The following blog reflects on an article contained in the Oil & Gas Journal (6 November 2017) entitled “Existential crisis drives EPC consolidation” by Matt Zborowski.
The consequences of the low oil price continues to affect investment in new projects by the oil and gas majors and consequently the construction market for equipment suppliers/EPC contractors. The oil majors (including NOCs) have seen their income reduced over the past few years, thereby reducing the CAPEX sums available for new projects and delaying others.
Further, although oil, gas and derivatives demand has remained relatively stable throughout the world, and is now even increasing, the entry of USA shale oil and gas, and Iranian oil, into the market has spread the available cake over a wider spectrum, thereby reducing income per producer.
The effect is that the major producers are looking for savings in CAPEX when ordering new projects, and to achieve such reduction they require lower project prices from equipment suppliers/EPC contractors.
The suppliers/contractors can only provide the lower prices if they become more efficient, and this efficiency is passed through in a lower overall contract price. Such efficiency must also be reflected in a reduced schedule duration, possibly by more modularisation, thereby enabling a project to come on stream earlier.
The recent mergers/acquisitions taking place between equipment suppliers/engineers and oil and gas EPC contractors is a demonstration of the move towards more efficiency in the industry. By vertical integration, efficiencies can be achieved by a one stop shop for all matters from concept, basic design, FEED, engineering, procurement and construction to delivery of the project. This vertical integration can combine upstream, midstream and downstream activities and projects. As stated in the article, cross-border mergers/acquisitions have recently taken place between Technip and FMC technologies; SNCL, Atkins and Kentz Corporation; Wood Group, Infinity and AMEC Foster Wheeler. The pace of cross-border mergers and acquisitions continues with the recent General Electric and Baker Hughes tie-up, as also the proposed Linde and Praxair merger. It is believed that these company combinations will increase cost savings and make the joined companies more technically efficient, together with standardised rather than bespoke designs, and produce associated schedule benefits.
The original long term EPC global contractors based in USA, Europe, Japan and South Korea are also facing strong competition from what were originally less experienced contractors, particularly from China and India, who now hold major cost advantages, and their competitive and ultra-low tenders with subsequent award of projects is becoming more evident, especially in the Middle East. To this competition must also be added the current movement by GCC countries to buy into South Korean engineering and construction companies, and the intention of KSA to take control of its construction industry by creating a super-contractor.
Basically, less money is available for projects, competition is greater, especially from lower cost competitors, and clients expect the EPC contractor to bear a greater share of the risk by taking on board fixed price contracts, with more severe terms and conditions of contract, and to provide a one stop service, thereby further decreasing project cost and schedule times. On this basis, the financial efficacy and therefore existence of the EPC contractor is threatened.
It is to be noted, however, that recent agreements by OPEC and associated producers since 2016 to maintain the price of oil by reducing production appear to be having the desired effect of maintaining and even increasing the price of oil, albeit that this increase will also benefit marginal producers – a balancing act.
Overall, the actions to improve efficiency already taken and to be taken in the future are essential to overcome the threat to the existence and profitability of EPC contractors, equipment suppliers and engineering consultants, and require a fundamental shift in thinking to improve efficiency rather than just tinkering at the edges.
Martin Barth – Specialist Consultant