Downstream industry struggles with fewer resources, study says

Nov. 17, 2008
The global engineering contractor industry is experiencing a shortage of qualified manpower, according to a biennial survey of refiners and petrochemical producers.

The global engineering contractor industry is experiencing a shortage of qualified manpower, according to a biennial survey of refiners and petrochemical producers.

Operating companies rank qualifications of key personnel as the most important consideration in choosing engineering contractors. Other important factors include detailed engineering capability, experience with similar work, and construction capability of the contractor.

These are some of the conclusions of a survey of the global downstream engineering, procurement, and construction (EPc) industry conducted by Transmar Consult Inc., Houston.

The study, sponsored by the senior management of most of the leading EPc contractors, is based on 109 interviews with key decision makers in refining and chemical companies. During January-April 2005, Transmar conducted interviews in North America, China, Europe, Southeast Asia, and most of the producing countries in the Middle East.

The interviewees’ areas of responsibility include:

  • Engineering, 20%.
  • Construction, 15%.
  • Project management, 16%.
  • Planning, 13%.
  • Procurement, 17%.
  • Senior management, 19%.

“The downstream hydrocarbon industry is in a state of dramatic transition,” the study said. “This transition is marked by a diminishing availability of experienced technical manpower resources and equipment.”

The study said that this downward trend is occurring at a time when the demand for project resources is reaching unprecedented levels. The study therefore attempted to:

  • Provide insights into the changing forces affecting the global EPc marketplace.
  • Review the performance of specific EPc companies and identify any regional differences.
  • Provide the opinion of plant owners on specific issues that may influence the global EPc marketplace.
  • Identify and analyze the key buying factors that owners use to select an engineering contractor.
  • Identify “rising stars” amongst the different EPc companies.

Global refining outlook

The vast majority of owner interviewees were optimistic about the 5-year outlook for the global refining industry, the study said. Refiners see most refinery investments occurring in the Middle East and Asia due to abundant inexpensive crude feedstocks and a growing middle-class consumer group, respectively. The owner interviewees projected that refining capacity will grow about 10-14 million b/d during the next 5 years. Most of new capacity will be built in the Middle East and Asia, and 1.5-2.0 million b/d of capacity will be added in developed countries via capacity creep in order to handle heavier and more sour crudes.

“The new production coming out of the Middle East or for that matter Canada, thanks to the oil sands, means a lot more sour crude to process,” said a strategic planning executive for a large refiner. “I see a lot of upgrading work to handle the heavy crude and a diminishing of the crack spread between heavy and lighter crude. Our internal forecasters are planning on a global refining capacity increase of 10-11 million b/d.”

According to the study, interviewees felt that future refining margins would be sufficient to support $15-25 billion/year of capital spending during the next 5 years.

“Without doubt, the Middle East will be the number one spot for capital investment,” said a senior manager for Saudi Aramco. “We see growing capital spending throughout the world for refining. In 2008, it should surpass $18 billion globally.”

Also, study interviewees believe that the crack spread between lighter and heavier crudes will significantly diminish in the future.

“Over recent years much capital was expended on deep conversion, hydrocracking, to take advantage of the hefty crack spread; however, the crack spread is narrowing and that money stream will close out,” said a vice-president of operations for an independent refiner. “There will be less of this type of investing in the future.”

The study said that the one downward force on capital spending is “the technical manpower and equipment shortages that may make it difficult to efficiently spend the capital funds allocated for the refining industry.”

Global petrochemicals

The study found that petrochemicals are a third priority for most owners, as far as capital spending is concerned. Operators claim that increasing production and reserves are the first priority and that refining is the second. This is because most company managers appear to be less certain about petrochemical profitability than for production or refining.

International oil companies are less interested in investing in petrochemicals in their traditional geographic areas, preferring to invest in the Middle East and Asia due to low-cost feedstocks and booming consumer markets. The study interviewees predicted that capital investment spending for petrochemicals will be about $15-20 billion in 2008, with similar amounts spent in the next few years.

The study said that owners see a “bifurcated” petrochemical market in that there will be several world-class mega projects and many smaller projects in the $10-100 million category.

“There will be 300 or more petrochemical projects in the Middle East for some time to come. There will be a few very large ones and many smaller ones. There will be even more projects going on in Southeast Asia, but generally smaller,” according to a senior technical executive for Total Atochem. “By contrast, the US, the largest consumer of chemical products, will see its installed base of petrochemical plants shrink significantly.” The study noted a few other trends from the interviews:

  • Developed-country petrochemical manufacturers are consolidating among themselves for competitive and financial reasons.
  • Integrating refining and petrochemical manufacturing continues to gain momentum. Standalone world-class petrochemical plants are becoming rarer.
  • Diversification out of basic chemicals by many US and European companies continues. Many of these companies are moving into fine chemicals and pharmaceuticals.
  • New Middle Eastern petrochemical companies are increasingly open to using Asian engineering contractors, especially those in South Korea.

Technical resource shortage

The study said that owners are far more aware of the resource shortages than they were in the 2005-06 study (OGJ, Apr. 10, 2006, p. 44). Many operators are currently implementing plans to mitigate manpower shortages.

All the major oil companies are establishing programs to attract more young graduates. And some are starting programs to retain employees beyond retirement age, according to the study.

“For years, we made use of our own technical staff with the support of a few engineering contractors. This worked fine for a long time, but when our projects became larger and then the seller’s market for services arrived, we were in trouble,” said a senior executive for Air Liquide. “The technical manpower shortage made it difficult for us to compete for good technical people. These circumstances led us to eventually buy Lurgi and acquire more than 2,000 engineers for our needs.”

EPC selection criteria

During the past 20 years, Transmar tracked 18 principal factors that an owner considers when evaluating a contractor’s bid proposal for a major project. The current study added health, safety, and environment as a factor.

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The table shows the critical factors in order of importance as well as scores for 2003 and 2005. With the recent change from a buyer’s market to a seller’s market, the priorities of the selection criteria changed quite significantly, according to the study.

The study said that the “top seven buying factors are performance and execution-based factors and that execution factors and ‘time’ are now taking precedence over ‘cost or price.’”

Results of the buying factors survey showed some interesting trends, according to the study:

  • HSE is the third most important factor that owners consider.
  • In 2005, “quality of senior management” was ranked 18 compared with a current ranking of 8. This is because “owners want to forge links with a contractor’s senior management in order to assure that it gets the best people from the contractor.”
  • The “detailed engineering capability” factor was the fourth most important in 2005 and eighth in 2001. Now it is the second most important. According to the study, “in a manpower shortage environment, ‘big is better’ and owners attach real importance to the depth of engineering capacity of an engineering contractor.
  • “Contractor’s price” has dropped to 11 from 2 in the 2003 study because “owners are more concerned about getting their project completed than in extracting the very lowest price for the work.”
  • “Responsiveness and flexibility” have fallen to 14.

Overall contractor trends

The study found that the ratings of the performance of South Korean contractors have been rising. For the first time since 1983, a South Korean engineering contractor is ranked in the “best” list—the top 14 contractors out of 50 reviewed.

In addition, many owner-operators are more willing to use what used to be considered second-tier contractors, according to the study. This is a direct result of the technical manpower shortage.

Owner-operators are working with engineering contractors in new ways. In some instances, this entails paying a premium for access to the best employees in the engineering contractor’s company. Other owners are signing multi-project contracts to ensure continuity of the technical resources needed to perform the work.

In general, owner-operators feel that performance standards—quality and capacity of the global engineering contractor industry—have declined significantly. Many owners are therefore increasing their conceptual engineering staffs, which allows them to better supervise and control contractor performance, according to the study.