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COVID-19 outbreak and its impact on Oil & Gas EPC projects

DOWNSTREAM PROJECT MANAGEMENT

COVID-19 outbreak and its impact on Oil & Gas EPC projects

The impact of the COVID-19 pandemic is particularly visible on the demand for the services industry, including the EPC. This segment of the oil and gas value chain is largely a price-sensitive one and operates on low-profit margins with a heavy dependency on materials management, supply chain, workforce management, and various other economic parameters - GlobalData published a special report.

The on-going or new projects across the oil and gas value chain are likely to face numerous challenges in terms of project execution, planning, and risk management aspects from the pandemic.

So, how the EPC industry is coping up COVID-19 to stay afloat is something to be seen.

It is going to be very challenging for the industry to overcome this downturn in terms of managing the workforce and cost escalations in on-going as well as new projects.

GlobalData

China has significant exposure to the downstream sector and accounts for about 16 percent of the existing refinery capacity globally. It also accounts for around 29 percent of the existing petrochemicals capacity. The recent drop in demand from China has severely affected the overall oil and gas market and the associated supply chains, as per GlobalData estimates.

As a result, many upstream and midstream EPC projects across other countries can potentially face an issue during this quarter and subsequent quarters. In the affected region, some of the refinery and petrochemical projects may have been directly impacted due to the COVID-19 outbreak while others due to poor market conditions.

This is likely to cause delays and cost escalation issues for the EPC
projects in hand and also affect future projects pipeline, timelines, and project financing. Moreover, the prevailing economic situation may not be conducive for some new projects to come on-stream in the near future.

EPC companies that are considering to undertake acquisitions or corporate restructuring may also reconsider their plans amid the COVID-19 pandemic. A recent case of note is TechnipFMC, which has deferred its plan to undertake restructuring by splitting the company into two separate entities.

It intended to spin-off Technip Energies for overseeing the engineering and construction segment and TechnipFMC to be fully-integrated technology and services provider. The company has now postponed this restructuring due to the changing market environment and current economic conditions.

The global oil and gas industry has reported around 2,946 announced and planned projects with CAPEX more than US$1,221 bn for new/expansion projects in the oil and gas value chain that expected to commence operations during 2020-2022.

Of these, 1,391 are the new plants or expansion projects of refinery and petrochemical plants with a total CAPEX of US$572 bn.

As the cascading effect of COVID-19 continues to spread over the oil and gas industry, its impact is likely to be more on those projects that are planned to come on-stream during 2020 – 2022. The impact is expected to be more pronounced in COVID-19 affected countries, specifically China and Iran.

For the EPC companies, the key challenge in this difficult situation is workforce management, supply chain, cost over-runs, and increased subcontracting work timelines dependency resulting in these projects being pushed by at least by two-three quarters going by the current concern.

There could also be a need for contract negotiation with project owners due to contract compliance issues that might further strain the overall project financing for the EPC companies.

Some of the EPC contracts may also undergo subsequent revisions of project specifics, such as execution timelines or cost escalations. If these revision limits are surpassed, it can trigger the contract extension, suspension or termination rights and hence it needs to be looked at carefully.

The material published under partnership with

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