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Engineering & construction heading for a tumble.

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Petrochemical projects in Asia and the Mideast have kept major engineering and construction (E&C) firms busy through the recession, but much of that activity is expected to come to a halt later this year or early next. That is when most of these firms will have worked off their major petchem project backlogs and the long-anticipated E&C sector downturn is expected to begin.

E&C firms serving the chemical industry are headed for a slowdown with most firms expected to begin tightening their purse strings, including making huge layoffs, as early as year-end. The global recession and tight credit markets have significantly curtailed demand and caused some projects to be delayed or cancelled. Customers are cutting costs due to several factors including the fall in chemical demand and the anticipation of further cost declines in E&C equipment and raw materials, as well as in overall engineering, procurement, and construction (EPC) costs, firms say. The recent drop in the price of oil has also led to project postponements and cancellations. New bookings for major petchem work will likely be modest at best, although certain E&C sectors, including oil and gas, are expected to help to offset some of the downturn, major E&C firms say.

"We haven't seen the growth in the chemical business that we have seen in other business," says Craig Martin, Jacobs Engineering CEO. Like its rivals, Jacobs has had to deal with cancellations of some booked projects as customers have taken plants offline and either scaled back or delayed maintenance work.

In the Mideast, where most of the new chemical plants are being built, limited availability of ethane feedstock has also contributed to a slowing of construction activity there. Qatar has delayed several projects, including three petchem joint ventures with Honam Petrochemical (Seoul), ExxonMobil Chemical, and Shell Chemicals. The country expects to cut costs on energy projects by 20%-30% , says Abdullah Al-Attiyah, Qatar's oil minister. Saudi Aramco and Total delayed issuing construction bids for their Al Jubail, Saudi Arabia-based refinery and aromatics jv project by a few months, aiming to cut costs by 10% and save about $1 billion.

Several projects in Russia have also been delayed or cancelled because they are not deemed viable at the current low energy prices and poor product prices. These include a petchem project planned by Lukoil (Moscow) and Sibur's planned hydrogen peroxide-to-propylene oxide (HPPO) plant. Taneco, a unit of Tatneft (Almetyevsk, Russia), terminated its contract with Maire Tecnimont (Rome) and GS Engineering & Construction (Seoul) last month for a refinery and aromatics project at Nizhuekamsk, Russia. Taneco cites devaluation of the rouble and "a significant increase in forecast project costs." Taneco says the project "remains entirely viable" and will be built, however.

E&C firms, "which have picked up a couple of big projects in the second half of last year, should be okay and see out this year and a bit of next. Others that have not won a major project for 12-18 months will be struggling," however, says Roderick J. Dean, senior manager/strategic planning at M.W. Kellogg. "The only light is that the cost of plants is coming down fast," Dean says.

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Most E&C firms have called off their once-aggressive global recruitment campaigns, which sought to draw both engineers and craft laborers. There will likely be as much as a 10% E&C industry workforce reduction by year-end, says Peter Oosterveer, president/Energy & Chemicals Group at Fluor.

However, some firms continue to hire in specific regions. Demand remains high for craft workers in the Mideast for some of the mega-projects that require tens of thousands of laborers, Oosterveer says. These include Saudi Kayan Petrochemical Co.'s plans to build a world-scale petchem complex at Al Jubail, which will require 40,000 craft workers...

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