2011 Annual Report - SBM Offshore

3.1 Report of the Board of Management- Introduction
At the end of the first half of the year the Company installed the Yme and Deep Panuke platforms on their
respective offshore locations in Norway and Canada. This was the start of the commissioning activities, as well as
remaining construction works offshore to complete and prepare the facilities for start of production.
On both projects the Company had incurred additional cost due to re-measurement of on-site works, part of which
has been completed inshore, with the remainder to be completed offshore. These additional costs and
clarifications of the client’s contractual position on Yme at that time lead the Company to recognize an additional
cost exposure and book impairment charges totalling US$ 450 million on the two projects under the Lease and
Operate segment in the first half year 2011 results.
In January of 2012 the Company announced that progress on the work offshore and commissioning of the Yme
platform for start-up of the system had been significantly slower than anticipated. The productivity levels were
affected by bad weather conditions, among other reasons, and an increase in the work scope offshore.
The Company, together with its Yme client are taking action to improve productivity offshore and reach a common
path forward to complete the platform and start production. The Company cannot be explicit about the path
forward as the details are under discussion with our client, but all scenarios result in a significant delay in start-up
of the platform.
The amount of work to be completed offshore has been updated and, taking more realistic productivity levels into
account, this has resulted in substantial additional in the estimates of the costs and time to complete. The
potential recovery from the on-going arbitration proceedings has also been re-assessed, with the first arbitration
conclusions finding in favour of the client.
The Deep Panuke platform delivery has also been delayed due to low productivity and additional work on certain
systems, requiring further cost provisions. At year-end 2011, no potential recovery from the on-going court case
has been recognized, due to the likely long duration of the proceedings. On timing, the Company anticipates first
gas production at Deep Panuke in the summer of 2012.
Accordingly, a total additional impairment charge of US$ 407 million related to the Yme MOPUstor and Deep
Panuke platforms has been booked under the Lease and Operate segment in the second half of the year.
The Company will actively continue legal proceedings to minimise the costs to complete and to maximise
recovery of those costs. The outcomes of proceedings will only be known when the litigation, arbitration or
negotiation processes have run their course.
During 2011, the Company has refocused its product line on core FPSO products and associated services. By
focusing on core products with historically good margins whilst improving execution standards and project risk
profiles, the Company believes it will eventually return to delivering superior financial returns.
The disappointing financial performance over several years of FPSO projects worldwide is an indication that
rewards are structurally not aligned with obligations and liabilities of FPSO contractors. The Company will actively
pursue contract structures in which this risk/reward in balance is more favourable for contractor.
To face the new challenges of increasingly complex projects, the Company has adopted a new risk management
approach leading to a deferral of gross margin of US$ 57 million from 2011 to future years. Accordingly a new
This is a customized selection from the SBM Offshore N.V. Annual Report 2011
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