India is yet to Mature as ‘the EPC Market’
- Anil Chanana, COO - Oil & Gas, Leighton India Contractors Pvt Ltd,

International engineering contractors share a love-hate relationship with the Indian market. Despite many challenges of policy paralysis, complicated approval processes and consistent project delays, India has continued to be an important destination on radars of global EPC contractors. Having worked in different markets for over two decades, Anil Chanana, COO - Oil & Gas, Leighton India Contractors Pvt Ltd, is now looking after its operations in India. He shares his observation as an international service provider on the ‘not so matured’ Indian market exclusively with readers of CEW.

Each market is unique and has got its own set of challenges, be it in terms of the geographical location, mind sets, regulations, policies or people affecting the EPC costs as well as project outcomes, Chanana shares as he starts the conversation. He feels that the Indian EPC market is not yet as matured as some of the other international markets which are witnessing a number of timely project awards and more predictable project outcomes.

From the perspective of an EPC player, citing Middle East as the example, he notes, “Cash-rich Middle East region, particularly the GCC, has continued to be a favourite among the global EPC service providers and has become extremely competitive over the last few years. There are, at least, 6-8 major players like ADNOC, Qatar Petroleum, Saudi Aramco and few others in the region, who offer more opportunities compared to India where you predominantly find only two offshore oil & gas clients.”

Though many international EPC companies have set up their operations in India, lack of new projects in India over the last 18-20 months has been a major setback for the engineering contracting industry. With the change of government at the centre, Chanana is also hopeful that a number of projects which were put on the back burner might get cleared over the next couple of months, which would generate momentum and optimism for the engineering contracting industry. “Though it may take another 6-8 months for the remaining projects to be cleared, I do not see a shortage of projects over the next 3-5 years in the hydrocarbon space,” he observes on the positive note.

Indian market has its own set of challenges for the international players who start very much at the entry level. He elucidates, “International players find it much easier to enter the market through offshore projects where the transferability of international skillset is a lot easier as compared to executing onshore projects.” Once the international player is in the country, and has a good track record in offshore oil & gas space, it becomes relatively easier to build the onshore EPC capability. Leighton entered India on a bandwagon of offshore EPC contracting but gradually leveraged on the positive client relationships, and won a number of onshore projects and is now executing those projects as well.

Project owners have now become very demanding in terms of cost control and time lines for implementation which the contractors are bound to adhere to contractually and ensure timely commissioning of the projects. With experience, however, contractors are forced to build in contingencies, premiums and commercial management strategies in their EPC bids to reduce the execution risks for themselves.

Again, contracting models differ across countries depending on whether it is the buyer or the seller market, Chanana adds. He reveals that countries like USA, Australia and Canada still follow the EPCM mode of project execution, while the Middle East and Asia are more open and comfortable with the EPC mode of contracting. He believes that it is not possible to transfer all or major risk to contractors, a thinking that dominates in these two markets, and as a result they (the clients) end up paying premium for embracing EPC lump sum and EPC –LSTK contracts.

Chanana is of the opinion that globally the EPC industry is now learning from the traditional contracts and is experimenting with new hybrid contracting models. For instance in the UK, the project owners are also part of the project execution along with the contractor where contracts enable clients and contractors to share risks and rewards. Many international project owners are now getting into Early Contractor Involvement (ECI) contracts – a hybrid of EPC and EPCM contracts, which differs from the traditional approach of releasing the EPC tender document in the open market. The project owner selects a minimum number of preferred contractors (generally two) on the basis of non-commercial criteria and invites them to work on Front-end Engineering Design (FEED) or Basic Design with the client selected designer to provide value engineering, and understand material quantity risks, conduct contractibility and later submit EPC proposals. “ECI mode of contracting allows the contract to be converted into EPC model at a later stage which works well in favour of the project owners as they do not pay premiums which they would pay otherwise; it also provides confidence to the EPC contractor on understanding risks better,” he explains further.

Successful project execution requires selection of the right model at an early stage for the chemical process industry. He shares his experience, “EPC lump sum fixed price contracts have not worked successfully in the brownfield industrial environment, where the delivery programmes have to be planned around the operating assets to avoid any loss of production which results in unplanned downtimes and standby times during construction and/or installation.” “I feel ECI contracts work very well in the brownfield & greenfield industrial environment while fixed price EPC contracts may work well for certain greenfield projects,” he adds.

EPC contracts are not new to the Indian market but the contracts are still based on the age old practices. It is time that these change and the Indian project owners/ operators start adopting international best practices to be globally competent. It is high time that investors do away with the traditional approach of awarding the project only on the lowest cost criteria to get out of the fallacy of having allocated risks to the contractor, Chanana urges. This fallacy leads to compromises on safety, quality and environmental compliance which can cause commercial and reputational losses to project owners at a later stage. Chanana says that ECI is certainly the next phase of contracting model that India should embrace as this model has been successful in other countries. Though the papers have been presented in various conferences in India, the industry has to still walk the talk.

“China, I must say is learning very fast as they are absorbing knowledge from all parts of the world and are reducing the learning curve sharply,” observes Chanana.

Entering any new market requires significant investments, in terms of costs and resources, for any international contractor. Although India has seen the entry and presence of international players in the upstream and downstream sectors of the oil & gas industry, the long gestation periods, policy paralysis and red-tape are major deterrents for the international players to enter the space of infrastructure, power generation and water sectors which offer huge potential for local and industrial EPC players.