With about $1.8tn of projects planned or underway, the construction and oil and gas industries together account for about 58 per cent of all projects planned or underway in the GCC.
About half of all oil, gas, building and transport projects are under construction. Of the 50 per cent that are in planning, more than three quarters are at the study stage, about 9 per cent are under design, and 5 per cent are at some stage of tendering.
Projects are not evenly split between the two segments however, with the civil engineering and building projects that make up the construction and infrastructure sector accounting for close to $1.6tn of all projects planned or underway, about 88 per cent by value. The oil and gas industry can claim a relatively meagre $168bn of projects planned or underway in the GCC.
Oil and gas
The six GCC states have awarded $133bn-worth of oil and gas projects in the five-year period from the start of 2013 to the end of 2017.
Surprisingly, oil and gas project activity has fared relatively well despite the collapse of global crude oil prices since mid-2014. The value of GCC contract awards climbed steeply in 2015, although this is largely attributed to the award of several major contracts for the construction of Kuwait’s new 615,000 barrel-a-day (b/d) grassroot refinery at Al-Zour, which accounted for more than half the total $35.1bn awarded.
The value of contracts slipped back in 2016, with oil prices remaining subdued and oil producers’ group Opec cutting output in an attempt to halt their decline. Nevertheless, some $21bn of awards were made during 2016. This figure rose in 2017 to a five-year high of just under $30bn.
The upward trend looks to have slowed in 2018, with more than $13bn of contracts awarded up to 30 September. But with several major contracts awaiting a final agreement in Abu Dhabi and Saudi Arabia, the full-year total will be higher.
The GCC states have awarded nearly $461bn-worth of construction and transport projects in the five-year period from the start of 2013 to the end of 2017.
Segmenting the construction market further, the building and real estate sector lies behind the skew towards construction projects, with building projects accounting for about 70 per cent of all projects planned or underway in the GCC, and about 46 per cent of the budget value of all projects.
This is the view when looking at the individual projects that have been announced. If you extend the scope of projects to include the headline budget estimate for masterplans, including subprojects that have yet to be announced, building and real estate projects account for about 79 per cent of the value of all projects planned or underway in the GCC.
But despite the huge imbalance in the overall GCC projects market towards construction and infrastructure projects, there is a significant shift towards oil and gas projects when you look at the market by the average size of projects.
Value of projects
The average value of oil and gas project contracts awarded in the GCC from 2013-18 is $347m, compared with an average project contract value of about $56m across construction and infrastructure projects. And in the construction segment alone, which covers building and real estate projects and which accounts for the vast majority of projects, the average value of project contracts is $46m.
In broad terms therefore, one of the fundamental differences in the characteristics of the two segments is that oil and gas projects in the GCC are typically about six times bigger than construction projects in the GCC.
Closely related to the size of the project is the technical challenge involved in delivering a scheme.
Bigger projects will inevitably have a higher volume of design and construction elements that have to be coordinated. This increases substantially the risk involved and potential scale of the consequences caused by delays.
Additionally, the bigger oil and gas projects will generally involve the inclusion of a much higher level of process engineering and technology than is commonly found in a building or real estate project.
Mitigating this risk on oil and gas projects is done by having detailed designs completed prior to the commencement of construction. Also, the typical engineering, procurement and construction (EPC) contracts used on oil and gas projects allocate complete responsibility for project delivery on the contractor in the oil and gas sector. Whereas in the building industry, main contractors often are dealing with less complete design, frequent client changes and multiple specialist subcontractors.
The higher engineering and risk allocation involved in oil and gas projects makes the work more specialist, and thus increases the barriers to entry for contractors.
As a result of the requirement for higher levels of technical capacity, the EPC contractors and their employees working on oil and gas projects will generally be more involved in international markets, which will shape their focus on international standards of delivery, communication, safety and innovation.
A final key distinction between the two segments is that oil and gas projects will typically be sponsored by a few, large-scale oil companies, which are repeat project clients across multiple large-scale projects. Many construction project clients are irregular project sponsors, lacking experience or capacity in procuring and managing projects.
As a consequence, oil and gas project clients have sought to introduce efficiencies and increase standards through the development of internal supply chain management structures, and through the standardisation of specifications and contracts.
The one-off nature of building and real estate clients, along with the design contribution from architects seeking to add a unique aspect quality to buildings, means that there is a far more bespoke nature to many construction projects, introducing a higher degree of ad hoc decision-making in project delivery.
This article is extracted from a report produced by MEED and Mashreq entitled Transforming Construction: Lessons from Oil & Gas. Click here to download the report