TECHNOLOGY Operator/E&C relationship explored in Europe

A survey of 60 European executives and technical managers in the refining and petrochemical industries has revealed important industry trends.

Results of the survey, conducted by Transmar Enterprises Ltd., Paris, showed that:

Incorrect forecasts about the availability of light crudes have resulted in a glut of conversion capacity in Europe.
When making construction decisions, operators consider not only capital costs, but also the total expected costs over the life cycle of the plant.
Corporate downsizing has reduced operators' technical staffs considerably, and increased "outsourcing" of many functions, including research and development.

Survey methodology

Several major engineering and construction (E&C) firms commissioned Transmar to conduct a study of the E&C industry in Western Europe. The survey was designed to evaluate the factors that key decision-makers use to choose an E&C firm, as well as to rate individual firms.

In late 1995, Transmar conducted face-to-face interviews with downstream executives from more than 40 major refining and petrochemical companies. The results were published in a study titled, "The Transmar Study of the Western European Downstream Engineering and Construction Industry: 1995, The Year of Re-engineering."

The interviewees were asked to evaluate E&C firms. As a result of downsizing and the loss of what Transmar calls "corporate memory," only 13 contractors were known well enough by the executives to be evaluated in detail.

Decision factors

Table 1 [24000] lists factors downstream executives consider important when purchasing E&C services. The 18 factors are listed in descending order of rank determined by the 1995 survey.

The rankings from Transmar's 1993 and 1989 surveys are included for comparison.

The three factors considered most important are quality of key personnel, project management capability, and project control systems. The ranking of these three factors remains unchanged, compared to the 1993 survey (OGJ, Jan. 10, 1994, p. 57).

Only two factors-construction capability and experience in the same geographical area-changed appreciably in ranking since the last survey. Both of these factors moved up five notches since the 1993 ranking.

In addition to trends in so-called buying factors, general industry trends can be gleaned from the individual responses recorded during the interviews. Transmar's report maintains the anonymity of the interviewees by attributing their remarks using only their titles and countries.

Project costing

One important trend in the E&C business is the increased importance operators are placing on so-called life-cycle costing. Plant owners are concerned with receiving the best possible cost/benefit ratio over the life of a project.

A Dutch technical executive said, "We are pushing to use a 'staged gate process' to allow quicker decisions. Here, we look at not just the capital cost of the project, but at the cost...over its probable life."

Another trend is the adoption of functional equipment and materials specifications based on end use. "Why use expensive corrosive-resistant steel when you can use cheap carbon steel and inhibitors to prevent corrosion," said a Dutch technical manager.

A senior executive from Belgium said, "We have a small staff at our refinery and often allow the engineering contractor to guide us as regards specifications. The refinery business is too competitive to set up rigid rules about...specifications."

The survey also revealed that owners generally are supportive of contractors' efforts to use advanced information technology for interoffice communication. Such technology also is seen as promoting greater technical standardization.

"Together, owners and contractors are developing data warehouses with common data bases that allow greater sharing of data, [thus] enhancing productivity," according to the report.

E&C consolidation

As a rule, says Transmar, interviewees believe consolidation among contractors will strengthen the E&C industry.

"Over the long run," said one Dutch senior technical executive, "American and European contractors need to continue consolidating and improve performance to meet the challenges of an increasing number of foreign engineering firms in Eastern Europe, China, and other parts of the Far East."

A Dutch senior executive said, "Consolidation...means stronger contractors at better prices, and more willingness to try nontraditional means, as regards contracts."

Although consolidation in the engineering industry is helping refiners, according to one refinery executive from the U.K., there is a down side: "Engineering firms lack the flexibility to handle emergencies," he said. "They no longer have the same number of quality personnel to do a job."

Strategic alliances

Because of re-engineering in the downstream petroleum industry, operators are operating with reduced technical staffs. One consequence of this downsizing, according to the report, is that owners establish working relationships with fewer contractors and suppliers, and tend to choose well-known firms.

"Quite often," said a Belgian senior executive, "we do not go out for competitive bids. We would rather discuss the job with a 'favorite.'"

Such alliances, both formal and informal, are becoming more common. A technical executive from the U.K., for example, said his company had invited nine engineering firms to make presentations regarding alliance partnerships.

European operators, however, believe they are less likely to form strategic partnerships with contractors than are their counterparts in the U.S. The reason, according to Transmar, is that they see European Commission regulations as a barrier to forming partnerships.

In addition, national and corporate cultures can act as hindrances to alliance formation. A French senior executive said, "We think it best to have some freedom of action to choose the best firm, depending [on] technology,...location, etc."

Downsizing

Although restructuring of the European processing industry is still in progress, some believe their re-engineering programs have gone too far.

A Belgian technical executive said, "We have a staff of generalists and depend a lot on experienced contractors. However, we need to have people capable of making intelligent judgments about the use of contractors." To rectify the problem, his company is considering hiring a few experienced engineers.

A French senior executive believes downsizing has all but eliminated research and development in the refining industry. He predicts: "Much of the progress that is achievable will come through outside suppliers providing better automation or catalysts."

Transmar says excessive downsizing has caused loss of corporate memory. One U.K. senior executive agrees: "In many cases, re-engineering management consultants...caused more problems than they solved."

Overcapacity

European refiners badly underestimated the availability of light crudes in the medium term. Based on these incorrect predictions, many refiners instituted large-scale upgrades to enable their plants to process heavy crudes.

"Furthermore," according to the report, "operators compounded the mistake by significantly hiking the nameplate capacity. The result is a glut of light product capacity."

A French technical executive recommends gross rationalization: "There is a glut of gasoline in Europe [and] a surplus of conversion capacity. We need to shut down 8 to 10 refineries throughout the region."

Increased availability of condensate feedstocks has compounded the situation. "The surplus in condensate supplies is further damaging the economic returns on our conversion units," said a French senior executive.

In addition, demand for heavier products did not decline, as expected. "We did not guess correctly on what the needs would be for diesel and jet fuels," said a French senior technical executive. "This has hurt all the European refiners in recent years."