Renewed demand for energy amid long-term calls for sustainability has put EPC contractors in a tight spot, but a well-articulated strategy can help them succeed, notes Manish Marwaha, partner at Roland Berger’s Zurich office.
Oil & Gas Middle East: Why do you think EPC companies need to reposition themselves?
Marwaha: Having just emerged from one of the most challenging periods in their history, EPC companies now face a complex energy landscape that is evolving faster than ever.
EPCs have endured significant hardships including years of low capital expenditure, which have led to financial losses, significant layoffs and, in some cases, the permanent loss of capabilities. As capex rebounds, they now find themselves stretched to meet growing demand in core markets and challenged to develop capabilities to serve new markets. The choices made by EPC players over the next 3 to 5 years will thus determine whether they outperform or perish.
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Oil & Gas Middle East: What is the outlook for the EPC industry over the next few years and what are the key factors impacting your forecast?
Marwaha: Our outlook for the next few years is bullish – especially for the energy sector, which is firing on all cylinders. We see four key drivers:
- Energy security is at the forefront of the global agenda. It is therefore widely accepted that while decarbonisation is the right direction overall, conventional energy sources will nevertheless continue to be the mainstay of our energy mix in the near and mid-term.
- Capex is recovering to meet growing energy demand, which has bounced back from its lows during the pandemic and confidence around investment-worthy higher energy prices has increased. Accordingly, there is now a push to accelerate capital spending in order to fill the gap left by low investment in the preceding years. The rebound in oil prices has also replenished the oil companies’ capex coffers and strengthened their determination to further invest in conventional oil and energy.
- Decarbonisation is rapidly gaining traction with several projects in the pipeline in the areas of hydrogen, CCUS etc. As these projects break ground and come to fruition over the next 5-10 years, EPCs will find more and more opportunities to participate. But they will also face competition for resources and the need for new capabilities.
- Renewable investments will continue to grow rapidly, but only a handful of sectors – such as offshore wind – require the extensive set of capabilities embodied by EPCs.
Oil & Gas Middle East: Keeping in mind the current market conditions, can you discuss the steps that EPCs should take to succeed?
Marwaha: EPCs need a fresh and well-articulated strategy that reflects the evolving landscape in order to be prepared to face the kind of disruptive events we have witnessed in recent years. That will require a streamlined and (re)focused business portfolio:
- EPCs have some hard choices to make to strike the right balance between conventional and decarbonisation opportunities, and they must allocate their scarce resources accordingly. Moving away from conventional energy too quickly will leave opportunities on the table. But if they target decarbonisation too late, they will miss out on the opportunity to cement their position as the lynchpin of energy transition.
- EPCs need to apply the lessons learned from the recent downturn and distill their organisation to the essentials and what they are really good at. They must focus on their core competencies and deliver these in the most efficient and cost-effective but scalable manner possible. Crucially, scaling up must be done in tandem with reducing risk exposure. The latter can be achieved by exiting fixed-price lump-sum contracts and transferring a larger share of risk to operators.
Second, EPCs must define a clear scale-up strategy covering the technology, skills and human capital dimensions:
- Given the rapid rate at which decarbonisation is evolving, access to the right skills and technologies is critical. EPCs need a clear technology strategy that defines which technologies they want to acquire, which they want to partner with and which ones they should source externally.
- Regarding human capital, significant layoffs to date have significantly eroded EPCs’ intellectual capital and knowledge base. Looking at the need to scale up operations and attract even more diversified skills within a high-wage and increasingly hybrid work environment, people become the most critical success factor in an intensely competitive labor market.
Lastly, EPCs must change the narrative. They have languished on the stock markets in recent years due to profitability and performance issues. It is essential for EPCs to change this narrative and reposition themselves as champions of decarbonization and sustainability. This will enable them to unlock better valuations that reflect their pivotal role in the energy transition.