Contracting strategies in the Middle East

International Refinery Forum

Dubai 6 & 7 December 2005

Giancarlo Cotone Regional Sales Director Middle East and Indian S/C

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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 schemes
and trends

Question marks
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Contracting strategies in the Middle East

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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Contracting strategies in the Middle East

Market place past and future opportunities Projects awarded beginning 2004 to mid 2005

2,000 Value (MM USD) 1,500 1,000 500 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Number of Projects

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Contracting strategies in the Middle East

Market place past and future opportunities

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 international

contractors only

No intermediate range, no chances for international

medium size contractors

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Contracting strategies in the Middle East

Market place past and future opportunities Projects to be awarded (mid 2005 to end 2006)

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 1 3 5 7 9 11 13 15 17 19 21 23 25 27 Number of Project

Project value (MM US$)

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Contracting strategies in the Middle East

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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Contracting strategies in the Middle East

Traditional contracting strategy in the Middle East

Regional differences, lets use Abu Dhabi as a reference to analyse:

EPC contracting schemes Project management strategy

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Contracting strategies in the Middle East

Traditional contracting strategy in the Middle East

EPC contracting dominated by LSTK in the past years In the past there has been no incentive for owners to deviate from traditional strategy

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
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Contracting strategies in the Middle East

Traditional contracting strategy in the Middle East

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

A. B. C. D.

FEED contractor PMC contractor for the FEED phase, different from A PMC contractor for the EPC phase (often not the same as B) EPC contractor, different from B & C, could be the same as A

Disadvantages:

Poor utilization of PMCs technical skills Loss of continuity between FEED and EPC phase
Different from neighbouring countries.

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Contracting strategies in the Middle East

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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Contracting strategies in the Middle East

Alternative EPC strategies

Started in Nov 04, when alternative schemes were studied

and implemented for Khursaniyah (KSA) project

Snowball effect on public and private sector Massive use of alternative schemes by several State owned
and private companies

Two families of schemes:

LSTK through Open Book conversion Reimbursable with incentive scheme

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Contracting strategies in the Middle East

Alternative EPC strategies

LSTK through Open Book conversion

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

early detailed engineering, Open Book cost estimate

Joint 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 estimate

multiplying 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

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Contracting strategies in the Middle East

Alternative EPC strategies

LSTK through Open Book conversion (contd)

Owner retains the conversion option Combines LSTK advantages for owner (financing, budget
solidity) with better risk / contingency management, thus minimization

Short bidding period, as cost estimate does not need to be

accurate. Overall schedule cut by at least six months

Transparency / mutual agreement on contingencies,

risk and profit

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Contracting strategies in the Middle East

Alternative EPC strategies

Reimbursable with incentive scheme

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

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Contracting strategies in the Middle East

Alternative EPC strategies

Reimbursable with incentive scheme (contd)

The scheme establishes a win-win relationship Smooth contract management, both owners and
contractors 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

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Contracting strategies in the Middle East

Project Management schemes and trends

First possible improvement: combine PMC for both phases

Capitalize on experience acquired Easier transition, handover to the EPC phase Avoid disruption in project management in the
critical 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

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Contracting strategies in the Middle East

Project Management schemes and trends

Second possible improvement: combine PMC with FEED

Take better advantage of expertise of companies like

Foster Wheeler, who can add strong technical value to PMC

Easier management of the EPC, as PMC involved in

selection of EPC

Better interface management, especially for complex projects Common areas like utilities and offsites, automation and
control, etc., successfully EPCd by PMC (high instances in other countries)

This scheme is currently used in other Middle East countries

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Contracting strategies in the Middle East

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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Thank you

Giancarlo Cotone Regional Sales Director Middle East and Indian S/C
Email: giancarlo_cotone@fwuk.fwc.com www.fwc.com

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