GCC contractors in numbers
$29bn: Value of contracts awarded by Adnoc and its subsidiaries in 2009-10
$12.8bn: Value of contracts awarded by Saudi Aramco in 2009-10
20 per cent:Average drop in costs during 2009-10
Few contractors in the world, let alone in the Gulf, can claim that demand for their services reached record highs over the past 12 months. But according to MEED’s annual survey of oil and gas engineering, procurement and construction (EPC) contractors, that is precisely what happened in the region’s hydrocarbons projects sector during the 12 months to 31 March.
If you look at the volume of contract awards, it looks like it has been a great time for contractors
With a total of $46bn of new contracts awarded between April 2009 and March 2010, the region’s oil and gas companies committed themselves to spending more than they did at the height of the economic boom of 2006-07, when they signed off $45bn-worth of deals.
MEED’s research shows the value of the EPC contracts awarded during the 12 months from April 2009 was more than $15bn higher than the year before, when $28bn of awards were made. This in turn was an increase of almost $15bn from 2007-08, when only $15bn of contracts were awarded.
The change came when contractors started lowering prices to reflect a fall in material costs
Last year also marked a change in the make-up of the contractors who won the work on offer. South Korean firms were the overwhelming victors in 2009-10, winning $17.5bn of deals, or 38 per cent of the total. Previously contractors from the US dominated the projects market.
Abu Dhabi awards contracts during crisis
The survey highlights the emergence of the UAE as the most prolific spender on new contracts. Abu Dhabi National Oil Company (Adnoc) and its subsidiaries awarded nearly $29bn of contracts during the year. This was more than double the $12.8bn of EPC deals signed off by state energy giant Saudi Aramco, which has traditionally held the region’s biggest capital expenditure budget.
The UAE has sealed its reputation as a smart countercyclical investor, awarding tens of billions of dollars of contracts in a year when the average cost of EPC work fell by as much as 20 per cent from their 2007-08 peak.
|Top 10 EPC Contractors by awards|
|Contractor||Estimated value ($m)|
|1||GS Engineering & Construction||4,929|
|2||SK Engineering & Construction (SKEC)||4,342|
|5||National Petroleum Construction Co. (NPCC)||2,567|
|9||Hyundai Engineering & Construction||1,700|
|=10||China Petroleum Engineering & Construction Corporation (CPECC)||1,645|
|=10||China Petroleum Pipeline Bureau||1,645|
|EPC=Engineering, procurement and construction. Source: MEED|
The drop in costs is seen by many contractors and analysts as the main reason for the high volume of awards made during the year, in a reversal of the scenario seen in 2007-08. As demand for contractors boomed from 2006 onwards, the bids submitted by engineering firms and the EPC contracts ultimately awarded increased in price by as much as 100 per cent from similar projects in 2005. This caused the region’s national oil companies (NOCs) to hold off on signing deals, leading to a 66 per cent drop in awards by value between 2006-07 and 2007-08, from $45bn to $15bn.
|GCC oil & gas EPC contract awards|
|Total awards ($bn)|
|EPC=Engineering, procurement and construction. Sources: MEED; MEED Projects|
The change came when contractors started lowering prices to reflect a fall in material costs. In June 2009, analysis by MEED showed retendered and delayed EPC contracts were being bid and awarded at prices 19 per cent less than initial bid rounds and budgets from 2009. “What we see now is a whole lot of pent-up projects that were held up because of rising prices,” says Samuel Ciszuk, Middle East analyst at the US’ IHS Global Insight.
“In 2007-08, there was also a shortage of manpower that meant a lot of projects never got out of the Feed [front-end engineering and design] or even pre-Feed stages. Many national oil companies think that now is a cheap time, and it might be a good time to [make awards].”
Lower prices for oil and gas contract awards
Executives at several major EPC contractors confirm contract values have fallen 10-40 per cent compared with similar deals from a few years before. Aggressive bidding by contractors is pushing prices ever lower and not always to their benefit.
“If you look at the volume of contract awards made over the past year, it looks like it has been a great time for contractors,” says an executive. “But realistically, you are seeing people bidding at increasingly low margins, trying to get work booked while manpower costs remain static and a lot of the gains you saw from falling commodity prices on material costs in 2008 and 2009 being erased.”
Executives from a number of US, European and Japanese contractors tell MEED that they are being outbid by firms from South Korea. In some cases, established EPC contractors say South Korean firms bid as much as 40 per cent lower than their best price for major deals.
MEED’s list of the top 10 EPC contractors by value of awards won for 2009-10 contains four South Korean firms, including the top three: GS Engineering & Construction won $4.9bn of work; SK Engineering and Construction won $4.3bn; and Samsung Engineering won $3.9bn of contracts. Overall, South Korean firms won $17.5bn of contracts aided by their success on big projects such as Adnoc subsidiary Abu Dhabi Oil Refining Company’s (Takreer’s) new $10bn refinery at Ruwais. Contractors from the Asian state won all the main EPC deals on the scheme.
Bidding low helped the South Korean firms win contracts, but the high quality of their work has cemented their place in the region, says Kong Hong-Pyo, executive vice-president of overseas marketing at Samsung Engineering.
“In 2008, when resources were limited, we delivered five large-scale projects on-time in the Middle East and some even earlier than scheduled,” he says. “This established our reputation in the region and garnered respect and trust in our capabilities. Also, strengthening our competitiveness in terms of quality, cost and delivery helped us secure the largest market share of $8bn [total, across all sectors] in new orders in 2009.”
Rival firms agree South Korean contractors are developing a reputation for completing jobs on time and on budget, although the next five years will be the biggest test of their capabilities. “South Korean contractors have done well recently but completing the really big jobs they have got will be the biggest test of their ability yet,” says an executive from one US engineering firm. “Manpower alone will be a big issue here.”
South Korean contractors remain bullish on their ability to get the work they have won done and to staff projects with top engineers.
“Acquiring local engineers and labour, and lack of equipment are challenges in this industry,” Kong says. “The way EPC companies respond to these challenges will determine their competitiveness. We had an annual average increase of more than 30 per cent in new orders for the past 3 years, which means it is crucial for us to have experienced engineers to execute the projects. [Samsung] has invested in top talents to maintain sustainable growth early on. Since 2006, we focused on recruitment and training.”
The company hired 1,800 new employees during the five years to 2010, bringing overall staffing levels to 5,100, he says. Other contractors from South Korea also recruited heavily during this period.
South Korean firms have established a dominant position in the market, but they now need to make sure that they maintain it. Chinese contractors are increasingly interested in the opportunities the Gulf has to offer and are also able to offer low prices. They won $3.4bn of EPC deals in the sector in 2009-10, with rival firms certain that this number will grow in the coming years.
The survey also reveals that regional firms are now entering the contracting market, with a UAE-based company, National Petroleum Construction Company becoming the first Gulf firm to enter the top 10 contractors, winning $2.5bn of contracts.
While South Korean contractors won the most deals, it was in the UAE that the most contracts were being awarded. The country, largely through Adnoc, signed off more contracts in 2009-10 than were awarded in the entire region the year before.
In the past Adnoc was seen as a slow-moving company, with few deals ever awarded and lengthy tender process. But with EPC costs so low, the company has seized its chance.
If Adnoc did not hit technical problems on its $10bn development of the Shah field and had been able to award all the EPC contracts on the scheme before the end of March, it would have signed off nearly $40bn of contracts.
“They have been lightning-fast,” says an executive at one leading EPC firm. “There has been a real push to get prices as low as possible, and they have cleared their backlog as quickly as is possible. What they have awarded this year was unimaginable in 2008.” With contracts on most of Adnoc’s major schemes now awarded, contractors do not expect the UAE market to be attractive in coming years, especially as prices start to escalate.
“The UAE has awarded almost all of its big projects and it will be slowing down from here on,” says Ciszuk.
Future opportunities in the country will largely be limited to offshore developments being developed by Abu Dhabi Marina Operating Company (Adma-Opco) and Zakum Development Company (Zadco), which are expected to award about $20bn of EPC contracts between 2010-15.
A similar slowdown is likely across the rest of the GCC with Qatar, a major contributor to the previous record year of 2006-07, unlikely to award major contracts until it lifts a moratorium on the giant North Field, expected in 2015.
The Saudi Arabian market is likely to remain strong. But there will be fewer opportunities in new oil production facilities now that Aramco has completed a $100bn upstream development plan and is focusing on exploring for new gas reservoirs and maintaining existing production levels.
“Over the next five years, [Aramco] is expected to spend $100bn on avoiding any degradation of oil production capacity,” says John Sfakianakis, chief economist at Saudi/French lender Banque Saudi Fransi.
The kingdom’s current production capacity is 12.5 million barrels a day. “It all has to do with maintaining Saudi Arabia’s role as a swing producer and that is done through heavy investment,” Sfakianakis says.
Contractors are eyeing Kuwait with interest, but are wary of the country’s track record, especially after contracts awarded on a new $15bn refinery in 2008 were cancelled in March 2009 amid political opposition.
Looking ahead, contractors are expected to seek opportunities outside lucrative Gulf states for work. Iraq is set to become the fastest-growing market in the Middle East, if not the world, in coming years as international oil companies working in the country award billions of dollars of EPC contracts to boost output. Analysts say that if just half the work planned for Iraq goes ahead, it could create a new boom market for contractors, leading to a capacity crunch similar to that seen in 2006-07.
The Paris-based International Energy Agency is forecasting oil demand to grow 1.5 per cent to 91.2 million b/d from 80 million b/d currently. The investments made by Gulf producers in the past year could prove to be even cannier than they seem now.
These investments have been made at a time of low costs and the new facilities will come onstream in time to meet requirements abroad, while avoiding an Iraq-inspired overheating of the market.
The region’s oil producers will continue awarding contracts regardless, says Sfakianakis. “[This year] is a testament to the countries’ commitment to the sector,” he says. “But they don’t have the luxury to avoid spending.”