Top Foster Wheeler chemical execs weigh impact of recession

The long-term view

28 April 2009 00:00  [Source: ICB]

Global engineering contractor Foster Wheeler talks about the economic downturn and its impact on chemical projects around the world

Foster Wheeler's Andy Allen, global business director, chemicals, petrochemicals and polymers, and Carolyn Greenhalgh, strategic planning and marketing director, discuss how the worldwide recession is affecting the company's global engineering and construction (E&C) group, which focuses largely on oil and gas, refining, and chemical-related work.

Q. How has the downturn affected Foster Wheeler's order book?
Carolyn Greenhalgh (CG): Clients are taking longer to decide on what they want to do with their projects. Customers with projects in development are considering more scenarios, and others are looking at phased investment.

As our work is not just in chemicals, but also upstream, in liquefied natural gas (LNG)/midstream and refining, as well as in pharmaceuticals, that gives us a bit of a cushion. In the past few weeks, we have announced some major wins in the refining sector, including in the US and Colombia, and a major grassroots refinery in India.

Andy Allen (AA): Speaking generally, the chemical industry has been harder hit than other industries we are involved in. There has been a marked reduction in chemical product demand, which has hit the pure play chemical producers harder than the more integrated or diversified companies. In addition, the credit crunch has hit chemical companies that are highly leveraged. Nonetheless, in December of 2008, we signed a contract for the initial phase of front-end work for what is expected to become one of the largest petrochemical plants in the world.

Q. How many projects have been delayed or canceled as a direct result of the downturn?
CG: We have not had any material cancellations from our E&C backlog thus far. It is true that we have seen some delays to awards and some phased awards too.

Q. Which countries are suffering the most in terms of project delays/cancellations?
AA: The mature chemical markets of North America, Europe, Japan and Korea are having a tougher time than elsewhere, as capacity in these areas is older and sometimes less efficient than new large-scale production in Asia and the Middle East, and they do not have a feedstock advantage in these mature markets.

If a proposed plant is targeted purely to meet market volume growth, then justification for that project has to be questioned right now. If the client is trying to get a genuine new product on the market, or if the facility is based on advantaged feedstock, or serves a geographic market that remains strong, then there is less reason to delay.

Q. What impact is the credit crisis having on chemical companies' plant maintenance plans?
AA: Clearly some plants are being shut down and if these closures are permanent, then no maintenance is required.

For those plants in temporary shutdown, then it is industry practice if a plant is down to do some work on it, and this will bring maintenance plans forward.

Catalyst changes are usually based on the volume of material processed. So, if a plant's throughput volumes are lower, then the catalyst life will be longer and the interval between catalyst change-outs will be longer.

Q. How has the squeeze on financing affected projects that are underway or that are being planned?
CG: Not much of our prospective work has been affected, but I have noticed that some highly leveraged pure chemical companies have been unable to get financing. Projects funded by the big international and national oil companies have not been affected so much.

AA: There are a lot of companies saving cash as a precautionary measure.

CG: Some are releasing work in phases. We have had partial project releases, where companies are freeing work in tranches.

Q. What areas, both in terms of geography and product slate, is Foster Wheeler focusing on as having the most potential, post-crisis?
CG: As well as the Middle East, major locations for investment are North Africa, notably Libya, Algeria and Egypt, the "Stan" republics of the former CIS, Russia, and Central and South America.

For example, North Africa wants to use its significant reserves of oil and gas to diversify downstream. They are looking at chemical production to maximize value from their refinery product streams and also to lessen their reliance on oil and gas revenues.

AA: It is clear that products that go directly into the automotive industry and housing, such as nylon, are having a very tough time.

Looking at emerging technologies in chemical production, coal-to-chemicals is looking very interesting and gasification is becoming increasingly accepted as a chemical technology.

Biomass to chemicals too, with the right political support and pricing, could see promising growth rates in some areas over the next three to five years. We have capabilities in all of these areas, so these trends could bode well for us.

Q. What indications is Foster Wheeler picking up from its customers about the timing of an upturn?
CG: Most are looking at the long term in planning their investments, given that it can take six years or so from initial concept phase to commissioning of a new complex. Projects in the study and front-end engineering and design phase now probably would not go into production until 2013-2015.

AA: There are still quite a few clients that are working on the early phase of projects. Our global E&C backlog at the end of February was a record for our company in terms of man-hours: it is comforting to be sitting on that.

Q. Are there any opportunities that Foster Wheeler could potentially take advantage of as a result of the downturn?
AA: For a contractor, the more old chemical capacity that is shut down, the better in the long term because it makes space for new capacity. Over the past few years, there have been so many projects going on that companies have not had the internal resources to keep them all moving, and capital costs have been very high. I am hoping there will be a re-emergence of projects that have the dust blown off them.

FOSTER WHEELER FACT BOX

Operational headquarters: Clinton, New Jersey, US

Presence: more than 14,000 employees in 28 countries

Market capitalization: about $2.5bn (€1.9bn - April 2009)

Website: www.fwc.com

Major engineering and construction centers: UK, Italy, US, Singapore, Thailand, China, India, France, Spain

Major petrochemical projects underway: Saudi Arabia, Singapore, Thailand, Kazakhstan, France, United Arab Emirates, South Africa, Malaysia, China

Major refinery projects underway: India, Colombia, US, Vietnam, Singapore, Malaysia, Spain, Libya, Greece, Russia

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Author: Elaine Burridge
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