VAST steel structures have been a common sight at the Jebel Ali free zone in recent years. Coming in all shapes and sizes, they have dominated the skyline, soaring high above the low-rise industrial units that have sprung up all around. It often seemed that no sooner had one oil or gas platform been shipped out than another rose up to take its place at the 60-hectare fabrication yard of J Ray McDermott Middle East. This spring, however, the view is unimpeded and only the heavy lift cranes in the yard are visible from the nearby Sheikh Zayed road.

McDermott has been a leading player in the regional oil and gas sector since 1960, when it installed the first offshore platform in the Gulf at Al-Khafji in the neutral zone. In 1970, the company established its first fabrication yard and support base on the Dubai creek, re-locating to the Jebel Ali free zone in 1986. In the 40 years since the Al-Khafji order, the Middle East subsidiary of the US' McDermott International has built up an impressive track record, fabricating and installing more than 620 structures and 2,600 kilometres of pipeline in the Gulf and India.

Nevertheless, 1999 is proving a difficult year for McDermott and everyone else trying to make a living in the oil and gas industry. Fifteen months of low oil prices and a market awash with crude have caused a sharp decline in field developments, as operators rein in their capital spending. The belt tightening has extended to the Gulf offshore sector, despite its low production costs, where several projects have either been delayed or cancelled altogether.

'The market is tough,' says Peter Marler, commercial director of J Ray McDermott Middle East. 'The projects we are seeing at the moment are relatively small and predominantly reservoir maintenance schemes, involving water injection, gas injection or new wellhead platforms on the edge of existing reservoirs. The gas sector has also slowed, as a consequence of the economic downturn in South-East Asia.'

The magnitude of the decline in new project opportunities is all the more marked as it comes in the wake of an exceptionally strong performance in 1998. Last year was one of the busiest on record for the Jebel Ali yard, with more than 40,000 tonnes of facilities leaving the quayside and sales exceeding $340 million. Much of the business was generated from the development of Qatar's North field, where multi-million dollar contracts with both Ras Laffan LNG Company (Rasgas) and Qatar Liquefied Gas Company (Qatargas) were completed.

The regional slump has encouraged McDermott to refocus its marketing activities. While stressing that the Jebel Ali yard will continue to pursue new opportunities in the Gulf, India and the Caspian, officials are talking more and more of West Africa. 'What we are focusing on is to export our skills. We are looking to get more involved in the West African market, where the projects are fairly robust, with low production costs and high volume reservoirs,' Marler says.

McDermott is no stranger to the region. When it was operating out of Jebel Ali as McDermott-ETPM East, it worked closely with its sister company, McDermott-ETPM West, which covered West Africa. Following the termination by mutual consent of the worldwide joint venture agreement with ETPM 12 months ago, J Ray McDermott Middle East was handed direct responsibility by its parent to pursue fabrication opportunities in the area. The decision has already paid off. The Jebel Ali yard is now working on an eight-leg jacket for the US' Chevron Corporation, which will be installed in the North Nemba field in offshore Angola. A second contract has been won for the supply and installation of module support framing (MSF) on the deck of a floating production storage and offloading vessel (FPSO), also destined for Angola.

Breaking into the FPSO market is a priority for McDermott. With the vessels gaining in popularity, especially in the Atlantic basin, the company sees the sector as offering considerable potential for its Jebel Ali-based engineering and fabrication capabilities. The emphasis is being placed on building and integrating topsides on hulls that are being constructed primarily at South Korean shipyards.

In tandem with the drive to raise market share, McDermott is seeking to reduce costs and increase productivity at its Jebel Ali base, which now provides employment for over 2,000 workers. This year, some $5 million is being invested in the yard, as part of a programme to improve material flows, debottleneck production facilities and boost equipment performance. However, more radical action may be required if the market fails to pick up soon.

Downturn management

'The one thing that we always say is that we will always be here. But we have to recognise that the market may not support us in the form that we are in at the moment. We may divest certain assets, but we are definitely not getting out of the area,' says Marler. 'We are getting to the point where we will have to vary our costs to match the market cycles. Previously, we have been staffed to cope with the upturn. Now, we are aiming to be staffed for the downturn, which will mean that most of our costs will have to vary with the workload.'

Over the past 10 years, J Ray McDermott Middle East has been in the privileged position of having a steady workload passing through its regional base. Despite not bidding in Abu Dhabi, where the local National Petroleum Construction Company (NPCC) dominates the market, and being barred from working in Iran by US sanctions, the company has succeeded in maintaining healthy order books by virtue of its successes in Qatar, India, West Africa and the Caspian. The challenge now is to manage the downturn. 'The next two years will see our lowest level of activity for many years. It is not as bad as 1985/86 at the moment, as our fabrication activities continue to be bolstered by West Africa,' Marler says. 'But like everyone else, we need a recovery in the oil price.'

Angus Hindley