In 2009, South Korean engineering, procurement and construction (EPC) contractors won $51bn-worth of contracts in the Middle East. But amid fierce competition from rivals in China and India and contractors from Japan, Europe and the US looking to win back lost market share, the Koreans are looking to develop new strategies that will keep them at the top of their game in the future.
Samsung Engineering is one South Korean contractor that had an incredibly successful 2009 in the Middle East and North Africa (Mena). Out of a total of $10bn-worth of global orders the company won last year, some $8bn came from the Mena region. Dongwoon Kim, chief operating officer of Samsung, says the company is proud of its achievements, but he cautions the company cannot afford to rest on its laurels.
“Samsung has grown on our hydrocarbons expertise and we have been concentrating on that up until now,” Kim says. “But our company has an ambitious growth plan and relying only on hydrocarbons is not good enough to achieve our future objectives.”
“We have a plan that by 2015 we will have new orders of $30bn and revenue generation of $20bn,” Kim adds. “By 2015, we want to have at least 30 per cent non-hydrocarbon project orders. The company has set a policy to increase its presence in non-hydrocarbon areas such as steel mills, power plants and water desalination.”
Samsung’s diversification plans for the Middle East are already taking shape. In March, the company signed a contract for a 1 million tonne-a-year heavy section rolling mill at the $1.2bn Hidd Steel Mill project in Bahrain as part of a joint venture with Germany’s SMS Group. Work has already started on the facility, with completion due in the fourth quarter of 2012.
We have a plan that by 2015 we will have new orders of $30bn and revenue generation of $20bn
Dongwoon Kim, Samsung Engineering
“Over the past four years, we have been preparing for extending our [non-hydrocarbon] operations overseas, especially in the Middle East,” says Hong-Pyo Kong, chief marketing officer for Samsung. “[In the future] you will see us win aluminium, water, power plant and steel mill projects. This year, I think there will be a minimum of one project for each.”
Samsung’s determination to remain competitive is also reflected in its graduate recruitment programme, which it has expanded over the past five years. “We have made an effort to increase our capability by hiring 300-400 fresh graduates annually and training them on the job,” Kim says. “That has been the differentiating factor and our capabilities with regards to skilled employees are about double what other Korean contractors have.”
Samsung is not the only South Korean contractor looking to diversify beyond hydrocarbons. However, each contractor has its own plan on how it will set about transforming its business and reassert its position in the Middle East.
More than half of SK Engineering & Construction’s (SK E&C) order backlog is now in the Middle East, and the firm is now working to develop from being a low-cost contractor into a more sophisticated outfit.
“Aside from a huge refinery project in Ecuador, most of the projects available are coming from Middle East countries, especially Saudi Arabia, the UAE and Kuwait,” says Casey Choi, president of SK E&C. “Kuwait was a little bit withdrawn last year, but it is coming back again.”
The $12bn Manabi refinery in Ecuador will have a capacity of 300,000 barrels a day (bpd) and is the first overseas process plant project for which, SK E&C will be conducting the front-end engineering and design (Feed). Choi believes this is the way forward for the firm in the Middle East.
“If you look at the history of the evolution of the [Korean] EPC contracting business, the path forward is clear,” Choi says.
“We have to move on and do more value-added engineering and project management services such as Feed, feasibility studies and project management services.”
As part of the South Korean conglomerate, SK Group, SK E&C has extensive domestic experience in designing and building large process plants, such as the 900,000 bpd Ulsan refinery run by sister company SK Energy.
“We designed and built the SK Energy refinery complex and it is the second biggest in the world,” Choi says. “That’s where our origins are and refining is our core competency.”
“So we are looking to move into [refinery] operations and maintenance services. This total solution provider is something that not many companies can do. SK E&C is trying to differentiate itself, not just from [other South] Korean contractors, but from international contractors such as Bechtel or Fluor [both from the US]. They don’t have an operating arm, but we do,” Choi adds.
GS Engineering & Construction (GS E&C) is another South Korean contractor that had an excellent 2009 in the Middle East, winning $5.1bn-worth of work in the region out of a global orderbook of $6.9bn. Since 2005, the company stopped bidding on civil and architectural projects in the region to focus more on technical process plant contracts and it is a strategy that has worked well.
“In 2009, Abu Dhabi was the busiest market for us,” says Sang-Ryong Woo, president of GS E&C. “One award alone was worth $3.1bn. This was the EPC contract for a residual fluid catalytic cracker unit at the Ruwais refinery for state-owned Abu Dhabi Oil Refining Company.”
GS E&C also won the $2.1bn EPC contract to build the fourth natural gas liquids (NGL) train for Abu Dhabi Gas Industries (Gasco) in partnership with the UK-based Petrofac. Woo believes such partnerships are becoming essential for companies looking to progress into new business areas.
“This kind of deal is one of GS E&C’s business strategies,” Woo says. “GS and Petrofac complement each other well. Petrofac has plenty of experience with gas projects in the Ruwais area, while GS has more precise and sophisticated project management systems.”
“GS has 60 per cent stake in the scheme and Petrofac has 40 per cent,” Woo adds.
“And based on the experience of this partnership, we are looking to develop more projects with Petrofac in Abu Dhabi, Saudi Arabia and other areas across the Middle East.”
The firm’s decision to link up with a European partnership makes good sense from a risk management perspective, say industry experts. A decade ago, an entire project would have been budgeted at $500m, whereas today a single package can cost more than $3bn. When the difference between a decent profit and a massive loss on such large projects can be so acute, sharing risk is a practical solution.
We are bigger than many other contractors, but we are not yet the best. The challenge is to become the best
Sang-Ryong Woo, GS E&C
GS E&C plans to use its partnering strategy to break into the potentially lucrative Iraq projects market.
“We are making plans. I cannot give a name yet, but we are preparing to enter the Iraqi market with one of the major energy companies,” Woo says.
But the Korean model of competitive pricing coupled with highly efficient project execution is not something that can be exported to a country where delays due to security issues are common. “We are monitoring the situation in Iraq and I’m sure it will be a big market for us,” says Kim from Samsung.
“We do not have a specific timeline, but we expect a much better market situation in a couple of years’ time.”
Woo agrees the security situation in Iraq is a concern, but believes contractors have to be ready to enter what could be the Middle East’s biggest projects market.
“Iraq has big potential, but the problem is security,” he says. “Once the security problem clears, then we have to move quickly, otherwise it will be too late.”
Seoul-based Daewoo Engineering & Construction (Daewoo E&C) is also using partnering to win business in the Middle East by bidding on a large number of projects such as the Doha Port in Qatar or power plants in Iraqi Kurdistan.
The company recently teamed up with Italy’s Saipem to bid for the processing plant package on the Shah gas field being developed by Abu Dhabi National Oil Company (Adnoc) in the south of the emirate. The estimated $1.5bn contract for the utilities and offsite package was awarded by Adnoc to Samsung on 29 April.
|Value of contracts won in the region|
|Year||Number of countries||Contract amount ($m)|
|Source: International Contractors Association of Korea|
The UAE’s decision in December 2009 to award its first nuclear contract to a Korean consortium has thrown the spotlight on South Korean contractors and the local media has dared to suggest they are now the world’s best.
But, Woo from GS disagrees. “Korean contractors are not number one. The dollar amount of contracts is not that important. We are bigger than many contractors, but we are not yet the best. The challenge is to become the best,” he says.