Engineering & Procurement Services

Supply & Demand Dynamics

On a global basis, engineering and procurement services in the Oil & Gas industry are on the top 3 list of demand sectors, which makes it a very large “consumer” of engineering expertise and man-hours. The demand for engineering services in the upstream petroleum industry is directly affected by:

• New projects, both offshore and onshore
• Brownfield and tie-in projects
• Maintenance and operations ( to a lesser extent)

A temporary decline in upstream oil &  gas projects balanced by growing activities in renewables and strong resilient downstream and chemicals segments. 

The total global market size of engineering services is around $1 trillion and expected to continue expanding.  The regions that are growing fastest are Africa and the Middle East. 

Supply

Over the years, the market for engineering services went through various cycles of consolidation and growth. Yet, the number of engineering houses is extremely diverse and spread geographically and per expertise and discipline. The segmentation patterns are generally around size, expertise, and geography, and could be divided as follows:

• Large, global, integrated and multi-discipline engineering companies
• Niche companies who specialize in a particular geographic market and may have multi-discipline capabilities
• Small engineering companies who specialize in a particular set of disciplines, e.g. marine & subsea
• Very niche companies that are known for unique expertise, e.g. pipeline routing or vibration management and alike.

Key Players

Below the list of large, global, integrated and multi-discipline and multi-industry engineering companies who together, constitute around 80% of the global market both revenue-wise and market share size.

1. Wood Group / Amec Foster Wheeler
2. TechnipFMC
3. Fluor
4. Petrofac
5. Saipem
6. Jacobs
7. McDermott
8. Worley Parsons / Advisian
9. KBR
10. Chiyoda
11. Subsea 7
12. SNC-Lavalin
13. JGC
14. Aibel
15. Offshore Oil Engineering
16. Mott MacDonald
17. Aker Solutions
18. Prosernat

Cost & Price Analysis

Price

Prices for engineering and procurement services experienced significant growth between 2011 and 2014. Following the industry downturn, prices stagnated, with some areas where prices for engineering services went down by around 5-10%.  Going forward, and expected increased activities in 2021 and 2022 and the availability of qualified and experienced engineers (multiplied by retirement as well), will significantly affect the prices. 2nd half of 2020 should see stable demand and price levels, as those contacts had been signed prior to the current downturn. 

Engineer companies tend to add their mark-up to procured items, generally higher than the prevailing cost of the capital, but lower than c. 5%. In addition, that percentage depends on volumes of purchased materials. The higher the volume the lower the markup. A mark-up of higher than 5% should be questioned. For most companies, this is not their core business, hence they tend to be more flexible on commercial arrangements. 

Cost

• Costs have been going up around 2% per year
• Supply & demand for qualified engineers is a large  cost driver
• Demand for engineering services from other industries, such as civil infrastructure, buildings, clean energy, and petrochemicals, has a significant impact too.

Total Cost of Ownership

Areas to look at for total cost of ownership: 

• Cost of rework – make sure all work is done correctly from the 1st pass, otherwise, an engineering company is incentivized to make errors, so they can charge for re-work man-hours for correcting the errors
• A good engineering house can make a significant difference to your project by coming up with a good solution. So paying slightly more for an outcome that could be game-changing is worth to consider and evaluate
• The calibre of engineers offered during tender submission may not be available when the actual job is executed. This means whatever assumptions have been made in anticipation of the level of engineering expertise may not work anymore, which in turn may have affected the initial assumption and cost normalization during the commercial evaluation
• Most of the engineering companies would have a large buying power, as most of them are in EPC business as well. Yet, very often 3rd party suppliers prefer to work with end-user directly. In summary, the larger the engineering company, the higher the chances of obtaining the best prices for procured items.  Another important aspect for companies in the flow of revenues through their books that may help them to beef up financials. 
• Keep an eye on situations when an engineering company propose too many single/sole source purchases without rational reasoning. This may indicate that there are arrangments that an engineering company has with suppliers that may add additional benefits to that engineering company
• Key areas to evaluate and look at, during the selection process for upstream engineering services:
  • Professional credentials and certification
  • Experience in similar projects
  • Knowledge of local specifics where a project is performed
  • Previous records and performance levels
  • Professional integrity to ensure quality work is produced at all times