SAUDI Arabia is dominating the energy contracting market in 2011 and will continue to do so in the years to come, awarding possibly $30 billion of deals annually, according to analysts.
More than $320 billion worth of EPC contracts have been awarded in the region’s hydrocarbons sector in the last six years, but the annual outlay has been far from stable. 2004-05 saw huge investment in LNG programme. Since then there has been a greater focus on gas and refinery projects. Pipeline and production schemes have been relatively stable.
Only Saudi Arabia has shown a consistent level of hydrocarbons EPC investment. High oil prices provide the financial firepower to push ahead with major projects, but they have also reflected high economic growth, which pushed up commodity prices and made awarding large EPC contracts in 2007-08 less attractive. The fall in material costs in 2009 was a major factor behind the record year.
The last two years saw the meteoric rise of Abu Dhabi, the return to domination of the lump-sum turnkey contract model, growing competition for contract awards following the downturn in 2008, a 20-30 per cent fall in the cost of projects and the dominance of the Korean contractor at the expense of the Western companies. Korean firms won an estimated 50 per cent of major contracts GS was the most successful energy contractor in 2009, winning $5.5 billion worth of deals. SK, Samsung Engineering and Hyundai E&C all won major contracts in markets right across the GCC and in countries where Korean contractors had little track record, such as Abu Dhabi.
While Korean contractors remain strong, European firms have been much more aggressive, reflecting declining backlogs and concerns about future prospects. Saipem, Petrofac, Tecnimont and Tecnicas Reunidas (TR) have all won major awards. With competition intensifying, pricing has come under even greater pressure and as a result, bids are coming in well under budget.
COST SAVINGS
The UAE and Saudi Arabia have taken full advantage of the fall in EPC costs. Total and Aramco say they saved more than 20 per cent in bringing the cost of the Jubail export refinery to under $10 billion.
On the SAS project in Abu Dhabi, Gasco obtained a $1 billion or 22 per cent fall in EPC prices after asking contractors to resubmit prices. The Bab compressor scheme in Q1 2009 for Adco saw a 50 per cent reduction in the EPC price compared with original bids submitted in 2007. Clients are also making savings on contract terms by turning to LSTK contracting. Analysts say the level of project activity in 2011-12 will largely depend on a handful of mega projects proceeding.
Looking at the prospects for the coming years, analysts say project activity is set to decline over the next three years from the highs of 2009 and the reduction could be steep if the handful of remaining mega-projects fail to proceed. The areas of highest activity are expected to be offshore, refining and gas processing, with Kuwait, the UAE and Saudi Arabia potentially being the biggest markets.
Margins will remain under intense pressure as European and Japanese contractors attempt to build up workloads. Koreans will remain a major force, although their fate may well depend on how successfully they can deliver the 2009 awards.
