EPC Contractors:

Changing with the Industry

Larry Bolander

AIChE Management Division Conference April 2007

Agenda
What makes EPC Contractors Successful? The World Yesterday The World Today Where are the Resources? Staying Up with the Changing Technologies Market Uncertainty Procurement Challenges EPC Challenges Future State of Industry

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What Makes EPC Contractors Successful?

Meeting Owners Objectives

Delivering Quality Work

Economic Compensation

Delivering Value
Technology experience Resources & services Improving lifecycle costs

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The Contractors World Yesterday

Previous Execution Strategies
Few projects Small to medium size Mainly revamps Sufficient supply in market
Prices Deliveries Resources

Resulting Execution Strategies

FEED by select contractors Mixed execution Competitively tendered EPC lump sum projects Many took risky projects at low (or no) margin Agreed to onerous contract terms Integrated, client-led PMC

Hungry contractors Sporadic mega projects

Contractor margins were squeezed by owners from an average of 6 to 10 percent pre-1985 to 2 to 5 percent in the 1990 to 2002 period.
Independent Project Analysis

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The Contractors World Today

Current Situation
Demand exceeds resources Increased project size and complexity

Execution Strategy for Success

Increase in sole source awards PMC+ contractor FEED & EPC tied together Negotiated awards

Mega projects up 900% since 2002

Unstable supply market

Prices Deliveries Resources

Based on contractors willingness to commit resources

Shortage of qualified contractors

Construction using multiple qualified contractors Operating under a Managed Growth principle

Contractor now demands 10-12 percent on a risk-free basis.

Independent Project Analysis

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Workload Distribution

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IPA Regional Risk Distribution

(Regions Displaying Highest Risk Premiums)

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Process Plant Industry Bookings

(Sustained Demand Case)
60% Growth between 2005 and 2009 3 of 5 new employees
250
Refining Chem/Petrochem O/G Production Synthetic Fuels

Effective Capacity

200

MM MH/Yr.

150

100

50

0
85 87 89 91 93 95 97
Year

99

01

03

05

07

09

Graph compares process plant industry bookings expressed in man-hours compared to the available man-hours in the industry. * Source is major oil companies including ExxonMobil, the Joint Industry Program, ENR, and Fluor

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Where Are the Resources?

N. America Bachelors Degrees from 1999-2005
20% increase in Engineering Bachelor Degrees since 1999 3% increase in 5 major areas for EPC contractors since 1999 27% decrease in Chemical Engineering from 1999 to 2005 12% decrease in Civil Engineering from 1999 to 2005
80000 70000 60000 50000 40000 30000 20000 10000 0
1999 2001 2003 2005

Total Disciplines

EPC Disciplines

Information from 334 USA & 7 Canadian Engineering Colleges

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Source Michael T. Gibbons HO20060444_001.ppt American Society for Engineering Education

Where Are the Resources?

Global Graduates - 1990 vs. 2004
1.2 million/year engineers & scientists graduate from Chinese and Indian universities Chinese & Indian graduates = USA, European & Japanese graduates China & India = 3x the number 10 years ago In 1970, USA accounted for 30% of worldwide university enrollment; now, USA is 12%

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Where are the Resources?

Fluor Support Of Educational Programs
Actively recruit at 100 universities/technical institutes globally Teaching at US, Kuwaiti, Poland & Chinese universities/schools Developing global internship opportunities Strategic partnerships with 15 US universities including:

Philanthropic contributions - engineering/construction departments, student associations, scholarships Participation in University Advisory Boards Teaching & influencing curriculum development Mentoring, summer internships & new grad recruiting Society of Women Engineers (SWE) National Society of Black Engineers (NSBE) Society of Hispanic Professional Engineers (SHPE)

Commitment to diversity liaison programs

Outreach to 21,000+ elementary, middle school, high school students in 16 countries to raise profile / awareness of engineering

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Industry Resources Challenges

Lead / management personnel aging Large experience gap between leads and others
Stretch / challenge employees Offer opportunities to enhance skill sets

Recruiting
Higher salary offers to attract new employees Hiring new grads Tapping into other industries

Maximizing global resources

Standardizing work processes Training

Retention
Reward to retain Flexible company policies

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Staying Up with the Changing Technologies

Schools teach how its been done Contractors must anticipate trends before owners
Develop expertise Begin process planning Connect with licensors / suppliers

Investments shifting to non-petroleum-based plants

Ex. Nuclear, coal gasification, bio-fuels Ex. CAD modified design / construction work processes

Writing the future on modifying processes

Large fabricators/suppliers doing more design work

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Sharing Knowledge
Retirees Giving back Senior engineers Rotation - Research Global Execution Centers Training & Development Young engineers Rotation - Projects Qatar China USA Spain Australia

Training simulators

Knowledge Management Center

Operations excellence

All Disciplines
Students Projects and Research Community Scholars and teachers

Individual Procedures

Work processes

Projects

Government and industry collaborative skills initiatives

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Procurement Challenges: Market Uncertainty

Extremely volatile commodity, material and equipment prices Extending lead times Higher shop loads Reasons:
Sustained raw material supply and demand imbalance Constraints throughout the supply chain Capacity not being added Consolidation of 21 key suppliers down to 4

Major Equipment Escalation General Fabricated Equipment

Bulk Materials Escalation Fabricated Pipe

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EPC Challenges
Employees market
People jumping from company to company Salaries increasing exponentially Must market industry better to attract workers

Sharing knowledge Expand fabricator resource base

Train third-world fabricators Help them be successful

Owners need contractors to be execution partners

Higher investments (mega projects) require more commitment Greater investment for contractors to grow business (salaries, real estate, equipment, training, etc.) Higher fees Wall Street expectations

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Key Relationship Success Criteria

Alliance
Trust; Risk & reward Compatability

Strong

Strength of relationship

Partner
Reliance Trust

Depth

Closeness Added value

Weak Low

Impact on business performance

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High
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Future State of Industry

EPC workload to peak in 2009

Large drop in lead resources in 2-5 years More projects awarded to less qualified contractor teams More projects will miss on costs and schedules Contractors with best teams / tools / processes will succeed Promoting engineering careers in schools

Contractors / owners / suppliers teaming on new technologies Continued volatility for commodities / material / equipment Owners adopting contracting strategies to meet market realities will experience best results Large fabricators/suppliers doing more design work

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Questions?

Larry Bolander

AIChE Management Division Conference April 2007