Boom Times For Megaprojects
The world's hunger for energy is fueling giant backlogs for engineering and construction firms
By Marianne Lavelle
Posted Sunday, September 24, 2006
From the Persian Gulf to the Gulf of Mexico, huge engineering and construction companies are reaping the bonanza of the run-up in oil and natural gas prices over the past four years. Much of the money that left consumers' pockets is flowing now into steel and concrete-megaprojects to deliver more gasoline, natural gas, and electricity than ever before.
Firms are drawing up plans to expand and boost the performance of oil refineries in the United States and build new ones overseas. They are plotting out massive plants to turn natural gas to liquid in the Middle East and Africa and equally daunting facilities on U.S. coasts to turn it back to a gas. For the first time in years, they will raise smokestacks for burning coal to produce thousands of new megawatts of power across the country. Even new nuclear power plant construction in the United States seems possible-although, as with every other type of large project, at a high price. The boom has so much momentum, industry insiders believe, that it will continue despite the recent falloff in energy prices.
Gold rush. "I'd say the market right now is the strongest I've seen it in my 32 years in the business," says Alan Boeckmann, chief executive of Fluor, a world leader in heavy construction. In the past quarter, Fluor broke records by winning $5.8 billion in new contracts. Its project backlog grew 17 percent in just those three months to $18 billion. A key factor:
The Persian Gulf nation of Qatar tapped Fluor to construct one of the largest liquefied natural gas facilities ever, as the emirate seeks to become the world's leading supplier of this crucial fuel.
But there's enough work for Fluor's competitors to share in the explosive growth. As a privately held company, Bechtel doesn't post quarterly numbers, but the engineering giant surely added to the $18.1 billion in revenue it reported for 2005. It was named this summer as joint lead contractor for one of the largest oil refinery expansion projects ever in North America, an estimated $4 billion undertaking in Port Arthur, Texas, by the Saudi-Shell venture Motiva. Bechtel's partner, Jacobs Engineering, saw its backlog increase 12.1 percent to $9.4 billion in the past quarter.
Foster Wheeler, near the brink of bankruptcy only two years ago with 10 consecutive quarterly losses, reported record profits in August and saw its backlog swell 85 percent. It landed the front-end engineering job on ExxonMobil's new petrochemical complex in Singapore.
"The health of engineering companies is in direct relationship to the health of their customers," says Mike Dudas, Bear Stearns analyst, while pointing out that each of the industry's major players has from 25 to 80 percent of its backlog tied to oil and natural gas. Although the industry giants have tried to diversify to free themselves from commodity boom-and-bust cycles, no other business is quite as lucrative as energy.
Fluor, for instance, is well known for government contracting-nuclear weapons plant cleanup, contracts for the Federal Emergency Management Agency in New Orleans, defense logistics in Iraq. But all that government work added up to only 15 percent of last quarter's net income; oil and gas accounted for nearly 50 percent of profits. "The need for modification and expansion is very real across the whole energy market-upstream, downstream, petrochemicals, and power-every part of that sector is seeing significant spending," says Fluor's Boeckmann. In that sense, this boom differs from previous up cycles. In the late 1990s through 2001, when oil and gas prices were cheap, there wasn't much investment in heavy energy infrastructure.
But there was a frenzy of natural-gas-turbine power plant construction in the United States-widely welcomed as less polluting than coal and designed to take advantage of what many mistakenly predicted would be a perpetually cheap fuel.
As natural gas prices soared over the past two years, utilities turned back to coal in a big way, with 12,000 megawatts of new capacity planned in the next three years-roughly enough to power 12 million homes-after years of virtually no coal generation expansion at all. And for construction firms, today's coal boom is better news than the best days of gas-turbine mania.
Alex Rygiel, engineering industry analyst with Friedman, Billings, Ramsey, estimates that turbine stations cost $100 million to $300 million, while the price tag of a new coal plant is $1 billion. "The projects in this new power-generation cycle we're witnessing are far larger," he says.
Washington Group International, which just added a new major coal project to its portfolio-expansion of the Springerville Generating Station serving greater Phoenix-says the opportunities don't stop with coal. "With the passage of the Energy Policy Act [in 2005], nuclear plants are beginning to be contemplated," says George Nash, who heads up power development for WGI, which has worked on 40 existing nuke plants in its history. "That's an area that we haven't seen active for quite a while."
Of course, a nuke revival would have to compete for resources with the coal and refinery revivals and a host of other energy projects. One nuclear industry newsletter recently reported that the projected cost of a new plant has risen to as much as $2,000 per kilowatt, 80 percent higher than the industry was touting only a year ago. It's easy to see why engineering companies would salivate-a 1,000-megawatt plant at that price would be
$2
billion-but most analysts are not counting on any new nuclear plants in the United States soon.
Pricey. The high cost of engineering services is becoming an issue even for oil companies flush with cash. Tesoro, the No. 2 refiner in the western United States, this summer canceled the much-anticipated overhaul of its Anacortes, Wash., facility because the $250 million price tag of the project (which was being constructed by Fluor) had risen 50 percent since just the start of the year. Costs are spiraling not only for crucial materials like steel but also for skilled workers. "It puts engineers in a very strong position to write contracts moving risk back to the customers,"
says Rygiel.
Fixed-price engineering and construction contracts are a relic of "the old days," says Lynn Westfall, Tesoro's chief economist. "That was the traditional way in our business over 25 or 30 years and probably longer,"
he says. But now, all of the big engineering firms assure their shareholders they are moving to cost-plus or cost-reimbursable contracts, meaning the customer pays more if material or labor costs increase. "You don't know the true cost of a project until it's over," says Westfall.
High
engineering costs will be even more of an issue for energy companies if fuel prices-and profit margins-continue their slide. Michael Leger, president of Turner, Mason & Co., consultants to both refiners and their lenders, says he does not think many companies will follow the path of Tesoro and actually cancel projects. Energy demand is still growing and expected to outstrip the 1.7 million barrels per day of U.S. refining capacity planned through 2012. "There are sufficient numbers of well-founded, viable refining projects that need to go forward to keep [contractors] quite busy for the next several years," he says.
Philip Asherman, chief executive of Chicago Bridge & Iron, a leader in refinery and liquefied natural gas projects, says his company's backlog has grown at 30 percent annually for the past four years. "We have not seen any interruption in spending due to fluctuation in oil or gas prices or some of the other volatility in the market," he says. The industry has certainly ridden past cycles up and down, but the current growth of worldwide energy consumption, particularly in China and India, is unprecedented. "We think,"
Asherman says, "this is a market unlike any previous market for our industry."
Boom Times For Megaprojects
The world's hunger for energy is fueling giant backlogs for engineering and construction firms
By Marianne Lavelle
Posted Sunday, September 24, 2006
From the Persian Gulf to the Gulf of Mexico, huge engineering and construction companies are reaping the bonanza of the run-up in oil and natural gas prices over the past four years. Much of the money that left consumers' pockets is flowing now into steel and concrete-megaprojects to deliver more gasoline, natural gas, and electricity than ever before.
Firms are drawing up plans to expand and boost the performance of oil refineries in the United States and build new ones overseas. They are plotting out massive plants to turn natural gas to liquid in the Middle East and Africa and equally daunting facilities on U.S. coasts to turn it back to a gas. For the first time in years, they will raise smokestacks for burning coal to produce thousands of new megawatts of power across the country. Even new nuclear power plant construction in the United States seems possible-although, as with every other type of large project, at a high price. The boom has so much momentum, industry insiders believe, that it will continue despite the recent falloff in energy prices.
Gold rush. "I'd say the market right now is the strongest I've seen it in my 32 years in the business," says Alan Boeckmann, chief executive of Fluor, a world leader in heavy construction. In the past quarter, Fluor broke records by winning $5.8 billion in new contracts. Its project backlog grew 17 percent in just those three months to $18 billion. A key factor:
The Persian Gulf nation of Qatar tapped Fluor to construct one of the largest liquefied natural gas facilities ever, as the emirate seeks to become the world's leading supplier of this crucial fuel.
But there's enough work for Fluor's competitors to share in the explosive growth. As a privately held company, Bechtel doesn't post quarterly numbers, but the engineering giant surely added to the $18.1 billion in revenue it reported for 2005. It was named this summer as joint lead contractor for one of the largest oil refinery expansion projects ever in North America, an estimated $4 billion undertaking in Port Arthur, Texas, by the Saudi-Shell venture Motiva. Bechtel's partner, Jacobs Engineering, saw its backlog increase 12.1 percent to $9.4 billion in the past quarter.
Foster Wheeler, near the brink of bankruptcy only two years ago with 10 consecutive quarterly losses, reported record profits in August and saw its backlog swell 85 percent. It landed the front-end engineering job on ExxonMobil's new petrochemical complex in Singapore.
"The health of engineering companies is in direct relationship to the health of their customers," says Mike Dudas, Bear Stearns analyst, while pointing out that each of the industry's major players has from 25 to 80 percent of its backlog tied to oil and natural gas. Although the industry giants have tried to diversify to free themselves from commodity boom-and-bust cycles, no other business is quite as lucrative as energy.
Fluor, for instance, is well known for government contracting-nuclear weapons plant cleanup, contracts for the Federal Emergency Management Agency in New Orleans, defense logistics in Iraq. But all that government work added up to only 15 percent of last quarter's net income; oil and gas accounted for nearly 50 percent of profits. "The need for modification and expansion is very real across the whole energy market-upstream, downstream, petrochemicals, and power-every part of that sector is seeing significant spending," says Fluor's Boeckmann. In that sense, this boom differs from previous up cycles. In the late 1990s through 2001, when oil and gas prices were cheap, there wasn't much investment in heavy energy infrastructure.
But there was a frenzy of natural-gas-turbine power plant construction in the United States-widely welcomed as less polluting than coal and designed to take advantage of what many mistakenly predicted would be a perpetually cheap fuel.
As natural gas prices soared over the past two years, utilities turned back to coal in a big way, with 12,000 megawatts of new capacity planned in the next three years-roughly enough to power 12 million homes-after years of virtually no coal generation expansion at all. And for construction firms, today's coal boom is better news than the best days of gas-turbine mania.
Alex Rygiel, engineering industry analyst with Friedman, Billings, Ramsey, estimates that turbine stations cost $100 million to $300 million, while the price tag of a new coal plant is $1 billion. "The projects in this new power-generation cycle we're witnessing are far larger," he says.
Washington Group International, which just added a new major coal project to its portfolio-expansion of the Springerville Generating Station serving greater Phoenix-says the opportunities don't stop with coal. "With the passage of the Energy Policy Act [in 2005], nuclear plants are beginning to be contemplated," says George Nash, who heads up power development for WGI, which has worked on 40 existing nuke plants in its history. "That's an area that we haven't seen active for quite a while."
Of course, a nuke revival would have to compete for resources with the coal and refinery revivals and a host of other energy projects. One nuclear industry newsletter recently reported that the projected cost of a new plant has risen to as much as $2,000 per kilowatt, 80 percent higher than the industry was touting only a year ago. It's easy to see why engineering companies would salivate-a 1,000-megawatt plant at that price would be
$2
billion-but most analysts are not counting on any new nuclear plants in the United States soon.
Pricey. The high cost of engineering services is becoming an issue even for oil companies flush with cash. Tesoro, the No. 2 refiner in the western United States, this summer canceled the much-anticipated overhaul of its Anacortes, Wash., facility because the $250 million price tag of the project (which was being constructed by Fluor) had risen 50 percent since just the start of the year. Costs are spiraling not only for crucial materials like steel but also for skilled workers. "It puts engineers in a very strong position to write contracts moving risk back to the customers,"
says Rygiel.
Fixed-price engineering and construction contracts are a relic of "the old days," says Lynn Westfall, Tesoro's chief economist. "That was the traditional way in our business over 25 or 30 years and probably longer,"
he says. But now, all of the big engineering firms assure their shareholders they are moving to cost-plus or cost-reimbursable contracts, meaning the customer pays more if material or labor costs increase. "You don't know the true cost of a project until it's over," says Westfall.
High
engineering costs will be even more of an issue for energy companies if fuel prices-and profit margins-continue their slide. Michael Leger, president of Turner, Mason & Co., consultants to both refiners and their lenders, says he does not think many companies will follow the path of Tesoro and actually cancel projects. Energy demand is still growing and expected to outstrip the 1.7 million barrels per day of U.S. refining capacity planned through 2012. "There are sufficient numbers of well-founded, viable refining projects that need to go forward to keep [contractors] quite busy for the next several years," he says.
Philip Asherman, chief executive of Chicago Bridge & Iron, a leader in refinery and liquefied natural gas projects, says his company's backlog has grown at 30 percent annually for the past four years. "We have not seen any interruption in spending due to fluctuation in oil or gas prices or some of the other volatility in the market," he says. The industry has certainly ridden past cycles up and down, but the current growth of worldwide energy consumption, particularly in China and India, is unprecedented. "We think,"
Asherman says, "this is a market unlike any previous market for our industry."
