Hydrocarbon Processing - January 2021 - 9

M. VAN WAGENBERG, IBASC, Easton, Maryland

Business Trends
Case EPC-2020: Increasing competitiveness
and profits
Before the challenges of the COVID-19 pandemic, there
were already issues within the energy market (especially in the
oil and gas industry) that exposed challenges in the engineering,
procurement and construction (EPC) sector. Low-cost competition by EPC firms from Asia was already putting margins under stress. Apart from the alarmingly low quarterly results from
many publicly traded EPC firms, several articles pointed at fundamental problems-one of them being productivity.
The gap in global energy consumption and low oil prices
has decimated investments. An anticipated stream of projects
in LNG liquefaction and other areas has dried up. It has been
argued that Western EPC firms need to create more value added in hydrocarbons to sustain their position. Regardless, owners assign projects based on costs, and success will be a result
of value and productivity.
In this hypothetical case (EPC-2020), the market will be
explored and, from that basis, guidelines can be drawn on how
to make an EPC firm more competitive and increase its profit
to a healthier 5%-6% of sales.
Development in market segments/demands on a
project level, 2020-2024. The basis for Case EPC-2020

to cope with the current situation is to assess the market up to
2024. Demand analysis leads to the overview of markets that
is shown in TABLE 1.
In the oil, gas, chemicals and power (OGCP) markets, bids
can only be satisfactory if they demonstrate substantially lower
costs, with one exception: power needs to innovate to combine
hydrocarbon and non-hydrocarbon technologies, and government will support that in regions. If an EPC firm can deliver on
innovation, then projects in sustainable energy will have a better
profit margin. While investments in chemicals are solid, a contraction in other segments can lead to the need for low-cost bids.
In the downstream OGCP segment, productivity gains

and, in some cases, innovation are needed. Another other segment-life science, chemical specialties and manufacturing
(LSCSM)-focuses its engineering capacity to balance its capabilities; this segment may experience a very limited contraction. The investments in pharmaceuticals seem stable, especially in Europe. National policies are relevant. A trend in new
products and e-commerce leads to facilities for manufacturing,
e-commerce and data warehousing. However, competition will
be fierce, since EPC firms with unused resources from OGCP
will switch to this segment. The probability for a bid to improve
will be flexible-some owners will ask EPC firms to execute
the project with flexibility in time/scope, while remaining efficient. Lead time, as a project demand, is hardly mentioned.
As such, it is not listed as a key point for improvement. Circumstances may make lead time a competitive edge in the future.
Lower cost demand on EPC firms. The main demand in

both segments is to lower costs, which requires two generic steps:
1. Create purposeful offices, each with a single market
focus and goal: to create competition
2. Untangle complex matrix organizations, limit corporate
structure and size offices for full staffing.
Then, there are steps within each of the two primary market
segments. These include:
* Productivity gains in engineering to improve 15%
in 24 mos by adjusting division of labor and IT
* Ensure cooperation in market segments that require
solutions that fit national interests
* Map engineering processes to a project demand,
and tune for costs, innovation or flexibility
* Implement early warning and early correction alerts
on a project level
* Lock in products that result from IT improvements,
and then sell and monetize.

TABLE 1. Market overview
OGCP
Costs

Innovation

Costs

(X)

Europe

Asia/Middle East/Africa

U.S.

Lead-time

LSCSM
Quality

Lead-time

Quality

Innovation

N.A.

* Markets are typified with the objective of illustrating how EPC firms are to cope with segments
** Cost of engineering
*** Some EPC firms focus on sub-markets offshore, exploration
**** Assumes that the UK remains a de-facto partner in the EU

Hydrocarbon Processing | JANUARY 2021 9

Hydrocarbon Processing - January 2021

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