As part of the underlying Oil & Gas and Petrochemical market revolution, the business model for projects is changing.
The new business approach is a game changer for all the players of the energy sector.
A New Business Model to Cut Projects Costs
This new business model came up to cut the projects costs drastically.
Some Operators realized that the most important savings on a project cannot occur when the front end engineering and design (FEED) is completed. It is far too late.
Therefore, these operators put an high pressure on the contractors performing the FEED to stick to the money target they had assigned.
In fact, the new business model is a return to the basic of ROI (Return on Investment) calculations.
For too long, the Petroleum industry has only focused its effort to minimize project costs, taking usually 4 to 5 years to do so.
Thus, the new business model aims to shorten project timeline while reducing costs, delivering projects in 2-3 years.
As a result, the project ROI increases significantly under the combined effect of the time frame and cost reduction with earlier revenues.
Key Players of this New Business Model
Importantly, this new business model generates a collaborative relationship around a common interest between Operators and contractors.
Especially because, the contractor performing the FEED, takes a chance to reduce risks and unexpected costs during the EPC phase. The lower the contractor submits a quotation, the higher chance he gets to convert it into EPC while he can still expects a reasonable margin.
Meaning, the contractor is motivated since day-one of the FEED to submit the least expensive project quotation.
This new business model was marginal still four years ago. Crunching data from our database www.projectsmartexplorer.com, it represents today about 35% of the market.
The proportion of this New Business Model is rising year to year, upturning the way vendors should address the market.
New Pricing Policy for New Business Model
This new business model impacts contractors and vendors strategy and tactic, up to their pricing policy.
On strategic level, the contractors need to bid for the FEED in order to get the EPC contract. For the vendors, it becomes a “must” to position themselves at the FEED stage to promote their solutions.
The Oil & Gas and Petrochemical new business model also impacts the vendors pricing policy.
In this new business model, submitting a budgetary offer at the FEED stage is just killing.
In no-way a vendor has a chance to be considered at FEED stage in this context.
The vendors selected at this stage will have 99% chance to get the order at the EPC stage. At this EPC stage, the contractor has no more time and money to retender all the equipment pre-selected at FEED.
In this new business model, the vendor must adopt other pricing policy such as “Open Book Pricing” to submit competitive offer in preserving the margins.
In the Oil & Gas and Petrochemical New Business model, missing the FEED means missing the projects.
Of course, you can count on Project Smart Explorer
to guide you at Pre-FEED and FEED stage on these projects:
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