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KEEP IT AT HOME: CAPTURING VALUE IN THE REGION'S ENERGY EPC MARKET


Article
By James Thomas, Shantanu Gautam and Arun Sollin Selvan
September 2024
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 1. middleeastmonitor.com; eia.gov; trade.gov
 2. Lajčiak M. South Korean Development Model. Journal of International
    Analytics. 2016;(3):74-84. doi.org

Scaling the GCC’s energy sector is no small task: governments across the region
have already revealed plans to spend close to $1.5 trillion in the next 15 years
to expand capacity, accelerate renewables, and upgrade infrastructure. Yet
there’s another challenge that must be addressed: keeping this massive capital
investment within the region.

Download the perspective

About 90% of spending is expected to be channeled through lump-sum, turn-key
engineering, procurement and construction contracts in a market dominated by
international players.i While they bring needed expertise and proven ability to
build and operate large-scale projects, their preference to secure materials and
equipment from their own domestic, lower-cost markets can remove value from the
GCC and limit the opportunity to grow regional supply chains.

In addition, international companies often draw on the experience of their
global engineering centers, which may hamper the development of the kind of
in-country capabilities required to meet the future needs of GCC economies. And
with countries around the world undertaking similar initiatives and competing
for the same expertise, failing to develop domestic capabilities risks leaving
the GCC unable to meet the expected ramp-up in demand during the next decade.

While these are significant challenges, this unique moment also presents an
opportunity. By establishing “National EPC Champions,” GCC governments can make
local content contract requirements more effective, empower the development of
supply chains and talent, attract much-needed execution capacity, and be a focal
point for coordination across a complex web of stakeholders. We recommend four
actions:

 * Demand standardization to unlock economies of scale
   
   Many energy and water infrastructure projects have similar design and
   material requirements. For example, the use of pipes and valves in fluid
   transmission and storage projects are common across the oil and gas, power,
   petrochemicals and water sectors. Guaranteeing revenue for companies
   designated as National EPC Champions by allocating “seed projects” would
   create visibility into demand, with standardization of designs and materials
   unlocking economies of scale and reducing project cycle times.

 * Localize supply chains to capture spending
   
   Our research indicates that for every $100 spent on EPC projects, around
   two-thirds goes towards the procurement of equipment and materials. With
   National EPC Champions more tightly controlling the engineering phase,
   sourcing from local markets can be prioritized, in turn securing the demand
   needed to make localization commercially viable. Enabling suppliers with
   incentives and demand off-take schemes could ensure a significant share of
   overall EPC spending is retained locally.

 * Consolidate human capabilities to build the talent pool
   
   Nationalized energy and water operators today have in-house engineering and
   project management capabilities catering to their business’ specific needs.
   Consolidating these capabilities within EPC champions to reduce fragmentation
   may build a critical mass of talent, creating high-skill job opportunities
   and achieving better resource utilization, especially as various sub-sectors
   experience different capital intensity cycles.

 * Transfer knowledge to enhance capacity
   
   Several GCC economies have domestic players in the energy and water EPC
   sectors. These players need to increase their technological capabilities,
   acquire deeper experience and the financial strength to deliver major
   projects, which will then put them in consideration for key tenders. By
   facilitating joint ventures between domestic EPC champions and international
   players, governments could enable the transfer of capabilities and attract
   more capacity into their markets.

Developing major infrastructure is always challenging, and projects of the
magnitude required across GCC economies demand international involvement. But we
know from experience it is possible to balance needs and wants. In the 1970s,
for example, South Korea experienced a wave of economic growth during which it
prioritized local EPC companies—such as Hyundai and Samsung—in the construction
of domestic infrastructure.ii It sometimes required trading short-term cost
savings for longer term benefits, but the emergence of these companies as
international giants underscores the opportunity National EPC Champions focused
on their respective national energy and water sectors present as a possible
solution. The next wave of capital investment in the GCC’s energy sector is
coming quickly—now is the chance to act.

This article originally appeared in Oil & Gas Middle East, September 2024.


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CONTACT US

James Thomas

Partner, Strategy& Middle East

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Shantanu Gautam

Principal, Strategy& Middle East

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Arun Sollin Selvan

Manager, Strategy& Middle East

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