However, as capital expenditure budgets slowly rebound, owners seem to have a heightened aversion to risk and a newfound zeal for getting the most from their investments.
In line with this, we expect to see a continued slow but steady recovery over the next 12 months. Our cautious optimism in this area is only really being checked by volatility in commodity prices stemming in part from uncertainty around US shale producers’ ability to produce and move product to market, the influence of OPEC/ Russia and the re-application of US-backed sanctions on Iran.
Despite this ongoing price instability, energy firms have increased capital spending and money is flowing again, albeit with a sharp focus on capital efficiency.
The new reality
In response, hiring is once again underway in the engineering and construction sector, after years of declines from layoffs and retirements. These new hires, coupled with a wave of recent mergers and acquisitions, bring new challenges to successful project execution. With smaller payrolls, less experienced staff, and critical resources now distributed across offices and time zones, engineering, procurement and construction companies (EPCs) need to figure out how to execute project work effectively as capital spending begins to pick up.
Executing projects across offices makes it more difficult to coordinate engineering disciplines, models and project data and brings new complexity in terms of integrating project teams that have different ways of working and inconsistent design standards, so having a single technology platform to enable a coordinated, multidisciplinary engineering effort is a real advantage.
Push for diversification continues
Diversification of revenue will remain as a goal for EPCs in 2019. The wave of mergers and acquisitions to gain access to new markets and areas is likely not finished, including a pivot towards chemicals, petrochemicals, transportation, and buildings in an attempt to diversify revenue streams away from overreliance on oil and gas.
We are also likely to continue to see more EPCs offering services to owner-operators that help them run their plants more effectively. This is most likely to take the form of using intelligence generated during the project design stage, including all the modelling information, to help get more out of the plant during the operations phase. Examples of this approach might include the engineering and construction firm tuning process models based on actual operating data, so the models that operators use to plan and schedule work are more up-to-date and deliver better results.
China flexes its engineering muscle
As we look ahead, it seems increasingly clear that the EPC industry is turning a corner, but as in any industry there will be winners and losers. Ultimately, what’s undeniable is that the money will be flowing toward projects and engineering firms that deliver lower risk and ‘increased discipline’ around cost. This, in turn, leads to China.
In the opening panel discussion of the Rice Global Forum I attended recently in Houston, Texas, Don Bari of IHS Markit said that his company’s research indicated Chinese EPCs performing work in China were doing so at a relative cost ratio of 0.57:1, compared to similar projects in the West. He also noted that, for the first time, the work in China by local EPCs was now at an equivalent level of quality to Western projects.
Speakers from both McDermott and Fluor also spoke of the trends toward sourcing major components and modules from offshore fabrication yards in India and China, to be more competitive. The advantages there include not just cost, but also the ability to circumvent skilled labour constraints in places like the US Gulf Coast.
During the Q&A session at the event, panel members were asked whether they saw Chinese EPC firms as a competitive threat. The consensus was that Western EPCs would likely form mutually beneficial partnerships with their Chinese counterparts.
I think a bigger question surrounds the strategic direction of the Chinese EPCs preferring to play on home turf, where work has been abundant. What happens if they start to compete more aggressively for work on projects outside of China, leveraging a home base where they can produce quality, lower-cost modules for shipment anywhere in the world?
They have already made significant inroads in Africa and have surely seen how their Korean neighbours have successfully expanded engineering and construction services into the Middle East. Driven by international mergers, the ramp-up of engineering centres in lower-cost countries like India and the shift toward sourcing components and modules from Asia, the EPC industry is going global. This is a trend that large EPCs ignore at their own peril.
These ongoing developments make it even more important that EPCs ensure they have the right engineering technology solutions in place. Knitting together international engineering operations requires software and technology platforms that enable work-sharing and consistent project results across offices and time zones.
Going forward, we are likely to see continued improvement for EPCs that focus on the process industries. Despite the ongoing volatility of energy prices, prospects are brighter than they have been for some time as capital expenditure budgets recover, revenue diversification and companies invest in new technology.
Content published by Professional Engineering does not necessarily represent the views of the Institution of Mechanical Engineers.