Trend Report: Plant Construction Tough Competition in Chemical Plant Construction

Editor: Alexander Stark

Chemical companies continue to build new plants. Between 2005 and 2015, global investment in the chemical industry increased by nearly a factor of three and currently stands at more than $ 200 billion. But this rapidly growing market also has growing challenges. This Achema trend reports sheds some light on current mega-projects and the impact this development has on engineering companies.

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Most chemical plants are based on conventional design and construction, but the engineering departments at chemical companies and EPC contractors are about to make major changes to the engineering process.
Most chemical plants are based on conventional design and construction, but the engineering departments at chemical companies and EPC contractors are about to make major changes to the engineering process.
(Source: Pixabay / CC0 )

Frankfurt/Germany — Growth creates a size imperative. The Sadara mega-project, which was completed in Jubail in Saudi Arabia in the autumn of 2017, marks an additional milestone in the global chemical boom. By making a $ 20 billion investment, the project partners Saudi Aramco and Dow Chemicals have positioned themselves to exploit the increasing demand for chemicals. According to market research estimates, the annual increase in demand for chemical products over the next 20 years will be in the 4 to 4.5 % range.

In response, chemical companies continue to invest and to some extent the size of the investments is also increasing. The oil company Saudi Aramco in partnership with the plastics manufacturer Sabic intends to build an oil-to-chemical complex in the next few years at a cost of 20 billion dollars. Together with the French energy company Total, the Saudi industry leader is planning to spend $ 5 billion on construction of an ethylene-propylene plant. Adnoc, the Abu Dhabi state oil company, has announced plans to increase its petrochemical production capacity by a factor of three to 11.4 million metric tonnes by the year 2025.

However, the launch of spectacular projects is not limited to the Middle East. The shale gas boom in the US has generated demand for new petrochemical projects. Four new ethane crackers were completed in 2017 alone. Four additional crackers are currently under construction and scheduled to begin operating in 2019. A second wave of investment is already underway. The feasibility of building five more crackers is currently being assessed. The American Chemical Council estimates that annual capital spending by US chemical companies will increase from $ 40 billion in 2016 to $ 58.6 billion in 2021. In February, the Council listed 294 current projects with a total value of $ 179 billion.

Capital expenditure on production expansion and new plants and equipment increased in the European chemical industry as well last year. According to estimates published by the European chemical trade association Cefic, capital spending in the global chemical industry increased more than threefold between 2005 and 2015. Excluding the Middle East for which no data is available, capital spending in the chemical-producing countries rose to 170 billion euros in 2015. Capital spending by German chemical producers was roughly $ 18.8 billion in 2017.

Raw material demand to support existing and new production capacity produces a follow-on effect. Further investment will be needed in the oil & gas sector. The International Energy Agency (IEA) estimates that by 2040, petrochemicals will replace the fuel sector as the main force driving global demand for crude oil. Daily demand in the chemical industry will reach 15.7 million barrels, 47 % higher than in 2015.

Structural Change in Chemical Plant Construction

That is basically good news for the chemical plant construction industry. However, structural change in the industry has been underway for several years. As projects continue to increase in size, greater risk has to be accepted. In addition, investors and plant operators prefer to do business with global partners who take total responsibility for everything from feasibility studies to commissioning, and often the financing as well. European plant construction companies, and German firms in particular, are now too small to take on that role.

For several years, German companies have been lamenting the increased competitive pressure. A current study carried out by the German Engineering Federation VDMA indicates that competition will become even tougher in world markets. EPCs based in China, Western Europe and the US are regarded as major competitors in the market for large projects. Depending on the technology and area of specialization, companies have felt the effects of lower oil prices as customers canceled or delayed capital spending projects.

Restrictive financing conditions and a reluctance to offer alternative financing services are often the reason why German companies fail to acquire EPC projects. A current study by the consultants PWC reveals just how important this factor can be. Customers ask for project financing in one out of every four requests for quotation.

Despite increased capital spending in the chemical industry, the trend towards larger-scale plants reduces the number of medium-scale projects. As a result, German EPCs are looking not only for ways to differentiate themselves, but also for new business models. For example, the engineering companies want to attract customers with their technology and by adding operational services to their portfolios. They are doing this in response to growing market demand. The engineering and services company Bilfinger estimates that by 2020 there will be more than 11,000 chemical and pharmaceutical plants in Europe, North America and the Middle East that are more than ten years old and will require modernization. The service business provides an opportunity to increase turnover, and that is one factor which makes it attractive to EPCs.

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In addition, the presence of a local service organization provides an operating base which can be used by a local sales team to acquire new projects and for other activities in the regions. There is an ongoing trend towards increased local content in construction projects. This includes equipment procurement, often based on a best cost country sourcing strategy, as well as local recruitment for project work such as installation and project management. Local content is often a requirement imposed by customers. This is frequently the case in Asia and the Middle East where companies are state-owned, and it is used as a means for stimulating the local economy.