Growing power of local firms in the oil and gas contracting sector

18 April 2008
Small, regional companies are becoming a significant force in the oil and gas contracting sector because of their increasing expertise, combined with valuable local knowledge.

With just a fraction of the resources, technology and money of national and international oil companies, local contractors are often overlooked when oil majors boast about their latest drilling venture or refinery upgrade.

While it is true that much of the massive ramp-up in capacity across the Middle East would not be possible without the big international firms, local contracting companies and consortiums have become a significant force in their own right.

“We would have just a fraction of our current workload if we tried to do jobs by ourselves,” says one Saudi Arabia country manager of a US engineering, procurement and construction (EPC) firm. “Working with local companies used to sometimes be seen as a nuisance of sorts. But these are now firms that could win work anywhere in the world. They are trained, skilled, and of course local. They know the terrain we are tackling better than anyone else.”

Despite their importance to the Middle East’s energy sector, few generalisations can be made across the region about the type of companies that control the local sector.

Egypt, rich in hydrocarbons and a lure for international oil majors, has mostly opted for just two state-controlled contractors - Petrojet and ENPPI - to deliver its key energy projects. The tie-up was cemented in 2007 when Egypt and Libya agreed to exclusively use the two companies as in-house oil construction companies for future joint ventures.

State control

In gas-rich Qatar, which is spending billions on developing its liquefied natural gas (LNG) industry, few local firms win sizeable deals on its large-scale projects. The state-run Qatar Petroleum controls some work through its subsidiaries and tenders the rest to trusted global firms.

Similarly, the UAE, which has the fifth-largest oil reserves in the world, devotes much of its contracting work to the National Petroleum Construction Company (NPCC), controlled by Abu Dhabi National Oil Company (Adnoc).

In Saudi Arabia, Aramco’s massive $90bn five-year investment outlay to boost its crude and refining capacity has benefited some of the kingdom’s longest-serving local contractors.

Riyadh has been eager to encourage local firms to participate in the oil sector after research in 2007 by the Petroleum & Mineral Resources Ministry showed less than 20 per cent local contribution levels in Saudi Arabia, compared with 40-55 per cent in Norway and Canada.

Aramco sent a ministerial delegation to visit six oil-producing states - Canada, Egypt, Malaysia, Norway, Venezuela and Indonesia - to ascertain how it could improve its relationship with local contractors.

It found inadequate training, poor English language skills, a shortage of qualified personnel and a failure to meet technical qualifications were some of the failings. The ministry is understood to be working on new information and communications technology (ICT) infrastructure in Riyadh, and better links with educational institutions, as a remedy.

While long-term strategies to improve domestic content are welcomed by the industry, many local companies have been profiting from the lack of domestic competition. In May, local oil and gas construction firm Mohammed al-Mojil Group will float on the Saudi stock market (Tadawul) with a market capitalisation of SR2.1bn ($560m) after a book-building exercise.

The company, which counts Saudi Aramco and Saudi Basic Industries Corporation (Sabic) among its biggest clients, generated a 164 per cent year-on-year lift in net profits to SR549m in 2007. Revenues were SR2bn in 2007, up 119 per cent on the previous year.

Boom market

One former Aramco executive says providing local contractors are well organised and ambitious, they should be making money in the current energy boom. “The industry has grown very quickly in a short space of time, even by Saudi standards,” says the executive. “That can leave some companies behind if they are not properly organised, but for others, the sky is the limit.”

He points to the introduction of a more formal system of supply-chain management in the kingdom, which has helped drive the local market.

In 2005, Aramco created a strategy to source the inventory and related non-core activities to the local market as a means of promoting the local economy. As part of the agreement, it chose four locals - Al-Barwadi, Al-Dossary, Al-Mohaidib and Al-Forzan - as its main suppliers of building materials for the next decade. More than 4,000 line items will eventually be covered by the agreements.

With a $40bn materials procurement programme for the 2007-11 period, the Aramco executive estimates half of these purchases could be targeted by local manufacturers.

“There will always be global companies when it comes to Saudi Arabia’s oil sector because of its sheer size,” he says. “But local contractors can make a play for a bigger slice of the pie now, and they are being encouraged along this road under the terms of some of these new supply agreements.”

Italian contractor Saipem, which relies on Saudi Arabia for about one-fifth of its global revenue, says the importance of local contractors cannot be overstated. “If you get a contract but you are not a big, local employer, you end up executing these mega-projects in a hostile environment,” says Pietro Franco Tali, president of Saipem. “Local content is something we have been working hard at for some time.”

Not all local ventures are proving successful in the current high-cost environment. Saudi Arabia’s Abdullah Rasheed al-Rushaid Company has lost millions of dollars carrying out a series of drilling operations with Houston’s Parker Drilling. The joint venture has had delays delivering six new rigs and recently entered talks over compensation with Aramco.

In Abu Dhabi, the local Al-Mansoori Engineering has been operating in the oil field services business for more than 30 years.

Nabil Alalawi, managing director of Al-Mansoori, says it has been difficult to attract the best skilled workers to a local firm.

Skills shortage

“The company philosophy from day one has been to encourage and employ local as much as possible,” says Alalawi. “But we face problems. There is a lack of local people who are qualified, and we find many of the locals would rather drift into the banking or real estate sectors.”

As one of a select few local contractors that are successfully competing with US giants. Alalawi says it has also taken time to be considered seriously. “The challenge when we started was to convince these big companies that we can do this type of business,” says Alalawi. “It was very hard to convince people we were up for it and, of course, the young graduates feel more comfortable going with a big international name.”

He says local companies, which have been able to endure the cyclical changes in energy investment over the past decade, are likely to be highly profitable now. But he is not convinced that young entrepreneurs will be drawn into creating oil and gas companies.

“Oil and gas is very specialised and it is a long-term return on business due to the amount of capital required from the start,” says Alalawi. “There is a lack of commitment to the oil and gas business from the local community.”

One Cairo-based gas executive sympathises with Alalawi’s frustration, but says countries such as Egypt and Algeria, which boast high levels of local workers, face their own struggle to secure skilled labour.

“I keep going to conferences and hearing how lucky we are in Egypt to have this big workforce on our doorstep,” says the executive. “Yes, it is true we have good interest in our energy industry, but we are also one of the first places where the big international companies come to look for their next recruits. We face our own battles here too.”

One Doha-based oil entrepreneur bidding for a construction deal with Qatar Petroleum says there is no problem with local contractors participating in the Middle East energy sector, despite its participation levels remaining some way behind other oil economies.

“We have an unusual situation in the region where national oil companies control much of the market and international contractors are scrapping for the biggest tender deals that come out,” says the Doha executive. “Sometimes it feels like local contractors are an afterthought. But the best locals will still compete with international companies. I do not think locals would want it any other way.”

Key Fact:

Local firms' participation in the Saudi oil industry is at 20 per cent, compared with up to 55 per cent in overseas markets.

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