The EPC sector has been growing steadily in India. Worldwide, there is a high demand for new and refurbished infrastructure and India is no different. Since India is often dubbed as emerging manufacturing hub of Asia, naturally there is a high demand for several projects – roads, bridges, water treatment facilities, power, chemical, petrochemical plants etc. To be more candid, construction activities of several projects from different sectors have been accelerated in India.
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However, opportunities for EPC companies are different depending on the performance and potential of the sector they are catering to. Take the example of hydrocarbon sector. India is the fifth-largest consumer of energy in the world, and is likely to surpass Japan and Russia to become the world’s third-largest energy consumer by 2030.
According to the International Energy Agency (IEA), hydrocarbons satisfy major energy demand in India wherein coal and oil, together, represent about two-thirds of total energy use. Natural gas accounts for about 7 per cent share. The petroleum and natural gas industry in India has attracted foreign direct investment (FDI) worth $3,332.78 million during the period April 2000-December 2011, according to the data provided by Department of Industrial Policy and Promotion (DIPP). All these definitely augur well for the EPC sector.
New business avenues
There is huge demand for petrochemicals in India and consequently potential opportunities are arising here in terms of expansion of refineries, pipelines, fertiliser complexes and LNG terminals. “The Ministry of Chemicals and Fertilisers has approved proposals to the tune of $35 billion in PCPIRs at five locations. The fertiliser industry is also expected to witness a growth phase as existing players are looking at new projects and massive expansion plans,” says Alwyn Bowden, President and CEO, Essar Projects India Ltd.
With these extensive expansion plans spanning across the country, there is a strong chance that companies with the requisite expertise and capabilities will find their order books quite active in the years to come. “The pressure will come for the contracting chain to take more responsibility, fuelling the need to move further towards the EPC model as practised in many other parts of the world,” he points out. It seems that there is no dearth of scope or opportunity for the EPC companies in the hydrocarbon sector. Take the example of Petronet LNG. It is the biggest LNG importer of India. Recently, it signed an agreement to invest Rs 4,500 crore in building a five-million-tonne import terminal at Gangavaram Port on the Andhra coast. This will be the country’s fifth LNG terminal after Dahej, Dabhol, Hazira and Kochi. The LNG terminal at Gangavaram Port will comprise facilities for receiving, storage and regasification of LNG and would be built in 42 months.
According to The Associated Chambers of Commerce and Industry of India (ASSOCHAM) report, the growth rate of $ 40-billion Indian petrochemical industry is expected to range between 12 to 15 per cent in the next five to seven years. In recent years, the global chemical and petrochemical industries have moved eastward towards Asia and the Middle East with major hubs being set up in these regions. This simultaneously represents a tremendous window of opportunity for Indian chemical and petrochemical industries.
ASSOCHAM also noted that India can take advantage of this shift and attract large funds from investors keen to invest in the region near mega demand centres – India and China. “The hydrocarbons area continues to be an attractive sector for EPC companies in India, given the fact that planned capital expenditures have more or less been met consistently, which is not the case in some other infrastructure sectors. Petrochemicals would also represent a strong opportunity area going forward, given the latent demand potential in India,” observes Biswanath Bhattacharya, Director, KPMG India.
Moving away from conventional model
Besides expansion and investment in the hydrocarbon sector, EPC industry is also witnessing shift in conventional method of contract. “The new opportunities are emerging in the sector as the contracts are moving from conventional method or single large Lump Sum Turnkey (LSTK) towards multi-LSTK model. This provides opportunities to medium-sized, specialised EPC contractors to participate directly instead of as sub-contractors. In single LSTK, only large EPC companies would be eligible to participate,” points out Savan Godiawala, Senior Director, Deloitte India.
Also, the larger project is broken into several sub-projects to have multi-LSTK contracts for each of the sub-projects. This helps in reducing risk as each EPC contractor is responsible for his sub-project. Also, specialised EPC contractors would become available for the specific sub-projects. “Of course, this arrangement means greater role for the project management team,” he says.
Refining redefining EPC
The projects in refining and petrochemical sectors are generally massive projects with high level of multi-disciplinary complexities involved. Timely delivery of the project within acceptable quality, safety standards and budgeted costs is critical. “There is evidence that the client companies are appreciating the value EPC companies bring in terms of project management and integration skills with single-point responsibility for executing mega projects,” says Bowden.
In the overseas markets, many customers have found it beneficial to transfer entire project risk and responsibility to competent EPC contractors, thereby eliminating the need for a large management team for day-to-day monitoring, integration and management of engineering, procurement and construction functions. “Internationally, for projects on the fast track, there is an increasing trend for contracts to start on open book model that can be later converted to LSTK as requirements become more firmly defined,” he says.
According to GR Singh, Vice President, BD, Sales & Execution, Linde Engineering India Pvt Ltd, since 2001-02, India has transformed from being a net importer of petroleum products to being a net exporter. “During the last decade, the overall addition to the refining capacity was in the order of 118 MMTPA. Similarly, there had been steady increase in installation of ethylene crackers as well as downstream petrochemical products hubs across the country. India has been net exporter of refining products since 2001-02 and the future trends of investments by HPCL, BPCL & IOCL confirm highly positive trend. With regard to petrochemical projects, huge investment plans are in pipeline, which may be delayed but likely to be materialised within next three to four years,” he says. According to Godiawala, as time and cost overruns are primary concerns in EPC projects, current trends are towards ‘Reimbursable or Open Book conversion to LSTK’. “Here, EPC contractor enters the project at an early stage of project planning and progressively firm up the LSTK contract. This helps in building significant synergies leading to savings in time and cost,” he says.
The hectic activities in the hydrocarbon sector coupled with government’s pro-active approach for the sector provides ample scope for EPC companies to grow. It is to be seen how the companies capitalise on the emerging opportunities.