Lower contracting prices favour clients in the Middle East

30 November 2010

Contract awards in the region fell in 2010, making bids more aggressive. Saudi Arabia is likely to dominate the energy contracting market in 2011

Oil & gas in numbers

$72bn: Value of contracts awarded in the GCC during 2009

$35bn: Value of contracts awarded till date in the GCC in 2010

$20bn: Value of the UAE nuclear deal

Source: MEED

In the first nine months of 2010, $35bn-worth of major awards were made to engineering, procurement and construction (EPC) contractors in the GCC, with about  $5-10bn still expected before the year ends. The figure falls short of the $72bn-worth of contracts awarded in 2009.

Top GCC EPC contractors, by country*
*=Value of projects under way.
Source: MEED Projects

Contractors say that their expectations have not been matched by the low level of activity throughout the year. 

“It has definitely been a year of two halves,” says an Abu Dhabi-based contracting source. “A lot of jobs that we were expecting to be awarded in the second half of the year have not materialised. In fact, 2010 has been the exact opposite of 2009, which ended very strongly.”

There are a number of reasons that are completely out of the control of EPC contractors that could explain the lull in activity compared  to 2009.

Korean dominance in contracting market

The $20bn UAE nuclear deal signed at the end of 2009 gave the year’s figures a top heavy feel. Contractors would argue the award should not be included because it does not fall under the umbrella of the oil and gas sector.

Many people thought prices would not go lower than 2009. But in 2010, they have been even more aggressive

Abu Dhabi-based contracting source

In 2009, the EPC contracting market in the GCC witnessed South Korean companies in the ascendency. They dominated the market by winning about 47 per cent of the major contracts in the region last year.

GCC oil & gas EPC contract awards
Total ($bn)
EPC=Engineering, procurement and construction.
Sources:MEED, MEED Projects

South Korea’s GS Engineering and Construction won contracts worth $5.5bn in the GCC in 2009. Other big winners included Samsung Engineering, SK Engineering & Construction and Hyundai Engineering & Construction.

A lot of the contracts won by the South Koreans were in markets where they had little track record, such as Abu Dhabi.

“Many non-Korean contractors didn’t know what hit them last year,” says an Abu Dhabi-based contracting source. “Contractors I speak to make excuses and talk about [South] Koreans getting government subsidies and access to credit lines, but the fact remains that all of these companies have very effective project management systems in place.” While South Koreans dominated, many European contractors had a solid 2009 in the region due to the sheer amount of work that was made available. The UK’s Petrofac, France’s Technip, Spain’s Tecnicas Reunidas and Italy’s Saipem also picked up major contract awards.

In 2010, many major contracts in the Middle East have now been awarded, so competition has intensified as many EPC contractors look for new projects. 

Lower contracting prices in the Middle East

“Many people thought prices would not go lower than 2009,” says the Abu Dhabi-based contracting source “But in 2010, they have been even more aggressive.”

An executive from an Indian contractor admitted he was surprised at how competitive firms had to be when bidding for oil and gas process plant EPC contracts in the region. 

“The prices contractors are submitting now are unbelievable,” he says. “Now if you win a contract you have to ensure that your supply chain is perfect and hope that the next 30 months are going to be trouble free. At today’s prices, the contractor could go under if something went seriously wrong.”    

State energy giant Saudi Aramco has had a relatively quiet year and has had to regroup a number of its projects. The US’ ConocoPhillips pulled out of the 400,000 barrel-a-day (b/d) Yanbu refinery in the first half of the year, but Aramco pushed on with the contract and awarded the majority of the construction contracts in July.

The major winners were South Korea’s SK Engineering & Construction and Daelim Corporation, who were awarded the crude distillation unit and gasoline process unit respectively, with Tecnicas Reunidas winning the coker block.  

While Saudi Aramco moved quickly to push ahead with the Yanbu refinery as a solo project, it also made them slow the pace on other schemes, says a Saudi Arabia-based contracting source.

“Credit has to go to Aramco for the way they made a quick decision at Yanbu,” he says. “However, other megaprojects have slowed down in the second half of the year.”

The bids for the major onshore and offshore packages at the Wasit gas development programme are now in, but no decision will be made until the first quarter of 2011.

Aramco contracts

The $6bn-plus Wasit gas development programme will see the two offshore sulphur-heavy non-associated gas fields, Arabiyah and Hasbah, undergo development by Aramco. About 2.5 billion cubic feet a day of gas will be produced from the fields and transported to the processing facility at Wasit.

The $500m site preparation contract for Wasit is expected in December and is likely to be the last award Aramco will make in 2010.

Bids are expected in December for the similar $3bn Shaybah natural gas liquids (NGL) project in the kingdom’s Empty Quarter. Shaybah is an existing oil field and the NGL project will see Aramco separate around 228,000-b/d of NGL from crude oil.

Four EPC packages are on offer at Shaybah:  a cogeneration plant; a gas treatment facility; an NGL recovery plant; and utilities. A decision is due in early 2011.

“The bids for both of these projects are going to be very competitive,” says one contracting source in the kingdom.”

“It will likely be the last major award before the Aramco Dow project takes off, so the bidders will be looking to start the year with a win.”

On the petrochemicals side, Saudi Arabia is looking to award a number of projects in the short term.

Bids for the $500m planned polyethylene terephthalate (PET) and purified terephthalic acid (PTA) plants at Arabian Industrial Fibre Company’s (Ibn Rushd) complex in Jubail are in. A decision is expected to be made in early 2011.

Bids are also in for Saudi International Petrochemical Company’s (Sipchem) $600m ethylene-vinyl acetate (Eva) unit joint venture at Jubail.

“As more feedstock becomes available, you will see more projects such as Ibn Rushd and Sipchem come to the EPC market,” says the source in the kingdom.

“These projects are not multi-billion mega deals, but contractors winning these types of jobs now will be in a good position in a couple of years’ time.”

In the rest of the region, 2010 has also been a year of consolidation rather than surges in growth. After 2009, Abu Dhabi has not tendered many major projects, but is still looking to make awards on ongoing projects.

Abu Dhabi Gas Industries (Gasco) is expected to announce the winner of the $800m EPC contract for the sulphur handling and processing facility at Habshan by the end of the year. India’s Dodsal is the lowest bidder.

Gasco is also due to announce the winner of its $300m Ruwais sulphur handling terminal expansion by the end of 2010, with the consortium headed by Italy’s Techint emerging as the frontrunner.

In Qatar, plans to ramp up its liquefied natural gas capacity to 77 million-tonnes a year will come to fruition by the end of 2010. Plans for its $18bn-plus Pearl GTL (gas to liquids) by the UK/Dutch Shell have moved somewhat slower, when the scheme was faced with delays. The Pearl GTL project is expected to hit full production in 2012.

Petrofac won an estimated $650m contract to upgrade Qatar Petroleum’s gas processing facilities at Dukhan and Mesaieed in April. The EPC contract for the $800m Barzan gas development is expected to be awarded by the end of the year by the joint venture partners Qatar Petroleum and the US’ ExxonMobil. South Korea’s Hyundai Heavy Industries (HHI) is expected to be selected.

Until Iraq starts to pick up, then Saudi [Arabia] will be the place where most projects are happening

Saudi Arabia-based contracting source

With many of the UAE’s projects now being executed, 2011 looks like it is going to be Saudi Arabia’s year. The kingdom’s expansion plans show no signs of slowing down and major projects are expected to start over the next 12 months.

Saudi Arabia energy boom

The $16bn Aramco Dow petrochemicals joint venture at Jubail, the $7bn Jizan refinery and the $5bn carbon black plant planned by Saudi Basic Industries Corporation (Sabic) and ExxonMobil Chemical is going to drive the EPC market.

“Until Iraq starts to pick up, then Saudi [Arabia] will be the place where most projects are happening,” says the contracting source in the kingdom. “And Iraq won’t pick up on the EPC front for at least another two years.”

The Abu Dhabi-based contracting source also thinks that the emirate will start to slow down in regards to major EPC awards.

“Abu Dhabi will not want to overload with too many projects,” he says. “The next step in the emirate will be downstream, but I’m not expecting that to really take off until 2012-13.” 

The major concern for all EPC contractors should be the increasing cut-throat pricing strategies that are being employed in the region.

While the Middle East has always had a reputation of being a region that drives a hard bargain, it also has the reputation of being prepared to pay for quality.

However, many contractors say that as there are only usually one or two companies in each country with the resources to build multibillion dollar-process plants, contractors are forced to be more competitive.

“It’s definitely a buyer’s market and Aramco and Sabic are the only companies that can execute such large projects in Saudi Arabia,” says the contracting source in the kingdom.

“When you have that kind of power, contractors basically can either go along with it or look elsewhere.”

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