Engineering and construction companies are expanding

Providers explore all possibilities in E&C

12 August 2008 17:44  [Source: ICB]

Global engineering and construction companies report that the projects are changing, but the chemical sector continues to show a surprising amount of resilience

AT THE beginning of this investment cycle - around 2002-2003 - a key measure for engineering and construction (E&C) firms was the number of new "mega" projects being developed on the back of the Middle East's low-cost ethane. Ethylene-based cracker complexes with downstream chemical production predominated.

Times have changed, however. Fewer new ethane supplies are coming on line, demand for such facilities is slowing, and naphtha is ascendant, say major E&C providers.

Ethane is often a supplementary feedstock for newer projects, but naphtha, which delivers a wider range of by-products, is calling the shots. Projects are increasing in size and scope, with more downstream units, notably in Saudi Arabia and the United Arab Emirates.

The Middle East is not the only region keeping the E&C firms busy. US-headquartered E&C major Fluor is taking on an increasing number of projects in Russia.

"We're seeing a lot of petrochemical work coming up in Russia, and I have expectations that that will be growing for us going forward," says Peter Oosterveer, Fluor's senior vice president for chemicals.

"Conservatively, we see 10-15%/year growth in Russia [for at least the next three to five years], mainly with petrochemical products and refineries."

In September, Fluor was selected by Russia-based oil company Tatneft to manage the construction of its $5.6bn (€3.5bn) petrochemical complex in Nizhnekamsk.

Most of Fluor's petrochemical-related work is still in the Middle East, however, with four major projects in Saudi Arabia and a fifth in Kuwait. There will be further growth in the region, says Oosterveer. "But there will be less and less natural gas available in the Middle East."

Norwegian-based global E&C provider Aker Solutions, which emphasizes niche technologies such as purified terephthalic acid (PTA), polyethylene (PE) and polypropylene (PP) - where it has extensive capability - continues to focus on China and the Middle East.

"China is expected to continue as the main driver for petrochemical process investment over the next several years, driven by its burgeoning economy," says Jim McGrath, president of global business development for Aker Solutions' process and construction business area.

KBR, the global engineering, construction and services company formerly known as Kellogg Brown & Root, also sees big growth in Asia and the Middle East.

According to the US firm, key product areas, in order of importance, will be PTA, ammonia, nitric acid, urea, vinyl chloride monomer (VCM), cumene, phenol, hydrogen peroxide, acetone, aniline, methyl di-p-phenylene isocyanate (MDI), methanol, acrylic acid, acetic acid, vinyl acetate monomer (VAM), medium-quality terephthalic acid and dimethyl ether (DME).

SUN POWER

The photovoltaics industry's insatiable demand for polysilicon has been a boon to both Fluor and fellow E&C provider Foster Wheeler. The US company has a "keen interest" in polysilicon, says Andy Allen, global director, chemicals, petrochemicals and polymers, for Foster Wheeler's Global Engineering and Construction Group, which had operating revenues of roughly $3.7bn in 2007.

"We note the market is very active and are involved in current projects, plus we are looking with interest at new opportunities," Allen says.

Fluor is involved in polysilicon projects in North America, Europe and China. In April, it was awarded a contract for engineering, procurement and construction (EPC) management services by Chinese company LDK Solar, based in Xinyu City, for the world's largest new polysilicon facility, a $1bn, 15,000 tonne/year project.

Fluor intends to continue its involvement in these projects, but also to expand. "We have an expectation that we can get more involved in the downstream units, that would be the silicon wafer manufacturing," says Oosterveer.

Demand for polysilicon from the solar industry is expected to grow at an annual double-digit rate, says producer Wacker Chemie of Germany, with electronics sector polysilicon growing at around 10%/year. It is estimated that about half of the polysilicon manufactured is used in solar applications, but Oosterveer says that figure should be much higher.

FEEDSTOCK ALTERNATIVES

Coal gasification, which is often touted for its potential to free chemical manufacturing from the clutches of petroleum, has not escaped notice. "As feedstock costs have increased and concerns over security of feedstock supply are frequently raised, the use of coal as a feedstock is likely to increase," says Allen. "This is already happening in China, and the same could be expected in the US and other coal-rich countries."

Foster Wheeler is involved in the continuing development of new processes to enable the production of olefins from coal-based methanol. Aker Solutions is pursuing methanol as an alternative feedstock as well.

Methanol's new applications will include transport fuels and olefins, says McGrath. Aker Solutions is a preferred EPC partner with technology licensing company Davy Process Technology and specialty chemical company Johnson Matthey, both of the UK, in methanol, and "we have a number of good opportunities for projects from both coal and gas-based plants."

THE PRICE OF PROJECTS

Rising costs for labor and materials have helped increase project costs. "We have seen projects shelved after the initial design phase because of rising costs," says Oosterveer.

Both operators and contractors are facing shortages in skilled personnel. "This manpower skill shortage will worsen in future as many experts are nearing retirement and the industry is not able to fill the gap," says Tim Challand, president of technology at KBR.

Construction commodity prices have risen as well, not only because manufacturing costs are higher, but also because of high demand in project construction, say several E&C providers.

"The market is heated, but we are being selective about the work we are bidding for," comments McGrath. "The challenge for owners and contractors is to develop more innovative models for project execution to manage this situation."

He cites Aker Solutions' project execution model, which focuses procurement costs on China, where best value for the company has been achieved. Foster Wheeler aligns itself with clients from the concept-design phase to help shape investment plans, including the specific project and cost.

"That's the big advantage with being able to work with clients from such an early stage, you get to really understand them and their objectives and can be much more focused in how you can help them realize those objectives and deliver what are often mega-projects in today's busy environment," says Allen.

The fine and specialty chemicals sector, which is moving in a different investment cycle to basic petrochemicals, shows continued strength, according to Foster Wheeler.

"Certainly China and India are proving to be very active, but the Middle East is at last making the step into higher added-value chemicals, in part due to the fact that these facilities are more labor-intensive in operation than the basic petrochemicals complexes," Allen observes.

A "lively" investment market should be expected in the short to medium term, he says, as more commodity chemical manufacturers move into specialty and specialized chemical markets, including pharmaceuticals feedstocks.

The OPEC 2007 World Oil Outlook estimates that about $2.4 trillion will be invested to build and expand upstream facilities from 2006 to 2030. The report also estimates that around $455bn would be invested from 2006 to 2020 to increase refinery processing capacity.

Customers have become more realistic about what can be achieved in today's market with the pressures from price escalation and a shortage of labor.

"Some customers are changing their expectations to be more in line with today's market," notes Oosterveer. "[But] still, there are customers who have not changed their frame of expectation. They still believe that what was quite possible four or five years ago is possible in today's market."

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By: Ivan Lerner
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