If regional clients are asked to describe their experiences with Japanese contractors, they invariably say two things. First, that Japanese companies are reliable, capable and deliver on time to specification – in short, they are excellent companies to do business with. Then there is a pause, and they add that the Japanese can be a little expensive.
Comparatively high man-hour costs in Japan – and a highly centralised approach to decision-making – are the chief burdens. However, the contractors say they are well positioned to procure materials globally at excellent prices due to their powerful buying muscle. This muscle is often pumped up by having huge trading houses such as Mitsubishi Corporation, Sumitomo Corporation or Mitsui & Company involved in the process, providing logistical as well as purchasing support.
But the Japanese also like talking about quality. ‘There is a constant debate in the Middle East over the quality versus cost conundrum,’ says a senior contractor in Tokyo. ‘This is summed up in the attitude towards the Koreans, who have come in very cheap in the past. Clients have . been disappointed with the work that has been done. The problem is that too many Middle Eastern clients have short memories and still tend to focus on cost rather than quality.’
The nature of the competition varies from market to market. ‘We are very competitive in the gas sector,’ says Chiyoda’s Kenji Yamasawa. ‘It helps that the Koreans don’t get prequalified as they have no real experience and they don’t have the technology.’
Despite the Korean cloud, Japanese contractors are also pleased to report a little more elbow room. ‘There are fewer engineering, procurement and construction [EPC] contractors in the market at the moment,’ says Kazuo Yamaga, senior managing director of JGC’s energy sales division. ‘It is still competitive, but with some of the European and US companies pulling back we are well placed to expand our market share.’
Even if the competition increases, the Japanese will continue to be drawn to the region’s large-scale industrial projects. ‘The Middle East market will continue to grow and the big oil, gas, petrochemicals and utilities projects will attract increasing interest from Japanese companies,’ says Yamasawa. ‘This will continue to be on the EPC side for the engineering companies, but some of us are beginning to think about becoming developers as well. If the project is right, it is a very effective form of diversification.’
MEED interviews senior executives at three of Japan’s leading engineering companies:
Mount Fuji can clearly be seen from JGC Corporation’s World Operations Centre in central Yokohama. At 12,500 feet, it dominates the horizon. Given its success on major projects across the Middle East and North Africa in recent years, JGC would seem to occupy an equally dominant position in the region.
‘Since the 1997 Asian crisis, there have been fewer major projects in Asia, but there has been a regular flow of opportunities in the Middle East,’ says JGC’s Yamaga. ‘As a result, Middle East and North African business accounts for about 40 per cent of our overseas turnover. The Asian markets will come back but the Middle East is very important to us. We like winning big contracts.’
JGC’s recent run of success has been impressive. Over the past year, it has won, in joint venture with international partners, more than $3,000 million worth of new EPC contract work in the regional oil and gas sectors. Awards have included: the $745 million contract on Algeria’s In Amenas gas and condensates project; the $875 million EPC contract on Oman’s Sohar refinery; the Eur 1,200 million EPC contract for Libya’s Wafa gas field production and treatment facilities; and the $1,000 million EPC contract for the first liquefied natural gas (LNG) train at Damietta, in Egypt.
JGC adopts a flexible approach to partnerships and joint bids. ‘We have a permanent alliance with KBR [Kellogg, Brown & Root, a business unit of the US’ Halliburton] for LNG [liquefied natural gas] and GTL [gas-to-liquids] projects: we’ve bid together for a long time, but it was set down in writing two years ago,’ says Yamaga. Last year, JGC signed a similar arrangement with the US’ Stone & Webster, a subsidiary of The Shaw Group, for ethylene projects outside the US and Europe.
‘We are also pleased to work with our competitors on projects where a teamed approach benefits both,’ says Yamaga. ‘We have worked with Chiyoda, Foster Wheeler and many others, but we approach this on a case-by-case basis. It works best on the large contracts.’ This is evident on the Sohar refinery project, where JGC has teamed up to bid with Chiyoda.
Supporting JGC’s appetite for these large contracts is a surprisingly large physical presence in the region. Japanese companies in general are often criticised for their apparent reluctance to deploy staff overseas and for their highly centralised decision-making processes. JGC has attempted to break the mould. With offices in Abu Dhabi, Algiers, Al-Khobar, Arzew, Doha, Tehran and Tripoli, JGC is better positioned than most of its competitors.
‘We have developed a strong presence because over the next two years we are anticipating $10 billion-15 billion worth of energy-related projects in the Gulf and we want to win 10-15 per cent of it,’ says Yamaga.
JGC’s regional focus is on lump-sum contracting, although it also bids for basic engineering work on projects where clients allow the front-end engineering and design (FEED) contractor to compete for the subsequent EPC package. ‘In general we are an EPC contractor, but we have excellent FEED capabilities which we deploy in the region on a project-by-project basis,’ says Nobuo Kikuta, general manager of the Middle East group of JGC’s energy sales division. ‘For example, we did the FEED on the Sohar refinery in Oman. We used it to position ourselves best for the EPC contract.’
One of the reasons many Japanese contractors are comparatively infrequent bidders for FEED contracts is cost. ‘Overheads for Japanese companies are comparatively high; our man-hour costs are high,’ says Yamaga. ‘And this makes it difficult for us on FEED contracts. For EPC work, most of the costs come from subcontracting and sourcing in global markets and, due to our size, we have real advantages in this area. This allows us to be more competitive on EPC bids.’
The Iranian market might prove to be an interesting case study for this approach. For example, JGC is doing the FEED for proposed National Iranian Oil Company LNG projects. ‘It still needs a gas sales agreement, but we expect to finish the FEED by next March and the project could be tendered by the fourth quarter of next year,’ says Yamaga. The hope is that JGC will be well placed to win the EPC when it is tendered.
JGC has also been working alongside Foster Wheeler on the first-phase feasibility studies for the development of the huge Azadegan oil field. With $3,000 million worth of ‘Silk Road’ financing flowing from Tokyo to Tehran for energy projects, JGC feels well positioned to pick up later FEED and EPC work on the development.
It is also eyeing opportunities even further upstream. ‘We are looking to expand our presence in the region and last year we established an oil and gas development division,’ says Yamaga. ‘If we find the right opportunities, we are hoping to invest in upstream oil and gas. We want to take equity positions in projects, and become developers as well as engineers. We know this is hard to break into in the Middle East, but we will be bringing technology upstream as well as our balance sheet.’
Along with JGC, Chiyoda Corporation is the most prominent Japanese contractor on the Middle East energy scene. In the past year alone it has won, in joint venture with international partners, close to $2,000 million of new contract work – and there is more to come. Little wonder, then, that the region is one of the company’s key markets. ‘The Middle East is very important to us,’ says Chiyoda’s Kenji Yamasawa. ‘The overseas market accounts for about 60 per cent of our business and about 30 per cent of our overseas contracts are won in the Middle East.’
Chiyoda’s focus on the energy EPC sector is reflected in its recent contract awards. They include train 4 on the Ras Laffan Liquefied Natural Gas Company (RasGas) project in Qatar, the methanol package at the Saudi International Petrochemical Company (SIPC) complex and the ethane cracker on the Jubail United Petrochemical Company (JUPC) project. One of its few non-energy contracts is also at Ras Laffan, where it is working on the estimated $300 million common seawater cooling project.
With the exception of the SIPC contract, all Chiyoda’s recent awards have been won in partnership with international companies. For the JUPC cracker, it is working with Halliburton KBR, a company that has held a 3-4 per cent stake in Chiyoda since 1998.
‘We look at forming alliances on a project-by-project basis. We look for the optimal factors. Sometimes alliances can be encouraged by manpower issues, and sometimes by information gathering beforehand,’ says Yamasawa. ‘For alliances, we are always looking for the sort of collaboration by which both parties benefit.’
Like JGC, Chiyoda adopts a selective approach to bidding for FEED contracts. Says Yamasawa: ‘We would like to do FEED because it often gives you a better chance to win the EPC contract. But you can’t live on FEED alone. We like it when FEED and EPC are integrated.’
Chiyoda is keen on increasing its share of the EPC management (EPCM) market. ‘In the future, we would like to see more EPCM contracts. There is no clear trend towards this in the Middle East yet, but it could be starting. It is better for clients to approach contracts on an EPCM basis and they should like it. We call it ‘plant life-cycle engineering’ and we are trying to move people towards it.’
It is also considering venturing into new business areas. ‘JGC’s chairman has recently announced that JGC wants to be involved in the concession business and maybe we will have to do the same,’ says Yamasawa. ‘EPC work offers thin rewards on projects so it might make sense to diversify upstream and downstream. We will have to wait and see.’
For the time being, Chiyoda’s focus remains very much on the EPC market. After a two-year absence, it is heading back to Oman. In joint venture with the UK’s Foster Wheeler Energy, it has recently been awarded the third LNG train project at Sur and is the preferred bidder in a team with JGC for the $870 million Sohar refinery. In Qatar, it is one of the four EPC bidders for the Qatar GTL (QGTL) project, while in Iran, it is closely monitoring the Persian LNG development.
‘We don’t have fixed targets for our business in the region. First there must be projects and then we set our goals: it doesn’t depend on us, but on the clients,’ says Yamasawa. ‘We aim to win 5-10 per cent of the project flow in our main areas.’
Given the geographic and demographic realities of the Middle East – fast-growing populations living in the most arid area on earth – it is no surprise that a company specialising in desalination is aiming to expand its activities in the region. Hitachi Zosen Corporation has already had good experiences in the Middle East, and it is hoping to have more in the months and years ahead.
‘We are expecting a lot of desalination capacity to be tendered in the near future,’ says Sadao Amafuji, general manager of Hitachi’s plant business department. ‘Water and power are needed very badly in Saudi Arabia in particular and we will get a clear picture next year on how they are going to move forward with this. We are expecting to have developers’ RFPs [request for proposals] issued in the second or third quarter of next year.’
Hitachi is hoping that by then its track record in the region will have been improved. Already prominent is the desalination EPC contract won on Oman’s Barka independent water and power project (IWPP), and before that the desalination component of the Taweelah B plant in Abu Dhabi.
Hitachi is preparing to bid, by the revised 16 December deadline, for the Ras al-Khaimah desalination plant. It is also the selected EPC contractor for the bid tabled for Abu Dhabi’s Umm al-Nar IWPP by the UK’s International Power (IP) with Mitsui & Company and Tokyo Electric Power Company (Tepco). ‘When bidding for these projects, it makes a substantial difference to have proven experience in the region,’ says Amafuji.
The main competition comes from Italy’s Fisia Italimpianti, the UK’s Weir Westgarth, France’s Sidem and South Korea’s Doosan Heavy Industries & Construction. The way this competition is played out is also changing, with a growing proportion of regional desalination projects being conducted on a build-operate-transfer (BOT) basis. ‘This puts more pressure on potential developers assembling strong formations for the different EPC components,’ says Amafuji. ‘For us it gives a different sort of client.’
Hitachi is contemplating changing the dynamic further by adopting the developer’s role itself. ‘We have been asked to be prepared to put equity into Saudi projects alongside local partners and it is something we are considering,’ says Reiji Akazawa, associate director, environmental systems & plant headquarters. ‘We already have an IPP [independent power plant] in Japan and we are looking at combining our power and water capabilities and then becoming an IWPP developer.’
Given the financial ill-health of some of the dominant IWPP developers in the region, such as AES Corporation and CMS Energy, there could be rich pickings for any new entrants into the developers’ market. ‘There could be a shortage of developers interested in the Gulf before long,’ says Akazawa. Saudi Arabia, in particular, could be looking for a lot of projects in a short period and the risk profiles may not be attractive to all.
Hitachi has other surprises to spring on the market. ‘We have been developing our own technology on the desalination side: it is based on new ways to integrate systems,’ says Amafuji. ‘If we win the Ras al-Khaimah we will be looking to deploy it.’