Playing to win

15 March 2002

As part of its regional marketing drive, Foster Wheeler produces a glossy brochure detailing its work experience in the Middle East and North Africa. Running to 12 pages, the publication covers major contracts won by the engineering contractor since 1930 and the award of its first regional order for a cased- tube still unit at Abadan in Iran. As well as highlighting the company's impressive regional credentials, it shows that the make-up of Foster Wheeler's order book has changed considerably over the years. Whereas once engineering, procurement and construction (EPC) contracts made up much of its oil and gas workload, nowadays it is the engineering and project management orders that dominate.

Foster Wheeler is one of the most active international players in the regional oil and gas business. At present, it is working on more than 20 assignments, ranging from the Samir refinery upgrade in Morocco and the Qatif field development in Saudi Arabia to the Dolphin gas project in Qatar. While study, front-end engineering and design (FEED) and project management consultancy (PMC) contracts are well represented, not one EPC contract features on the list.

The paucity of current EPC work says more about the state of the lump sum turnkey (LSTK) market in the Middle East than it does about Foster Wheeler's capabilities. It would be wrong to classify us as a non-LSTK bidder,' says Gianni Bachiddu, executive president at Foster Wheeler International Corporation. 'We are simply very selective.'

Foster Wheeler has good reason to be cautious. In recent years, the LSTK market in the Gulf has been cut-throat, a consequence of diminishing opportunities and the return of South Korean contractors. 'What's the point of getting involved when you run the risk of losing money?' says Bachiddu. 'If you put a 10 per cent margin into your bid, you are just wasting your money. If you want to be in the loop, it has to be no more than 5 per cent.'

Then there is the risk. 'In the Middle East, you don't lose money on the E or P. You lose it on the C, the construction. In Saudi Arabia, for instance, 35 per cent of an EPC contract is on construction, which is subcontracted out and not directly under your control,' he says.

Bachiddu also questions the merits of the LSTK approach for the client. 'On LSTK projects, you lose a lot in terms of lost production. It can take four to seven months from issuing the LSTK package to actual award. That is months of lost gas or oil production, sums which far outweigh the savings made through LSTK bidding,' he argues.

Foster Wheeler has proposed to clients such as Saudi Aramco alternative contracting procedures - the open book, for example. Under the open-book model, the client tenders a project and selects an engineer on a cost basis. After having received quotes for the critical equipment items and quantified the amounts, the engineering contractor sits down with the client to agree a margin for the construction works.

Despite its reservations, Foster Wheeler is closely tracking selected EPC opportunities. Having completed the Oman LNG plant at Sur in 2000, Foster Wheeler is looking to return to the sultanate: its Italian office has teamed up with South Korea's LG Engineering & Construction for the estimated $900 million Sohar refinery scheme. 'This is a strategic prospect. We are one of the few international companies that know Oman as an EPC contractor. We know that LSTK contracts can be executed there,' says Bachiddu.

The company has also been tempted to go for some of the larger LSTK contracts in Saudi Arabia, either through its UK or Italian office. However, its recent run of success in winning large-scale FEED and PMC contracts from Saudi Aramco has limited opportunities. 'There are at most four companies that have the critical mass of process engineering to be able to execute FEED and PMCs the likes of which we have done on Haradh and Qatif,' says Bachiddu. 'We have also achieved something in Saudi Arabia that is almost unheard of: getting repeat business.'

Despite its heavy engineering workload, Foster Wheeler has refrained from establishing an engineering presence in the GCC. 'We have been pushed strongly to establish one, but we look at the rationale and to us there is no point. If we were to open an office in every place that we had been asked, then we would have 100 offices around the world,' he says. Consideration has been given to setting up an engineering presence in Iran, but with so many local engineering companies available for partnering on specific projects, Foster Wheeler has decided against it.

Saudi Arabia and Iran will remain the company's most important regional markets. In the kingdom, the company has high hopes that the long-planned upgrade of the central and western refineries to clean fuel production will proceed. Outside Aramco, priority has been assigned to participating in the Saudi gas initiative.

Says Bachiddu: 'We definitely want to be involved with the core ventures. We believe that we are in a privileged position, given that we have been in Saudi Arabia for many years and have the muscle to assist a multinational oil company that needs manpower, planning and process engineering.'

Foster Wheeler is equally upbeat about Iran, where it has worked before, during and since the 1979 Islamic revolution in Iran. 'The number of prospects is huge. The way work is structured there [construction work is executed by local contractors under separate contracts] allows us to play pretty well. There is a tremendous amount of engineering and PMC work around, coming from both the national oil company and the foreign companies with buy-backs.'

Elsewhere, Foster Wheeler is involved in a host of high-profile gas and refining projects. In December, it was awarded, with France's Sofresid, the prestigious upstream FEED package on the Dolphin gas project. A month later, it took the PMC contract for the third phase of the onshore gas development (OGD-3) and phase 2 of the Asab gas development (AGD-2) in Abu Dhabi. Over in Qatar, it is the FEED contractor for what is set to be the region's first gas-to-liquids (GTL) plant, planned by Qatar Petroleum and Sasol, while in Kuwait, it is carrying out a number of assignments for local refiner, Kuwait National Petroleum Company.

Foster Wheeler's profile is somewhat lower today than it was back in the 1990s, when it was carrying out major EPC contracts for the likes of the Equate Petrochemical Company in Kuwait, Oman LNG, and Saudi Aramco Shell Refinery Company (Sasref). Nevertheless, it can still draw on an extensive Middle East order book, thanks largely to its considerable engineering capabilities, and selectively pursue EPC opportunities. Says Bachiddu: 'An essential part of our business is to avoid being rigid. Flexibility is everything.'

Angus Hindley

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