Case Study

Petrofac’s Onshore Engineering & Construction

Business: Complexity of Growth in Sharjah

In the summer of 2014, Subramaniam Sarma, Managing Director of Petrofac’s

Onshore Engineering & Construction business (OEC), was busy planning for an
upcoming one-day retreat with his top leadership group. Reflecting on the earlier
retreat which took place in April 2014 he acknowledged some progress. Still he felt
more focus and attention was needed to address the organisational challenges they
were facing as Petrofac emerged as a large and successful player in the oil and gas
facilities industry.

This case was written by Edward Rogers for discussion purposes only and is not an original source document.
Copyright 2015 Indian School of Business for use in Managing Complexity Course. For permission to use
please inquire to the author at edward_rogers@isb.edu
 How would he get people across his expanding organisation to play well together
and support each other in the way they had always done before experiencing the
phenomenal growth trajectory of the last ten years?

Sarma contemplated the type of challenges he saw ahead. He knew how to close
deals, how to organise projects, how to manage the risks and costs to completion and
he had competent project managers who could execute. Quality at a good price was
Petrofac’s strength from the very beginning. But the things he was hearing now
sounded like what employees used to tell him about their previous employers.

Petrofac had been able to recruit good talent because it was an exciting place to
work, dynamic and growing and relatively free from bureaucracy. From what he was
hearing, it sounded as if Petrofac was becoming another large bureaucratic company
with non-aligned departments. This also threatened their performance capability of
delivering quality products at better prices. It seemed Petrofac had solved the
problems of its clients and now found itself facing its own internal organisational
problems that challenged the core of who and what the Petrofac brand really meant for
both clients and employees.

The Early Years

Petrofac was established in 1981 in Tyler, Texas with 25 employees and a vision to
grow big. Based on some strong technical talent in CEO Ralph Martin and VP-
Engineering Lou Owen, both oil field veterans already Petrofac persevered. Soon two
more players joined, Greg Hendrickson and Gordon McLeod. The first decade saw
many of the typical challenges that face a start-up: making payroll, wearing different
hats, everyone pitching in to get the work done, agonising over competitive bid
proposals etc. By 1991 in the aftermath of the Gulf War American ventures were
again cast into a positive light in the Middle East. The time seemed right to drive
toward that big vision that started with Ralph Martin.

Around the end of the Gulf War in 1991, Maroun Semaan and Ayman Asfari came
to Tyler Texas to meet with the four early Petrofac leaders and offered to forge a joint-
venture for expanded work in the Middle East. Out of these negotiations, Petrofac
International was formed in July 1991. Petrofac International was capitalised at US$1
million and open for business in the Middle East.

The team went to work immediately and landed a few contracts in Syria and
Azerbaijan for around US $6 million. It was enough to get on their feet. Later that
year Petrofac won a US$60 million project in Oman, huge for the small JV. To win
they had to form a partnership with a large Omani construction company but it
worked and they were on their way. Winning work brought a different set of

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challenges such as staffing and managing the larger projects. Shortly after winning the
Oman project Maroun Semaan moved from Tyler Texas to Sharjah to set up the
Middle East Office of Petrofac International. Reflecting on the move Semaan
commented:

!We had the determination to pursue, win and execute large lump-sum projects
"a challenge which many contractors still avoid today! We realised from the
very beginning that in order to be successful we first had to be based close to
our customers. Secondly, we had to establish and grow a multi-national and
cost efficient organization of the highest calibre that could execute and
manage the risks associated with EPC contracts.#%$

By the year 2000 Petrofac (in a JV with ABB Lummus) had won a US$600
million contract in Algeria based in part upon its willingness to accept some risk in the
project by taking a 10% stake. This risk-sharing model was helping drive Petrofac into
the larger projects it sought. The shared risk helped align other interests like safety
and quality. David Walker, former president of BHP Billiton operations and
development-UK, North Africa and Middle East said this about the JV with Petrofac:

!Whilst we have pursued an aggressive project schedule, it has not been at the
expense of a safe working environment. The alignment between BHP Billiton
and its joint venture partners, the Petrofac/ABB Lummus collaboration and
the many subcontractors in the areas of health, safety, and environment has
delivered real benefits to all involved.#&$

By 2003 it was becoming clear that the US operations were of lesser significance
to the long term potential of Petrofac. Though a difficult decision, especially for the
early founders, the US business was sold to the Chicago Bridge & Iron Company in
2003 ending Petrofac’s direct involvement in the US market. It had achieved the
dream of becoming a global oil services company set back in 1991. Now it had to
chart its course ahead as the size and complexity of the projects grew ever larger. To
handle the work Petrofac itself expanded rapidly. More financial scrutiny came with
the public listing on the London Stock Exchange in 2005 with a market capitalisation
of US $ 1.3 billion.

Reorganising for Success

In 2011, as Petrofac celebrated 30 years of success, it launched a new division

called Integrated Energy Services (IES) to focus on providing complete solutions to

% !Petrofac Marks 30 Years in Business,#$internal publication, Petrofac, 2011.

& !Ohanet gas development, Algeria,#$article on petrofac.com company website.

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energy clients including consulting, design, and training services. This move
represented a reorganisation for Petrofac, moving the soft services into the new IES
unit and keeping the hard construction services in the EPC unit. IES was set up to
offer three types of contracts:

1. Production Sharing Contract (PSC) for new energy field development where
Petrofac would design, develop and construct new field operations.
2. Production Enhancement Contract (PEC) for mature energy field management
where Petrofac would deliver increased yield or increased operational
efficiency to existing fields.
3. Risk Service Contract (RSC) where Petrofac would build, operate and transfer
operating capability thereby sharing in the development risk.
4.
All three of the IES contract types were open to risk sharing whereby Petrofac
would participate materially in the cost and return of the project thus helping to align
Petrofac’s interests with those of the client. Petrofac had contracts in place across the
spectrum of risk. Figure 1 portrays the difference between a typical pure service
contract and the risk sharing contract type:

Figure 1: IES Risk Model3

Production Sharing Contract Risk Parameter Pure Service Contract

High/Medium Exploration Risk None/Low

High Development Cost Risk Low/Medium

High/Medium Reservoir Risk None/Low

Medium Commodity Price Risk None/Low

Cost and Profit Oil Revenue Specified Monetary Amount

No Defined Services Yes

Impairment Risk Recovery of Costs Incurred Credit Risk

Petrofac was now organised into two divisions: the new Integrated Engineering
Services Group and the Engineering, Construction, Operations & Maintenance
(ECOM) Division. Within the ECOM division there were several businesses
including: Onshore Engineering & Construction (OEC), (Sarma’s Business Unit),
Offshore Projects & Operations (OPO), and Engineering & Consulting Services
(ECS). See figure 2 for the Petrofac Group Structure:

3 From Petrofac Report, !Capital Markets Day, 14 June 2011#$retrieved from petrofac.com

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 Figure 2: Petrofac Group and Division Structure as of 20134

Divisions Engineering, Construction, Operations & Integrated Energy Services (IES)

Maintenance (ECOM)

Reporting Onshore Engineering

Segments Engineering Offshore Projects and &
& Consulting Integrated Energy Services
Operations (OPO)
Construction Services
(OEC) (ECS)

Service Onshore Offshore Offshore Engineering

Engineering & Training Production Development
Lines Projects & Capital
& Consulting Services Solutions s
Operations Projects
Construction Services

By 2014 Petrofac was present in 29 countries with over 18,000 employees. They
operated 12 training centers including one collaborative effort with Raytheon based at
the Johnson Space Center in Houston, Texas. NASA has large deep water tanks used
for training astronauts for space walks and repairing satellites in space. Petrofac made
use of NASA’s extensive deep pool facilities to train underwater off-shore crews in
survival techniques. Such innovative and high quality training helped maintain
Petrofac’s image as a high quality and safety conscious yet efficient service provider.

However, Sarma and his staff could see that the rapid growth was straining the
Petrofac culture. In 2013 alone Petrofac hired 2,700 new staff. Such rapid growth
inevitably caused stress to the systems that had been in operation for decades. Nigel
Paton, Executive Vice President, Business Performance, Onshore Engineering &
Construction in Sharjah reflected on the culture changes:

!We had in effect two cultures existing side-by-side in Petrofac. The original
culture of people who knew each other and how to get things done was now
heavily mixed with a new culture of recent recruits who knew only the
procedures in the manual and relied on process more than people. These two
cultures co-existed but there was a lot of tension in the system, especially
when under pressure and deadlines. People who know one way don't like
being told to go out of their way to get something done or worse being told it
(can't be done that way'$anymore. We were going to have to figure out a new
cultural foundation to guide people or risk our success model.#$

Key to Petrofac’s ability to supply efficient results was the extensive use of three
Value Engineering Centres (VECs) in India where much of the routine engineering

4 Ibid.

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Exhibit 4: Simple example of a model map with clues to breaking the cycle.

design work was handled. Petrofac operated engineering design centers in Mumbai,
Chennai and Delhi. The VECs provided much of the core engineering talent that was
needed in the design phase of a project. Locating the centers within India allowed
Petrofac to keep the engineering costs lower than if they had to do all that design work
in the Sharjah office. It also meant complex coordination between the managers of the
VECs and the Project Managers to manage the workflow demands.

Onshore Engineering & Construction (OEC) in Sharjah

Handling all the issues that arose between the VECs, the projects and the
functional support units was taking more and more of Sarma’s time as he led the OEC
business in Sharjah, UAE. He could also see the threats to long-term success and the
need to address these organisational issues now rather than postpone them.

Working with his staff, he decided to hold some one day retreats for his leadership
team to discuss collaboration.

The first retreat was held in April 2014 and focused on teamwork and
collaboration: what enhanced it and what prevented it. A survey was conducted and it
revealed that though Petrofac’s core values were still important and embodied, the
company looked more like a loose collection of discrete teams than a collaborative
team. The results were not totally surprising but they were alarming and everyone
sensed the risk it posed to long term success.

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 Kaye Krause-Whiteing worked for Sarma in the marketing and communications
area and could see many of the issues as they came up in employee feedback sessions.
The projects were scrambling to get the right talent assigned yet to minimise costs
from the VECs and other support groups. These were typical issues in large
organisations but they were recently becoming serious threats to the Petrofac success
model. Kaye expressed some of what she saw going on:

!Our project managers are very good at what they do. They know the business
and are technically competent. In the earlier days, everyone pitched in, rolled
up their sleeves and got the work done and the rewards were commensurate. It
was a great big family and there was a lot of camaraderie. That isn't gone but
it may be at risk if we don't address it. Some of our leaders haven't taken the
time to step back and realise that their role has changed from being a project
manager and do-er to being primarily a leader of mangers and do-ers. For
some it's understandably hard to let go of the technical work. For others, the
inherent leadership skills may be lacking and some just aren't aware that their
role has changed. I think the retreats will cause a lot of useful conversations
to happen that will begin to address these issues.#$

The charts (see Fig 3 and 4 below) and the survey summarised the feeling that the
OEC business had some work to do. The charts were circulated after the April retreat
and were visible in many offices throughout the building in Sharjah. Stimulated by
the discussions that ensued at the first retreat, Sarma decided that the second retreat in
October should look at the complexities facing OEC and what they might do about
them. It would focus on the complex issues facing the leadership team and especially
the concerns about collaboration as revealed at the April retreat. Sarma wanted to
create meaningful conversations among his leaders not just a broadcasting session. He
considered that with the right stimulation in thinking, they would figure out what to
do. He has a very smart and capable team but without a strong process driven
approach the potential for misunderstanding was more than he could afford to risk.

The second retreat was scheduled for October in Sharjah and all the leaders were
notified that they were expected to attend the full day. The April charts were circulated
again to remind people of the importance of collaboration. See the charts from the
April Retreat in Figure 3 & 4:

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 Figure 3: Indicators of Organisational Collaboration

UnCollaborative Organisations Collaborative Organisations

Foster internal competition Reward people for sharing data and information

Focus on blame rather than collaborative Avoid pitting people against each other
problem solving

Overlook key stakeholders when formulating Recognize people for gaining broad input
strategy or making decisions

Embrace a (star'$culture rewarding individual Use collaborative language

achievement over collective achievement

Encourage information hoarding since Clarify role of competition

(information is power'

Encourage resource hoarding and political Structure goals that support collaboration
alliances rather than productive working units

Encourage rework, low output and redundancies Lend senior support for collaboration

Erode focus through conflicting goals and Promote clear roles and responsibilities with
objectives accountability

Fire fight instead of finding root causes See root causes and correct them systematically

Figure 4: Indicators or Collaborative Leadership

Traditional Leadership Collaborative Leadership

Believe power comes from their position of Believe power is greatest in a collective form
authority

Maintain ownership of information Openly share information and knowledge

Sometimes listen to suggestions & ideas from Encourage suggestions & ideas from their team
their team

Deliver the approved solution to their team Facilitate brainstorming with their team

Allocate time & resources only when proven Enable their team by allocating time & resources
necessary right away

Adhere to specific roles & responsibilities Allow roles & responsibilities to evolve &
fluctuate

Fight fires and focus on symptoms See to uncover the root causes of issues

Review staff performance annually according to Offer immediate & ongoing feedback &
company policy personalized coaching

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 Nigel Paton worked with Kaye Krause-Whiteing and Manu Soni, a recent graduate
from the Indian School of Business (ISB) to develop a plan for the second retreat.
Together they put together a programme that would draw attention to their challenges
but would also invite conversation that would help get issues into the open and
facilitate movement toward a collaborative style of leadership and organisation. Sarma
commented on his expectations for the upcoming retreat:

!We are very good at solving client problems, building complex facilities that
work right and work safely. To continue doing that, we have to learn some new
skills to manage ourselves as a large and diverse company. Most of our
experienced project managers came up in the early culture of Petrofac. Then
we hired a lot of outsiders recently, experienced but not yet having Petrofac's
culture as an integral part of their DNA. This mix can cause confusion as to
expectations across units and groups. We simply cannot afford to compete with
ourselves. The external competition is only going to get tougher. We must
learn to be a collaborative organisation if we want to continue on the success
path we have been on now for 33 years.#$

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 Appendix 1 Acronyms

CEO Chief Executive Officer

ECOM Engineering, Construction, Operations & Maintenance
ECS Engineering Consulting Services
EPC Engineering Procurement Construction
HR Human Resources
ISB Indian School of Business
IES Integrated Energy Services
JV Joint Venture
OEC Onshore Engineering & Construction
OPO Offshore Production & Operations
PEC Production Enhancement Contract
PSC Production Sharing Contract
RSC Risk Service Contract
VEC Value Engineering Centers

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Appendix 2 Sample Financials from 2013 Annual Report

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