Petrochemical owner-contractor business model for project construction needs changes

Signs of financial distress in recent years point a prevailing downstream plant construction model where the increased risk taken by contractors has made them increasingly vulnerable.

Image courtesy of ConvegniAncisa/Pixabay

Looking at the industry, especially from the contractor’s side, one can see “a number of mergers, acquisitions, divestitures, even bankruptcies,” said Stephen Cabano, president and COO of Pathfinder LLC, which specializes in project planning and execution consulting.

Over the past 15 to 20 years most project owners “have been shedding more and more of their internal capability” when it comes to new plant construction to increasingly rely on contractors that take the risks, he said.

It has become “more or less a broken business model,” he added, speaking during a Reuters Events mid-July conference.

Pathfinder has provided support to about 4,900 projects representing $750 billion in investment, according to its website. It is a privately held organization without ties to owner or contractors, it added.

Cameron Remeljej, head of facilities at BHP Billiton, and Tony Bazzini, chief engineer at ExxonMobil global project company, also expressed other concerns involving contractor risks, the importance of a value-driven approach,  and the need for greater coordination.

Too much risk for contractors

An increasing number of engineering, procurement and construction (EPC) contractors are deciding to stay out of some contracts, or getting out of a certain sector, Cabano said.

“A depleted contractor pool to work with” cannot be healthy for any owner-organization that needs to build plants, he said.

Another negative side for project owners is that the focus on the initial construction cost may not result in the greatest overall savings for the decades that an asset will be operative.

The initial construction cost of a project can always be reduced to fit the requirement, “but if it negatively affects operability, maintainability and so on, I’m not sure that’s the best solution from an owner standpoint,” he added.

Price vs. value driven

The focus should be on value rather than price, said Tony Bazzini, chief engineer at ExxonMobil global project company, speaking during the same conference.

“Over time the industry has moved to a contracting model which is price, procurement driven versus value driven and, as a result of that, we’ve driven margins down,” he said.

Margins have declined to a point where service providers may not have the incentive to invest in innovation and technology to improve performance, he added.

“Our mutual success as an industry depends on each other functioning and profitable,” he said.

“When a company announces that they are leaving the energy, the oil and gas sector because it’s risky, that’s bad for an owner, it limits the playing field, it increases cost,” he said.

“What we want is a more inclusive, highly functioning, profitable, mutually respectful environment, where everybody has a chance of winning and not this winner-loser, loser-loser model that we have,” he said.

Stressed ecosystem

“On top of that, risk is not expressed in a common language,” Bazzini added.

What one organization considers success may not necessarily align with the goals of other organizations in the same project.

“Until we get to that point where we have that transparency and alignment on what success looks like the ecosystem will remain stressed,” he said.

Covid-19, which Bazzini estimated has wiped out some $140 billion off books in terms of project activity, has also emphasized the need for collaboration and transparency, he said.

Collaboration “will absolutely be much more important going forward than even a couple of years ago,” he added.

“We been working with C.I.I. (Construction Industry Institute) and other companies as well as ECC (Engineering Construction Contracting Association) on these issues,” he added.

Using blockchain, tackling resource waste

Cameron Remeljej, head of facilities at BHP Billiton, said there is work underway to eliminate waste of resources, and to adopt blockchain technology.

“Projects are difficult. Things do go wrong, and they end up being fixed with time and money,” he added.

There is work underway by ‘OS2’ (operating system 2.0 industrial) researchers to address coordination, and the term ‘Neighborhood Model’ has been coined, he said.

“We’re looking to figure out how to set up contracting models that incentivize collaborative behavior and properly allocate the risk,” he said.

“In the OS2 research we are looking at blockchain and using it to try to streamline some of the processes,” Remeljej said.

Researchers are looking at the use digital tools much more in the design, construction, construction monitoring, process, and then over in the operation space.

“That’s a journey that we’ve just started,” Remeljej said.

“One day the 3D model will be on the Cloud,” he added. Then everything will happen on one shared space where every participant provides collaborative input that would be verified through blockchain.

Signs of distress, M&A

Engineering and construction firm KBR Inc. will exit most LNG and other energy projects to instead focus on government contracts, according to reports.

The company’s CEO Stuart Bradie wrote to employees to inform them that the company will “no longer engage in lump-sum, blue collar construction services,” Reuters reported on June 22.

Houston-based McDermott International announced on June 30 it had restructured by “equitizing” nearly all of its $4.6 billion of debt.

It sold Lummus Technology to repay debt. McDermott had filed for Chapter 11 bankruptcy in January, saying at the time it had secured $2.8 billion to allow it to remain in operation.

CB&I (Chicago Bridge & Iron), a large EPC company with headquarters in The Woodlands, Texas, merged into McDermott International in 2018.

Worley completed in April 2019 the acquisition of the energy, chemicals and resources division of Jacobs Engineering Group.

By Renzo Pipoli