EPC market review: Changing positions

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Dr. Aldo Belloni, member of the executive board of Linde.

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Sam Mathew, director, Mott MacDonald.

Contractors from around the world have flocked to the Middle East and want a piece of the downstream action this year.

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, 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.

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