Compendium of Industrial Parks Chemie/Pharma/Biotec 2015

Cost-cutting currently abounds in almost all the global oil and gas companies. In response to the massive oil price collapse, the companies have postponed the „final investment decision“ for 45 major projects until the middle of the year. Thus capital expenditure to the tune of some $200bn has been deferred – according to energy consultancy Wood Mackenzie.

„By year-end we may be able to count the number of major upstream projects that reached a Final Investment Decision (FID) during 2015 on one hand“, says Angus Rodger, analyst with the British market researcher. Current investment cuts correspond to 20bn barrels of oil equivalent. Above all, costly deepwater projects and oil sands projects will be affected by these cuts.

Here the energy companies are evidently pursuing two aims: On the one hand, they are reacting to the crude price collapse with cuts and are securing capital for dividend payments to their hard-hit shareholders. On the other hand, they see the deferment as an opportunity for cost optimisation in the projects. The companies expect price cuts in plant construction and engineering services to result from the cutbacks. „Given where we are in the corporate capex cycle, only those assets with the most robust economics can expect to make the grade. Projects which can only prove economical at crude prices above $50 per barrel will be subjected to rigorous scrutiny. We estimate the majority of these projects are now targeting start-up between 2019 and 2023. However, if the major IOCs continue to focus on cutting future capital commitments then these dates will be pushed back further“, Rodger believes.

This is a dramatic development for oil producers. Just a year ago they could have undertaken projects with $90 a barrel „break-even“ price. As the months went by, the price per barrel has fallen successively first to $80, then to $60 to $70, and ultimately to $55. More and more projects planned for long-term completion will fall by the wayside in the face of these challenges.

As a result, Norway currently has no large-scale exploration projects (i.e. those with an investment volume exceeding $ 120m) in the offing. „When you consider that the decisions we make this year are the ones that will generate income four to five years from now, it‘s worrying“, says Grethe Moen, CEO of Petoro AS, the state-owned enterprise which in turn owns about one third of all Norwegian oil and gas deposits.

Other states are also affected: In the Middle East, where deposits can be tapped cost-effectively and with comparative ease, there has been a 53 percent cut in investment. The investment climate has also become bleaker in the Russian and Brazilian upstream segments.

And the Consequences for Chemical Plant Construction? Just what are the consequences for process plant construction? Are contractors increasingly shifting their focus from the upstream sector to downstream business, i.e. to (petro)chemical projects? And will the gloomy investment climate in the exploration sector have a negative impact on investors in downstream projects?

A look at the balance sheets and half-year figures of the pertinent engineering services providers permits a straightforward characterisation of the situation: The closer the plant construction company works to the borehole, the more serious the impact. The further downstream services are provided, the less the company will feel the oil price collapse. While exploration specialists such as Baker Hughes or Schlumberger have already announced mass layoffs and the French plant construction company Technip plans to cut 6,000 jobs, the multinational engineering and construction firm Fluor Corporation, which is active in the downstream segment, is still reporting increasing profits and growing numbers of new orders. Thus Fluor‘s sales in the oil and gas business increased by 21 percent in the second quarter of 2015, and the orders received grew by $4.3bn to a total of $41.6bn. However, the current quarterly report of the US engineering company concedes that this development will not be sustainable over a longer period. The above result is based on projects which are currently in the completion phase. The report emphasises that the ongoing volatility of the market is placing increasing pressure on the expected results.

This pressure is also felt by competitor Worley Parsons: This company‘s half-year results, above all in the „Hydrocarbons“ and „Minerals, Metals, Chemicals“ sectors, were in part significantly poorer than in 2014. The company‘s current report points out that, while the short term and medium term investment plans of chemical customers remain impressive, the globally operating chemical companies are reconsidering their location decisions in view of current developments. This means that some project decisions could be delayed. These considerations are driven by the dwindling price advantage of North American shale gas over naphtha, the chemical feedstock widely used in Europe and Asia.And what about the German plant construction companies? Here the picture is less uniform. While Linde reported 4.7 percent lower first half-year sales for its Engineering Division, Thyssen Krupp has come out with modestly increasing sales for its Industrial Solutions segment in the first nine month of its 2014/2015 business year. Air Liquide, whose Global E&C Solutions division now includes the former Lurgi company, reported new orders of €600m for the first half of 2015  – up by 11 percent on the previous year. In contrast, Linde Engineering‘s new orders for the period between January and June were down by €334m on the previous year.

That the German (chemical) plant construction industry will not remain unscathed by declining oil and gas prices is obvious from the relevant companies‘ financial reports: „In view of the volatile and falling oil and raw materials prices customers are showing some degree of reticence in placing orders“, is the message delivered in the report issued by TK IS. However, at present the project pipelines of Linde, Thyssen Krupp, and Air Liquide are well filled: „The projects are followed up and thus remain present in the well-filled project pipeline.“

This assessment is also in accord with the activities of the German chemical and pharmaceutical industries where investment continues unabated: Half of Bayer‘s current and future €1.7bn annual investment in its life-science business will go to German facilities. Ineos is modifying its plants in Germany and at other European locations for use of American shale gas, and engineering services providers such as Cologne-based Planting are reporting a steadily increasing number of projects – both for existing plants and for new plants. CEO Dieter Hofmann: „Germany has sufficient innovation and investment activity, also in the new plant sector.“

Conclusion: The chemical industry is continuing to invest in the expansion of its production capacity. The major players also have some ambitious growth plans, above all in Europe. These are sure to lead to new projects and plants.

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