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Independent Companies Business Model in Oil & Gas and Petrochemicals

Conventional Model in Managing Projects

Oil&Gas Project ArchitectureThe fossil industry relies on large scale projects to produce Oil & Gas and Petrochemicals, constantly bringing new capacities to support the ever growing demand.

Most of these projects are running along a conventional process in phases with an extensive value chain.

When international oil companies (IOCs) and national oil companies (NOCs) are willing to develop giant projects over a 4 to 5 years time frame, they usually orchestrate it in first three steps:

 1) Feasibility study, or conceptual study, or basic design, or pre-front end engineering and design (Pre-FEED)

 2) Front end engineering and design (FEED)

 3) Engineering, procurement and construction (EPC)

For each one of these milestones, the operating IOCs or NOCs usually call for tenders.

Therefore projects are often found with the FEED being performed by one engineering company and the EPC executed by another one, especially if the tender of the EPC contract has been organized by the engineering company doing the FEED.

This cascade of tenders provide the operating companies and their partners transparency and the expectation to get lower costs at each phase.

In opposite way this process is time and cost consuming, in some cases it may require the support of additional engineering services provider for project management consultancy (PMC).

Therefore, when it comes to independent companies Independents, whose projects to be developped are smaller with fast-track schedules, the distribution is not the same anymore.

New Players, New Model

First, Independents proceed in short time and less capital intensive projects to make their return on investment as quick as possible.

To complete their condensed planning and save time, Independents cut call for tenders by awarding the same company for FEED and EPC phases.

In fact, the relationship Independents tend to have with Engineering companies is not the classic customer relationship but rather seek for a partnership.

A partnership, because most of the time Independents need to secure financing before to make the final investment decision (FID), consequently they need the FEED conclusions to convince the banks of the project profitability.

This point changes Engineering companies involvement in projects because their perfomance during the FEED stage will directly impact their further business at EPC stage.

In minimizing the EPC costs evaluation after the FEED phase, the Engineering company will facilitate the chances for the Independents to obtain the financing support from the banks and institutions for the EPC contract.

In counter part, when the Independents have secured their project financing, they award the EPC contract to the Engineering company who completed the FEED without tender.

Therefore, the Engineering companies become active partners of Independents in the success of projects around a “fair” price, good enough to make money for all parties.

More Agility Required for Vendors and Sub-Contractors

In skipping the tendering process, the interactions period are shortened from FEED to EPC contracts, requiring more agility from the projects vendors and sub-contractors.

Currently these projects are no longer marginal as they represent approximately 30% of the Oil & Gas and Petrochemical projects above $100 million capital expenditure.

To track these projects that represent a growing share of the market, the vendors and sub-contractors sales organizations need to adopt, more than ever, a pro-active approach to be more agile and closer to the decision makers.

Using tools such as Project Smart Explorer to guide the prospects, enables companies to tract these new projects and raise their hit rate.

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