EMEA Capital Projects Update
There are two main changes in the region that affect the projects landscape. The first obvious one is the price of oil. The drop in oil prices has reduced the number of projects in places such as the North Sea and Russia. It has also meant a reduction in refining projects in the Middle East as revenues from exploration and production are reduced. For projects in much of the region, a lower oil price makes return on projects more challenging. In other words, companies are struggling to make investment decisions. Even independent producers, who may only have one field to develop, are delaying that development.
The other issue in the region is the political uncertainty leading to economic uncertainty in the Eurozone. The Eurozone is still struggling economically, slowing the need for new chemicals production and thus new projects. This summer’s Brexit vote has increased the uncertainty and, with it, the caution for moving forward on investments.
We would expect this trend to continue in the next couple of years because there is no expectation of a quick rise in oil prices. Meanwhile, it will take at least another 2 years for the United Kingdom’s exit from the European Union to be negotiated.
External political and economic uncertainties are causing owner company engineering directors to lose sleep at night. Further exacerbating their sleeplessness is that these uncertainties are outside of their control and not likely to go away anytime soon. Companies have reduced their capital expenditures over the last couple of years and, in some cases, are continuing to rein in capital project investment spending. Making matters worse for engineering directors is that companies are having a difficult time deciding on investments with the limited capital expenditure funds. Engineering directors are under increased pressure to make sure their businesses are sanctioning the right projects that will achieve the best business returns. Companies are coming to IPA to resolve project selection challenges. IPA is also regularly being asked by clients to support project cost and target setting functions and to help make sure the right projects are in their portfolio. They also want IPA to delve deeper into cost issues to determine what is driving project costs. These requests reflect ongoing concerns owners are facing as a result of economic uncertainties and sluggish economic growth across the region.
On the positive side, the uncertainty is causing more organizations to look at their capital effectiveness more intensively. This is bringing new attention to cost performance, and companies are looking at metrics much more seriously. This is also bringing to IPA new companies who want to understand their project performance or even to help establish project systems.
Companies in the region still seem to be depending on contractors to supply knowledge/talent gaps. They still want to understand how to leverage fewer owner resources and how best to organize. Some are working towards centralizing or in some cases re-centralizing their resources. This issue is far more difficult to address for state-owned companies that have to manage in siloed organization structures. In these organizations, sharing resources from a central source is difficult. In some cases, we have heard where companies have increased staff assuming an increase in projects. When the projects did not materialize, these organizations had teams with too many people without clear accountability. These organizations are now looking to optimize their staffing and keep needed skills.
* Yarossi was with IPA since its founding in 1987. She retired as IPA’s EMEA Regional Director in December 2016. Nekkhil Mishra assumed the role of IPA EMEA director upon Yarossi’s retirement