ANALYSIS Builders eyeing Aramco-led infra projects in Saudi Arabia
Samsung, Hyundai placed bids as part of Aramco's land development package
By Kim Hyun-bin
Saudi Arabia's state-run oil corporation is pushing ahead with its long-term growth project that is grabbing the attention of local construction companies. Many hope the mega-project will open up a means to revive their currently stagnant overseas plant procurement divisions.
Last month, Aramco announced major expansion plans for its industrial investment program, “Aramco Namaat,” signing 22 memoranda of understanding (MOU). These focus on the four key sectors of sustainability, technology, industrial and energy services, and advanced materials, and are linked to 13 major construction projects.
“Namaat” means “collective growth” in Arabic, and the program aims to create new value, driving economic expansion and diversification in Saudi Arabia.
“Namaat offers our partners significant opportunities to participate in Aramco's long-term growth strategy and play a vital role in the Kingdom's expanding energy and chemicals supply chain,” Aramco CEO Amin H. Nasser said. “We believe these exciting target sectors offer significant opportunities for all the current and prospective parties involved.”
Among the firms that signed MOUs, both Samsung Engineering and Hyundai Engineering & Construction inked deals in the engineering, procurement and construction (EPC) sector.
The recent announcement from Aramco is raising hopes for Korea's stagnant overseas construction industry to recover and revive.
The MOUs in the EPC sector include the resumed Jafurah Gas Processing Plant project and the Zuluf Oil Field development project, in which industry watchers believe there is a high possibility of Samsung and Hyundai landing the deals they have placed bids on.
The Jafurah project was cancelled last year but was resumed this year, with construction involving a main package facility, along with five associated plants, worth $4 billion.
Samsung Engineering and Hyundai E&C placed bids for the construction of the gas compressor and the gas restoring and utility package units, respectively, and are currently awaiting the results.
The Zuluf Oil Field development project involves transporting crude oil and gas from offshore fields to land and building the facilities to handle processing. Samsung and Hyundai also placed bids on the land development package worth $4.25 billion won.
Industry watchers believe that Samsung and Hyundai have a good chance of sealing their deals for parts of the Zuluf project as well.
Construction companies have been eyeing procuring more overseas deals, after the industry was hit hard by the drastic drop in oil prices and the COVID-19 pandemic. Korean builders have been striving to expand their overseas projects as cash sources, as the domestic housing market has continued to slow down.
According to the International Contractors Association of Korea, total overseas construction procurement fell 9 percent to $16.6 billion as of September 13. The total number of procurements stood at 331 projects, down 12 percent from the same period last year.
Crude oil prices has been on a steady rise since the fourth quarter of last year, becoming a positive signal and reason behind Middle Eastern countries increasing their construction orders for oil refineries, as well as key ordering agencies and state run oil companies expanding their budgets for construction.
Ahead of the Aramco mega-project announcement last month, the United Arab Emirates (UAE)'s state-run Abu Dhabi National Oil Co. (ADNOC) resumed its Hail & Ghasha gas project in this year's second quarter, after continuous delays.
All eyes are on whether Indonesia's Lotte Chemical Line project, which includes seven construction projects worth $2.4 billion total, will start to pick up steam. Samsung Engineering and DL E&C have placed bids on the projects.
Hyundai E&C, DL E&C and GS E&C have also placed bids on the Philippines North-South railroad project, which is worth $2.5 billion, and they are currently waiting for a decision.
Although local builders have been inking new contracts, some industry experts believe that it will take some time for the overseas procurement market to recover.
“The COVID-19 crisis and low oil prices, as well as uncertainties in the global economy that had reduced construction orders, have been showing signs of recovery. However, not all uncertainties in the global market, or other unfavorable factors, have been resolved,” a major construction company representative said. “We are not seeing a sharp turnaround from the current situation.”
Hyundai excavators / Courtesy of Hyundai Construction Equipment
Increasing PPP procurement
Nevertheless, local builders have been finding success in overseas public private partnership (PPP) deals, adding to their profitability.
According to the industry, major local construction companies, including Samsung C&T, GS E&C and SK Eco Plant, have been forming diverse overseas PPP consortia, through which they have been selected as the preferred bidders. If everything goes according to plan, local builders are expected to secure $8 billion worth of PPP construction projects, the largest total value of orders ever in one year, and a 1,000-percent increase from the previous year.
Samsung E&C has shown strength in the EPC sector and was in charge of the UAE's HVDC PPP submarine cable project. The total budget was around $3.5 billion, and from it, Samsung's EPC contract was valued at $2.7 billion.
The company also plans to enter another PPP project for Qatar's Fercility-E integrated water and power plant, in a consortium with Japan's Marubeni and Kyushu Electric Power Transmission and Distribution Co.. The project is worth $3 billion, and Samsung is expected to earn $1.8 billion from the EPC contract.
GS E&C formed a consortium with Australia's North East Link and has been selected as the preferred bidder for a road and terminal project. This PPP project is worth around $8.8 billion won and of that, 1.8 billion won will be allocated to GS E&C.
Local builders have been left out of the global PPP market for the past decade. According to the International Contractors Association of Korea, among overseas procurements, only 3 percent to 5 percent were from development projects. After reaching total annual procurements amounting to $2.8 billion in 2010, since then, total construction procurements have failed to exceed $1.5 billion for the past decade.
As market price competition has been getting fiercer in the EPC sector, profitability has been drastically reduced, forcing local builders to turn to infrastructure projects, as the demand for traffic, communication, distribution and energy infrastructure is on the rise. Developing countries are in dire need of infrastructure upgrades and their relative lack of know-how in the construction field has been leading to PPP deals.
“Local construction companies are avoiding the fiercely competitive subcontractor market and are entering into infrastructure development projects as well as revising their portfolios towards PPPs,” a major construction company representative said.