EXPANDING and contracting

To many people, the contracting industry seems to be doing exactly that - contracting. And like industries across the board, companies are being faced with the task of finding a way of adapting to the current straitened circumstances.

In the face of a cyclical downturn in many of its client industries, contractors like AMEC are finding new ways of working. The goal is to cut the cost of building and adapting plants; removing the stumbling-blocks to the smooth running of projects; and allowing contractors, clients and suppliers to extract the maximum amount of profit from their dealings.

AMEC's Process and Energy division is at the forefront of these efforts. Recently bolstered by a major acquisition, its engineering division has been split so that offshore and onshore contracting are no longer intertwined. This, explains Graham Wilson, the managing director of the onshore engineering and projects division, gives the process and energy division the flexibility to respond to the different demands of its markets.

The roots of the recent restructuring go back to the attempted takeover of AMEC by Kvaerner, said Bob Greener, engineering operations director of AMEC P&E's project execution base at Darlington. The bid was unsuccessful, but as a result, AMEC had to refocus on its business objectives.

Instead, the company decided to establish closer relationships with its existing and new clients, while making selective acquisitions to broaden particular areas of its business, such as the 42 per cent stake in French contractor Spie Batignolles, strong in such areas as electricity, railways and pipelines.

BUYING AND BROADENING

But of more relevance to the process division is last year's acquisition of Babcock King Wilkinson, the process division of Babcock International. Finalised earlier this year, the acquisition fulfils two objectives for the company: it gives it process expertise further downstream from its traditional areas of oil and gas, refineries and petrochemicals; and it broadens its geographical spread, thanks to BKW's strong presence in the middle and far east, west Africa and, particularly, China.

Despite the recent crises in Asia, China is still a major growth area for contracting, says Wilson. `Most of the major petrochemicals operators have very strong investments in China,' he comments. `The fundamentals there are still strong, although the growth rate has dropped a bit - it's really just a case of timing.'

Buying a company with existing links in China was a vital prerequisite for doing business there, Wilson notes, because it would take years, working from scratch, to build up the relationships with local government and industry that are so important for doing business in the East. BKW has been operating in China for the past 11 years, says Bob Churchill, AMEC BKW's director and general manager, and has a reputation for reliability that a newcomer couldn't match.

The company is constantly on the lookout for new growth areas, and is now about to join the newest oil-rush, to Azerbaijan and the oilfields in the Caspian sea. `Bacu is going to be the Aberdeen of the Caspian,' says Greener, `but first we've got to get the oil out!' Major developments in the area are some four years off, he estimates.

Refinery revamps are becoming a particularly lucrative area, says Wilson; the firm is now working on the fifth successive revamp of the fluid catalytic crackers at Texaco's refinery in Pembroke and a major revamp and shut-down at Exxon's complex at Mosmorran, Scotland.

CYCLE RACE

The immediate prospects for process contracting in AMEC's home marker are rather downbeat. `We're facing an investment slowdown,' says Wilson. `In fact, what we're seeing is capital expenditure rather than investment - the money firms are spending is not adding value to their business..' The petrochemical industry's notorious cycle is now firmly in its overcapacity phase, especially for products like paraxylene.

`Overall, we haven't got an optimistic view of petrochemicals,' says Wilson. `If you'd asked us 18 months ago, the view would have been far rosier.' He believes that the market is likely to stay flat for the next two years before climbing the next cyclical upswing; `in the meantime, the order of the day is to keep looking for ways we can add value. The big challenge is for us to find ways of making projects that would otherwise be non-viable work for both us and our clients.'

WORKING AS A TEAM

The key to this is a partnering approach to contracts, says Wilson. This was pioneered by AMEC and is now widespread throughout the UK contracting industry, both on and offshore. `We found that there was a need to develop closer links with operators, and adopted that as part of our strategy,' he says. `As part of that, we develop an understanding of our clients' business drivers, to help them extract as much value as possible .'

The philosophy behind the partnering arrangements is to allow the operators to focus on their core activities. `Their business is getting oil out of the ground, or turning it into petrochemicals - it isn't engineering or construction,' comments Wilson. `This allows us to be involved right from the conceptual stage of a project, which is where most of the real savings can be made.' Removing the overly prescriptive way of working which has prevailed in the contracting industry introduces flexibility; for example, in procuring equipment which isn't overspecified for the job `because that's the equipment we always use,' which can both cut costs and enhance the efficiency of the completed plant.

One project where a partnering approach has shown real success is at BP's Coryton refinery. AMEC provides support for all conceptual engineering at the refinery, and carries out all front-end engineering packages; detail engineering; procurement, construction and commissioning services. At any time, there are several projects running at the refinery, with values varying from a few thousand pounds to £10million. To date, some 160 projects have been completed, and the team is working on about 90 more.

The agreement has completely changed the way that AMEC works, says Wilson. Rather than just providing workers that come into the site to do one or two jobs and then leave, the AMEC staff form a `projects group' at Coryton and are integrated seamlessly with the refinery's operation - to the extent that, to external appearances, there's no way of telling which staff belong to BP and which to AMEC. `It's got to the point where the customer is not BP Coryton; it's the various operational groups within the company,' Wilson comments. `Moreover, the agreement isn't just a service contract; it's a performance contract. We share in the success or failure of the project.'

Similar operations are underway at another BP site, the chemicals complex at Grangemouth. In a major expansion of petrochemicals capacity, the company is building a 300 000tpa linear low-density polyethylene plant; while on an adjacent plot, its joint venture with Elf Atochem, Appryl, is building a 250 000tpa polypropylene unit. AMEC and Lyon-based firm Technip are the contractors on the projects, which are worth a total of £200million. `The projects are being executed as a four-way alliance between BP, Atochem, Technip, and us,' says Wilson.

Partnering is becoming increasingly common in the UK contracting industry, thanks to the ACTIVE (Achieving Competitiveness Through Innovation and Value Engineering) Initiative, which involves Britain's main contractors and operators and several large equipment suppliers. The initiative aims to cut the cost of building and commissioning a plant by 30 per cent, by eliminating the adversarial culture of bidding for projects and moving towards partnering schemes. The majority of the savings are made in the early, conceptual stages of the project, often in simplifying the bidding procedure and standardising contracts. Once the project enters the engineering, procurement and construction phases, the costs are `locked in' and there's very little scope for further savings.