g cotone presentation final for ibc - 15-11-05

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1w:\dept\d151\a\graphics\depts\279\int ref forum Dubai 6_7 dec\giancarlo cotone

Giancarlo Cotone

Regional Sales Director Middle East and Indian S/C

Contracting strategiesin the Middle East

International Refinery ForumDubai 6 & 7 December 2005


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Contracting strategies in the Middle East

Highlights

Market place

Past and future opportunities

Traditional contracting strategies

Alternative EPC schemes and trends

Project management schemesand trends

Question marks


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Market place past and future opportunities

Study the past and plan for the future

The following two graphs refer to Abu Dhabi, and are based on:- past awards, beginning 2004 to mid 2005- future awards, up to end 2006

Areas considered: multi discipline EPC projects for oil & gas,gas processing, refining, petrochemical

Source of information: commercial databases


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-

500

1,000

1,500

2,000

Value(M

MU

SD)

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Number of Projects

Projects awarded beginning 2004 to mid 2005


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Specific for Abu Dhabi only .

What does the first graph tell us?

Up to 100 MM$, only local contractors

Only one contract in the range above 100 and below

1,200, but it is a pipeline

Above 1,200, three projects, two major internationalcontractors only

No intermediate range, no chances for internationalmedium size contractors


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Projects to be awarded (mid 2005 to end 2006)

-

200

400

600

8001,000

1,200

1,400

1,600

1,8002,000

Projectvalue

(MMU

S$)

1 3 5 7 9 11 13 15 17 19 21 23 25 27

Number of Project


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Current and future opportunities

Specific to Abu Dhabi .

What does the second graph tell us?

More projects in the intermediate range

More chances for medium size international contractors

Good news for both customers and contractors

But what are the key points for the whole region?


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EPC contracting schemes

Project management strategy


Tradit ional contracting strategy in the Middle East

Regional differences, lets use Abu Dhabi as a referenceto analyse:


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Large availability of contracting and construction resources

Stability of prices- for steel and equipment

Many EPC contractors willing to follow the scheme

Unbalanced risk, high LS contingencies

EPC contracting dominated by LSTK in the past years

In the past there has been no incentive for owners todeviate from traditional strategy


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A. FEED contractor

B. PMC contractor for the FEED phase, different from A

C. PMC contractor for the EPC phase (often not the same as B)

D. EPC contractor, different from B & C, could be the same as A

Typical project management scheme in Abu Dhabi up to four different parties:

Disadvantages:

Poor utilization of PMCs technical skills Loss of continuity between FEED and EPC phase

Different from neighbouring countries.


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Alternative EPC strategies

What are the key drivers for change?

Number and size of projects

Number of simultaneous projects

Uncertainty of material prices

Availability of resources

We see a lot of change in KSA and other Middle East countries


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Started in Nov 04, when alternative schemes were studiedand implemented for Khursaniyah (KSA) project

Snowball effect on public and private sector

Massive use of alternative schemes by several State ownedand private companies

Two families of schemes:

- LSTK through Open Book conversion- Reimbursable with incentive scheme


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Early Work Agreement (EWA) up to conversion to cover (FEED),

early detailed engineering, Open Book cost estimate

J oint owner / EPC effort

Early procurement by EPC, orders formally issued by owner,to be novated to EPC

Conditions for conversion to be pre-agreed, i.e. cost estimatemultiplying factor(s), Ts&Cs

Agreed estimating methodology

Multiplying factor(s) include contingency, risk and profit, based on Ts&Cs After conversion it becomes conventional LSTK

LSTK through Open Book conversion


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Owner retains the conversion option

Combines LSTK advantages for owner (financing, budgetsolidity) with better risk / contingency management,thus minimization

Short bidding period, as cost estimate does not need to beaccurate. Overall schedule cut by at least six months

Transparency / mutual agreement on contingencies,risk and profit

LSTK through Open Book conversion (contd)


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Rationale: to optimise risk management

Sharing risk, while mitigating budget risk for the owner A number of possible schemes

Basic elements:

- establish EPC target price- share over-run and under-run

Variable elements are:- services on LS or reimbursable basis

- dead bands for over-run and over-run TIC- details of incentive / penalties scheme

Reimbursable with incentive scheme


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The scheme establishes a win-win relationship

Smooth contract management, both owners andcontractors PMT are focused on the same goal

Contractors responsibility as high as required, through

incentive / penalty scheme

Need to evaluate target price accurately. Bidding process,estimate accuracy almost like LSTK

Reimbursable with incentive scheme (contd)


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Project Management schemes and trends

Capitalize on experience acquired

Easier transition, handover to the EPC phase

Avoid disruption in project management in thecritical onset phase

Keep historical memory of the project

Could soon be applied in some cases in Abu Dhabi

This scheme is currently used in other Middle East countries

First possible improvement: combine PMC for both phases


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Project Management schemes and trends

Take better advantage of expertise of companies likeFoster Wheeler, who can add strong technical value to PMC

Easier management of the EPC, as PMC involved inselection of EPC

Better interface management, especially for complex projects

Common areas like utilities and offsites, automation andcontrol, etc., successfully EPCd by PMC (high instances in

other countries)

This scheme is currently used in other Middle East countries

Second possible improvement: combine PMC with FEED


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Question marks

Will there be a Snowball effect in Abu Dhabi, like in KSA?

Is it likely to happen?

What are the factors preventing the change?


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Giancarlo Cotone

Regional Sales Director Middle East and Indian S/C

Email: [email protected]

www.fwc.com

Thank you

g cotone presentation final for ibc - 15-11-05

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