CW’s E&C ranking Fluor leads; CNCEC, Saipem, Samsung, WorleyParsons, and Sinopec follow
10:09 AM MST | December 9, 2013 | —Natasha Alperowicz
CW’s third annual survey of engineering and construction (E&C) firms focuses on the hydrocarbon processing and related industries, including petrochemicals, chemicals, and minerals and metals. Of the companies surveyed, total sales in these markets grew by 11.4%, to $119.1 billion in 2012. Currency movements, notably the strengthening of the US dollar against most competitor currencies, including the yen, euro, pound sterling, Korean won, Indian rupee, and Canadian and Taiwanese dollars, depressed the reported growth. At constant exchange rates, sales of the companies surveyed grew by 14.8% last year—a slowdown on 2011, when sales in US dollars and local currencies each rose by about 19%.
CW’s analysis contains two contractor rankings. One focuses on relevant markets (p. 21), and the other is based on overall E&C revenues (p. 22), for information purposes. CW’s analysis confirms Fluor as the leading international player in the onshore hydrocarbons and related sectors in 2012. Sales to relevant markets of the Texas-based contractor rose by an above-average 19.5%. Onshore E&C sales of its Italian rival, Saipem, fell in US dollar terms and rose by only 3.9% in constant currencies, the lowest growth rate of CW’s top-10 onshore hydrocarbon contractors. Saipem grew strongly in 2011. Many analysts have speculated that Saipem’s well-publicized difficulties in 2012–13 would diminish its ability to compete in the global market, and these figures may be harbingers of a downward trend. Saipem’s onshore sales, profits, order intake, and backlog all fell year-on-year in the first nine months of 2013. Saipem’s reported numbers overestimate the company’s exposure to CW’s relevant markets since they include onshore infrastructure-related activities.
Two Chinese E&C contractors—China National Chemical Engineering Co. (CNCEC) and Sinopec Engineering—appear in CW’s survey for the first time. We rank CNCEC, on the basis of its overall sales, above Sinopec, although Sinopec claims to be the leading E&C provider to the Chinese refining, petrochemical, and rapidly developing coal-chemical industries. CNCEC is ranked number two, behind Fluor. This position likely exaggerates CNCEC’s importance in the industry. Sinopec’s disclosure improved dramatically after its initial public offering earlier this year—it now gives a detailed sector-by-sector breakdown—but CNCEC, associated with the Sinochem group, discloses only overall sales. CW accepts this anomaly in the interest of better reflecting the overall weighting and growth of China in the world hydrocarbons E&C market. The sales dynamics of the two companies are comparable. There are two other large Chinese E&C contractors, but their sales figures are unavailable, and the companies are not included in CW’s listing.
Some of the leading E&C firms, including Mitsubishi Heavy Industries and Bechtel, report higher overall revenues than CW’s market leaders but do not break out their results by industry segment, so they are omitted from the relevant markets ranking. The disclosures of other companies, such as Techint Engineering & Construction, Intecsa, and Hitachi—which are also active in relevant markets—are insufficient for inclusion in either table. Most contractors’ reporting categories are also not directly comparable with those of their competitors, so our survey should be viewed as an indicator, rather than a numerical definition, of the state of the industry.
Double-counting also distorts the picture. Many firms include in their metrics a proportion of business subcontracted to other firms or work carried out by other contractors, including competitors, for which they are responsible to the client. This work is also then claimed by the firm that actually does it. Jacobs and Foster Wheeler are two companies that recognize this practice, and they each provide consolidated figures and numbers that eliminate third-party reimbursable or flow-through revenues. CW ranks the two firms on the bases of their consolidated sales.
The most striking performances last year came from the four Japanese contractors—JGC, Chiyoda, Toyo Engineering, and Mitsui Engineering & Shipbuilding—despite the significant appreciation of the US dollar against the yen. The contactors’ combined sales to the hydrocarbons and chemical industries rose by 28.3% in US dollars and an even more remarkable 34.9% in yen, boosting the contactors’ share of CW’s relevant markets to 11.2%. Chiyoda, with 57% growth in US dollar sales to these markets, including almost tripled sales to the general chemicals industry, led the charge.
The largest Japanese contractor, JGC, reports growth of 13.7% in US dollars and 19.5% growth in yen. JGC and Chiyoda each continues to benefit from the fast-growing liquefied natural gas (LNG) market; their sales to this sector rose by 69.5% and 33.6% respectively, in 2012. JGC, in particular, is targeting the United States for growth in LNG. CW expects Japanese firms’ growth in US dollars to be more muted in 2013 because of the continued appreciation of the dollar against the yen, which, as a result of government policy, has devalued by a further 19% compared with the average for the fiscal year ended 31 March 2013. This increase in competitiveness, generated by the policies of so-called Abenomics, could lead to an acceleration in Japanese contractors’ local-currency sales in 2014 and beyond.
South Korean contractors also report impressive sales growth in 2012, as in the previous year. After 49% growth in 2011, combined sales of the five leading companies—Samsung Engineering, Daelim, SK Engineering, GS Engineering, and Hyundai E&C—to relevant markets rose by 28.6% in US dollars in 2012, as the South Korean firms continued to gain market share. Their underlying growth was slightly better; sales rose 31% in South Korean won in 2012 after almost 44% growth in 2011. The companies’ outstanding performance is due largely to contracts awarded in the Mideast in 2010 and 2011 that were typically on cost grounds and often with very low profits. The gradual switch away from large projects in the Mideast means that most of the South Korean players are currently trying to improve their technology offer as they reorientate toward the United States and other advanced countries and industry sectors. The firms are also more focused on the bottom line.
Daelim’s individual plant sales surged by a hefty 81% in US dollar terms in 2012, thanks to orders received during the previous year. However, the company’s order intake fell in 2012, so its 2013 performance is unlikely to be as impressive. Samsung Engineering, the leading Korean contractor, ranked global number four, reports 28% growth in US dollar sales to the hydrocarbons industries in 2012 but fell into major losses in the first half of 2013. GS Engineering, the fourth-largest South Korean contractor, also lost money in the first half of this year.
European contractors lost market share in 2012. Sales to relevant markets of the nine Europe-based companies in the ranking fell 7% in US dollars and inched up by only1.3% in local currencies. The contractors’ combined market share fell to 26.4% in 2012 from 31.6% in 2011. Petrofac, which mainly serves the oil and gas industry, was the best performer, with sales of its onshore E&C and engineering and consulting services businesses rising by 7.3% in US dollars. Foster Wheeler and Maire Tecnimont suffered the biggest declines, with sales to CW’s relevant markets down 29.7% and 16.8% in US dollars, and 23.4% and 9.4% in euros, respectively. CW includes Foster Wheeler in the European group, although the company is listed on Nasdaq and reports in US dollars. Foster Wheeler is registered in Switzerland and has its operational headquarters in the United Kingdom. Only 23% of its sales are in North America.
Chinese firms continue to penetrate the international E&C market. Sinopec Engineering’s sales outside China grew 20% in 2011 and by a massive 53.6% in Chinese currency terms in 2012 mainly because of contracts in Saudi Arabia, the United Arab Emirates, and Iran. About 66% of Sinopec’s non-Chinese sales were in the Mideast in 2012 and another 30% were in Central Asia. However, with overseas sales representing only 16.9% of the total, the company is still dependent on its home market. Its rival CNCEC’s disclosure is rudimentary, but in recent years it has built chemical plants in Pakistan, Bangladesh, Turkey, Iran, Indonesia, Vietnam, and South Korea.
US E&C market overheating, becoming very expensive
E&C firms are benefiting from an upsurge in investment in North America, where many companies have announced petrochemical, methanol, and fertilizer projects based on cheap shale gas. However, the US E&C market is beginning to overheat, resources are being squeezed, and the country is now said to be the most expensive place in the world to build new plants.
James Gallogly, CEO of LyondellBasell Industries, outlined the issues at the Gulf Petrochemical and Chemical Association (GPCA) annual forum, held recently in Dubai. He tells CW that a combination of factors, including the lengthy permitting process, equipment bottlenecks, and a squeeze on human resources, will likely delay many US projects. “The resources to get the job done are becoming scarce; the lead time for major pieces of equipment has gone up from months to over a year for certain items, including some valves and compressors. The market is heading toward overheating,” he says.
Gallogly says that an estimated 9 million m.t./year of new ethylene and derivatives capacity is expected to come onstream in the United States in 2017–19 because of the shale gas revolution. LyondellBasell itself is expanding crackers at La Porte, Channelview, and Corpus Christi, TX, to provide an extra 1.8 billion lbs/year of ethylene capacity—equivalent to one world-scale cracker—by 2015.
Projects have already become much more expensive in the United States than in the Mideast, says Mark Garrett, CEO of Borealis, a partner with Abu Dhabi National Oil Co. in the Borouge joint venture. The Borouge 3 project at Ruwais, United Arab Emirates, slated to be commissioned next year, cost only half of the sum required to build a similar complex in the United States, he says. Garrett estimates that only one-third of the numerous cracker and derivatives projects announced in North America will go ahead on schedule, one-third will be delayed, and the rest will likely not materialize at all. But, this is the price of success, and the United States will be a focus for petrochemical capacity building for years to come, industry executives say. Stephen Pryor, CEO of ExxonMobil Chemical, told delegates at the GPCA forum that the United States has enough gas reserves to last 100 years.
Overseas E&C contractors are scrambling to strengthen their operations in the United States, and JGC is among them. The company has worked collaboratively in the country in the past but is now gearing up its own US subsidiary for major gas-related projects, including petrochemical and LNG plants. An association of JGC and Fluor won a contract in October to build an ethylene plant for Chevron Phillips Chemical (CPChem) at Baytown, TX. JGC is the lead partner in building the 1.5-million m.t./year CPChem cracker and will handle engineering and procurement (E&P) for the core facilities. Fluor will handle E&P for the facilities outside battery limits and hire construction resources for the entire project, which will be executed under a lump-sum conversion contract. Technip is providing its ethylene technology. A new subsidiary, JGC America, will start operations in Houston in 2014 and will eventually increase its workforce to 500 staff.
Sinopec Engineering also recently launched itself in the United States. The company established a US subsidiary in 2012, and in January 2013 won a $1-billion engineering, procurement, and construction (EPC) contract from M&G Group (Tortona, Italy) to build the world’s largest single-line purified terephthalic acid and polyethylene terephthalate resins plants, with capacities of 1.2 million m.t./year and 1 million m. t./year, respectively, at Corpus Christi. Sinopec plans to establish an integrated operating center in North America, funded by some of the proceeds from the company’s recent IPO.
Investment in the Mideast, until recently the largest market for international contractors, has slowed because of the dwindling availability of gas and other cost-advantaged feedstocks. Mideast producers, encouraged by their countries’ governments, have been trying to diversify into downstream operations through smaller projects that add value and create jobs. The region will nevertheless host several large petrochemical and related projects in the coming years. In Kuwait, there are plans to build the Olefins III complex at Al Zour, and Oman is planning a $4-billion-plus olefins and derivatives project at Sohar. Gas-rich Qatar currently has a moratorium on the use of gas for new petrochemical projects but, as part of its aim to add value to basic raw materials, has sanctioned two large ethane- and propane-based complexes at Ras Laffan for completion in 2017–18.
In Saudi Arabia, Saudi Aramco and Dow Chemical are well into the construction phase of their $20-billion Sadara jv, scheduled to be onstream in 2016. Aramco and Sumitomo Chemical, meanwhile, are doubling capacity of their Petro Rabigh jv. Sabic, the largest chemical producer in the region and one of the leading players worldwide, is diversifying downstream and has many projects in the implementation phase, the largest being a $3.4-billion elastomers project with ExxonMobil at Al Jubail.
Iraq is expected to become a significant producer of petrochemicals further into the future. Meanwhile, following the expected easing of sanctions, the fortunes of Iran’s petrochemicals industry may be revived.
Elsewhere, Russia offers good opportunities for the E&C industry. Activity is up in licensing and EPC contracts as major Russian producers try to monetize the country’s plentiful gas resources. Among the largest schemes announced recently is an alliance between Sibur and Gazprom to build a gas-based petrochemical complex at Belogorsk. Sibur is also planning a large gas-based complex at Tobolsk, where the company recently completed constructing propane dehydrogenation and polypropylene plants. SamaraOrgSintez has licensed technologies to build methyl methacrylate, polymethyl methacrylate, and ethyl acetate plants at Novokuibyshevsk, and is planning a petrochemicals jv with Rosneft.
China is continuing to rapidly expand, particularly through coal-chemical facilities, and there are major opportunities for overseas contractors. WorleyParsons and Fluor have large Chinese subsidiaries, and other international E&C firms are trying to gain a foothold or expand their operations there. Jacobs, number seven in CW’s ranking this year, is among the most active. The company signed an option agreement this year to acquire Suzhou Han’s Chemical Engineering. Suzhou has two specialty Class-A design licenses for China’s chemical, petrochemical, and pharmaceutical industry that allow it to provide engineering, design, procurement, and project management services for chemical and petrochemical projects in China. Jacobs’ Shanghai operation currently has an industry Class-B design license, which limits its operations. The acquisition would lift Jacobs’ headcount in China to more than 600.
Technip signed an agreement recently with China Huanqiu Contracting & Engineering to establish jv companies in Rome and Beijing to handle procurement in the European and Chinese markets for onshore and offshore activities. Huanqiu is one of the four biggest Chinese E&C players, which include Sinopec Engineering, CNCEC, and China Petroleum Engineering & Construction Corp.
A flurry of corporate and restructuring activity has occurred in the E&C industry recently as companies seek to expand their international footprints or focus on specific geographies or fields of activity. Jacobs, again, has been among the most active. The company acquired, in 2013 alone, Guimar Engenharia (Rio de Janeiro), a privately held engineering services and project management-construction management company serving the pulp and paper, petroleum, chemicals, food and beverage, mining and minerals, building, and infrastructure industries; Ilitha Projects and Ilitha Staffing, two services companies operating from Cape Town; and Marmac Field Services (Costa Mesa, CA), a gas pipeline design and engineering firm. Jacobs also recently signed a $1.2-billion agreement to acquire services provider Sinclair Knight Merz and expects to close the deal before year-end. These transactions follow acquisitions by Jacobs in Australia in 2012 and of Consulting Engineering Services (India) and of Aker Solutions’ process and construction business in 2011.
WorleyParsons made two significant acquisitions in its 2013 financial year: TWP (Johannesburg), to provide WorleyParsons’ worldwide customers with engineering and product delivery capabilities for underground mining and precious metals, and Rosenberg (Hundvåg, Norway), to expand the WorleyParsons’ presence on the Norwegian continental shelf.
The urge to merge has also gripped AMEC (London), an engineering, project management, and consultancy group. AMEC, just weeks after withdrawing from a proposed acquisition of Kentz Group, has reportedly hired Goldman Sachs to advise on a possible $3-billion-plus bid for Foster Wheeler. The two companies had reportedly held discussions in the past but were not in talks at CW press time. AMEC is not included in the CW ranking because it is focused on upstream oil and gas, and mining and minerals, and does not serve CW’s key markets of petrochemicals and related industries.
Larsen & Toubro (L&T), India’s largest E&C firm, is reorganizing internally to sharpen its focus. The firm has separated its hydrocarbon business into a wholly owned subsidiary, L&T Hydrocarbon Engineering, and is pinning its hopes on overseas markets to compensate for flagging demand in India. If the strategy is successful and the new company achieves critical mass, it could be separately listed on the stock exchange after three to four years.
Developments in the E&C industry have not been uniformly positive, however. Samsung Engineering, the fastest-growing E&C contractor in recent years, posted a huge loss for the first half of 2013, and on 1 August the company’s board ousted then-CEO, Park Ki-Seok, and replaced him with Park Choong-Heum. The switch was prompted by an explosion in July at a water tank under stress-testing that killed three people and injured several others. The tank was being built for the Samsung-MEMC polysilicon jv at Ulsan, South Korea. Samsung Engineering tells CW that the company is now in the middle of a strategy review under its new management. Reports in Korea say that Samsung Engineering has been instructed by its parent Samsung Group to be more conservative in its market approach and financial accounting and to focus more on increasing profitability rather than chasing market share. A combination of the three Samsung E&C companies—Samsung Engineering, Samsung C&T, and Samsung Heavy Industries—to create a full-spectrum contractor for the power, mining, LNG, petrochemicals, and onshore and offshore oil and gas industries has also been mooted. The three have small overlaps and sometimes compete with each other for individual projects.
The two leading Italian contractors, Saipem and Maire Tecnimont, have also faced challenges. Problems with contracts in Algeria, Mexico, and Canada led Saipem in June to issue its second profits warning in five months, which pushed the company’s share price down to half of its January value. The company now expects losses of €300–350 million ($406–474 million) in 2013 instead of a previously forecast net profit of €450 million. A new management team under CEO Umberto Vergine in January slashed the company’s full-year net profit forecast, citing lower margins on new orders. Saipem, in its June statement, added that the ongoing problems in Algeria, including but not limited to cost overruns, would account for about half of the forecast losses. Allegations of corruption in a contract to build oil pipelines for Sonatrach led to the resignation of two previous Saipem CEOs, one from his then position as CFO of Saipem’s main shareholder ENI (Rome), in December 2012. “Saipem is now unable to recover certain extra costs, as negotiations [with Sonatrach] have broken down,” the company announced in June.
Saipem added that difficulties with Mexico and Canada contracts would cost the company a further €260 million. However, Vergine says that “strong management actions,” including firing the manager responsible for the two contracts, and “higher-margin contract wins” announced this year, mean that earnings will recover in 2014 and beyond.
Saipem’s activities have attracted the attention of the Italian stock exchange watchdog, Consob, which has warned that there could be further irregularities in the company’s 2012 financial reports. Italian investigators were, in September, reportedly probing allegations of insider trading and market manipulation, including a charge that Saipem shares were sold by insiders the night before the January profit warning. The controversies surrounding Saipem have stirred speculation that ENI might try to sell down its 43% stake.
Maire Tecnimont’s problems were caused by upsets outside its core markets. Major losses on power-generation projects in Chile and Brazil, together with budget reviews on several infrastructure and civil-engineering contracts, pushed the company into the red in 2011 and 2012. Maire Tecnimont is restructuring financially, including raising capital via a rights issue to shareholders, which was completed in July; rescheduling debt; and disposing of €300 million of noncore assets by 2016. The company has sold its share of two infrastructure projects: an Italian high-speed railroad line and the Copenhagen underground metro system. Maire Tecnimont has reshuffled its top management; embarked on extensive internal cost-cutting; and is focusing even more on its core oil and gas, petrochemicals, and fertilizer activities. The strategy involves derisking EPC activities; expanding the company’s geographical footprint; developing engineering-service revenues; emphasizing technology-driven businesses, especially those involving proprietary technologies; and seeking involvement at earlier stages of the project chain. The move is expected to generate a larger number of smaller but more profitable projects. Maire Tecnimont returned to profit in the first half of 2013.
Separately, the numerous cracker projects in the United States and elsewhere have emerged at a time when the so-called Ethylene Club of contractors with ethylene technology has been whittled down to four, following last year’s acquisition by Technip of Stone & Webster from the Shaw Group. Technip says that the two companies provided technology for a combined 50% of existing worldwide ethylene capacity. Linde Engineering, another member of the club, formed an alliance with Bechtel in 2011 to build and expand ethylene plants in the United States. The venture, based at Bechtel’s offices at Houston, combines Linde’s technology and Bechtel’s E&P and direct-hire construction capabilities. The other club members are Lummus, part of CB&I; and KBR. CB&I has been awarded a $1-billion engineering and construction contract to build a 1.2-billion lbs/year ethylene plant for Ingleside Ethylene, a 50-50 jv between OxyChem and Mexichem at Ingleside, TX. The plant is expected to start production in the first quarter of 2017.
Worldwide ethylene capacity is about 150 million m.t./year and growing at about 3.5%/year, and the geographic focus is broadening, contractors say. “Future capacity will be more spread around the world,” says Jean-Paul Laugier, v.p./ethylene at Technip. Technip has chalked up a string of ethylene contracts recently. It was awarded the front-end engineering design (FEED) contract for Dow’s 1.5-million m.t./year ethane cracker in Texas; FEED for CPChem’s 1.5-million m.t./year ethane cracker, also in Texas; and FEED for Sasol’s 1.5-million m.t./year ethane cracker in Louisiana. The company has also carried out the FEED work for Sadara’s 1.5-million m.t./year mixed-feed cracker at Al Jubail and EPC work for Etileno XXI’s 1.05-million m.t./year ethane cracker in Mexico.
Technip CEO Thierry Pilenko told the company’s inaugural ethylene forum, at Los Angeles in November, that projects are becoming more complicated. “Not only are today’s projects much larger in terms of capital investment, they also are far more demanding technically, with many embodying significant amounts of new technology. They are also more challenging to execute, featuring complex contracting consortia, multiple execution centers, and frontier locations.”
ExxonMobil’s Pryor told the GPCA forum that the United States market would not be able to absorb all of the petrochemical and downstream capacity being planned there and that it would need to increase exports significantly. Analysts say that, as a result, many companies in Asia, including in China, are holding back on investment decisions to determine what impact the incipient US industrial renaissance will have on world petrochemical markets. Certain Asian firms, Hanwha Chemical being a prominent example, are planning to invest directly in new plants in the United States.