Global EPC firms forge ahead in increasingly difficult landscape

Matt Zborowski
Staff Writer

Today's landscape for engineering, procurement, and construction (EPC) companies working in the oil and gas sphere is mired with project complexity, rising costs and exposed risk, and low oil and natural gas prices. Now, with operating companies slashing capital spending budgets and with fewer contracts up for grabs, competition among the major EPC firms is at an all-time high.

"Clearly this is not something that's sustainable forever," Richard Westney, founder and chief executive officer of Westney Consulting Group, told OGJ last month in its Executive Spotlight. His firm assists oil and gas engineering and construction management projects with predictability and risk assessments, strategic planning, performance transformation, and project implementation.

"You can't have the industry sit here with every single sector regarding itself as being in a bad situation and something they have to work their way out of," he said.

Westney stressed that "different [operators] are doing different things depending on their strategy" to survive and continue to turn a profit, and that's reflected through each contractor. "There will be organizations that come out of all this stronger and more competitive, those that don't survive, and those that survive but are weaker," he said. "And all of that, of course, depends on the strategic decisions people make."

Jeff Reilly, group president of strategy and business development of the newly combined Amec Foster Wheeler PLC (AmecFW), was among the handful of executives who spoke to OGJ about their companies' perspectives on the industry and their strategies for the coming years.

"The market conditions remain challenging in many places and the current commodity price environment looks set to continue for some time," Reilly said.

Among the broad portfolio of clients for companies like AmecFW, national oil companies (NOCs) have in particular suffered during the downturn as they struggle to provide financing for various social initiatives within their respective borders.

"While [international oil companies] and NOCs in the oil and gas space still have a long-term price outlook, many are limiting expenditures and decreasing capital spend over the next couple of years as they adjust to the current market conditions," Reilly said.

London-based Amec PLC closed on its purchase of Switzerland's Foster Wheeler AG in late 2014, creating a company with a workforce of 40,000 people worldwide and 2013 annualized scope revenues of £5.5 billion. In a news release published at the time of the deal, Amec explained that the merger strengthens its positions in North America and Europe and further enhances its presence in growth markets of the Middle East, Asia, and Latin America. The combined company would have "a broader spread of customers among both independent oil majors and the world's national oil companies," it said.

"First and foremost, integration of the [AmecFW] organization is going well and we are steadily developing revenue synergies-we count revenue synergies as those which neither individual company would have achieved itself-and achieving cost savings," Reilly said. "In the current environment, [AmecFW] has benefitted from the company's low-risk multimarket model, our diversity, adaptability, and scalability. We have developed a diverse business with a range of services to many different customers in more than 55 countries."

A wide range of projects and capabilities is a luxury nurtured by only a few of the world's largest EPC firms, and one that has helped those companies forge ahead in an increasingly difficult environment. "Today as [AmecFW] we are much stronger together than either Amec or Foster Wheeler on a standalone basis," Reilly stated.

Fewer discretionary projects, megaprojects

On the current state of AmecFW, Reilly said, "Current projects that we have in execution are progressing well, but we are seeing delays by owners in the issuance of [invitation to bid] and in making final investment decisions. Generally, what we're seeing across the oil and gas industry is that any 'discretionary' projects-ones that don't need to be done for regulatory reasons or don't have a very high rate of return-are slipping out."

AmecFW is seeing a decline in underlying scope revenue expected during 2015, according to its September investor presentation. However, the company has been helped by stronger returns in its downstream segment to mitigate weakness in the upstream. The company is seeing strong performance from its pipeline business, but reports delays in project ramp-ups.

Reilly also noted that "megaprojects are under consideration" by his company. "We have many pre-FEED [front-end engineering and design] and FEED activities under way for our clients. The uncertainty is around the timing of when these megadevelopments will receive their [FID] funding in the current commodity pricing environment."

Westney has observed that megaprojects, or "gigaprojects"-those too large to be called even megaprojects-have increased the "mutual distrust" between operators and contractors due in large part to the massive skillset and risk-taking required to execute such projects.

Economies-of-scale and the technical challenge are the primary components of megaprojects, he noted. "Do you really need to build something very big when, in fact, maybe a more sensible strategy is to do things in phases, each of which is smaller, and allows you to wait and see how things work out before you do the next one?"

Westney said the mindset that companies "have to be able to make big bets and do big projects" is being questioned, especially amid "Great Crew Change"-the mass retirements of highly skilled and experienced Baby Boomers in the industry and the resulting need to replace them with similarly skilled, albeit less experienced, employees.

"My guess is that megaprojects to the extent they are done will be subject to far higher levels of scrutiny, planning, and risk analysis if nothing else to at least ensure they're predictable," said Westney, who also emphasized the necessity of good portfolio management for driving down costs. Companies have to be aware that changes made through the supply chain to create economies-of-scale can, in some cases, create diseconomies-of-scale in other aspects of the project, Westney noted.

Graham Hill, KBR Inc.'s executive vice-president of business development and strategy, said projects in which his company are involved are "progressing normally" at the moment.

"There has certainly been a drop off in the amount of megaprojects available, especially in certain high-cost areas like Canadian oil sands, ultradeep water, and Australian unconventional gas and LNG," Hill said. "But there are still projects being investigated in lower-cost areas such as American LNG, downstream, and fertilizers, and Middle East in all areas."

He said, "The majority of contracts are now [lump-sum] EPC fixed price, where owners are taking advantage of the lower oil scenario and pushing prices down through the value chain. Megaprojects in the reimbursable EPCM space are more limited. [Invitation to bids] are at the reduced level commensurate with the project scenario outlined above."

KBR reported in its second-quarter earnings call that it will have "a continued strong base of large projects in backlog" through 2015-16, including a $2-billion ammonia-urea complex in the US Midwest with an undisclosed client, and the Gorgon and Ichthys LNG projects in Australia.

The company said existing LNG projects are expected to remain significant components of earnings during that time period, and it will continue to see the favorable resolution of pending change orders resulting in 2016 LNG income being comparable to 2015.

"We have had several new contracts awarded recently, which is pleasing in a tight market," Hill said. "It means that we are winning the right kind of work. The project pursuits we are focused on are sustainable even in a challenged oil price scenario. We are one of the very few oil and gas contractors working on five offshore oil and gas megaprojects simultaneously, with several new awards in the last few weeks."

Jim Brittain, president of Fluor Corp.'s energy and chemicals business in the Americas, observed that major projects "are not being cancelled, but some are moving to the right." The company also is seeing "a number of projects moving forward globally in the downstream and petrochemical markets," he said.

Fluor's oil and gas segment reported new awards of $2.7 billion and a backlog of $28.7 billion at the end of this year's first half, including additional refining work in Europe and new production and chemical work in Canada, according to the company's second-quarter presentation.

"Our oil and gas backlog is near all-time highs-for example, we were recently awarded two packages for the new [Kuwait National Petroleum Co.] Al-Zour refinery in Kuwait. We continue to see a strong slate of opportunities on a global basis, including petrochemicals, refinery expansions, pipelines, and LNG, and are well-positioned for them."

'Cooperative effort' with operators

Westney said the result of tightening wallets has only added to the "mutual distrust" between many owners and contractors. With competitive bidding and much less leeway for both parties, the collaborative efforts seen in the past-when several operators were known for their relative amenability toward contractors-have generally become less common.

Reilly says AmecFW, meanwhile, is working with major operators to increase the capital efficiency of their projects. "It has generally been a cooperative effort to address the issues facing the industry," he said.

"We listen to our customers, we deliver the services they need, and we become a trusted partner. To that end, we are continuously working with operators to figure out ways to deliver enhanced value for less capital cost and eliminate inefficiencies to help ensure profitability of our customers in the current conditions-a fundamental challenge for the entire oil and gas industry as it transforms in response to the current environment."

Reilly cited the company's "more 4 less" lean and scalable engineering processes and integrated delivery whereby AmecFW has "spent the last 2 years talking to customers and working out how to provide the services they need more efficiently," he said.

"This is a new approach to reducing duplicated costs with the project owner, making the supply chain even more efficient, and using technology to ensure we get things right first time and every time. Efficiencies from 'more 4 less' have been proven to deliver 30-60% savings-in time and cost-compared to traditional approaches.

"For example, we were awarded a 3-year contract by Maersk Oil to provide integrated services in the UK sector of the North Sea, including project management, engineering services, procurement, offshore construction, and offshore operations support. We'll use our 'more 4 less' lean and scalable engineering processes and integrated delivery together with our specialist Scopus Engineering organization. We have rewritten how our services in the North Sea are delivered and have built a new way of working collaboratively, safely, and efficiently to answer our customers' needs in this tough market."

KBR's Hill said, "Operators are now testing their projects at keener oil prices and indexed linked LNG prices to ensure their projects are robust under all foreseeable market scenarios. So far we have had no projects cancelled, which demonstrates that we have been focusing on the right projects in challenging oil price scenarios."

Hill said, "Operators are of the opinion largely that 2016 will continue to be tough, but that by mid-2017, we should see oil prices at a more sustainable level of around $65/bbl. This is consistent with more analyst forecasts. KBR is in a fortunate position of being more heavily weighted towards gas projects-offshore, onshore, LNG, and downstream-than oil, a position which benefits us in the current downward cycle in oil."

He said, "Our approach to the business has always been to balance upstream, midstream, and downstream projects; and throughout the lifecycle-consulting and studies, front-end engineering and detailed design; and some selective fixed price EPC work, followed by long term asset services (maintenance) business. We announced earlier this year a new initiative, in partnership with Bernhard Capital, in asset services, Brown & Root Industrial Services, based in Baton Rouge, La."

Hill attributed the company's ability to survive to a new business structure and strategy announced late last year, allowing KBR "to take significant cost out of the company, to create a leaner, more streamlined, and more efficient organization," which passes cost savings to its customers."

Hill said, "We have also worked hard to improve our procurement and supply chain, subcontractors, and suppliers to ensure we are obtaining competitive prices commensurate with our safety, quality, and delivery objectives. We have good response from our suppliers, who continue to support KBR globally. We have entered into a strategic alliance with EPIC Piping and fabrication to source very competitive pipe spool fabrication from their facilities in Louisiana and Texas."

Fluor's Brittain said, "Our clients, many of whom are oil and gas operators, are focused on their per unit costs, such as dollars per barrel. They are cautious about deploying their capital through new projects-only projects with a lower capital spend and high rate of return are moving forward in this environment."

He said, "Our clients are asking for innovative project solutions, certain performance and accountability from contractors, not only to balance risk, but to deliver the capital efficiency they need for projects to move forward. We can take a project from concept to start-up, with turnkey control; we can lower costs and improve safety and quality by integrating procurement, fabrication, and construction at every phase."

Brittain said Fluor has worked to offer solutions to its clients to enable them "to move forward on projects that would otherwise not be economic for them." He said, "This approach includes our global supply chain, '3rd Gen Modular Execution,' and growing self-perform construction and fabrication capabilities."

Brittain mentioned Fluor's relationship with South Africa's Sasol Ltd., which dates back to the early 1960s because of Fluor's "ability to deliver projects with capital efficiency and cost and schedule certainty," he said.

"Fluor is currently building Sasol's world-scale ethane cracker and derivatives complex in Louisiana, for which we also executed the front-end engineering and design. We also recently signed a collaboration agreement to support Sasol's facilities in South Africa."

Importance of skilled workforce

Brittain said, "We have streamlined decision-making to rapidly address new opportunities and realigned our business leadership and employees. We are supporting clients' needs and demands by controlling the critical path of modularization, supply chain, and direct hire craft labor, while leveraging our global offices to support project execution.

"We are continuing to make investments in these areas to improve control and delivery at the project level. We are growing our construction and fabrication offerings to deliver capital-efficient solutions for clients so they can move forward on projects that would otherwise be uneconomic. For example, we recently announced a joint venture with [China Offshore Oil Engineering Co. Ltd.] to own, operate, and manage the Zhuhai Fabrication Yard in China. We are also investing in our craft workforce, and are opening a craft training center this fall in the Gulf Coast."

Reilly said AmecFW recognizes the increased "competition for skilled technical talent," which "is widely attributed to the nature of the highly specialized and experienced job roles, a generally ageing workforce without adequately replenished supply, and an overall increase in the technical complexity of projects."

According to its September investor presentation, the company has seen 5,000 hires and "exits" this year, leaving overall employment flat year-over-year. Workforce scale-downs include a more than 65% cut in contractor staff from greenfield projects in northern Europe and Commonwealth Independent States and 20% cut in oil and gas operations in Canada.

About 300 senior engineers have been hired for projects in Kuwait, and more than 400 positions have been added in Aberdeen over a 3-month period for Clair Ridge topsides hookup 75 km west of Shetland Islands.

While Reilly said AmecFW hasn't been hit hard by the "Great Crew Change," Fluor, says Brittain, has seen a portion of its US workforce retire, which has brought about the continued hiring of recent graduates to maintain "a steady pipeline of new talent."

Brittain said, "New graduates are placed in both formal and informal mentorship programs to support the transfer of knowledge from our more experienced personnel who are nearing retirement. We also encourage employees to take 'stretch assignments' to grow their leadership capabilities. We are developing and growing this workforce-our company's future leaders-and are committed to developing and retaining that talent."

Brittain said, "In terms of formal programs, our 'Graduates Advancing to Professionalism' and 'Emerging Leaders' groups provide career development opportunities for both recent graduates and midlevel professionals, respectively. We offer 'Mentoring Circle' programs, enabling groups of employees to meet regularly with senior leaders to discuss the company and career development."