MELTDOWN RISKS: MEGA EPC PROJECTS RECOVERY FROM THE DOWNTURN

3/15/2014
Agenda for Presentation Economic Downturn and Macro Impacts on Global Investments in EPC Projects Cash Flow and Bank Credit Exchange Rate and Commodity Pricing Orders Cancelled Projects on Hold New Projects Projects during Meltdown Projects Post Meltdown Recovery Summary

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

Meltdown and Recovery in GDP

Project Risks and Causes of Project Failure

Delay in completion (increase in IDC) Capital cost over-run Technical Failure Revenue Contract Default Increased Price of Raw Materials Loss of Competitive Position Commodity Price Risk Volume Risk Overoptimistic Reserve Projections Exchange rate Technical Obsolescence of Plant Financial Failure of Contractor Contract Mismatch

US Nuclear Plants Eurotunnel Alstom Combined Cycle Dabhol AES Drax Natural gas plants Argentina Merchants Euro Disney; Tollways; Subways Briax Gold Project Jawa Power in Indonesia Iridium Stone and Webster MCV

Impact of the Drivers of Free Cash Flow Value on Risk in EPC Projects

Revenues

Forward prices and contract sustainability Volume and capacity utilization Credit quality of off-taker

Operating Expenses

Efficiency in converting inputs to outputs Operation and maintenance expense volatility On-going Capital Expenditures

Capital Expenditures

Completion and technology Over-run Delay Credit and protection of construction company

Classification of Risks Free Cash Flow

Project finance risk can be classified in a number of different ways. One is the free cash flow items of Construction Risk and Capital Expenditures

Cost over-runs Construction delays Plant performance

Commodity Price Risk

Trends in prices over time

Productivity Equilibrium long-run cost of production Upper and lower boundaries

Volatility

Volume Risk

EPC PROJECTS IN RISK DURING MELTDOWN

3/15/2014

nuclear
Under execution Cancelled On Hold New

hydro

thermal

wind

solar

t&d

267 50 120 245

142 50 28 132

80 46 13 112

25 13 4 25

8.8 14 12 20

465 97 101 347

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

All Values in Billion Dollars

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DOWNTURN
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400

RISK PROFILE AT PEAK MELTDOWN

All values in Billion Dollars

350
300 250 VALUE

200
150 Nuclear 100 Hydro Thermal Wind 0 Cash Flow Risk Nuclear Hydro Thermal Wind Solar T&D 100 65 34 12 4 214 Exchange Risk 100 34 27 6 2 124 Commodity Price Risk 67 43 29 7 2.2 127 Projects Cancelled 50 30 45 13 14 97 Projects on Hold 120 28 13 4 12 101 New Projects 245 132 112 25 20 347 Solar T&D

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

50

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RECOVERY

LOW MARGINS FALLOUT OF SLOWDOWN

RECOVERY
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RISK PROFILE POST STIMULUS

250
200

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

All values in Billion Dollars

150 VALUE 100 50 0 Cash Flow Risk Nuclear Hydro Thermal Wind Solar T&D 41 41 21 5 1.2 124 Exchange Risk 56 18 16 4 1.1 64

Nuclear Hydro Thermal Wind Solar

Commodity Price Risk 62 33 24 4 1.3 79

Projects Cancelled 21 23 40 6 5 90

Projects on Hold 27 20 9 3.2 7 76

New Projects 178 92 140 17 12 238

T&D

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3/15/2014 Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

RECOVERY

RECOVERY AND RISK MITIGATION

1.4
1.2 % R e c o v e r y

0.8 Nuclear 0.6 Hydro Thermal 0.4 Wind Solar 0.2 T&D

0 Nuclear Hydro Thermal

Cash Flow Risk 0.41 0.630769231 0.617647059 0.416666667 0.3 0.579439252

Exchange Risk 0.56 0.529411765 0.592592593 0.666666667 0.55 0.516129032

Commodity Risk 0.925373134 0.76744186 0.827586207 0.571428571 0.590909091 0.622047244

Cancellation Risk 0.42 0.766666667 0.888888889 0.461538462 0.357142857 0.927835052

On Hold Risk 0.225 0.714285714 0.692307692 0.8 0.583333333 0.752475248

New Projects 0.726530612 0.696969697 1.25 0.68 0.6 0.685878963

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Wind
Solar T&D

DATA BANK
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Study Includes Data from 317 global projects in the areas of generation, transmission and distribution of electricity. Countries included China, India, USA, Brazil, Russia, Germany, Canada Projects included Nuclear, Hydro, Thermal, Wind, Solar and T&D System Minimum project size was of $250 million

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

TYPE OF RISKS EXPOSURE FOR EPC PROJECTS

3/15/2014

Cash Flow and Bank Credit Exchange Rate and Commodity Pricing Orders Cancelled Projects on Hold New Projects

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Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

METHODOLOGY

Year wise data on Cash flows, Working Capital Credit Availed, Foreign Exchange Employed, Commodity Prices( Like Steel, Cement, Copper, Oil,etc on projects stretching from 2004-2009 were collected from various published sources like the annual reports, analyst briefing and press releases. Risk assessment was done using standard processes from the above data for Projects using the Australian Standard

3/15/2014 Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

Critical Risk Factors were use in arriving at predominant risks for projects.
Values as shown in table in slide one and two were arrived at using influence factors on the total value of projects under execution. The post meltdown period has been taken from 2009 April onwards.

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SUMMARY

Of total EPC projects studied value of ones at risk during the meltdown was 997.8 Billion Dollars

3/15/2014

267 Nuclear
142 Hydro 80 Thermal 25 Wind 8.8 Solar 465 T&D T&D projects were exposed to the largest value of risks as usually happens during any downturn in a state economy followed by Nuclear which were mostly in China and India. Hydro projects were more at risk than the thermal projects. Cash Flow Risks affected nearly 50 percent of the projects seriously and were also the main reasons for placing projects on hold. Thermal Generation projects recovered from the meltdown fastest and planners placed the highest confidence in such projects as seen from the largest growth in new orders .

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

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SUMMARY.CONTD
3/15/2014

Projects on hold have been released albeit slowly and here T&D Projects ( 93%)followed by Thermal Projects(88%) gained the most during the recovery.

On Hold and Projects in Wind have shown a very good turnaround ( 80%)
Cancelled Wind and Solar are yet to see revival (Less than 40% Solar and 33% Wind have been revived) Hydro Projects have remained relatively more stable than all other projects. On Hold Nuclear and Cancelled Projects have shown little recovery ( Less than 25%)

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009

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Projects in Africa
Risk Assessment 1329 MW Mmamabula Energy Project South Africa

Power requirements might slow down during the economic recession, but as no major new power plants have been built for years, the current low reserve margin means any increase in the demand for electricity before 2014 is problematic. Type of investors that have been targeted for the Mmamabula project have not been directly affected by the economic downturn. Institutions are looking to invest in solid, tangible assets and infrastructure, such as power stations.

Mega Projects in Middle East at Risk

Risk Tradeoff: Contractors and Owners During Meltdown

Contractors initially welcomed the lions share of risk on EPC projects in return for the significant profit potential that could be derived from having simultaneous control over

design, procurement, and construction and any resulting efficiencies in cost schedule. Over time, however, owners began to demand
an increased role in the design process, heightened fast-track completion requirements, enhanced performance guaranties

-with no corresponding assumption of risk.

Assessment of Risks in International EPC Projects In Current Global Economic Environment

Risks associated with third-party technology and equipment

supplied by owner equipment manufacturers (OEMs) increasingly shifted to the contractor. Contractors bid on EPC projects where they were unable to adequately utilize value engineering innovate to balance increase in accepted risk.

Assessment of Risks in International EPC Projects In Current Global Economic Environment

Profit margins declined, Owner penalties increased, EPC contractors were caught in the squeeze. Not surprisingly, contractors met the increase in risk with higher pricing, thereby depriving owners of the cost savings EPC projects were intended to provide. Even worse, the incidence of disputes soared, often followed by protracted and costly litigation.

Assessment of Risks in International EPC Projects In Current Global Economic Environment

A recent survey of construction trends in Power Plants in US, Europe and Asia and Middle East by (BASmS) Business Advisory Services management Solutions found that there has been a significant Increase in construction related disputes over the past few months The survey also found that the disputes were much more prevalent on complex projects costing more than $500 million

Assessment of Risks in International EPC Projects In Current Global Economic Environment

Thus the major causes of disputes and claims: 1.Architect/engineer error and omission, 2.Excessive change orders and owner/contractor interference. Less frequent causes mentioned were differing site conditions, acceleration issues and non-performance of subcontractors.

Assessment of Risks in International EPC Projects In Current Global Economic Environment

Possible Reasons: Tighter current global economic environment fight harder for every dollar leads to hard-line negotiations, tough contract terms and strict enforcement of contract language.

Assessment of Risks in International EPC Projects In Current Global Economic Environment

The time has come to persuade owners, developers and project financiers that the engineer-procure-construct (EPC) contract is no longer the best delivery system for building the next crop of nuclear power plants.

Alliance contracting represents a viable, proven alternative to adversarial business-as-usual contracts.

The Projects During Transition

1.Ras Tanura Integrated Project (RTIP) 2.Pearl GTL 3.Petro Rabigh Refinery Upgrade 4.Shah Sour Gas Field Development 5.Khurais Oilfield 6.Manifa Offshore Oilfield 7.Saudi Kayan Petrochemicals Complex 8.Hassyan Power & Desalination Plant 9.Ras Girtas Power Project 10.Shaybah Phase 2 Expansion Total cost: $114.5 billion
The primary driving forces behind our project power list are Saudi Arabia, Qatar and the UAE, where energy and infrastructure projects on a world-leading scale continue to progress. With almost US$120 billion worth of critical energy and infrastructure projects up for grabs

EPC Companies Who Matter

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Bechtel (USA) Technip (France) Aker Solutions (Norway) Chiyoda Corporation (Japan) SNC-Lavalin Group (Canada) J. Ray McDermott (USA) JGC Corporation (Japan) Hyundai Heavy Industries (South Korea) Foster Wheeler (USA) Daelim Industrial Company (South Korea)

Fluor, Foster Wheeler, Shaw Group, Jacobs, Technip, Toyo, JGC, Toyota, and GS Engineering in Korea, they typically win the majority of the work. As their backlogs increase thats a clear barometer that equipment will be ordered going forward

Projects Today
1.

2.
3. 4. 5. 6. 7. 8. 9. 10.

Nassiriya Oilfield (Iraq) Integrated Gas Development Project (UAE) South Pars Gas Field (Iran) Jubail Export Refinery (Saudi Arabia) Tianjin Petrochemicals Complex (China) Touat Gas Field (Algeria) Gassi Touil Gas Field (Algeria) Skikda Refinery Upgrade (Algeria) Sipchem Polyvinyl Plants (Saudi Arabia) Borouge (UAE)

Projects Today
1.

2.
3. 4. 5. 6. 7. 8. 9. 10.

Trans Sahara Pipeline Al-Shaheen Refinery Nabucco Pipeline Yanbu Export Refinery Khalifa Point & Fujairah Refineries Jubail Export Refinery Integrated Gas Development Abu Dhabi Crude Oil Pipeline Kuwait Oil Co drilling platforms Oman oilfield services contract

Thank

You

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3/15/2014

Presented at the World Engineering Congress Bangkok 4th and 5th May 2009