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Oil & Gas and Petrochemical New Business Model

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.

If the contractor reaches it, the Operator converts the FEED contract into engineering, procurement and construction (EPC) contract.

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.

Timeline New business model versus traditional business model
New Business Model versus Traditional

Thus, the new business model aims to shorten project timeline while reducing costs, delivering projects in 2-3 years.

In this case, the Operator does not organize bids for the EPC contract to cut time. At the end of the FEED, the Operator decides or not to convert the FEED into EPC contact.

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

Previously used by Independent Operators, this new business model is now adopted by NOC (National Oil Companies).

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.

A New Business Model for a new Pricing Approach
A New Pricing Model for a New Business Model

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 contractor will only pick up the vendors submitting the most aggressive price at FEED stage to secure the final investment decision (FID) with the operator and convert the FEED into EPC contract.

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.

For this New Business Model, vendors must not miss the FEED stage. Indeed, all technical and commercial decisions will be made upfront of the EPC stage to execute the project on Fast-track.

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:
www.projectsmartexplorer.com

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1 Comment to “Oil & Gas and Petrochemical New Business Model”

  1. Chers Amis

    A mon grand âge, j’ai connu et vécu plusieurs crises pétrolières chez un grand opérateur français….
    Et à chaque fois continué à travailler avec des stratégies de projet innovantes, mais copiant et améliorant toujours ce qui s’est fait lors des crises précédentes.
    On avait nommé cela les “cooperative studies”, qui consistaient à impliquer les contracteurs au plus tôt dans les projets.
    En charge de grands projets, la hiérarchie me faisait confiance pour coordonner les équipes techniques internes et imaginer les grandes lignes du nouveau projet (conceptual). Nous proposions quelques voies pour la réalisation et impliquions ensuite au plus vite nos engineering et contracteurs pour continuer ce qu’on nomme aujourd’hui le FEED.
    Toutes les idées étaient les bienvenues…et le contrat pour la suite était passé au plus tôt.
    Deux options, un contrat engineering management s’il s’agissait d’un engineering pur, un contrat EPC si on avait un contracteur.

    Rien ce bien nouveau donc, mais les systèmes internes des opérateurs sont aujourd’hui beaucoup plus difficiles à convaincre. Manque de souplesse et parfois de technicité des systèmes mais aussi des individus. Trop de computeurs et pas assez de crayons dans la première phase.
    Mais on s’en sortira
    Je vous souhaite le succès et la forme dans votre montagne
    Très cordialement
    JJ ROYANT

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