TSR
Total shareholder return
U
UKCS
United Kingdom Continental Shelf
UNGC
United Nations Global Compact
Upstream
The segment of the petroleum industry having to do with exploration,
development and production of oil and gas resources
V
VCP
Value Creation Plan
Petrofac Annual report and accounts 2015 / 187
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188 / Petrofac Annual report and accounts 2015
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P
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Petrofac Services Limited
117 Jermyn Street
London SW1Y 6HH
United Kingdom
Tel: +44 20 7811 4900
Fax: +44 20 7811 4901
www.petrofac.com