How Energy Division Lead to Major Losses for Sime Darby

There are 4 multimillion Ringgit projects entered by Energy and Utilities division of Sime Darby, but turned out bad. One of the projects is collaboration with Qatar Petroleum (QP), the Bulhanine and Maydan Mahzam project. Sime Darby has been awarded a RM265 million contract to build wellhead platforms where the scope of works in the contract covers three wellhead platforms, installation of about 40 kilometres of pipeline, 23 kilometres of umbilical and alteration to existing platforms.

It started in April 2006 and supposedly completed in August 2008. However, the division has encountered delays and cost overruns which resulted in losses on the project exceeding RM500 million, which have already been accounted for. At that time, they still try to negotiate with the QP project’s client on claims for the over budget cost, but the Board has already decided to reverse the revenue of RM200 million previously recognized in the Group accounts for Financial Year 2009. The second project is the Maersk Oil Qatar project (MOQ).

Maersk Oil awarded Sime Darby Engineering the EPCIC contract to build and install a process platform, a utility platform and three bridges off the coast of Qatar in February 2007. It was scheduled for completion in October 2009 but there have been delays and cost overruns in this project which caused losses of RM159 million for Financial Year 2010. According to Sime Darby, the cost overruns were incurred on transport and installation, and hookup and commissioning works. It is not clear if the overruns were the result of under-budgeting, and unexpected increase in raw material costs, or both, or some other reason.

Even though negotiations were made with the client, they still could not probe the losses. The third project related with the MOQ project, which is the construction of vessels for the MOQ project’s usage called the Marine Project. MARINE Project was meant to turn Sime Darby Bhd into a major marine vessel player in the oil and gas industry, but it didn’t turn out as planned when they picked the wrong shipbuilder. The project including building a derrick-lay barge, a pipe-laying ship, an anchor handling towing supply, and a tug boat that could send supplies to offshore oil rigs.

Sime Darby had suffered cost overruns of some RM1. 3 billion for all three projects. And the last project is the Bakun hydroelectric dam project. The project was tendered to Sime Darby Group along with seven-member consortium by the government at a total of RM 1. 788 billion. The Bakun hydroelectric dam project, in which Sime Engineering Sdn Bhd holds a 35. 7% effective interest, was awarded in September 2002 and was initially scheduled for completion in September 2007. However, due to various factors, completion has been delayed and costs have escalated.

There are three developments affecting the Bakun project. The first is the merger of the Sime Darby, Guthrie and Golden Hope into a new entity named Synergy Drive. The second is the proposed takeover of the Bakun project by the contractor, Sime Engineering. The third is the revival of the submarine HVDC cable under the South China Sea to transport electricity from Borneo to Peninsular Malaysia. These four projects were under the former president and four other senior executives’ control.

They are Datuk Seri Ahmad Zubir Murshid (CEO), Vice-president Datuk Mohamad Shukri Baharom, chief financial officer Abdul Rahim Ismail, head of oil and gas Abdul Kadir Alias and senior general manager of Sime Darby Engineering Mohd Zaki Othman. These personnel were accused of failing to carry out a due diligence on all projects. It also has been reported that they had neglected findings from KPMG, specifically on the deals with MLC shipping Group (construction and sale of four units of anchor handling towing supply at RM285 million and construction of a derrick lay barge for a sum of RM 295 million) and Puteri Offshore Pte Ltd.

The VP was blamed for disregarding the due diligence process when he did not disclose or sufficiently highlighted the fact that he had already signed deals with MLC and Puteri Offshore. Sime Darby also has done investigation conduct by the legal and forensic consultants which has validated the finding where they may have been breaches of duties and obligations and inappropriate conduct.