The idea of a Gulf national oil company establishing a joint venture contracting company is not new. Indeed, this year, Abu Dhabi fabricator National Petroleum Construction Company (NPCC) – the venture between Abu Dhabi National Oil Company (ADNOC) and Athens-based Consolidated Contractors International Company (CCC) – is celebrating its 30th anniversary.
Nevertheless, the timing of the QP proposal, which remains under discussion, is highly significant. For with regional oil and gas contracting opportunities multiplying, fears are growing that unless action is taken, there will simply not be enough EPC contractors to go around to support the Gulf’s ambitions.
Qatar’s extensive list of energy projects looks set to have a similar impact on the EPC market as Dubai’s building boom has had on the civils sector. In the Dubai case, the explosion in project activity has placed a heavy strain on local contracting capacity and pulled resources out of the rest of the region. It has also resulted in a major shake-up in the contracting pecking order. Most international contractors now concentrate on projects in the emirate valued at more than $150 million. That has left a gap in the market and allowed local contractors, which until three years ago seldom carried out anything over $50 million, to apply for and win contracts of $100 million or more.
A similar pattern is emerging in the EPC market. The leading contractors, such as Paris-based Technip, Italy’s Snamprogetti and JGC Corporation and Chiyoda Corporation, both of Japan, are increasingly focusing on projects of over $500 million. Their elevation has left a vacuum. For contracts in the $250 million-500 million price bracket, South Korean and medium-sized European contractors are looking to step up and fill the void. For projects worth less than $250 million, newcomers are making their mark. The likes of India’s Larsen & Toubro, Spain’s Tecnicas Reunidas and the US’ Chicago Bridge & Iron have all won over the past two years EPC process contracts for the first time in the GCC.
The entry of new players may have eased the capacity issue at the lower end of the market but it has certainly not solved the overall problem. Some of the biggest EPC contractors are already looking at near-full order books. In the spring, Chiyoda pulled out of its planned joint venture with JGC for the $890 million Sohar refinery contract, citing too much work. Orders are piling up at JGC as well. The contractor, which is working on a string of major awards in Saudi Arabia, Abu Dhabi and Oman, is close to signing the $1,600 million Ras Laffan gas treatment plant contract on the Dolphin gas project. It is also low bidder for the $430 million low sulphur diesel production (LSDP) package on the Bahrain Petroleum Company (Bapco) refinery upgrade.
JGC and Chiyoda have traditionally dominated the liquefied natural gas (LNG) construction market in the Gulf. And with Qatar planning over 30 million tonnes a year (t/y) of new LNG capacity over the next five years, both contractors face an even heavier workload. No one expects either JGC or Chiyoda to abandon their presence in other Gulf markets completely. But both are likely to adopt much more selective bidding procedures.
The EPC contractor pool would certainly benefit from a return of the US contractor. Firms such as Bechtel, Foster Wheeler and Fluor Daniel beat a hasty retreat from the Gulf EPC market in the late 1990s, citing onerous risks and cut-throat competition. Ever since, they have been concentrating on the lower-risk front-end engineering and design (FEED) and project management contracts.
There are few signs that the bigger US engineering contractors are about to change their stance towards EPC contracts. Indeed, international consultants argue that the only way to attract the major players back is for Gulf clients to switch the focus away from the EPC and lump-sum turnkey approach and move towards the EPC management (EPCM) or reimbursable engineering model. ‘The beauty about the EPC approach is that as a client you only have to make one decision; with EPCM contracts, everything needs a decision,’ says a Dubai-based analyst. ‘The national and international oil companies don’t want that. But the reality is that clients may well have no choice if they want their projects built.’
Even if the number of EPC contractors swells, it will count for little without a substantial increase in subcontractor capacity. ‘The real bottleneck in the EPC market is on the subcontractor level,’ says an international EPC contractor. ‘We rely on subcontractors for everything from logistics and supplies to cement and civils. If there is not the capability or capacity, projects can’t be built.’
Again, Qatar is likely to face the biggest squeeze. Over the past five years, Doha has averaged contract awards totalling about $3,000 million a year. In the coming three years, that figure could jump to $10,000 million-15,000 million if all the LNG and gas-to-liquids projects planned proceed. In addition, for the first time in years, the Doha energy sector is facing competition for resources from infrastructure works. Already, the growth in infrastructure and building projects has been blamed for a cement shortage and a rise in construction material prices.
The Gulf EPC market has come full circle over the past four years. Back in 1999, when oil prices were only just beginning to recover and new projects were at a premium, clients benefited from rock-bottom prices, the result of intense competition among contractors for any work tendered. Today the picture is very different, with the ball now firmly in the EPC contractor court. As another international contractor says: ‘There is undoubtedly limited capacity in the EPC market. And if clients want to get the best, they will have to be more flexible. For us, the market presents an opportunity to recover the losses of the past and to get more favourable terms. If we don’t, then we will not bid.’
Angus Hindley, with Ashok Dutta