Middle East engineering firms: Chasing new revenue streams

19 October 2010

Post-project contracts could mean big business for engineering firms in the Middle East, but so far the major deals are being signed in the upstream sector

Petrochemicals in numbers

$91bn: Value of refineries and petrochemicals plants completed in the 2000-10 period

$300bn: Investments by local producers in new downstream facilities by 2020

1.5 per cent: Yearly cost of running a petrochemicals plant (percentage of original capital expenditure)

Source: MEED Projects

Operations and maintenance work in the Middle East and North Africa could open up new business opportunities for the established oil, gas and petrochemicals engineering firms, as competition in the construction market becomes fiercer. While there is plenty of work on offer in upstream operations, the downstream market has yet to yield many operations and maintenance contracts.

If you do a good job … there is no reason you can’t spend 10 or 20 years under contract on one plant

Senior engineering executive

In the decade to the end of 2010, construction work will have been completed on more than $91bn-worth of new refineries and petrochemicals plants in the region, according to projects tracker MEED Projects. Local producers plan to spend a further $330bn on construction contracts for new downstream facilities by the end of 2020, with much of this to be spent on megaprojects worth more than $10bn.

Intense competition for engineering firms in the Middle East

The schemes present good opportunities for engineering firms with project management, design, technology and construction as their chief source of income. Even if only a third of the planned projects go ahead, the region will remain the biggest downstream construction market in the world for many years to come.

The result of such high levels of activity has been to draw new engineering firms into the region, increasing competition to win contracts. In recent years, the relatively small pool of US and European engineering, procurement and construction (EPC) contractors has been joined by new competitors from South Korea, China, Taiwan and the Middle East in bidding for major projects in the region.

The new breed have challenged the established players on every level, often bringing in incredibly low bids yet completing their work on time, on budget and to high standards. The larger engineering firms have increasingly moved to less risky work to leverage their expertise, such as project management consultancy or front-end engineering and design contracts. At the same time, many smaller firms have started seeking opportunities in new lines of work.

The financial crisis has lent more urgency to this change in strategy.

“A lot of the work we did in the past was all about bidding on a big job, getting it, getting the manpower together, then looking for something that could replace it, in terms of income and the people we were using, a few years down the line,” says a senior engineering executive at one US firm that has worked in the Middle East for decades.

“Over the past five years, we have been looking at ways of finding more long-term work where we can really play to our strengths. I would say that the downturn, when a lot of future work was suddenly put on hold all over the world, really compounded that notion.”

As a result, many firms have awakened to the potential for work not in constructing new plants, but running the region’s refining and petrochemicals infrastructure. Paul Hodges, chairman of UK petrochemicals industry consultancy International Echem, estimates that the annual cost of running a refinery or petrochemicals plant is about 1.5 per cent of the original capital expenditure.

Sources at several major refining and petrochemicals companies say that overall, operational expenditure on a plant is likely to be about 2-3 per cent initially, totalling about 20 per cent of the initial investment over the first decade of the plant’s life.

This would mean the region’s refiners and petrochemicals firms spend $1.4-2.7bn a year just keeping the plants built since 2000 running. By 2020, producers will spend an additional $5-10bn a year on operations under the same metric.

Lower risks for operations and maintenance contracts

Furthermore, whereas few of the plants built in the past decade cost more than $5bn (most were priced in the hundreds of millions rather than the billions), the world-scale plants currently being planned and built present even bigger opportunities, the senior executive says.

“If you take something like a $10bn refinery, and say that operational costs are about 2 per cent of [capital expenditure], then that’s a $200m a year price tag for operations,” he says. “A five-year operations and maintenance contract for that plant wouldn’t account for the full amount, but could easily run into $500m-plus.”

Although the margins on offer for operations and maintenance are not as big as with major EPC contracts, the risks are much lower and the job does not necessarily end once a contract is completed, he adds.

“If you do a good job, and can offer a good price every time the contract comes up for tender, then there is no reason you can’t spend 10 or 20 years under contract on one plant,” he says. “If you get four or five of these deals, then that’s some excellent guaranteed revenue – billions of dollars, maybe – that you have booked, which is going to stay with you for the life of the plant.”

The operations and maintenance sector is already big business for established upstream firms. On 11 October, UK engineering firm Petrofac won the $50m contract to take over the operation of the Sajaa gas plant in Sharjah, along with associated offshore gas production facilities. Sajaa is owned by a 60:40 consortium of the local government and UK oil major BP.

The contract that caught most engineering firms’ interest, however, was the estimated $1bn deal awarded to a joint venture of US engineering major Fluor and the local Trading and Agency Services under the name Qatar National Facilities Services. The pair will perform maintenance and undisclosed services at the $18bn Pearl gas-to-liquids plant being built by Qatar Petroleum and the UK’s Shell at Ras Laffan.

Long-term deals

“When you see a big firm such as Fluor taking an interest in the market and making money on it, you know that something is happening,” says the engineering executive. Sources close to Fluor say it considers long-term deals, such as that in Qatar, as attractive and is actively pursuing more work in the region.

Other major engineering firms confirm to MEED that they are also eyeing the possibility of landing similar contracts, particularly on megaprojects worth upwards of $10bn. Firms interested in the operations and maintenance market include Foster Wheeler, Mustang Engineering, Jacobs, Bechtel and KBR of the US, Australia’s WorleyParsons, Japan’s Chiyoda and France’s Technip among others.

Many of the biggest projects in the region are in the refining and petrochemicals sectors, particularly in Saudi Arabia, the UAE, and Kuwait.

State energy giant Saudi Aramco is in the process of building two $10bn refineries at Yanbu and Jubail, the latter with France’s Total, and is also working on plans to build a $15bn-plus petrochemicals complex at Jubail with the US’ Dow Chemical.

Qatar Petroleum plans to build a new $5-10bn petrochemicals complex at Ras Laffan, while state-run Abu Dhabi National Chemicals Company (Chemaweyaat) plans to build another petrochemicals complex in the emirate’s Western Region. Abu Dhabi Oil Refining Company (Takreer) awarded construction contracts for its new $10bn refinery at Ruwais in late 2009. 

Kuwait, meanwhile, has long harboured plans to build a new refinery at Al-Zour which, by some estimations, could cost up to $15bn, although this project has been stalled by wrangling between Kuwait Petroleum Corporation, the country’s government and opposition politicians.

Given that many of these facilities will be built on a scale never attempted before, the expertise of outside contractors should prove invaluable, Hodges says.

“If you are in a position where you are building a project from scratch, you have to look at bringing in outside expertise,” he says. “The first two to three years, you will be debottlenecking [increasing capacity] and fixing things that don’t work, so at that point you will need a lot of help.”

In principle, engineering executives say the market should be huge. However, the partnerships between local firms and international oil and petrochemicals companies could limit the amount of outside help they will need or want to bring in. Many regional producers are proud of their ability to run their plants unaided, as well as to build up the skills of their own workforces.

More contracts will appear in Qatar as part of the government’s strategy of creating opportunities for small to medium enterprises, one Qatar Petroleum insider says.

Operations and maintenance deals will be tendered exclusively to either local firms or joint ventures between local and international partners. This, he says, is part of plans to promote private-sector growth rather than a model that is likely to gain momentum elsewhere in the region.

In Kuwait, state refiner Kuwait National Petroleum Company already offers long-term operations and maintenance contracts, which cover small-scale work at its three refineries, although these tend not to be large enough for major international firms. In 2009, it awarded three five-year maintenance contracts for work at the Mina al-Ahmadi, Mina Abdullah and Shuaiba plants, worth a total of about $300m to local firms.

In-house operational expertise for UAE oil firms

Elsewhere, contractors say state oil firm Abu Dhabi National Oil Company, which either runs or is a shareholder in all of the emirate’s downstream businesses, wants to build its own operational capabilities, rather than subcontract work to international firms.

Takreer and Abu Dhabi Polymers Company (Borouge), which produces polyethylene and polypropylene at Ruwais, both run their own plants and only award small maintenance contracts, contractors explain.

Where work is offered, it is for manpower and services during routine turnarounds – periods when plants are shut down for maintenance work before being restarted over a period of a month. This market, which is dominated by specialists, such as Pakistan’s Descon and India’s Litwin, does not offer the kind of revenues the big engineering firms are looking for, with contracts only worth $20-50m.

For the moment, major operations and maintenance contracts in the refining and petrochemicals sectors remain a pipe dream for large engineering contractors, but the potential for such work is huge.

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