Introduction

After a long drought of investment of almost a decade (2019 end – 2023 1Q), it is time for some serious investments to be visible in the energy industry. Technip CEO Arnaud Pieton mentioned recently “This (backlog) provides excellent multi-year visibility, equivalent to approximately three times our annual revenues”. (Reference: https://www.reuters.com/business/energy/technip-energies-posts-record-h1-backlog-lifts-guidance-shares-jump-2023-07-27/) The order booking of various EPC companies like Technip, Petrofac, Tecnicas Reunidas, etc. indicates that the EPC boom is here. The boom that began will last for a few years to a decade going forward. The energy sector is crucial for the nation’s growth and abundance. History has indicated that growth is directly related to the energy it consumes. The logic is simple as energy is consumed more infrastructure, goods, and services are produced, and therefore GDP (total of all economic exchange) is bound to increase. The point is growth is required for a country to sustain, and increase influence, and therefore energy consumption is bound to increase.

Causes of EPC Boom in the Energy Industry

The main causes of the EPC boom are

i) Lack of investment in the past decade in Oil and Gas

ii) Hunger for growth – to increase influence

iii) Green transition – climate consciousness

iv) Recovery from world pausing “CORONA”

The above reasons happening simultaneously are indeed a potent combination to skyrocket the thirst for EPC projects as this is the primary route to alleviate the risk for the energy operating companies. It is indeed a spectacle to observe the EPC boom as it will unfurl in the next few years to a decade before it will run out of steam.

If we look closely at the causes – it is clear that none of the causes are going to vanish in the next few years therefore the boom is here to stay.

Let us look at the causes in detail:

i) Lack of investment in the past decade in Oil and Gas – The price of oil between 2014 – 2022 will tell the story (graph below). Sustained low prices with over-investment and oversupply from the previous investment cycle prevented further CAPEX. As we all know the oil and gas supply to be sustained investments are required so as the investments paused it showed up as a decline in production.

ii) Hunger for growth – Economic wars are the path forward and to win them growth is a weapon. For growth energy is one of the prime drivers. So increased energy consumption is natural to enhance growth.

iii) Green Transition – The human being’s consciousness of preserving nature is from the existential crisis looming over the whole world due to the wanton destruction of the green world thereby disturbing the equilibrium. This resulted in global warming and fossil fuels are one of the major contributors. The transition path is not yet clear but we need energy therefore in conjunction with fossil fuel the demand for EPC projects is blossoming in both fossil fuel and non-fossil energy. This concurrent demand is pushing up the EPC projects.

iv) Recovery from world pausing “CORONA” – was a black swan and it was an eye opener that a virus can bring the world to a grinding halt. But being a human, the most intelligent species, we found a solution within 24-30 months which is remarkable. The period of lack of growth in the search for survivability of the human race added a dimension to the present demand to make up for the lost time.

Impact

The impact can be divided into two categories : (i) short-term and (ii) long-term. The impacted areas are in demand for people, material will shoot up. Let us understand the impact on each aspect separately.

People: My favorite subject has always been people. You can read my earlier post People are assets describing the importance. How does it impact? As a general understanding of a child, we see things upon arrival on Earth and therefore think the things we see are already in place and we came later. The underlying feeling remains with us as we grow up. Now, contrast this with an all-powerful new CEO who will come to an understanding that the systems are available and people arrive later. So, the feeling prevalent would be people are superfluous and will be culled at a given opportunity (say less demand) to prove the point besides it is one of the low-hanging fruit in the balance sheet. Other items in the balance sheet are difficult to understand and therefore ignored. This scenario changes when the demand for people increases and the same new CEO (old by then) will think in terms of economics that people are commodities and therefore available, probably at a higher cost due to high demand, thereby getting ready for the next round of culling as the demand falls. This creates a sinusoidal wave which is difficult to control. Replacement of people is impossible as each one is unique and the cost of loss involved is very difficult to assess as it is intangible like the past employee’s reputation, cost of training, period of unproductiveness, loss of productivity of the experienced due to training, rapport with the client, impact on company’s image, etc. which are difficult to estimate. These are understanding only and not easily calculated. The salary is a finite number and can easily fit in the balance sheet – easy for layman understanding.

Material: The supply of material is finite as the cost of adding production of these is high and it takes time to increase it. Therefore, as the demand increases which is relatively faster creates a squeeze in availability and this leads to two outcomes. One the price increases depending upon how urgent the material is required and the second one is the time required for the material to be available. Both factors time and price are key to EPC’s success. Common sense indicates that more time required means more is the cost. The risks of EPC in the “boom” phase increase. These risks will be factored in subsequent bids as an increased price which impacts the budget of the owner companies. Due to the changing scenarios, EPC will need to adapt and find a way to succeed but the bottom line is that this will be a challenge in the next decade.

Concerns: The preceding paragraphs highlight the concerns about the availability of people, and materials. The price at which these were budgeted and the difference in the actuals will lead to EPC success risk and therefore abandonment of some of the EPC or delay due to lack of finance will come into play.

Short term solutions

Availability of people

• Salary needs to increase to attract more people into the industry
• Sustainability of oil and gas and its transition to a newer energy sector to be promoted to attract more talent
• Management to focus on hiring quality at a higher salary and keep engaged with a proactive strategy with provision for retention in the event of uncertainty

     Availability of materials

• Material sourcing is to be developed as much as possible.
• EPC projects are to be staggered based on priority and therefore sourcing can be streamlined
• Expeditors need to be hired
• Collaboration with suppliers to identify the bottlenecks and improve delivery.

Long term solutions

     Availability of people

• The energy industry’s influence and sustainability drive the world’s growth fundamentally needs to be highlighted at the college level to encourage talented young people to join to work for the world’s future.
• Job security – to be highlighted as energy is one of the main drivers of the world’s growth and sustainability.

Availability of materials

•  Investment in production to be included based on future growth.
• Alternate supplier chain to be identified and grown to avoid supply risk. Diversification of the geo-political location of suppliers will further reduce the risk.

Conclusion

The EPC boom in the energy sector is here. This is good for the industry and mankind together. Growth is the way to bring millions out of poverty. The driver of growth is energy and more energy can be produced with new projects executed by EPC.

The concerns and solutions listed above need to be taken into account for short-term and long-term management of the EPC boom for a better world.

More opportunities for more people will lead to an equitable world. A world with more prosperous people is the “dream” of us.