Fleming Conference - Final
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Transcript of Fleming Conference - Final
An Overview of Where Bidding is Thriving
Energy Construction Project Outlook:
An Overview of Where Bidding Is Thriving
Contacts:Walter Pesenti
Managing Director
An Overview of Where Bidding is Thriving
Content
• Current Conditions for Capital Projects in Oil and
Gas
• Investment Drivers in the Energy Space
• Contracting Strategies for the Current Business
Environment
• Q&A
An Overview of Where Bidding is Thriving
Current Conditions for Capital Projects in
O&G
• Return on Capital Employed (ROCE) has declined steadily since
2011. The recent drop in oil prices compounded the challenge, with
the Exploration and Production (E&P) sector posting some of the
most significant decline.
• The Oil and Gas (O&G) industry is at an inflection point, due to
growing demand for energy and more complex operations in a
challenging production environment.
What are Owners doing?– Improving ROCE and closely monitoring its performance.
– Reducing cost and improve operational efficiency – Difficult transformation to focus on costs.
– Taking a close look at the entire portfolio to improve efficiency, including pulling back from some regions with
uncompetitive performance, disposing of assets, and improving acquisition performance.
– Investing in new infrastructure and equipment, and reducing inventory.
– Diligent and effective reviews at project development, design, and construction milestones.
– Sharing risk models with partners and suppliers.
Challenging Environment
An Overview of Where Bidding is Thriving
Capital Projects Outlook
Short Term
– North America focusing on increasing production and
streamlining operations to maximize ROCE
– Middle East increasing investments to diversify
Downstream operations
– Europe focus in increasing throughput and optimize
portfolios
Long Term
– The International Energy Agency (IEA) forecasts that the
energy industry will invest $38 trillion to 2035:
– $16.9 trillion in power
– $10 trillion in oil
– $9.5 trillion in gas
– Nearly two-thirds will be invested in countries outside the
Organization for Economic Cooperation and Development
(OECD).
– This represents a significant challenge for the industry.
In the short term, capital projects will continue to progress as long as they
can deliver on ROCE. For the long term, there will be unprecedented scale of
capital investment in the Energy industry to 2035; effective project delivery
will be increasingly important.
Source: World Energy Outlook and OECD/IEA
Opportunities
An Overview of Where Bidding is Thriving
Capital Projects Benchmarking
• The track record is mixed—some successes but many projects with notable
issues
• Adhering to the set timeline (+5% best practice) and budget (+10% industry
average) is a key challengeAccording to IPA,1 one in eight projects is a disaster, averaging in:
1 Independent Project Analysis
Challenges
An Overview of Where Bidding is Thriving
Macro trends indicate significant population and energy demand
growth by 2035, which set growth strategies for companies
Investment Drivers in the Energy Space
Source: BP Global Energy Report
At the current pace (base case), the growth in energy demand
by 2035 would increase by nearly 34%.Gas is be the fastest-growing fuel. Renewables are growing to
have 9% of the energy share by 2035.
1.5B to
reach 8.5B34%
An Overview of Where Bidding is Thriving
Crude Oil Market
$52.00
$54.00
$56.00
$58.00
$60.00
$62.00
2017 2018 2019 2020 2021 2022 2023 2024
Chicago Mercantile Futures Prices (12/19/16)
WTI Brent
Crude Oil Supply Growth
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50,000
100,000
200
0
200
1
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Mb/d
Historical Oil Production and Consumption
Total North America Total S. & Cent. America
Total Europe & Eurasia Total Middle East
Total Africa Total Asia Pacific
Oil ConsumptionSource:BP
There are expectations of tighter oil markets in the next few years
An Overview of Where Bidding is Thriving
Natural Gas Market
Source:BP
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100.00
200.00
300.00
400.00
200
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Bcf/
d
Historical Natural Gas Production and Consumption
Total North America Total S. & Cent. America
Total Europe & Eurasia Total Middle East
Total Africa Total Asia Pacific
Natural Gas Consumption
$0
$5
$10
$15
$20
$25
0
10
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30
40
2016 2017 2018 2019 2020
$b
illio
ns
# o
f p
roje
cts
Natural Gas Pipelines and Storage Projects
Construction Begun Early Development
Advanced Development Announced
Estimated Construction Cost
• 82 projects at different phases from announced through commencement of
construction
• Expands take-away midstream and storage capacity for unconventional gas plays
• Estimated aggregate construction value thru 2020 is approximately $60 billion
• 40% of the projects that are in earlier stages and are at risk due to surplus
natural gas supply
Source: Platts/SNL
Surplus production if driving near-term projects
An Overview of Where Bidding is Thriving
Power Projects 2016 to 2019
• Total planned capacity of approximately 220,000 MW, with 86% in the United
States
• Expands use of Renewable and Non-Renewable Fuels
• Estimated aggregate construction value is approximately $740 billion,
with >60% planned for post-2019
$0
$100
$200
$300
$400
$500
$600
0
20,000
40,000
60,000
80,000
100,000
2016 2017 2018 2019 2019+
$bill
ions
Megaw
atts
Power Plant Projects - U.S. and Canada
Total Under Construction Capacity
Total Announced Capacity
Estimated Construction Cost
Source: Platts/SNL
Power projects have an estimated aggregate construction value of
~$740 billion
An Overview of Where Bidding is Thriving
LNG Projects 2017 to 2021
• 41 projects at different phases from announced through commencement
of construction
• Key take-away for natural gas surplus from unconventional gas plays in
U.S. and Canada
• 60% of the projects that are in earlier stages have no cost estimates
yet
Source: Platts/SNL
$0
$20
$40
$60
$80
$100
$120
0
2
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2017 2018 2019 2020 2021+++
$bill
ions
# o
f pro
jects
LNG Projects
Construction Begun Early Development
Advanced Development Announced
Estimated Construction Cost
LNG projects estimated aggregate construction value through
2020 is ~$140 billion
An Overview of Where Bidding is Thriving
• Approximately 600 projects totaling ~42,000 miles of transmission lines
• Different phases from announced through commencement of construction
(new and upgrades)
• Expands and upgrades the electricity grid to provide more reliable service
• ~$50+ billion estimated construction value between 2017 and 2022
Source: Platts/SNL
0
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4
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0
2,000
4,000
6,000
8,000
10,000
2017 2018 2019 2020 2021 2022
$bill
ions
Tota
l P
lanned
Mile
s
Transmission Projects by Region/Year
SPP WECC RFC
SERC MRO NPCC
TRE Planned $ Spend
Transmission Projects
Transmission projects have an estimated aggregate construction
value of ~$72 billion
An Overview of Where Bidding is Thriving
Energy M&A
• 400+ deals completed and pending over trailing 12 months (12/1/15
to 12/28/16)
• $200+ billion in aggregate transaction value
• Includes entire company deals, asset deals, and private equity
deals
Source: Platts/SNL
Energy M&A have a $200+ billion in aggregate transaction value
with Midstream segment representing near half of the aggregated
value, followed by power with majority of the deals
An Overview of Where Bidding is Thriving
Construction to Drive Organic Growth and
Deals across Entire Energy Supply Chain
Deals across the entire energy supply chain will overwhelm
suppliers
An Overview of Where Bidding is Thriving
Contracting Strategies for the Current
Business Environment
Considerations for Selecting a Style of Contract
Type ReimbursableManagement
FeeTarget Cost Unit Rates Lump Sum
Pricing Competitive Highly
Competitive
Competitive Very Competitive Highly
Competitive
Contracting Time Required Short Long Medium Long Long
Scope of Work Definition General
Definition,
Variable Scope
Detailed
Definition, Fixed
Scope
Semi-Detailed
Definition,
Variable Scope
Semi-Detailed
Definition,
Variable Scope
Detailed
Definition, Fixed
Scope
Risk of Cost Overrun High Low Moderate Low Low
Potential for Claims Low High Moderate High High
Market Conditions Required None Competitive Moderately
Competitive
Competitive Competitive
Negotiation Effort Low High Moderate High High
Control and Administration
Effort
High Low Moderate to
High
Moderate Low
Risk of Schedule Overrun High Moderate Low Moderate Low
Contracting strategies in the U.S. and Canada are shifting to Lump Sum, but
there are still many Reimbursable type of contracts
An Overview of Where Bidding is Thriving
Questions and Answers