EPC Market Review: Changing positions

New project activity in the Middle East is slowing as petrochemical companies adjust their ambitions in the face of new business realities. Financing plans are being rearranged, and contracts with engineering firms renegotiated.

This current situation has shone a light on engineering, procurements and contracting (EPC) companies who are facing a tough market with the current economic slowdown. Many companies have reviewed bidding activities. “The market and competition is very harsh at the moment,” explains Arturo Grimaldi, senior vice president at Technip Middle East, which recently won a contract for the US$9.6bn project of the Saudi Jubail Refinery and Petrochemical Complex (SATORP). “The market that used to be a sellers market has been skewed in favour of buyers, the balance of power has shifted back to the project owners,” he adds.

Construction costs in the Middle East rose steadily over the last few years as the economic boom in the region pushed up prices of materials such as steel and cement, but the downturn had a harsh impact. “The effects of the economic crisis have in some cases resulted in the award of new projects being postponed,” says Dr. Aldo Belloni, member of the executive board of Linde AG. Linde won a $1.5bn contract to build a cracker in Abu Dhabi for Borouge 3 in July this year. “We therefore assume that new orders in our engineering division will not be sufficient to achieve the same level of sales revenue in the 2009 financial year as in 2008,” he reveals.

New Behaviour

The current economic situation has impacted many aspects of the EPC scene, from the cost through to the bidding process for projects, as a multitude of companies race to secure contracts, especially here, one of the few global territories where genuine explansion is continuing. “All the major contractors from around the world are here and competing in a very hard manner,” Grimaldi explains.

Accessing the Middle East market became the ultimate goal of contracting companies. “It appears that several of our competitors, in need of new work, are willing to assume very substantial risks, which is different from what we experienced over the past three to four years,” says Peter Oosteveer, group president, energy and chemicals at Fluor Corporation. Fluor has won many projects in the region including Kuwait, Saudi Arabia, Libya, Qatar and UAE. It seems all the main contractors have been obliged to reconsider their own way to be competitive.

Exactly what constitutes a mega project has changed in the last few years. “Previously a US$3 billion or $4 billion petrochemical project was seen as mega project, but now we can be talking about $15bn, $20bn or $25bn complexes, often integrated with refining and including a much wider range and larger number of process units,” says Carolyn Greenhalgh, director of strategic planning, global engineering and construction group at Foster Wheeler, which was involved in many of the mega projects across the region.

“We used to think of a mega project as one that cost $1bn, but the cost of these is now around $5bn to $10bn per project, and they are still out there.” adds Oosteveer. Projects owners have become reluctant about releasing contracts, and are generally more conserva-tive before proceeding in negotiations with contractors. “Some companies do more study work or a more detailed FEED before giving a final go ahead, or they might release the contract in stages,” says Greenhalgh. Though the majority of business segments have felt the harsh pinch of the downturn, some segments have continued growth.

“Our polysilicon business has promise for strong growth. We are in a dominant position in polysilicon projects worldwide and are currently also involved in front end activities for various polysilicon projects in the Middle East,” says Oosteveer.

As petrochemical companies try to reduce the operational cost, they started looking for alternative solutions such as the integration of their utilities to reduce the cost. SABIC has awarded a major performance-based contract to Drake & Scull International to integrate its utilities (see page 27), in a move concurrent with a general cost-reduction trend across the downstream sector. “We are seeing significant growth in utilities segment for downstream companies,” adds Ian Johnson, sales manager at IFS, a provider of computer software to energy EPC contractors.

Some companies are still fortunate enough to be enjoying the bonanza in the regional petrochemical sector.

“Our main activities are actually growing and not going down,” says Sam Mathew, director, global operations, oil, gas and petrochemicals at Mott MacDonald.

Challenges

As the number of awarded projects has been reduced, EPC contractors are facing new challenges, and shifting their ambitions accordingly. “The market is more fierce and harsh,” says Grimaldi. “We want to be in the full spectrum of different projects presented in the area, not only mega or gega projects but also now medium sized ones” Grimaldi explains.

The type of challenges contractors face in the region have changed. “In the past three to four years, the main challenge was to ensure that material was delivered in a timely fashion in order to support the construction schedules,” says Oosteveer.

“In addition it has been a challenge to obtain qualified construction workers,” he adds. But now the challenges are related to the kind and the size of the projects.

“The challenges are generally related to the project scale and its complexity. The size of the new wave of petrochemical facilities we are working on, and have been working on, are huge and still growing,” says Greenhalgh.“The construction of offsite and utilities packages that are needed to support these expansions and world-scale facilities are also dauntingly huge and complex.

“Some of the latest developments include a significantly larger and wider range of process units that we have ever seen,” she adds.

The complexity of projects is another challenge facing the contractors, especially with the trend of building integrated refineries. “The nature of the project itself is a challenge. But this is our key strength of Foster Wheeler. We are one of the few companies who can handle these kinds of mega projects,” Greenhalgh explains.

Local Focus

The majority of major projects in the Middle East are state-backed projects, feasibility studies are still progressing, and contract awards are forthcoming. The time from feasibility to development phase is taking longer now, largely because clients are pushing hard for lower costs.

Convincing the clients to accept the real cost of the project became another challenge. “The general expectations of clients is that there is a downturn so they are expecting a reduction of costs. But that is not the case,” says Mathew. “Some of the contractors have to struggle now because some of the contracts are already in the bag and clients are expecting a reduction of costs. For new projects people are talking about a reduction in material costs, but it is slowly coming down,” he explains.

Compared to other global petrochemical and chemical production hubs worldwide, the Middle East will continue to offer a better opportunity environment. In the middle of the credit crunch, and while the whole world suffers from a severe liquidity problem, many significant project contracts have been awarded in this region. Among the projects moving forward is the plan for a $20 billion chemical industrial city in Abu Dhabi, that will be managed by Abu Dhabi National Chemicals Company ChemaWEyaat and the Austrian firm Borealis.

There is a general consensus between the different EPC contractors that the Middle East market will remain the principal destination for new business orders. “The projects have slowed down little bit but we remain very positive about the position of the Middle East in all of our key activities,” says Greenhalgh.

Project owners will be the main beneficiaries from the rampant competition between the different contractors in the region. A good example has already materialised, with the cost of Saudi Aramco’s Ras Tanura Integrated Project dropping to less than $20bn compared to the initial $26bn estimates, and a $6bn rebate can’t be all bad.

Contracts To be awarded October 2009

• Saudi Kayan’s 300 000 t/y LDPE. The estimated cost is US$300m.
• Saudi Arabian Chlor Vinyl Company will award contract to build 300 000 t/y ethylene dichloride plant and 250 000 t/y caustic soda plant. The estimated cost is $400m.
• Abu Dhabi’s Fertil to award a $1bn contract to expand its urea and ammonia plant.

Andy Allen, global director, chemicals and petrochemicals division at Foster Wheeler

The US-based Foster Wheeler is one of the largest EPC contractors in the world. The company has a significant presence in the Middle East and has constructed some of the region’s most ambitious downstream projects.

“We have operational offices in Al-Khobar in Saudi Arabia, and in Abu Dhabi, as well as several project offices dotted around the region,” says Andy Allen, global director, chemicals and petrochemicals division at Foster Wheeler.

The company has been involved in many large scales projects in the Middle East, both in the upstream and the downstream. “Talking just about the petrochemicals projects we have recently completed, or that are coming online soon, we have been involved in projects in Saudi Arabia like PetroRabigh, the major investments by SABIC subsidiaries Yanbu and Sharq, in the UAE and also in Kuwait,” explains Allen.

Additionally, Foster Wheeler is engaged in many upstream projects. It has received a basic engineering contract to develop offshore export facilities in Iraq, and Karan offshore platforms for Saudi Aramco in the Kingdom.

“Being global gives us the ability to leverage our international network to ensure that we can execute all the projects we win, we have a concept in the company that says we don’t take the project if we think that we couldn’t make a good job of it,” Allen reveals. The company is currently looking for investment opportunities in different parts of the world. “We are looking for investment opportunities in North Africa, which has tremendous oil and gas resources,” Allen said. The company saw its revenues rise sharply in recent years. Sales were US$6.85bn in 2008, $5.1bn in 2007 and $3.5bn in 2006. Foster Wheeler’s global engineering and contracting group generally accounts for around 60% of revenues (versus the company’s Global Power Group).