- There has been relatively high contracting activity (engineering, procurement, and construction [EPC] and time charters) in 2021.
- Since the last version of this report, one EPC contract and several floating storage regasification unit (FSRU) time charter contracts have been awarded.
- No major overall supply bottlenecks in the LNG regasification terminals market during the forecast period are expected, although the impact of COVID-19 on ongoing projects is still unclear.
- Sharp recent escalations in the price of raw materials, particularly steel and other metals, are likely to have a significant effect on upcoming onshore EPC contracts. Most of the leading international EPC contractors are unlikely to be willing to take on these extra costs, with prices of EPC contract bids offered by contractors now expected to be higher than before these cost increases.
Key demand trends
Global EPC activity was relatively stable—at about 40 million metric tons per annum (MMtpa) from 2015 to 2019—but decreased by 17% in 2020. COVID-19 containment measures delayed some projects under construction, resulting in less activity. In addition, more uncertain demand for LNG—in the short term—resulted in fewer projects starting construction.
However, demand for EPC services is forecast to increase again from 2021. Some of the construction activity initially planned for 2020 will be done in 2021, while more projects are expected to be sanctioned because of a positive outlook for LNG demand. Mainland China in particular will drive EPC demand. During the forecast period, 25% of global activity will be in mainland China, while its share in Asia Pacific will be 38%.
Key supply trends
Laying off staff has been the primary means to improve utilization and reduce overheads in the face of demand uncertainty in 2020. While most of the head count reductions were driven by the weak market, some were because of a deliberate bidding policy that resulted in companies not requiring as large of a workforce as before, and divestitures.
Many contractors have reported big losses or very low margins in the past few years. A combination of operators focusing on cost cutting and a very competitive oversupplied contractor landscape has resulted in very poor financial results for the contractors.
EPC contactors are also increasingly pursuing diversification strategies with the long-term aim of reducing their reliance on oil and gas markets in favor of growth industries where their capabilities can be applied, such as green energy. Although these segments still represent a small portion of the overall revenue of EPC contractors, they are likely to grow in importance over the next decade, further reducing contractors’ reliance on traditional oil and gas projects.
Supply chain implications
Several of the leading onshore EPC suppliers have entered the latest oil price downturn with healthy backlogs. This situation provides them with a significant buffer over the next one to two years, meaning they will be less desperate to pick up new work during a period when onshore upstream EPC contract awards are expected to be reduced.
Any supply and demand imbalance within onshore LNG regasification terminals will most likely be a result of high demand from other construction industries competing for the same EPC services. The reason is that activity in the LNG regasification market is very fragmented and relatively small (compared with other construction industries) in each market.
Contract and cost trends
EPC costs for onshore LNG import terminals declined by 1% in 2020 after being at the same level in 2019 as in 2018.
However, EPC costs in the first quarter of 2021 increased by 7% quarter on quarter, the largest quarterly increase since the third quarter of 2009. Sharp recent escalations in the price of raw materials, particularly steel and other metals, have cascaded through bulks and equipment costs.
Between 2020 and 2025, onshore EPC costs are forecast to increase by 23%. Labor (engineering and construction) and equipment costs will be the main cost drivers during the forecast period.