In April 1981, Sime Sembawang Engineering was set up as a joint venture between Sime Darby and Sembawang Engineering Pte Ltd. It operates a fabrication yard to serve the oil and gas industry in construction of offshore platforms. In January 1999, Sime Sembawang Engineering changed its name to Sime SembCorp Engineering (SSE). In April 2005, Pesida Equipment Sdn Bhd, a wholle-owned subsidiary of Sime Darby Berhad made a 30% share acquisition from SembCorp Utilities Pte Ltd, the company officially became Sime Darby Engineering (SDE). Malaysian Oriental Holdings Berhad held the remaining share capital. Malaysian Oriental Holdings Berhad is a wholly-owned subsidiary of Sime Engineering Services Bhd. Sime Darby Group, Sime Darby Engineering Sdn Bhd (SDE) is a key player in the Exploration and Production value chain of the oil and gas industry.
However, Energy & Utilities registered a total loss of RM1,751.7 million inclusive of provision for foreseeable losses of RM969.0 million and impairment of RM412.4 million for the year ended 30th June 2010. The Oil & Gas segment's four projects, namely the Qatar Petroleum (QP) project, the Maersk Oil Qatar (MOQ) project, the Bakun hydroelectric dam (Bakun) project and a project on the construction of marine vessels for use in the MOQ project, registered a total losses of RM1,645.6 million.
Activities and Problems of Projects
Maersk Oil Qatar (MOQ) Project
In February 2007, Sime Darby Engineering has been awarded an EPCIC contract by the Maersk Oil Qatar AS which valued at RM2.2 billion. This contract was due for completion in October 2009. EPCIC means Engineering, Procurement, Construction, Installation and Commissioning. As the leading oil producer offshore Qatar, Maersk Oil Qatar AS is a recognized pioneer in oil development and production techniques. In EPCIC contract, Sime Darby Engineering has to build and install a process platform, a utility platform and three bridges off the coast of Qatar. This project is implemented to continue develop and operate Al Shaheen Oil Field under a production sharing agreement with Qatar Petroleum.
However, in May 2010, Sime Darby Berhad has disclosed to public that there are cost overruns in MOQ Project and Energy & Utilities Division has made provision of RM159 million for the MOQ project. There have been delays and cost overruns in this project which contributed to foreseeable losses of RM526 million, of which RM367 million has been recognized.
In this MOQ Project, Sime Darby Engineering has hired engineering consultancy firm RNZ Integrated (M) Sdn Bhd in which fees totaling RM66.6 million was paid. It has been said that executives of Sime Darby Engineering has been negligent in hiring the engineer as actually RNZ has less experience and also does not have the necessary expertise in providing detailed engineering and design plans for the MOQ Project. There is more reputable engineer such as Ranhill WorleyParson Sdn Bhd but they have chosen to appoint a less reputable one. This decision was made by the former group chief executive officer Datuk Seri Ahmad Zubir Murshid and other four executives, former head of the group's E&U division Datuk Mohamad Shukri Baharom, former E&U division chief financial officer Abdul Rahim Ismail, former oil and gas head of E&U division Abdul Kadir Alias, and former Sime Darby Engineering senior general manager Mohd Zaki Othman.
The large amounts of costs overruns are also contributed by inadequate experience of Sime Darby Engineering in this MOQ Project and also lack of exposures of conditions in Qatar. It is because instead of implementing the project by their own, the company mainly relies on its sub-contractors in conducting nearly all of the projects. The defendants, which are the former CEO and other executives have been found negligent and breach of duty as they are the one who understand the company's capabilities and should know that the MOQ project has actually beyond the company ability.
There is also a breach of duty by the two executives, Abdul Kadir and Mohd Zaki as they are alleged to waive the performance bond which is important to guarantee the completion of the project. It seems like they will know that the contract progress will be disrupted and being in default. Besides that, the three executives, Mohamad Shukri, Abdul Rahim and Mohd Zaki were alleged to breach of duty as they paid to RNZ RM6.21 million for completion of work even though they received complaints regarding the poor quality of designs for MOQ project.
Qatar Petroleum (QP) Project
In 2005, Sime Darby Engineering decided to bid for the engineering, procurement, construction, installation and commissioning contract to be commissioned by Qatar Petroleum for its Bulhanine project with amount of RM867.8 million, which among others included the modification to 34 existing platforms, 17 subsea lines between existing and new platforms. It is the first major international contract for Sime Darby as main contractor to extend its operations into Qatar, despite it had no prior experience to undertake Middle East projects of such scale and magnitude. In addition, Sime Darby's energy and utilities division also not being familiar with marine transport and installation, subsea pipe-laying work, labor rates, yard and facilities in Qatar. Naturally, it was a very risky investment decision as they more familiar with the plantation and real estate.
However, Sime Darby Engineering still ventured in it and appointed Iran Offshore Engineering Co to carry out the transport and installation and pipe-laying work to solve their no marine capacities problem. It is considered as a reckless and inappropriate decision, given the existence of a US trade sanction on Iran and its close relationship with Qatar. Nevertheless, Sime Darby still carried out the project despite Qatar Petroleum's rejection of Iran Offshore and they were awarded with a letter of acceptance in April 2006 with targeted completion on August 2008 or 28 months.
Determination of Sime Darby to venture into Qatar seems like doesn't help much to the success of QP Project. Due to lack of capability and incompetence, there were many instances of delays. It even went worse by Sime Engineering's failure to record properly Qatar Petroleum's alleged promises to compensate Sime Engineering in such an event. Moreover, Mohamad Shukri and Ahmad Zubir were also alleged as having failed to inform the board on the delays, but instead falsified and reduced the actual cost overruns so that the true extent of damage to Sime Engineering's books were only recognized much later than it was supposed to be.
Furthermore, the division also engaged seven consultants costing it around RM102.0 million to put the project back on track and add value to the project. It was alleged that most of the consultants did not do any work but instead offered services rendered illegal in Malaysia, which those acts could tarnish Sime Darby's reputation.
By May 2010, the project's total cost had ballooned well over RM1.6 billion, almost RM800 million over budget. The delays and cost overruns have resulted in losses on the project exceeding RM500mil, which the division has already been accounted for. The Division is currently in negotiations with the client on the QP Project on claims for the cost overrun. Due to the negotiations are ongoing and can't conclude on this matter, the Board has decided to reverse the revenue of RM200mil previously recognized in the Group accounts for FY2009.
Marine Project
Marine Project was the project that concerns the construction of two tug boats that could send supplies to offshore oil rigs and a Derrick Lay barge for use in the Maersk Oil Qatar (MOQ) project and a pipe-laying ship too. In April 2008, Executive vice-president, Datuk Mohamad Shukri Baharom, proposed four shipbuilding constructions contracts to MLC and sold 4 units of anchor handling supply at RM285 million. Other than that, he also proposed derrick lay barge construction project with a sum of RM295 million which were expected be completed by end of May 2009 to MLC Shipping Group.
This project leads to major loss for Sime Darby Group because Executive vice-president of the energy division, Datuk Mohamad Shukri Baharom, making the wrong decision of choosing the shipbuilder and signs the deals before get the approved from the committee. He either does not sufficiently highlight the fact that he already signed deals with two shipbuilders to BOD during risk management committee meeting and Board of Directors (BOD) meeting on 27th and 28th May 2008 respectively. The shipbuilder that Datuk Mohamad Shukri Baharom deals with was MLC Shipping group and Puteri Offshore Pte Ltd.
In other of choose the wrong shipbuilder, the problem also raised when KPMG was roped to conduct due diligence on MLC which had limited access to records and documents that maintained by MLC companies in Singapore and China. Until mid of May 2010, the barge for use in MOQ project that estimated be completed by end of May 2009 has not yet been delivered. Sime Darby Group has formed Board Work Group (BWG) in October 2009 to review the operation of Energy and Utilities (E&U) division and its estimated Marine project may result losses of about RM155 million to the group.
Bakun Dam Project
The Bakun Dam project or Bakun Hydroelectric Project was initially been approved by Malaysian Government in 1986 to generate electric energy of 2400 MW. However, it had been postpone due to the decreased of projected demand of electricity and also cause by the recession in late 1980's. It subsequently has been revive in 1994 by privatized contract been awarded to the Ekran Berhad and scheduled to be complete in 2003 with approximate cost of US$2.4 billion. The project continued by privatized joint venture between Ekran and TNB, Sarawak Electricity Supply Corporation and Malaysia Mining Corporation (MMC) with the name called Bakun Hydroelectric Corporation. Ekran was having difficulties in finance their project which cost the Chairman to subscribe all unsubscribe of the right issues.
In 1997, the project was being postponed again due to the Asian financial crisis and some disagreement with the main contractor ABB with result in the Federal Government taking over the project (Adnan H.). However in 1999, Prime Minister again announced resumed of the project by the wholly own company of Ministry of Finance, Sarawak Hydro Sdn Bhd but with smaller scale generating 500 MW excluding the undersea cable as well. Subsequently, the project was awarded to Malaysia China Hydro Joint Venture comprises of Sime Engineering Berhad, Sino-Hydro Corporation of China, WCT Berhad, MTD Capital, Ahmad Zaki Resources, Syarikat Ismail and Edwards & Sons.
The main civil work was begun in October 2002 which include nearly 4000 workforce including experts, consultants, specialist, engineers and others. In 2008, Sime Darby Bhd has informed the Government of Malaysia that it had decided not to take up the equity interest in Sarawak Hidro Sdn Bhd and not participate in the development of the High Voltage Direct Current transmission link reply the letter of intention from the Ministry of Finance and Economic Planning Unit of the Prime Minister's Department. The project was 96% complete as at October 2010 and the impounding operations was started from long waiting for the approval from the Sarawak Ministry of Public Utilities.
The initial contract cost for the Bakun Hydroelectric Dam Project is RM1.8 billion as awarded by the government to the consortium of MCHJV. However, the total cost was overrun for nearly RM1.7 billion which is due to the increase of the materials cost and variation in design as reported by the Sime Darby Energy and Utilities Division. The delay in completing the project also causes the cost overrun.
In addition, some source have point out the corporate governance issue on this whereby the former CEO and 2 other top executive are being suit damages of breach of trust on the project amounting at least RM92.2 million. The amount comprises of two amount of RM74 million and RM16.5 million which were wrongly paid out to the Bakun Project and for wrongly giving away plants to Sinohydro. Furthermore, they are other matters and issues arise during the construction of the dam relating to their sub-contractors
Impacts of the Problems Incurred
The overall impacts of the project to the group were it incurred operating loss of RM1.7 billion for the period ended 31 March 2010 (3rd quarter of FY2010) for Energy and Utilities division where the provision was amounting to RM964 million. The provision totaling RM964 million is as follows:
Qatar Petroleum (QP) project - RM200 million
Maersk Oil Qatar (MOQ) project - RM159 million
Marine project - RM155 million
Bakun project - RM450 million
Other than that, the market cap and share price for Sime Darby group also affected. The market cap was RM51,981.9 million and dropped to RM46,633.4 million, while the share price was drop from RM8.65 to RM7.88 as at May 12 and August 26, 2010 respectively.
Besides that, the directors that involved in these three projects was been sues by Sime Darby group for alleged violation of the rights in the framework of the energy and utilities division. The directors that been sues were former president and chief group executive (CGE) Datuk Seri Ahmad Zubir Murshid, former executive vice president of E&U division Datuk Mohamad Shukri Baharom and chief financial officer Abdul Rahim Ismail Abdul Kadir Alias. Summarize of suit in E&U division was as follow:
Adapted from: 'Qatar Petroleum venture doomed from the start' (http://www.btimes.com.my/Current_News/BTIMES/articles/SIMQAT_2/Article/index_html#ixzz1Glt7iVXY)
In addition, it also gives the bad impacts to the public and especially future investors to invest in the companies for the future project that arise. With the lot news regard the loss generated from the project of E&U division, and civil lawsuit files by group to the subsidiaries and the directors give a big impacts to the reputation of the group and would caused the investors lost confidence to the group or company.
Recovery Plan
On May 13, Sime Darby Bhd president and group chief executive Datuk Seri Ahmad Zubir Murshid was asked to take leave of absence prior to the expiry of his contract on Nov 26 and on June 14 Sime Darby appoints the Datuk Mohamed Bakke Salleh from Felda Global Ventures Holdings Sdn Bhd as the new president and group chief executive. By taking this action, it shows that Sime Darby is willing to make a big step in improving the company's image to restore back investors' confident by appointing a more capable and reliable management team to act at the best interest of shareholders.
Besides that, the Board appointed a legal firm to independently conduct follow through investigations to determine culpability based on the findings of Work Group on the four key projects in the Division. After that, the Board has resolved to initiate legal proceedings and where appropriate, to lodge reports with the relevant authorities. On Dec 23, Sime Darby filed a civil suit against Zubir and four other former senior personnel for restoration in the sum of at least RM338mil plus damages. The suit was in connection with its loss-making Qatar Petroleum (QP), Maersk Oil Qatar (MOQ) and marine projects. The next day, Sime Darby filed another civil suit against Zubir Murshid and two others for restoration of RM90.5mil relating to the Bakun Dam project. The Board also has instructed the management and staff to fully co-operate with the Malaysian Anti Corruption Commission (MACC) in its investigations. Members of the Board stand ready to assist.
Suggestions and Recommendations
Enhance the Corporate Governance of the company especially for the Board of Director to perform better in oversight the overall performance of the company by putting more effort to oversee it. The Directors and the top management team should take into the consideration the shareholders interest before making any important decision as they are agent to the principle which is the shareholder. The company also can implement two tier Board of Directors structure where else there are some Group Directors sit in its subsidiary's board chairs. This is to ensure the goal congruence between the Group's goal and their own subsidiary's goals. The role of Audit Committee should be revised to ensure the accountability and transparency of the operations and as detect any problems or issues earlier stage. Besides, the Internal Audit Department should be independent in their judgment and regularly perform the audit in high risk area. Any red flag issues arise should be communicated directly to the top management and board of directors to ensure immediate corrective action will be taken before the problems spread further.
The company also should enhance their code of ethic and code of conduct within of the company as to ensure the integrity and ethical level of their employees. Regular employees training and development will make them better understand the company operations and will create the feeling of become part of the company thus result in motivating them to work harder. Better rewarding system can be implemented to reduce the possibilities of the employees taking a bribe or perform fraudulent acts such as falsifying the accounts.
The company should evaluate their capability to perform certain project at the first place before taking the contract or bid for the projects as it might be affect the future earnings if they don't have ability to do it. They also have to have better analysis and evaluation method to select the sub-contractors before awarding them the contract. It is to prevent and defaults or inefficient and incapability of the sub-contractor to deliver the project on time by taking the MOQ project as an example.
Conclusion
From the analysis done on the activities of the main four projects, we found that there are some obvious problems that contributed to the losses suffered by The Energy & Utilities Division. It faced a financially challenging period during the year due to cost overruns in the Qatar Petroleum (QP), Maersk Oil Qatar (MOQ), Bakun and Marine projects. Despite the losses of the oil and gas unit, other business units including power, ports and logistics as well as engineering services, performed relatively well. Various initiatives have since been undertaken to turn around the Division, particularly the Oil & Gas unit. Various new initiatives were implemented during the year to improve the governance and internal controls of the Oil & Gas business unit. Among the action plan was a three-phase transformation approach spanning a period of two years. For example, an Accelerated Capabilities Development Programme (ACDP) to enhance the management skills of its project managers is also in the pipeline. The programme will include application in real-life situations, with supervision from experienced trainers as part of the coaching method. As the conclusion, with the recovery plans and strategies, the Division hopes and is expected to turn around and become a profitable Division.
Appendix
Events Timeline
27 May 2010
A third-quarter net loss of RM308.6 million compared to a profit of RM150.6 million in the year-earlier period was reported.
May 13, 2010
Zubir took leave of absence while Datuk Azhar Abdul Hamid took over as acting group chief executive.
May 2010
Bakun project's cost overruns exceeding RM1 billion was reported.
Feb 2010
RM210 million in costs overrun on MOQ project in 2QFY10 was provided. O&G segment registered RM201 million losses for 1HFY2010.
Jan 2010
The E&U division head Shukri resigned. Hisham Hamdan took over.
Oct 2009
A board work group was set up to review the corporate governance and performance of Sime Darby's E&U division.
Late Aug-Sept 2009
PwC expresses concerns to chairman Tun Musa Hitam to urge the management for more details on the Bakun, MOQ and QP projects.
Aug 2009
The O&G segment recorded RM80 million losses for FY09, mainly due to the cost overruns incurred on the QP project.
Aug 2008
Internal auditor issued a report on losses in the O&G segment and was brought to the attention of the audit committee. However, the losses deemed immaterial.
