ROD DEAN'S 2006 REVIEW

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E & C Hydrocarbon Review - The Global view from Europe. Looking back on 2006 & ahead to 2007.

OK I know it’s late! But with TIC‘s doubling and sometimes trebling and schedules extending by 30% these factors affect the schedules of E & C industry scribes as well.! As each week has passed by in 2007 something out of the ordinary has happened. Giants have been toppled; acquisitions have taken place that on a P / E basis make you think ‘What is going on here’? We still wait to see the effect of our more reckless peers risk taking in 2004 and 2005 coming home to roost - well I have yet to see a single chicken! But I have seen a host of margins lurking around the 2-3% mark - which given the risks some of these companies take with LSTK contracting seems pretty meagre. Some of these companies are assisted by healthy margins enjoyed by the more sexy ‘Surf’ business which can generate margins in the region of 10-15% so that can keep the wolf from the door a little longer.

Anyway I am delighted to be able to present my 15th annual review of the International E & C Hydrocarbon industry and hope that in these unusual times I can highlight some of the major events that may enable us to understand the trends that point to the shape and size of our industry in the future and for those of us who are still gainfully employed to make strategic decisions that can prepare the ground so that we are able face up to and meet the challenges ahead.- and frankly they remain challenges.

Apologies for the two month delay (partly explained above) but I guessed there would be some very important events in our industry that could change the way we look at the future and sure enough the passing of Lord Titan, although not a massive shock, the timing was perceived by many to be somewhat premature and the shockwaves have been reverberating around the industry since then. Although everyone appears to be putting on a brave face and the financial results have been done and dusted with little damage to the stock price.

The Russians have been involved in a little bit of old style brinkmanship which must have most of the IOC’s scratching their heads and a number of contractors who have been following in their wake also wondering what’s going on, It’s back to our old friend LT, who has put a lot of faith and money into the land of the bear, now he is going his so called ‘hot line’ to the Kremlin may be a thing of the past. I also the future of TNK BP may be in doubt - certainly as far as the shareholding is concerned.. Shell has certainly had a rough ride in the Far East but seem to be sticking with it - what is clear is that the upper hand will be held by Gazprom and Rosneft in the future.

A new member of the LNG Club has also arrived and from the somewhat unfashionable surroundings of London W2 - although Paddington itself has been changing (and is no longer unfashionable). As I walked up Eastbourne Terrace recently the vista of glittering new office and apartment blocks was a big change to when I first walked down the same street some 33 years ago to pledge allegiance to this wonderful industry. In those days you were more likely to bump into Yootha Joyce rather than Don Hill! How times change. Offshore was the game in town then and Brown & Root and McDermott’s were the big names - the rest of us played the UK card and with the volumes of work so great we picked it up as we went along. Exciting days though - a latter day Klondike with all sorts of ‘chancers’ playing their cards as ‘Planners’ ‘Cost Engineers’ and other more rarefied titles. So that era came and went - but now we are in a much larger global boom (much much larger that the North Sea that I was lucky enough to be part of in the 70’s and early 80’s). I remember the (then) head of the John Brown Company ( a chap with a double barrelled name) said to us ‘ You know that this offshore game is a mere bubble - it won’t last’ Well e said that in 1975 or 1976, none of us believed him , but he was right.

Now each boom brings unlikely candidates to the table, often via a succession of takeovers and mergers that ultimately add very little to the value of the businesses. Recently we have seen a company named ‘Colt’ sold for a king’s ransom in another potential bubble environment. Now Colt’s skills may be limited to Tar Sands, but our friends in Eastbourne Terrace have been always been able to adapt to new trends and new areas of business - as we have seen in the last six months or so - well it will be a couple of years before we know!

As a relative newcomer to our industry said recently "We think it is smarter and wiser to grow organically instead of investing a lot of money in consolidation, integration and costly mergers. Normally, it takes double the time estimated and you get half of the synergies people were projecting." I think this fellow may be right!

Well it’s a brave man who stands up in front of the analysts and repeats those words when the industry is not looking as rosy. I have always been a progenitor of 1=1 will ultimately equal < than 2 (and often much less) - believe me I have studied almost every E & C merger and 1+1= 1 is normally the final result. But they keep saying 1+1=3!

So we come back to Eastbourne Terrace where the general engineering contractor who has inhabited this street since 1957 and has in the last 20 years or so has been involved in six mergers and takeovers - well the answer is still one! I have always had a sneaking regard for this company - adaptable, capable, staff numbers have ranged from 500 to 2300 and back again and are now over 1000 again, I think this alone says so much about the industry and the people who work in our industry and one of the reasons why I am still proud to be part of it. So, after all the to - ing and fro-ing we have the newest member of the LNG Liquefaction Club - welcome aboard and enjoy the ride!

After a little bit of personal local ‘joshing’ let’s get back to the practicalities of our current situation.

It was during 2003-2004 that our industry experienced very large percentage price increases (often as high as 50-65%) in major materials and equipment supply e.g structural steel, piping and electrical. This has stabilised somewhat in the past two years or so but the cost increases have continued albeit at lower rates. With industry demand remaining high, shop loads have remained stubbornly at + 80% and lead times have continued to stretch out in most areas by between 15 and 25% which has constrained the whole supply chain.

The boom has continued throughout this period although it must be said that we seeing a possible slow down as some project TIC forecasts have increased by up to 150 - 200% and schedules by up to 50%. It is interesting to report that there were no new LNG projects awarded in 2006 - even though if you advertise the fact that you have some spare LNG for sale, the phone will not stop ringing.

However there is no doubt that many energy projects are under threat from rising steel and labour costs - and the more ambitious the scheme the more vulnerable it is.

ExxonMobil abandoned its plans last week for its Qatar GTL project. Qatar’s Second Deputy Premier and Energy Minister HE Abdullah bin Hamad al-Attiyah said budget overruns lay behind the decision to scrap the gas-to-liquids GTL scheme.

The decision shone a spotlight on other massive projects Shell’s $12-18bn Pearl GTL venture also in Qatar, ENI’s giant Kashagan oilfield in Kazakhstan, $20bn worth of Nigerian LNG projects and dozens of refinery plans around the globe. It also highlighted a building tension in the 85mn barrels per day oil market. Consumer demand is growing, but so are the costs of projects to keep energy supplies flowing.

"Right now, everyone around us is postponing and delaying projects", al-Attiyah said.

Kuwait has told companies competing in a tender to build a 615,000 barrels per day refinery at al-Zour to go back to the drawing board after bids came in at more than double the $6bn budget.

US oil major ConocoPhillips said last month it expected to delay the upgrade of its Wilhelmshaven, Germany, refinery from 2007 to 2008 at the earliest because of cost. The surcharge for the type of steel used by the oil industry has risen around 10% since the end of 2006, and more than doubled since this time last year. Oil industry steel, which has to be extremely tough to withstand high temperatures and pressure, accounts for less than 2% of steel output.

A shortage of manpower has also resulted in soaring wage costs. Divers working in the North Sea oil and gas industry were awarded a 44.7% two-year pay rise last November. According to energy analysts CERA, the costs of major oil and gas production projects have risen more than 53% in the past two years and no significant slowdown is in sight. "This is central to every energy company’s strategic planning," CERA chairman Daniel Yergin said earlier this month.

Following ExxonMobil’s sudden exit from the Qatar’s GTL scheme, some industry insiders and analysts are questioning the wisdom of Shell’s Pearl project. "I don’t see Pearl as viable," said an industry executive. Qatar’s energy minister also appeared to cast doubt on Pearl. "Gas-to-liquid technology is expensive and very technical," Attiyah said. "Technology for the other projects is proven." Citigroup analysts forecast Pearl would generate a 9% internal rate of return based on a $15bn cost. This is below the 10-15% firms normally target. "Further cost escalation obviously dilutes returns still further and is hardly conducive to further investment in this form of project," Citigroup said in a report. Industry insiders note Shell is relying heavily on Pearl for production growth after it ceded control of the Sakhalin-2 oil and gas project to Russia’s Gazprom last year. Shell is also eager to strengthen its position in Qatar, which holds the world’s third biggest gas reserves after Russia and Iran. "Pearl was a ticket for Shell to get back into Qatar," said one source.

The ENI-led consortium that is developing the giant Kashagan oilfield in Kazakhstan - the world’s biggest oil discovery in 30 years - has already been delayed from 2008 to 2010. Industry newsletter International Oil Daily reported last week the $15bn project could be pushed back to 2011-2012. ENI CEO Paolo Scaroni has said he will talk about Kashagan at the annual results presentation.

Sceptical eyes are also turning to ambitious LNG projects in Nigeria. With a fifth of the country’s oil output shut by militant attacks, analysts and investors are questioning the prospects for Brass LNG and OK LNG, worth a combined $20bn. ENI, Total and ConocoPhillips are partnering Nigeria in Brass, and BG Group and Centrica may join. "In terms of upstream, there are numerous world-scale projects that are under pressure because the contracting market is so tight," said Jason Kenney, analyst at ING in Edinburgh.

International Energy Agency refining analyst David Martin said rising costs associated with new refineries made the expansion of existing refineries a more attractive proposition. Some 15.1mn barrels per day of additional refining capacity is planned by 2011, the IEA estimates. The agency, adviser to 26 industrialised countries, expects almost 5mn bpd of the total to be delayed beyond 2011 or cancelled because the economics do not stack up or the firms involved do not have sufficient access to capital markets. "The industry view is that you need margins of $6.50 a barrel over 20-25 years to generate an internal rate of return of 10% for a relatively sophisticated cracking refinery with a 200,000 bpd capacity. The IEA takes the view you need at least $8 a barrel," 2 Martin said. "(But) some new refineries are being built for strategic reasons - for example, China and India where it is a strategic goal to expand the refining industry and 10% internal rate of return is of less importance."

Here are a couple more examples relating to pumps and valves, two regular areas of bulk expenditure on every project. Humble products I know, but good examples of the bits and pieces we buy and sell on a day to day basis:-
Sales of industrial pumps will reach an annual level of $38 bn for the first time in 2011. This is the current forecast in the continually updated online report, Pumps: World Markets. Centrifugal pumps will account for over 70% of the revenues. Diaphragm, reciprocating, and rotary pumps will account for the balance. Municipal wastewater will be the largest application segment followed by municipal drinking water. Refineries will be the third largest segment, and power will rank fourth.

Asia will increase its lead as the largest regional purchaser. The very large municipal wastewater and drinking water plant expenditures are only part of the picture. It is outspending other regions in every category except pharmaceutical. In the coal-fired power segment, Asia will outspend the rest of the continents combined. China alone will spend more for pumps for coal-fired power plant applications than all of Europe and Africa combined.

There are some very high growth sub segments. They include desalination, ethanol, LNG, oil sands, and flue gas desulfurization (FGD). One of the big long-term changes in the market will be the reduction in pump sales for conventional oil and gas and refining applications and the growth of sales in non traditional applications.

More than 10,000 companies make industrial pumps. Five companies achieve pump sales in excess of $l bn. Sulzer achieves pump sales close to $1 bn. But the sales of the other 500 companies are much smaller. Less than 20 companies have sales of pumps exceeding $500m.

And the Valve Market is changing as well - whenever new processes develop, it is certain that there will be new valve variations to make these processes operate properly. The need to liquefy gas in the Middle East and transport it around-the-world has resulted in a number of new cryogenic valve designs. They are used at the LNG liquefaction sites, on tankers, and at the regasification terminals. New requirements in LNG, ethanol, tar sands, nanotechnology, and biotechnology will boost the industrial valve market to a record $52 bn annual sales level in 2010. This is the prediction in the most recent update of the online, Industrial Valves: World Markets.

Control valves will account for 25% of the total followed by ball, gates and globes, butterfly and plug types. Other valves will make up the final 18%. Much of the growth in the market will be in Asia, but there are other hotspots as well. The tar sands expansion in western Canada represents considerable potential for increased valve sales.

The U.S. will be expanding valve purchases in several areas. One is biotechnology. Another is LNG where a number of terminals to receive the LNG are now under design. The U.S. is already the leading ethanol producer with more than 100 plants in operation. To meet the administration’s goals for ethanol to comprise 50% of the transportation fuels, another 1400 - 50 MMGY plants will need to be built. The fact that many of the new ethanol plants will obtain their heat and steam from coal will also add to the valve potential.

Each new scrubber system installed on U.S. power plants requires a $1 m valve purchase. Over the next 15 years over 200 of these systems will be needed to meet environmental requirements. Additional valves are also required for the catalytic systems which reduce NOx at these same plants. The movement of over one billion people from rural Asia to its cities will boost the valve markets in water and wastewater treatment. Since Asia is more arid than other regions, the potential for desalination and the valves required to handle the corrosive seawater will be greater than other regions.

China is planning to invest in more power plant scrubbers than any other country including the U.S. China also will be building more new coal-fired power plants than any other country. They will also be the leading investor in many other basic industries. Power will be the biggest market sector for the valve industry in China in 2010. Wastewater will be the second leading sector.

So the forecasts on these two relatively humble bulk items in our industry say a lot more about the bottlenecks in our industry than just listing a few plants.

However in these perceived boom conditions we are not talking about an immediate real slow down yet. Although with every boom there has been a bust (historically) and none of us really know when and how it will end - but it will end. The danger signs are already there though - a number of major refinery expansions have been shelved, some temporarily but many of them may not see the light of day again. Grandiose schemes, many of them, floated by people who should know better - they get so far on low level cost estimates and then,,,,,,,, normally at the end of the FEED the bad news arrives (although some of them limp on into EPC proposals) - it’s often 2 to 3 times higher than expected, so that is that. Another project bites the dust.

So we have had major cost escalation, possible falling oil prices (although recently these have shown a welcome upturn), massive congestion and a shortage of resources both in engineering and construction. In spite of all of this there have been some huge projects awarded - especially in the Middle East where the Petrochemical Sector has come up trumps with a number of Worldscale Petrochemical complexes consisting of massive Ethylene plants with all the ‘trimmings’, a GTL project from Shell that will keep a number of contractors ‘fed’ for a few years and the usual gas plants. Add to that the planning of three or four vast refineries (some of which are already underway) and it is no surprise we see a company like CCC claiming resources of 120 - 140,000 (a few tears ago they only had half as many). A major GTL project has been shelved in Qatar but I guess the developer will maintain a close watch on Pearl and see how that progresses.

We are into the fourth year of this boom and with staff numbers still rising in many parts of the world I sometimes wonder where they are all coming from. A good example of this is the position Fluor find themselves - looking to hire an additional 1,000 staff in Sugarland they have subleased 191,000 square feet from Chevron through March 2010 in One Sugar Creek Place. Fluor will continue to occupy 1,000,000 square feet at its operational center at One Fluor Drive in Sugar Land! In the UK Fluor now occupy six buildings in the Camberley area and have over 2,000 staff in the UK - with all the work in the Middle East it is clear that both Fluor and Foster Wheeler are reaping the rewards of the premier positions that both hold in the region. Although it must be said some of the work around these massive complexes can be less than inspiring. But then that’s me being slightly snobbish - if it’s not differentiated don’t touch it!

So what does this mean in respect of resources both human and material for our industry? Most educated views believe that the current conditions reflect a medium term impact and a long term shift with respect to E&C talent. We must therefore continue to a 'develop and retain' culture with our existing head office resources and continue to expand engineering centres in India, China and SE Asia. This is happening but it can only happen at say 10-15% PA - if you move any faster the quality of the final product is difficult to control.

On the material & equipment side we must continue to expand strategic supplier alliances and low cost global supply arrangements in China and other low cost countries.

Construction remains another major challenge. The major upturn in workload hit the construction sector after the design and supply side of the industry. A good example of this expansion in resources is that traditional mainstay in the Middle East, CCC. I always remember them having resource totals in the region of 60-65,000 and a good solid job they have done too. Now, I understand they have grown to a range of 120-140,000, which is a massive increase on the ‘business as usual’ scenario - it will be interesting to see if they can maintain their traditional quality?

So what can the industry do? Expand global self-perform construction capabilities (Polish, Filipino, Indian and Thai construction forces)?

We should ask also, what are our clients doing to alleviate the current problems? For the most part ...not as much as we would expect. Most companies are still procuring E&C services primarily on price; probably planning and managing projects on a 'one-off' basis and disaggregating the Feasibility Study, FEED/Basic Engineering and Execution phases of the work. Clients are still shifting maximum risk to the contractor(s). Although many companies have recognised that the E&C markets have changed they have not adapted or modified their approach to projects. Owners are also in competition for projects and resources and there some recent examples where companies have clearly over paid for the asset and are then grappling with impossible cost projections as the number don’t add up.

Clients need to ensure they have early engagement with the ultimate EPC/EPCM contractor - to be fair some do this but there is a lot of FEED / PMC work still going on in the world, but then there are also a large number of mega projects currently under execution that probably suit this pattern of execution. They should also consider balanced risk sharing with incentives for the E&C contractors and workforce and multiple purchase agreements. With mega multiple projects a mixture of program management, EPCM and EPC approach with appropriate CM or C scope to suit local market conditions is another way forward where the potential risk to both client and contractor is so high that a more balanced view has to be taken.;

Above all, work with the E&C contractor and suppliers as 'partners' and ensure. Alignment on desired project outcomes underpinned by a fair and balanced contract with incentives to strive towards positive results.

To ensure success both client and contractor needs to invest a lot more in training and development to ensure the required quality standards and local content requirements are met. The obvious areas are the training and development of local resources, importation of skilled labour and in some cases EPC direct hire of construction resources - some contractors like Bechtel & CB & I already do this.

The low hanging fruit areas are off-shore engineering and work sharing, global sourcing of equipment and materials and off site preassembly and modularisation?

Most of us probably believe that the current hot market environment is likely a medium to long term shift, although most companies have recognised this but have not changed their approach to major projects. Without change, projects are at risk of cost increases, schedule slippages and quality problems. Contractors still have to deliver project value in the current environment. Benefits include ability to pursue growth plans by attracting the best E&C resources and to deliver projects successfully.

My soap box will be put away for the moment but I thought it appropriate to review the global conditions that our clients and contractors are operating under and the challenges that we face and the dragons that must be slain if we are to be successful and build for the future.

I will now specifically look at Europe and the UK generally with a specific focus on the E & C companies located in this region, which when you tot up the numbers is still the major region for global key resource numbers and is in the most favourable geographical position for executing projects in Europe, Africa and the Middle East and even Australia when you compare location with the USA.

There is no doubt that resource levels, both numbers and quality has been the major challenge for the UK E & C industry in the past year and it has to be said that the industry has faced up to this challenge in a very effective way. Last year I felt that the problems we were facing were similar to those 40- 50 years ago, but in those days it was a growing industry and new staff were pouring into the business to earn the higher than average salaries and to visit places with strange sounding names.

One of the big surprises this year has been the increase in total staff numbers in the UK E & C industry - where have they come from? There has been the usual ebb and flow of agency staff from contractor to contractor as their workforces move up and down to match the start and completion of major projects.

Major companies have looked outside to related industries to hire project controls, procurement, engineering and even some project managers. In order to continue to recruit quality engineers from other industries, we need initiatives that will communicate with and aim to attract engineers in industries such as manufacturing, aerospace, marine and construction.

Additionally we have been able to locate several hundred international staff who relocated to the UK. The process normally takes three months from initial contact to walking through the door but these efforts coupled with numbers of ‘veterans’ and new hires from other industries has enabled the UK to increase staffing by approximately 2,500 staff in the past 12 months.

There is much more needed to be done as we face up to the acute skills shortage facing the UK oil and gas industry and stark warnings have been issued about the real threat to our industry that unless more professional engineers and graduates are recruited and trained we are facing tough times. The numbers of graduates joining the industry however has never been higher and if the industry can hold onto 70% of the new starters this will help the industry in the future. Construction skills and numbers are continuing to erode and it has been noticeable recently that for major UK projects a number of European construction workers have been shipped in to execute the major workload increase in the UK based construction work (3 LNG Receiving Terminals, Gas Storage Facilities, Power and related plants plus various other facilities). It is also evident that the UK no longer has the trained construction staff to work on international construction projects so the need to train local staff for construction supervisory positions has never been greater - as highlighted in my opening remarks.

So its back to the very real challenges of low profile, skills shortages and the development of new technology that are constraining our ability to capitalise on a market which is set to show continued growth in next couple of decades. 'Its not if, its when; we face a ticking time-bomb over skills shortages, caused by an ageing workforce coupled with a lack of young people coming in to science and engineering careers'. At the moment, it is one of the most exciting industries to be in and we need to help get that message out there. It is an incredibly complex and challenging sector with rewarding and long-term career opportunities but few are aware of this. Helping the sector attract and develop people, including mature and young engineers and graduates, is a key priority for us.

The churn rate that the industry has seen in the past year has sometimes meant that companies have had a net change of 50% of their staff in a one year period, turnover has never been higher and salaries have been increasing at rates not seen since the mid 1970’s , when we were also experiencing high national inflation rates. These conditions have brought the return of good times for employees, both staff and agency, which when you consider that some of whom who have experienced the closure of final pension schemes to new employees in the past few years and in a few cases the total closure of their pension schemes altogether is very good news. Another welcome return (that’s if you are a ‘key’ employee) has been the golden hello / handcuffs. We are hearing of instances where some companies are offering ‘golden hellos’ of £30k and upwards + other attractive fringe benefits.

Aggressive poaching was rearing it’s head as we entered 2006 but has really taken off and during the last three months of the year reached new levels of aggression, deviousness and at times ‘sheer cheek’! With final salary pensions fading away we will soon be looking at a Houston style E & C labour force in the UK, although moving around from company to company will still be dictated by more difficult transport links and the gradual grid locking of South East England.

I am pleased to report that our efforts to recruit young people into the industry are beginning to bear fruit. - We can still attract them so we must give the training, support and leadership that any young recruit deserves, in any walk of life.

Another relatively new concept is 'knowledge management or sharing from the veterans before they ride into the sunset. Many of us are now taking the exit interview far more seriously and with all the other ‘lessons learned’ initiatives underway we should hopefully start to see these initiatives begin to pay off in the near future.

That there is a massive boom going on at the moment, there is no doubt, but how long it will last is another matter. There is a view in many quarters that in some areas - probably petrochemicals that most of the major new complexes have now been contracted and a number of the clients are already talking about battening down the hatches ahead of the recession. With the continued uncertainties of final material costs and schedules coupled with uncertain quality of construction companies, closing contracts whilst mitigating risk continues to slow the level of project awards down considerably. This is particularly true of gas and LNG projects where demand is still running at very high levels. With refining it is the faltering margins, coupled with high capital costs which are leading to a number of cancellations or at best major sanction delays.

Last year I focused heavily on the offshore industry and its (relatively) short history but huge influence it had on the UK E & C industry. Well last year saw it slip a little further down the League table- sure there still a few bright spots, namely the Caspian remains a happy hunting ground for KBR in Leatherhead where the work has flowed solidly through their office leafy Leatherhead. AMEC appear to have lost a bit more ground and CB&I are now a subcontractor to that new ‘Offshore Titan’ AkerKvaerner. Although one must believe, however that their future lies in the LNG Business (now Liquefaction as well as a growing reputation in the Receiving Terminal area where they continue to expand their global reach with a recent major award in (far away) Chile. Aberdeen is now clearly the centre of the offshore industry in the UK and will remain so until the industry begins its long slide to oblivion in the next 50-100 years. There will always be an opportunity in London with those smaller niche players like Petrofac, SLP and Genesis keeping the flag flying - however for KBR and to a lesser extent CB&I their long term offshore future must be clouded with uncertainty. The days of the Offshore Contractor with the full list of kit - Yards, Pipe lay Barges, Heavy Lift Vessels and the full Surf capability is perhaps long gone - although some of the players are making a go of it in some of the sectors - one recovery situation has been McDermott (one of the two famous old names of the offshore Industry).

So back to today's current boom - how does the global international community measure up to the massive pressures coming from different directions?

ABB (with Lummus still within their stable) have been through the asbestos process and come out of the other side. ABB resolved asbestos claims against its U.S. subsidiary Lummus, putting an end to its asbestos woes and paving the way for the sale of the unit. Lummus, which filed for bankruptcy earlier this year to give it a chance to settle its asbestos liabilities, has now exited Chapter 11 protection. ABB said the U.S. District Court affirmed a settlement plan which became effective on August 31 and would cost the company around $40 m in compensation payments to claimants who had been exposed to asbestos. The move came five months after a U.S. court confirmed the company's $1.43 bn settlement plan for its larger U.S. unit Combustion Engineering.

In olefins they have no EPC offering and utilise Snamprogetti or others as the EPC Contractor in the Middle East and Toyo in the Far East (Shell Singapore also recently awarded). Lummus was also awarded (with Sinopec) the first stage of the Fujian Integrated Ethylene / Refinery project. They also continue to pick up refining projects in Europe and the Middle East. So as they say there is ‘life in the old dog yet’! Also ABB said it is likely to sell its US subsidiary ABB Lummus Global in the medium term following the recent resolution of asbestos claims. 'Medium-term, a sale of the Lummus is likely, but ABB is in no rush getting rid of its subsidiary,' an ABB spokesman said. He confirmed previous comments that Lummus was not part of ABB's core business, but said the group would continue to develop the unit and then assess the best option for the group, its clients and its employees. "This is positive because there is nothing blocking the sale of ABB Lummus any more’’. Well that was four months ago and there appears to have been no real positive news that a disposal was underway although it was once again mentioned in the 2006 accounts!

Their appetite or capability for any real risk has long since gone, as a result of some grievous losses on fixed price work - they have suffered heavily in both Holland and the USA with heavy losses on the Lyondell PO/SM, Essar Refinery, India and the Brazilian Ethylene Complex there are others of a lesser magnitude.

Lummus has first rate technology (Olefins, Propylene, Refining and Petrochemicals and a state of the art Technology Centre in Bloomfield New Jersey). This would be a very good fit for a number of companies - Ethylene, Propane Dehydrogenation, Ethyl Benzene Styrene, Butadiene, Polypropylene and a number of Refining Technologies - a number of interested parties are rumoured to be sniffing around but ‘white’ smoke is in short supply. Should Bloomfield go there would be not much left of this once famous company dating back to the first decade of the century.

CEO’s have come and gone, some clearly well out of their depth, but the generally high level of activity in Ethylene, Refining and their strong technology portfolio has kept them going. Samir Brikho the former Chairman of Lummus has turned up as CEO at the sprawling, erstwhile aspirant AMEC - we shall meet him in the next paragraph. What is clear in the current climate (maybe it has always been the case) is that the wounded limp on and survive to fight again another day. Brikho has however already grasped the nettle in his new role and seems certain to carve out a reputation for himself whether that is positive or negative remains to be seen.

Our old UK friends AMEC have had another uncertain year culminating with a profits warning, a number of offers from break up specialists and finally a major management shake up with a number of ‘senior men’ departing and the arrival of Samir Brikho amid massive fanfares and ‘wall to wall ‘ articles in the major business newspapers. It is very interesting to read some of the accounts of Brikho’s prowess at Lummus - as we say it’s all about timing! Let’s say there miracles and miracles. But these are the facts as presented - ABB’s downstream oil and gas business Lummus Global, where he is reported in turning a $300m loss into a $40m profit in 18 months. Very interesting figures eh!

The first half of the year was taken up with the restructuring of the company into two divisions and the sale of Spie, its French based subsidiary. The sale of Spie yielded £85 m more than expected, but the real problem was clearly the Construction Division and there were another rift of exceptional charges in the middle of the year.

It’s not all bad news however and with the future nuclear programme where potential acquisition of BNG places AMEC in a strong position for preferment. Those old soldiers Brian Wilson and Neville Chamberlain are still in their roles as Non Executive Directors - AMEC has always been aware of the usefulness of having friends in high places in the UK.

I reported last year that 1995 was in fact the end of another UK Company's dream to become a major international player. Davy was once the pretender (even a member for a time) and after that John Brown Davy - both failed due to market volatility and contract losses, the former more so than the latter, but sadly the door is finally shut ‘the Brits will never join the Pantheon that contains the E & C Titans’, these will forever remain in the hands of the USA, Japan and now the French.

After a glorious decade at the helm of Britain's leading construction empire, Sir Peter Mason has left a company suddenly engulfed by a £140m after-tax hit and a severe identity crisis.

Sir Peter Mason's final year at Amec should have put the finishing touches to a glorious career, and the cherry on top was to have been a grand farewell and hearty thanks for taking the company's share price from less than one pound to more than three during his decade at the helm. For much of those 10 years, Amec was the golden boy of British construction.

It had the biggest turnover, and its mix of contracting and services work brought in attractive margins. As a result, Amec was one of the few construction sector firms that the City cared about. Instead, the past 12 months have been characterized by losses, contract disputes and the carve-up of the most powerful empire in UK construction.

So I will leave you with a few words from Mr Brikho and his vision for the future of AMEC. Depending on where you fit in Samir Brikho’s scheme, he is either your new pin-up or your worst nightmare. The former ABB executive took charge of Amec two and a half months ago and already he has cut £20m of costs. By the end of next year, he will have knocked out a further £80m - about a fifth of the total. Amec will have "lean and mean headquarters, very slim, very small", he said.

He will "eliminate regional headquarters in UK and North America", "control travel" and "curtail entertainment". Cutting costs will be so easy he says, he won’t have to do it "by picking the low-hanging fruit" - the fruit is so low as to be "lying on the ground". Amec, for example, has four offices in London alone and 112 in the US, he said.

Slashing costs is not his only skill. Like Amec, Lummus was taking on bad contracts and making poor decisions. Mr Brikho was stringent about focusing on cash generation and imposing strict risk controls. His plans for Amec are similar. To illustrate how radical he intends to be, Mr Brikho talked about his father’s old radio, with one big knob to turn to different stations and a small for fine-tuning: "I’m turning the big knob - I’m changing the station. This is a new broadcast. We’re not talking about fine-tuning."

Analysts and investors lapped it up. Having immediately sold the shares down more than 2 per cent after Amec issued a dire trading statement, Mr Brikho’s presentation sent the stock shooting up 5 per cent. Until then, many had hoped Amec would be bid for. After an approach from Australian group Downer in the summer, Texas Pacific Group and First Reserve made an indicative offer thought to be worth 450p a share or £1.5bn last month. The board rejected both but many expect it to yield eventually.

Lots of analysts seemed to be impressed. They described Mr Brikho as "a breath of fresh air" for the way he honestly appraised the group’s liabilities and bloated cost base. A former ABB colleague says Mr Brikho, a Lebanese-born Swedish citizen fluent in five languages, stands out from his peers with his humour and ability to put others at their ease. However, not everything he has touched has worked (apparently).

A quick check of his record also shows that he headed a joint venture between ABB and Alstom that had serious problems with new gas turbine technology. This became an important contributor to the liquidity crisis at Alstom. Mr Brikho has to hope that his detailed plans leave a more lasting impression than his presentation.

As I said last year ‘If success was measured on the number of Press Releases issued AkerKvaerner would win the prize hands down!’ – well this year another 99 have come from the pens of the Oslo scribblers - ranging from quite small awards to the regular announcements of disposals and corporate restructuring which seems to part of day to day life in the AK Group.

There were some quite major senior management changes in the spring - Kjell Inge Røkke stood down as board chairman in the Aker group – the old place won’t seem the same without him! That ‘old warhorse’ Inge Hansen who had led Aker Kværner for two years and before joining the company, was acting President and CEO of Statoil at a very difficult time, finally rode into the sunset of ’consultancy’. Executive Vice President of Aker, Martinus Brandal, took over as CEO and has presided over a successful expanding company.

The financial restructuring of the company is now complete - with the help of a number of Nordic Banks and Financial Institutions. Metso has purchased the pulping and power business a deal which was finally cleared by the EU before the end of the year. The final pieces of the jigsaw are falling into place.

AK forecast 12 months ago that it hoped to see an (EBITDA) margin of between 6.5% and 7% in 2007 and in a bullish statement in November they confirmed that they were right on target to achieve this - so the recovery continues. AK is continuing to focus on its ’knitting’ whilst like all good contractors picking up some new related tricks on the way in the areas of LNG. Whilst clearly not ready to join the club yet as a full member (and more of that later) it is gaining associate member status with the experience it will have gained ‘helping’ Linde on the Snohvit project and winning two EPC LNG terminal projects in the USA via its sensible partnership with IHI, the respected Japanese Tank contractor. If and when ( I suppose it must be when) the Shtokman LNG project finally gets underway in the next 5 years or so this hard earned experience from the Northern Cape and the good relations that the new O & G Titan Statoil - Hydro has forged with the Russians may begin to pay dividends . It probably will with any offshore work anyway. Add to this the niche areas of business in non ferrous metals contracting and some decent chemicals capability in the UK and Holland and you have a reasonably well balanced portfolio. Offshore Engineering & fabrication will always be its flagship activity, but that is no bad thing into today’s environment where hostile Arctic conditions spell the future challenges for many in our industry. So we leave AK getting on with the things it does well and making good margins to boot.

Before we let AK off the hook totally we must not forget the 32,000 pensioners, deferred pensioners and 1800 current employees in the UK (although I am not sure if the latter are still part of the scheme). As one of the 14,000 pensioners I have a vested interest on the fate of these forgotten people ‘Victims of the dream to create a UK owned E & C Titan ‘This year we heard that the trustee of the £1.3bn Kvaerner pension fund, which has 32,000 members and a £200m deficit, is in negotiations with the directors who bought out the company's UK arm for £1 last year in an attempt to avert the fund's collapse into the Pension Protection Fund.

We are told that the new Kvaerner plc insisted it was "properly positioned to meet current obligations". With a revised investment strategy, more aligned to the current circumstances, a reduction in costs and revised contributions (after 2006) from the participating companies, we believe that the Kvaerner Pension Fund can continue to meet its pension liabilities." They say that the fund "does not need to increase the investment income by many per cent to be fully funded again", and Kvaerner UK would strive to ensure "continued successful operation of all our businesses and the Kvaerner pension fund". So there we have it and I know quite a few of my readers are either existing or deferred pensioners - keep your fingers crossed.

When we left Bechtel in Hammersmith last year they were grappling with three major Middle Eastern Gas processing projects and the start of the next gigantic phase of the Jamnagar Refinery project in India. Since then we have received the 2005 Financial Report for Bechtel Inc who reported gains in revenue and new work orders in 2005, helped by the expansion of LNG projects around the world and revenue rose to $18.1 bn and the value of new bookings increased 18% to $18.5 bn.

Bechtel is executing two natural gas plant and pipeline projects in Abu Dhabi with a combined value of $2.75 bn and it also is building a gas processing plant for Saudi Aramco. Bechtel also will double the capacity of the Jamnagar oil refinery it built in India several years ago. Three of these projects are being executed in Hammersmith with the LNG work is executed in Houston. In its LNG work in 2005, Bechtel worked on new plants in Australia and Equatorial Guinea, expanded a plant in Trinidad, and completed an LNG job in Egypt. It is also developing an LNG terminal in Louisiana.

Bechtel's activity in China this year focused on acquiring more steel and other building materials to supply Bechtel projects elsewhere in the world. It also will build up its engineering support center in Shanghai and take on more work in China for multinational customers.

One company created more news than any other during the past year (and there is still more to come I think) and that is CB & I. I have already (mainly for sentimental reasons on my part) mentioned the rise of this new member of LNG (Liquefaction aspirant that is) Club earlier in my review. Well I make no apologies in coming back to focus on some of the darker aspects of their year. It started badly got better and ended in a flourish (with more of the latter to come in the short term). At the start of the year the global CB& I was under a cloud whilst it investigated allegations of accounting improprieties from a senior member of its accounting department revolving around the determination of claim recognition for two projects and assessment of costs to complete two projects that was possibly improper. The audit committee of the company's board of directors conducted an investigation into the matter with the full cooperation of management. CB&I said it believed that its overall earnings capacity, financial viability, growth potential and cash position remained intact. The top two global CB&I executives (both ex Fluor) were terminated and sued the company for wrongful dismissal and by May CB&I had agreed to make a $735,000 cash payment to former chairman and chief executive Gerald M. Glenn. CB&I said in a filing with the Securities and Exchange Commission that the payment is subject to some reductions, taxes and withholdings and that Glenn's stock options will vest according to schedule.

By June they were announcing a drop in net profit for 2005 down to $16 m, or $0.16 per share, from $65.9 m, or $0.67 per share, in 2004 due to subcontractor cost growth issues on two projects and timing issues related to the segmentation and derivatives factors. So as we say there is no smoke without fire especially as revenues increased 19% to $2.3 bn due to refinery expansion projects in North America, a large natural gas processing plant in South America, an LNG terminal in China and two LNG terminal projects in the UK. So the figures were even worse than expected. Senior executive appointments were made in both operations and sales as the company rebuilt its executive team after the three departures.

The industry press sharpened their pencils accordingly and a typical report went something like this:-

CB&I have a little more on its plate these days than just building the LNG terminals and storage tanks in which it specializes. With recent accounting problems and the departure of its CEO, CFO, and COO fresh in investors' minds, rebuilding credibility and investor confidence will be just as important.

Though Q1 results weren't entirely a great start, the good news outweighed the bad. Revenue rose 35% in the quarter, with results boosted by work on LNG projects in the U.K. helping significantly. The company also boosted its backlog from the end of fiscal 2005; it currently stands at about $3.4 bn, more than a year's worth of revenue at current run rates.

Gross margin fared worse, falling more than a full point. Operating income also dropped 20%, partly because of the costs associated with stock compensation and the investigation of the accounting troubles. Order levels were also lower this quarter, as new business fell 38%. It should be noted, though, that this tends to be a somewhat lumpy metric; the timing of large orders can make comparisons look really good or really bad from one quarter to the next.

Accounting irregularities are generally a valid reason to steer clear of companies, but I think CB&I have done a noteworthy job of quickly cleaning house. I couldn't comment on the impact it had on rank-and-file employees, but I'd consider the departure of three major executives a significant reaction to the problem.

A strong underlying market will also help heal the wounds a little faster. After all, while CB&I are a bit more specialized than average, plenty of large engineering and construction firms like Fluor and Washington Group are reporting encouraging order outlooks. So as long as companies like ExxonMobil or BP need new infrastructure, and the cash flow to fund it, CB&I should be in decent shape -- provided the company can keep its margins in order.

Smaller awards followed for the next three months and then in August a $1 bn LNG Terminal was awarded by Sabine Pass LNG for EPC + Fabrication and one week later their financials appeared to be back on schedule and moving ahead strongly - still as we say in the E & C industry ‘one swallow does not make a summer’. However by Q3 their credit facility had been increased to $ 850 m and global staff numbers up to12, 000 and the financial numbers looked pretty sound. Their base storage tank business continues to look strong and by October and November the industry press was confirming that the company was working with Hunt Oil and its partners on a cost estimate for the planned Peru LNG project with a view to a potential EPC award during the early part of 2007. (Which has now been confirmed - although the scope coupled with the final project costs make some interesting reading. Heady times indeed and the opportunity to make the big breakthrough and become a fully fledged member of the ‘LNG Club’ only time will tell so watch this space! There may a lesson to be learned here (something our industry has often failed to take on board over the years) - it's a complex job designing and building large plants for Lump Sum prices and if you were once a Tank Vendor with very good construction experience it is still a another giant step to become a competent major international EPC contractor and successfully execute projects even if your slice of the competence can be 70% of the TIC , which is alright in LNG Receiving Terminals but maybe more tricky in other areas of our business. It’s not the first time and I am sure it won't be the last time this will happen.

The UK (and Manchester based) minnows, Costain and Simon Carves (were part of Sembawang but both have been sold to that ‘up and coming’ Indian Company, Punj Lloyd) both struggle on, albeit at higher levels that one year ago. There have been some major awards for both in the past year, but as is often the case the big jobs take a little bit of extra effort to bring to realisation. Still staff numbers are both higher but Costain has continued to trade at a loss and posted a recent serious profits warning linked to losses on a Lump Sum project in Mexico - never a country that has been a happy hunting ground for International E&C Contractors!

Staying in the UK Day and Zimmerman continue to make little impact from their Stockport office and with barely 150 staff stay close to the industrial market... the same message I gave to you last year.

The rumours I mentioned last year relating to the acquisition of Davy Process Technology by Johnson Matthey was finally announced in late January with a purchase price of $71m although rumour has it that the actual figure was somewhat less - well that’s what you get when dealing with the Russians - mystery! The combination of Johnson Matthey's process catalyst businesses with DPT will present new opportunities to exploit the research capabilities of both organisations. The company said the acquisition will give Johnson Matthey new opportunities to grow its sales of catalysts into both existing and new emerging markets. The acquisition of Davy Process Technology is a further significant step in growing our Process Catalyst and Technologies business. The combination of DPT's process technology and engineering design capabilities with our expertise in catalysis will substantially strengthen our leading position as a catalyst and technology supplier to the world's chemical and energy industries. Since then DPT have continued to be very busy winning a number of front end packages across the broad spectrum of their product areas.

We continue to see the Indian conglomerates moving gradually up the food chain as they are able to take on wider responsibilities on EPC projects. Dodsal are one such company, winning a $951m contract, including long lead items, by Qatar Petroleum for an EPIC of Common Cooling Seawater System Phase-II at Ras Laffan. With this EPIC contract, Dodsal Group’s order book is approximately $2 bn.

Punj Lloyd is another company adding both capability and volume to their current offerings as highlighted with their recent acquisition of Sembawang Engineering. - see above in the Simon Carves paragraph.

Larsen & Toubro has probably demonstrated a wider range of capability than most and had further success than most supplying large amounts of equipment to a very hungry industry but also obtaining fairly high level involvement with Haldor Topsoe with a $150 m EP award from the Saudi Formaldehyde Chemical Company for methanol and carbon monoxide plants. Additionally they are on the acquisition trail with plans to acquire gas processing companies. They are looking at companies which have the technological skills for gas processing but gave no further details. L&T already offers facilities and equipment for gas processing that includes gas gathering, sweetening, compression and dehydration.

We have also seen Essar flexing their muscles as well with plans to expand their refineries and follow on from Reliance in the Gujurat Area of NW India.

Last year (2005) Foster Wheeler UK had a brilliant year as far as awards were concerned and their Financial Numbers for 2004 were also much improved. Well this year (2006) has been even better with the global FW financials reaching all time records in the last two quarters. The years of the ‘Robins Contract’ seem a million years ago and once again the example of FW proves that you can come back from ‘death row’ in the International E & C industry and their credit rating has been restored to B1 by S & P. How was this achieved?

A rigorous project oversight department was set up as early as 2002 to ensure that Projects meet /exceed client expectations and provide fair return and FW expects to be Paid for risk. If risk is unquantifiable, then don’t do it. If you don’t know what you don’t know, then you don’t go there or may do very little as a learning process. (A bit of Rumsfeldian homespinnery in the last couple of sentences!)

FW see five key critical success factors
Company must have potential sources of competitive advantage
Find the people who "get it" - look inside company, promote from within
Focus on the basics and embed very high standards of excellence - don’t overcomplicate or over sophisticate - "Hope is not an acceptable execution strategy"
Lead by example - corporate overhead was reduced from 276 to 72
Have the courage to take systematic action

Reduced debt by $842m since 2003 (now $191m) and transformed corporate capital structure. EBITDA had increased to $273 by 2005.

FW has also been selected for inclusion in the new NASDAQ Global Select Market. From July 3, NASDAQ-listed companies were classified under three listing tiers -- the new NASDAQ Global Select Market; the NASDAQ Global Market, formerly known as the NASDAQ National Market; and the NASDAQ Capital Market, which remained unchanged. The NASDAQ Global Select Market has the highest initial listing standards of any exchange in the world based on financial and liquidity requirements, according to NASDAQ. Prior to the change, Foster Wheeler had been listed on the NASDAQ National Market.

FW claim at least 60-65% of their work is competitively bid, the balance is negotiated. About 18% is LSTK, 25% has some price risk, and the balance is reimbursable. Since 2002 they have decreased the fixed price component dramatically but this has not been an explicit strategy. FW is primarily concerned with getting paid for their risk.

FW has had successful recruitment, almost 2000 people hired in last 3 quarters. (Surely a large number departed as well!) Engineers want to work on something they enjoy and in an environment where they are appreciated and are supported. Recruiting has been heavy in India, Shanghai, Singapore and Thailand. Houston’s hiring is strategic. FW has lost market share in the North American market but there is a strategic initiative to gain market share.

Reporting through their UK HQ there are a number of offices:-
Thailand is their biggest office, facing tough competition from Technip, Worley, Toyo and others - 600 people and busy, but limited by the available resources in the market.
Shanghai combined E&C and Power engineering office is about 250, projected to increase in 2007. All their business is PMC, and they are struggling to break in to EPC
Malaysia - KL office is not big (100 or so) but enjoying lots of PMC work - engineering is largely moved to the Thai and Indian offices.
Singapore - about 200 but supporting the major Shell Petrochemical and Lucite projects
India (Chennai) - has now moved to E&C control (from Power) and have grown to 70 in 2006 - this is an "export" engineering office only- they do not pursue business in India. However for an HVEC office this growth rate is exceptional and frankly probably much too fast to guarantee an adequate standard of work.
We understand an additional office is planned for Calcutta.

Awards have come thick and fast and one gets the impression that they take on the work whether they have the resources or not. FW Italiana has had several awards in the Middle East, Eastern Europe and Greece - its traditional hunting ground; The Madrid office is winning work in Spain, including quite a lot of power related work. Reading remains very strong in the Middle and Far East but is also winning work in the UK - it has a strong foothold in Refining and Petro Chemical areas. With the ever increasing demand to process heavy crudes their Delayed Coking process has had a very successful year with a number of strategic global awards. They are also moving slowly away from just a FEED / PMC contractor and taking on more EPCM and even some Lump Sum EPC work in the right circumstances.

They are now a fully paid up member (almost) of the fabled LNG Club ( a mysterious group of contractors from Japan, the USA and France who for the past 30 years have been able to handle the majority of the available LNG Liquefaction work. With the large increase in the number of potential LNG projects, coupled with the huge cost increases predicated on materials, equipment, construction and schedule there has been a trend away from full LSTK EPC contracts which has opened up opportunities for both FW & CB&I.

FW already working (with Worley Parsons) on the EPCM project for Woodside Train 5 at Karatha are also involved on other Australian opportunities at the Study / Pre FEED and FEED stages and has made moves (with Chiyoda) to go head to head with the TSKJ consortium in a front-end engineering and design contest to build a seventh train with an option to build an eighth under what is called NLNG Seven Plus. Each train will have a capacity of about 8 million tonnes per annum, making them as big as any yet under construction in the LNG sector. NLNG said previously it is targeting a final investment decision by the end of 2007. It also made clear that it "has a preference to execute the project with one single contract package".

So should some of us, who are classed as speculators, invest in FW or is it too late? On the London market the few quoted companies are trading at up to thirty times earnings - pretty heady stuff most of us would say. KBR have recently floated 20% of their equity as part of the planned separation from Halliburton (the rest will be spun off in March 2007) and are trading at just shy of 50% above their issue price. The gloss has gone off some of the major E & C’s on the NYSE , who are now trading off their historical highs achieved in middle of 2006. Foster Wheeler now has an order backlog that is nearly twice as large as their entire sales for 2005, and at least one analyst, James Thorne at MBT, believes they have enough business on the horizon to keep them busy for 15 years! But have we ever really believed what some of the analysts say?

So is too much optimism priced into Foster Wheeler or their compatriots to make them compelling today? My gut feeling is no, but I need to look into this some more. Everyone from the FT to Smart Money has been calling attention to these companies following their recent downturn, so perhaps it's too late for any good returns in the short term -- but over the coming decade, I can't find a solid backing for the argument that the demand for cleaner, more efficient power generation, refining capacity and gas developments is going to decline.

For Fluor in the UK another glittering year (£800m revenues must be an all time high?) However let me just digress a moment - that ‘old chestnut’ (for Fluor anyway) of Lump Sum contracts reared its head again. Now I have nothing but admiration for Fluor in their seventy years or so since Bob started out in Southern California - they are, I suppose the ‘Blue Blood’ of general contacting. They have been involved in some mighty projects in that time - from the Andes to the Middle East and many points in between you will have bumped into Fluor. Given the situation with ‘King Coal’ again I remember the huge Sasol Coal to Liquids plants in South Africa in the 60’s through the 80’s - mammoth projects that are very similar to the GTL plants under construction in Qatar today. Still back to my original point ‘the Fluor Achilles Heel’ LS contracting - over the years they have had a number of problems in this area and in 2006 the curse struck again. They have had one or two ‘ups and downs’ in that time. OK it was infrastructure this time - not Hydrocarbons or Power but it is a recurring theme in the company’s history. 2005 had been a record year for earnings with revenues up by 40%. Although Power had suffered a major loss on one project during the year overall margins stayed above the benchmark 3%. In the last big boom, in the late 1970s, Fluor's revenue and earnings growth "exploded," as an index of commodities prices paid by producers of goods climbed 8% annually from 1975 through 1982, Fluor's revenue soared 25% a year. By the end of Q1 2006 the stock was nudging $90.

During April Fluor announced that the relocation of its global headquarters to a new corporate campus in Irving, Texas, was completed in April 2006. "Fluor is off to a great start in 2006," said Chairman and Chief Executive Officer Alan Boeckmann. "Earnings per share exceeded expectations and we continue to see substantial new project opportunities in all business groups. The outlook for Fluor is very positive, with many of our markets in strong upturns driving continued growth in demand for engineering, procurement, and construction and maintenance services globally. Clients continue to announce significant capital spending plans, and the company is particularly well- positioned to capitalize on these trends in oil & gas, petrochemicals, infrastructure, mining and power."

All was still going well on a global basis but there was a slight hiccup when the British government rejected a $749.5m bid for British Nuclear Group Ltd. (BNG) from Fluor. The government told state-owned British Nuclear Fuels Ltd. (BNFL), the holding company that controls BNG, and the Nuclear Decommissioning Authority to formally approve a new sale process for BNG. It said officials from the Treasury and the Department of Trade and Industry had decided that BNFL would not be allowed to sell the entire subsidiary to Fluor. The British government may preferred to break up BNG as it could see this as a way to encourage competition in the British decommissioning industry, currently dominated by BNG. Fluor said then its offer recognized that BNG as a whole is worth far more than its individual parts.

Then in October Fluor said its third quarter results, scheduled to be released on November 6, would include approximately $168m in pre-tax charges for cost overruns on several fixed-price projects. Considering these changes, the company lowered its preliminary earnings outlook for 2006, sending the stock down 8.99% in the extended trade. The company also guided 2007 below Street expectations. Cost overruns in the company's Government segment include provisions of $133m relating to certain United States embassy projects and $13m on a construction project for the United States Air Force in Afghanistan. The company's Industrial and Infrastructure segment includes a provision of $22 m relating to a highway project in California. This hiccup reduced margins in Q3 to 1% and in the YTD to 3.8%.

In spite of this setback both European Offices remain full of work and progressing on all fronts. work sharing has been successfully integrated across all offices and Fluor staff are putting together integrated teams on a global basis for many projects. From the Camberley office there are projects in execution for Kazakhstan, Kuwait, Sakhalin most of which are in the construction phase. Recent project awards in Saudi Arabia (the huge Kayam Project are a sign of the bullish conditions in the Middle Eastern market places is the Habshan project.

Engineering on the Kayam UDO facilities began in July 2006 and will continue through 2008. Construction is slated to begin in February 2007 with a targeted completion of December 2009. Peak engineering employment is anticipated at 1,000 employees with peak construction employment of 12,000. Fluor offices in Camberley, U.K.; Houston, Texas; Manila, Philippines; and Saudi Arabia will be involved in the project, Coupled with the Habshan project in Abu Dhabi these projects give the Camberley office a solid backlog.

I have to say I am surprised that both Fluor and FW take on these large O & U projects in the Middle East - base load work I suppose (+ 1 million hours) and are linked to the FEED / PMC projects. So however there can be no doubt that Fluor has recovered their old 'pre eminence' in the Middle East and will remain as one of the major global E & C companies - there are some major refinery expansions in the USA (virtual new grass roots refineries) and with Whiting already awarded and a possibly another slated for Fluor the only doubt is will the projects ultimately proceed into the EPCM phase.

Jacobs reported record net earnings of $196.9mn, or $3.27 per diluted share, on revenues of $7.4bn for its fiscal year ended September 30, 2006. This compares to net earnings of $131.6m, or $2.24 per diluted share, on revenues of $5.6bn for fiscal 2005. Net earnings for the fourth quarter and fiscal year 2006 include a net, after-tax benefit of $3.1m, or $0.05 per share, representing the favourable settlement of a matter with the U.S. Internal Revenue Service ("IRS"), off-set in part by provisions recorded for certain other income tax exposures. The effects of the settlement and other income tax exposures on the elements of the income statement include an increase in pre-tax interest income of $3.3m, and a $1.5m net reduction in the Company's income tax provision.

Jacobs also announced backlog totalling $9.8bn at September 30, 2005, including a technical professional services component of $5.2bn. This compares to total backlog and technical professional services backlog of $8.6bn and $4.3bn, respectively, at September 30, 2006. Commenting on the results for year, Jacobs President and CEO Craig L. Martin stated, "Clearly we had a strong quarter, capping a good year. Earnings, sales, and backlog are at record levels. Our customers are continuing to invest, so we expect to see growth continuing throughout FY 2007." Also commenting on the results for the year and on the Company's earnings outlook for fiscal 2007, Jacobs Chief Financial Officer John W. Prosser, Jr. stated, "The outlook for 2007 should continue to track above our target 15% average growth with earnings per share between $3.75 and $4.05."

Jacobs continue to go from strength to strength in Europe - their strategy of focusing on major clients from regional offices with a few hub offices and the, but the focus is now clearly Hydrocarbons to fill the gap and given the forecast growth rate this probably the way forward. We are already seeing the fruit of their planning with some recent wins in the UK & European Refining sectors including substantial refining and chemical contracts in mainland Europe.

As well as awards Jacobs also signed a Letter of Intent with Kovoprojekta Brno a.s. (TKB), a top-tier engineering services firm based in Brno, Czech Republic, establishing formal cooperation to jointly execute projects in Central and Eastern Europe. The firms have worked together over the last 10 years on various projects, many involving sulphur technology. Through this new arrangement, Jacobs and TKB will provide a wider range of services for larger projects to their clients in the petrochemical, refining, manufacturing, buildings, and infrastructure sectors. TKB has over 200 employees engaged primarily in refining and chemicals, automotive manufacturing, and civil and infrastructure projects.

Wherever you go these days you bump into Jacob’s people and I have to say they cut a fine show - proud of their company and its achievements - fantastic international expansion and the way in which it has move progressively up the food chain. Old Joe would be very proud to see the result of his labours that started in a shed in Alhambra in 1947!

Petrofac is cashing in on strong demand for new facilities with half-year profits up by two-thirds and management predicting buoyant conditions are set to continue. Net profits in the six months to June jumped 67% to $52.6m from $31.5m. Sales rose 34% to $927m. "Market conditions continue to be strong and we believe are likely to remain so as the relative under-investment in the oil and gas industry in recent years is addressed," Petrofac said. Petrofac took new orders worth $1bn in the half to increase its order book to $3.3bn, up from $3.2bn at the end of 2005. The stock has continued to strengthen during the year and closed the year just shy of £4 - a major increase during the year. The office in Woking continues to expand and now numbers over 500 staff and is undertaking EPC/ EPCM projects. With this sort of growth in both volume and capability promotion to the premiership seems a good opportunity, which will be well deserved. In fact they are the first newly promoted company for many years - I suppose you would compare them with Reading FC (who may go a lot farther than we thought).

I got quite excited about the recovery at the UK branch of the Shaw Corporation - Stone & Webster during 2005 - this has continued at a good pace in 2006. At the start of 2006 there were 450 staff in Milton Keynes and by the end of December they were back up to 750 - levels not seen since the late 1990’s, just before the great crash which saw the company owned by Jacobs(almost) and Shaw , all in a couple of months. They have two ethylene projects in execution and this will remain the base load work for the office over the next couple of years or so. It’s not all Ethylene though with new areas like carbon capture appearing and that old S & W standby Power also featuring. With a balanced workload and some major new hires to strengthen their global operations maybe this time they can maintain these levels for more than just a couple of years - however it is not all blue skies. I hear a claims team is already deeply involved on a major project - don’t hold your breath! Their margins overall are still not what we would call ‘healthy’ - again there is a bit of the CB& I here, although they are much further along the road than our friends in ‘The Woodlands’. Leaving the old legacy behind is never easy, the conversion to full EPC (with all the bells and whistles) takes more time than you would imagine - with Shaw there is still a the pipe fabrication legacy ( it’s a construction legacy as well) that you have to merge with the Technology and Power legacy of S & W. Let me say this takes more time than you could possibly imagine. We saw it with KBR and have seen it with Shaw and CB& I - it’s a very tricky situation. Margins are generally lower than the market average (in the 2-3% with Shaw and CB& I) much higher with KBR E & C (if you can get the execution right).

For Snamprogetti, Technip and Saipem this has been another ‘very’ interesting year. The three of them are similar types - tied in with major energy companies (either officially or unofficially) strong in both onshore and offshore. Now onshore projects are generally Lump Sum, risky and take place in Brazil and the Middle and Far East - so with a bit of luck you might expect margins of 3 / 4 % - unless you have some real differentiation and then 6-8% might be expected. So that’s the picture for both Technip and Snam. Offshore is very different where the word SURF (basically Subsea) can mean margins of 15% and more. Now this is where both Technip and Saipem (more about them shortly) are the global leaders. Now for many years both Snam and Saipem have been (sort of) independent companies owned by the state energy company ENI. This can mean many things, but as with Technip, Snam and Saipem have always been flagship contractors for their national energy industries. So it came to pass in April... the inevitable happened.
Saipem agreed with Eni the purchase of 100% of the equity of treatment of hydrocarbons and the monetization of natural gas.

Saipem is a leading company in the design and execution of large scale offshore projects for the production and transportation of hydrocarbons, and has distinctive construction capabilities for the realization of onshore projects.

Saipem will have a position of primacy at the high end of the market for the provision of Engineering, Procurement, Project Management and Construction services for the Oil & Gas Industry, with a strong bias towards especially challenging activities in deepwater and remote areas; with significant technological competence such as gas monetization and heavy oil exploitation. The new Group will operate globally but with a strong local presence in the most strategic regions of West Africa, Middle East, Central Asia, and South East Asia.

So that’s how they announce these mergers - not a downside in sight! I won’t bore you with the rest but it goes on a bit. But as you know if they did use the following you would be very disappointed - dare I mention synergy? a position of primacy? a superior balance between capital intensive (offshore) and less capital intensive (onshore) activities?

The range and nature of the clients' profile of the new Group is broader and deeper? will be uniquely facilitated by the strong industrial relationships developed on many common endeavours, by a natural affinity and culture deriving from common roots? The capabilities of the two companies are both highly complementary and strongly synergistic: the amplification of the technological content and engineering & project management competence will facilitate new business, while the group-wide exploitation of the ability to operate in the toughest environments will increase efficiency?

I have heard these phrases mentioned, either partially or completely in every merger since the year dot - it’s really back to the simple 1=1+ 2 (or 3) (or1) .Stirring words all the same.

However since then the orders have continued to flow (both on and offshore) - this Italian Titan is now definitely one of the ‘Galacticos’ of the contracting industry.

For Technip it was another successful year with the split of business and margins very similar to the enlarged Saipem. Offshore and Onshore are a very similar size at about E3 bn Revenues a year but again margins are very different - with offshore a mixture of Surf and Conventional at 9% and Onshore labouring at 2%. So plenty of new orders and lots of ongoing work - but the meagre margins may disguise all sorts of difficulties - we shall see (next year?).

There was great excitement for a few days in late November when rumours (or were they just rumours?) of a Saipem bid for Technip. The latter’s stock price rocketed but fell back as quickly after denials by the Technip management. It was very hard to imagine this deal going through when you examine the structure of the French Energy industry - with Total, GdF, EDT and Technip having a dominant position in the domestic area and the flagship for French exports - as a major piece of the jigsaw Technip would not have nestled happily in the Saipem camp! The Wood Group staged a solid recovery with full-year earnings before interest, taxes, depreciation and amortization, or EBITDA, rising 45% to $210 m from $144.1 m in 2005. The company attributed the rise largely to the strong performance of its engineering activities and its well-support business. It said it continues to develop its presence in a number of territories around the world.

They remain strong in the North Sea, with 20% of there business, but also have a strong presence in the Gulf and North America, and are extending operations in Columbia, Venezuela, the Middle East, Africa and Asia-Pacific. Business was up across the three main areas of engineering and production, well support and gas turbine services.

Its manufacturing operation in China will be augmented by new facilities in Mexico and Saudi Arabia, fabricating well head valves and submersible pumps.

As well as its corporate HQ in Aberdeen and a subsidiary head office in Houston, Texas, the group now operates in 44 different countries, and employs 19,000.

Quite a story and one that has seen the stock rising well with a number of rumours of bid approaches. Well as we know and I keep repeating - many people pile in at the top of the market and with Sir Ian standing down as CEO in the New Year you never know. The Mustang purchase, some years ago is now looking good business - its all about timing as usual.

In Germany the big three have had another funny year but it seems finally to be moving towards some sort of conclusion:-
The big news in the Industrial Gases sector this year has been the acquisition of BOC by Linde for $15 - rumours of a Linde / BOC merger had continued for most of 2005 and I suppose something would ultimately take place. The (now) three main players in the sector Linde, Air Products and Air Liquide have operated in various JV arrangements with the other companies and continue to enjoy major success in their markets. LNG and GTL markets have remained robust and the general level of activity is very high across all fronts. The GTL plants utilise large scale ASU’s and there have been a couple of major awards in 2006 in the region of $1bn per plant. The fallout from the Linde / BOC deal was relatively minor with both US Anti Trust and the EU requesting relatively small divestments.

Linde sold their fork lift truck division to financial investors Kohlberg Kravis Roberts and Gold revolve around a successful start up of the much delayed Snohvit LNG plant currently in the completion stage in Hammerfest in northern Norway. We shall know in the next 3 months or so whether their seven year odyssey has been a success.

They have continued to make strong progress in the Ethylene business and have secured several substantial orders in the year.

The long awaited consolidation of the German E & C industry may be finally taking place! Gea Group AG has whittled down interested parties in buying the company's Lurgi business to four bidders and hopes to announce the buyer by the end of February. Lurgi’s value has been estimated in financial circles to be worth around - 500m Eur.

'From almost 40 bidders, they have managed to get the bidders down to six, and now have reached a final four. The bidders are made up of financial investors and companies in the same field, they are all financially strong businesses that are interested in strengthening the company, and they are optimistic that they will get a good offer.' Contrary to media reports, Russian gas giant Gazprom had not submitted a bid. Lurgi had hoped to close the deal by the end of 2006, but 'high interest' and 'complex due diligence' tests led to delays in the process. They have said that Lurgi workers should not fear job cuts following the sale of the company.

Gea merged Lurgi with its Zimmer division at the beginning of 2007, after original plans to keep the two businesses separate. This was a strategic decision partly because Lurgi did not have enough engineers. Qualified engineers are very difficult to come by in Germany. Joining the two companies has strengthened the workforce by 110 people and given the company a competitive advantage.

We know that Linde are in the final four and wouldn’t this deal be a perfect solution for the German E & C industry. Linde will receive a mention in the LNG section via their involvement in Snohvit (as Main contractor, Woodside, Sakhalin and Brunei.

Lurgi has quite a lot of things going for it and with its position in GTL with Petro and Statoil plus a legacy capability in all things coal. We are still not sure how well its mega Methanol plants are operating - but the combination would form a powerful unit.

This leaves Uhde out in the cold, or does it? There maybe difficulties with some of their Middle Eastern Ammonia plants but these are only rumours. They do have some good technology and have had a good run in Egypt, China and one or two other places. I guess we will have to see the result of the Lurgi situation before any other local moves take place.

There has been little news from Tecnimont this year suffice to say they seem to be doing what they do well and are picking up additional work to supplement an already healthy workload.

Spain is seemingly unchanged with the same old traditional faces but that ‘Paragon of the Spanish establishment’ TR has launched an IPO and since then the stock has done extremely well. A healthy workload has been supplemented by a number of additional awards in the Middle East. The high workload has continued to be supplemented by their itinerant army of Venezuelans. I did say given the aggressive sales strategy the final results remain to be seen - so far so good.

Dragados - always big in civil engineering, infrastructure and offshore fabrication have a continued appetite for the Hydrocarbon end of the E & C industry - taking risk and working with those less willing to take risk. - we are still waiting to see where this leads - I thought it might be 2005 and then 2006 but even last year there were a few awards in the Middle east but nothing to say that they were going to join the higher echelons of our industry.

Thanks to a higher profit margin stemming from a strategy of focusing on a select group of fields in which it has strength, Chiyoda was able to outperform industry leader JGC in the fiscal first half ended September 2006. Chiyoda booked a 16.6 bn yen pretax profit for the half term, compared with the 14.5 bn yen posted by JGC.

JGC recorded sales of 275.2 bn yen for the fiscal first half, about 64 bn yen more than Chiyoda. But Chiyoda's operating profit margin was 6.4%, significantly higher than JGC's 4.4%. "We focused on a few key businesses in trying to rebuild our operations," said Chiyoda Executive Vice President Hiroshi Shibata. "We sought to boost our profit margin rather than expand sales." The company is concentrating on operations where it is competitive technologically, generating roughly 70% of its total revenue from handling LNG plants and related equipment. About 60% of its total sales came from Qatar, where it could more easily boost the profit margin due to its extensive experience of doing regular business there.

Chiyoda also concentrated its marketing efforts on projects more likely to attract orders, minimizing spending on less fruitful operations. According to Nihon Keizai Shimbun projections, the company is likely to post a 42% year-on-year increase in pretax profit to about 33bn yen for the fiscal year ending March 2007, or 5bn yen more than the firm's own forecast, surpassing JGC's projected profit of 27bn yen for the full term.

JGC's profit margin was affected by rising prices of steel used for four major projects whose orders were won in spring 2004. Because it will no longer be impacted by the four projects next fiscal year, JGC is expected to earn a higher profit than Chiyoda, according to industry analysts.

"The difference in the two firms' business strategies is clear. Chiyoda is focusing on a few highly profitable areas of strength, while JGC is trying to spread the risk," said an analyst at Nomura. Unlike Chiyoda, which earned a substantial portion of its profit from its LNG plant operations concentrated in Qatar, one-quarter of JGC's group operating profit for the fiscal first half came from non plant engineering businesses. The firm is also aggressively investing in power generation and desalination projects in Saudi Arabia.

JGC also handles a wide range of engineering projects, including oil refineries as well as chemical and LNG plants. It has even taken on unprofitable projects as a way of acquiring new technologies and expanding its client base in such countries as Vietnam and Yemen, where it had no business experience. These projects "are considered as investments to expand business in the future," said JGC Vice Chairman Hideo Masuda.

Chiyoda can boost its profit more easily now that global plant engineering demand is expanding on the back of high crude oil prices. The company is seeking to lower its break-even ratio by increasing its profit margin, hoping this will make its profit structure less susceptible to market downturns. For its part, JGC is attempting to boost its profitability across a wide range of operations, bracing for a time when plant engineering demand will decline significantly.

LNG - the Eldorado still gets closer (but has not quite arrived yet - not one award in 2006) perhaps 2007 is the year - well it’s looking better or is it?

There was little in the way of project sanctioning last year in LNG but maybe that could change as 2007 progresses. It is not impossible to think that there could be new developments under way in Angola, at Pluto, with the Equatorial Guinea second train and possibly in Peru (now let to CB&I). However as I mentioned earlier in my report there are many negative signs that could further slow a number of developments.

There will be those in Nigeria saying that developments there too may surprise. And looking to the future there is even the prospect that Qatar might hold out the possibility of starting talks about projects to begin once its current moratorium on new developments ends.

Even with a cautious approach prevailing, there is still a decent chance that this year could see more project sanction pen action than last. Let’s take a closer look.

Chevron and Shell are holding back on construction projects from Australia to Nigeria, which could force up LNG prices for years to come. The primary reason is that the cost of building LNG plants has tripled in six years, according to Bechtel Group, the biggest US contractor.

The Gorgon project on Barrow Island, off northwest Australia, projected to cost as much as $19.2bn, is among the major ventures that have been delayed. None of the world's biggest energy companies approved developments last year.

Natural gas prices are three times higher than during the 1990s and consumption of the fuel will outpace the 1.6% annual gain in energy demand for the next 25 years, according to the Paris-based International Energy Agency.

"Costs are going up and they're going up far faster than anybody expected," said Andy Flower, a UK-based consultant to the LNG industry and a former BP executive. He forecasts that the world LNG shortage will last until at least 2011. Well he keeps popping up and making a living in that most difficult of games (forecasting) - well I have been following his words of wisdom for 15 years now and he seems to survive.

Natural gas in New York has soared from an average $US2 per million British thermal units in the 1990s because consumption increased oil costs rose and domestic supplies diminished. US gas production peaked in 1973, and demand since then has held steady, increasing the need for imports.

Gas may become more important than oil in the next 50 years because crude supplies are running out faster, according to the International Energy Agency. Global oil and natural gas reserves were about the same at the end of 2005, equal to 1.2 trillion barrels of crude, according to data compiled by BP.

Oil reserves are being burned almost twice as quickly as gas. LNG sales rose about 11% last year to 157 million tonnes, according to Wood Mackenzie Consultants in Edinburgh. It could jump about 66% to 261 million tonnes in 2010 and another 87%to 488 million tonnes by 2020, the group said.

Record LNG prices would not fall for "years to come", said Ari Soemarno, president of Indonesia's state energy company, Pertamina, until 2005 the world's largest LNG exporter. Prices under multi-year contracts, excluding freight and insurance, range as high as about $US10 per million British thermal units in Asia, assuming $US60 a barrel for oil, part of LNG price formulas.

The cost of building liquefaction plants has risen to as much as $US600m ($770m) for each million tonnes of annual production from about $US200m in 2000, according to San Francisco-based Bechtel.

Former Federal Reserve Chairman Alan Greenspan in June testified in Congress that LNG is "very important for the US, for our national security" and has argued for increased investment. "We have not picked up as quickly as we need" to increase imports, he told the Senate Foreign Relations Committee in Washington about energy security and economic risk. He declined to comment for this story.

Two of the newest and biggest LNG projects have been over-budget and late.

Sakhalin-2 LNG in Russia has doubled in cost to more than $US20bn. Snohvit LNG will cost $US9.5bn, almost 50 per cent more than first anticipated in 2002. Building LNG plants now takes four years, rather than three, because contractors are stretched, said Mr Flower, the consultant.

"Construction and permitting of LNG plants is a lengthy process," BP spokesman David Nicholas said from London.

Chevron, last year abandoned its timetable for approving the Gorgon LNG project in Australia. Developing the fields, which hold $US400bn of natural gas, would cost $US10bn and increase world supplies by 7 per cent. The driller and partners Shell and Exxon Mobil are studying ways to reduce construction costs. The project is "large, complex and faces considerable cost challenges", Colin Beckett, Gorgon area manager for Chevron said in an interview last month.

Politics and violence also hold back LNG developments. In the seas between Australia and East Timor, development of the $4.7bn Sunrise LNG project has been stalled for more than two years as the nations resolve how to split royalties.

Shell, the world's largest non-government producer of LNG, is struggling with projects in Nigeria because of rebel attacks and in Iran, where threats of sanctions over the nation's nuclear research program restrain investment. Iran has the world's second-largest gas reserves.

American politics also get in the way. BHP Billiton missed a target to win government approval in California for an $US800m import terminal near Malibu last year.

Celebrities including actors Pierce Brosnan, Halle Berry, and Tom Hanks, rock musician Sting and supermodel Cindy Crawford campaigned against the plant over safety concerns. The "not in my backyard" syndrome was among the obstacles in the US, Dr Greenspan said in June. "It's going to take a while" to increase supplies, he said.

Well most of the above still stands - except for 2005 read (in most cases) 2006 or even 2007 or 2008:-
Egypt is still moving forward but much more slowly than we thought last year (Exactly)
Nigerian activity is unlikely to move into EPC until 2007 - remember there are four major prospects (at the earliest)
Mauretania looks a long way off and Angola could be an EPC project in 2007 (Yes)
Skikda and Arzew will probably both proceed in 2006 (Well that was wrong)
The Iranian prospects were four a year ago, they are now two in number and their future is not yet certain. (Still moving slowly - but a lot of recent activity with Shell, Repsol and Total not discounting some early moves forward)
Yemen LNG is let and EPC execution underway
The Ras Gas and Qatargas major expansions are also let and under execution - huge Trains Huge projects - will keep Chiyoda , Technip and Snam busy and even Fluor have joined the 'gravy' train here (albeit offsites and utilities).
Nothing much is happening in Malaysia (an expansion Train possibly) or Indonesia (an expansion Train was shelved) and talk of a grassroots faculty in Sulewesi. Another former Chiyoda area is noticeably quiet. (And still quiet)
Australia has been the most active and surprising marketplace with Woodside Train 5 in execution, Chevron Gorgon moving in that direction and a number of FEED's in the planning stage with BHP, Woodside, Inpex etc leading the way.(Still moving slowly but at least some activity)
No sign of Sunrise yet or the Snohvit Expansion. The Sakhalin Expansion is planned but with the huge overspends on Phase one coming through this may move more slowly. (No change)
NW Russia remains very exciting - all the prospects I mentioned last year are still in play but there is probably someway to go before they reach execution. (even farther away now)
Peru is still looking good (It came good!) but Bolivia and Venezuela are probably still on the back burner. (Still on the back burner)

Summing up its tells you that the forecasting game is not easy (never has been) but that there is probably still a lot of work coming though that will surely test the metal of the so called, but now expanded 'LNG Club'.

The LNG contracting groups remain more or less the same companies - albeit changing partners to suit circumstances. The club comprises Bechtel, KBR, JGC, Technip, Chiyoda, FW and CB&I with Saipem making a claim. With so much LNG work around and quite a bit it of reimbursable (in Australia) the expansion of the club was bound to happen - whether any of the new entrants will take on LS risk is another matter (well CB&I may have answered the question.)

Another factor will be the size of Train (now setting a standard of 7 - 8 MTPA) the numbers of new trains will inevitable reduce in the future. We are seeing them in construction in Qatar and in Nigeria and maybe in some of the projects that are currently on hold or under review.

As a postscript we should mention the Snohvit LNG project in Northern Norway. Well its now well on the way and that ‘joiners’ fee I mentioned last year may be money ultimately well spent. We are still saying that the experience that would help them in the future should they be successful in joining any of the north Russian LNG projects - in fact their membership may still be a big plus to Gazprom, who have been invited to participate in Snohvit Train 2 - a prerequisite to the economic success of the overall Snohvit development. Unfortunately Shtokman LNG has run into a few problems - the major one being the hardening attitude of the Russian leadership in the Kremlin towards the IOC’s which has basically stopped any ongoing study work for the past six months or so. This is also coupled with the decision to develop a pipeline from Northern Russia to take the first few years of Shtokman gas to mainland Western Europe.

Norway remains a major supplier of Gas to Europe and the UK and the supply has increased during 2006 with the completion of the Britpipe from Nyhamna (well not quite as far as Nyhamna yet!) to Easington - but it started to supply gas during the autumn. Most of Europe perceives Norway as reliable supplier of gas (piped and hopefully LNG in the future) and the ‘man on the Clapham Omnibus’ is certainly now ‘more aware’ of the precarious state of current UK Gas supplies? Our own production is still falling away fast - now no longer self sufficient the Inter Connector has turned around and the three new LNG receiving terminals are now well on the way to completion. More gas is being transported to both the Kollsnes and Karsto Terminals so that means further expansions and upgrades are on the way at both locations.

GTL
GTL has continued to move on in the past 12 months - the EPC project under execution with Technip Italy for Sasol/Chevron plant is now complete and will be producing product very shortly and an expansion programme is already in the planning stage. Qatar remains the centre of early activity with the huge Shell Pearl project (2010/11 planned completion) leading the way. The Chevron Escravos project is in execution in Nigeria but is not without its problems. The Algerian project has been delayed until mid 2007, but may be later and another project is on the drawing boards in Australia. As mentioned earlier Exxon Mobil is taking a deep breath and shelving their Qatar GTL plant until the Pearl project is either well on it way or actually completed. Many of you have probably seen the Pearl GTL project announcements last week =related to the current forecast total cost which came as a surprise to many of us. Shell has however said that the current forecast is within their economic model and nothing has changed since their previous statements.

Refining
The refining recovery had continued apace and there were some very interesting opportunities coming forward. We have stated for a number of years that the U.S. oil industry needs new refineries due to the lack of refining capacity. There is no spare refining capacity in the U.S. today and that means" that the usual supply and demand balancing act has been thrown off kilter. Refineries have been operating at full capacity, whereas the average U.S. manufacturing plant operates at 75% capacity and this is probably falling. Since 1981, when refineries operated at 69% of their capacity, the number of refineries in the United States has dropped from 324 to 150. However at last we have good news to report - well not quite new refineries, but massive expansions are underway in Port Arthur with Motiva and Louisiana with Marathon - there maybe more to come? This is good news for the US contractors and good news for country generally. These two expansions will add close to 600,000 BOPD to the nations stocks and up to $5 bn of capex. Even the long gestation Arizona Refinery (near Yuma) is on the agenda again - I first remember this project being flagged in 1990 when I was with John Brown. Bechtel will probably get the order if and when it proceeds.

Refiners have hit the limit of their ability to pump light, sweet crude in particular. They have more capacity, but it's not the right sort. Light, sweet crude remains in many corners of the world, but the energy industry doesn't have the capacity to pump it. We are now seeing some very large grassroots and expansion seeing the light of day in Saudi Arabia and the Gulf States - these will take time to bring to fruition but we are moving in the right direction.

Simplistically though there are five main points to take into account:-
Global crude will become heavier and more sour - the premium for conversion is will increase
Significant demand growth expected with little anticipated supply growth
Increasingly global product market
Refining margins and ROACE expected to rise
Refining margins are driven by upgrading capacity - facilitating investment decisions
This will mean major additional work for the major E & C Companies and in Europe that will require Heavy Oil Upgraders plus some more complex schemes

I don’t often look at refining margins but in the past couple of years we have had some quite major fluctuations so it may be worth a paragraph or two. We had high refining margins in 2005 and the first half of 2006. Global refinery utilisation during 2005 was very high at over 92% and the whole supply chain was creaking but in the latter part of 2006 we have seen a reduction in product demand which has resulted in falling crude prices - now around $50/bbl. OPEC are supposed to have cut production to bolster the crude price, although one report is sceptical of this. A further cut may be required. In a relatively short period of time, we seem to have accepted that $60 crude is the norm - how times change.

The story for Europe is clear: if you have an investment plan, it needs to be proof against forecasted lower margins. Whoever did the economic analysis would be remiss if they have not done a sensitivity analysis for differing economic scenarios. Even with good refinery margins however, owners will be wary of increased exposure to risk from increased equipment pricing and extended project schedules - everybody wants a hydrocracker and a coker! Owners will now be factoring these elements into their long-term project plans. Clearly, COP has decided to pull out of the Wilhelmshaven investment. I also think the investment by Lotos at the Gdansk refinery is looking more risky. They have just deferred their plans to look at alternative ROSE unit feeds which would have resulted from advanced investment in incremental crude/vac processing capacity.

There is still some incentive for European refiners to do something about reducing fuel oil. If the changes to European coastal and inland marine fuel oil specifications do go ahead, there are both positive and negative implications for investment. On one hand, there would be an increased demand for 1.5%S fuel oil; on the other hand, LCO could be used as the base-stock for inland waterway marine fuel without the need for very expensive upgrading. However, in a Europe which is trying to process more Russian crude, it would mean that refineries could only sell high sulphur bunker fuel to ships leaving European waters or to power markets outside Europe. Total, in a presentation at the ERTC, have stated that the economics for their investments in Europe have export HS fuel oil as the base scenario and it still makes sense.

As always, the refineries with most to gain are the hydro skimmers as the margin for this type of refinery is back to break-even at best.

Syngas
Even the Ammonia business (which is 65% of this area) is looking much better with old plants closing and prices recovering greatly. The big growth area remains the Middle East and Iran (if you can take part in the action in the latter country). KBR, Uhde (Topsoe) and KBR dominate this market but only the former two have competitive EPC offerings. Activity is picking up and a net 15-20% of additional capacity could come on stream by 2010. This could be up to 4 major plants a year - depending on train size. With Methanol the situation is slightly different where mega plants (7,500 TPD) are now part of the landscape - one new plant a year may suffice. This market is dominated by Methanex with technology coming from Lurgi and Johnson Matthey (DPT) with AkerKvaerner and Lurgi providing execution. Hydrogen is still important but more of a commodity these days and highly competitive too with Technip, Howe-Baker, Linde and Topsoe dominating the market place which serves Refining, DRI and to a growing extent GTL (hopefully!).

Lastly, but not least, because it opens the road to the future is the' Hydrogen Economy'. This could change the face of the Syngas market and we are already seeing 'carbon capture' projects lining up where Carbon Dioxide is reinjected (for future generations to sort out), hydrogen will fuel the associated Power Plant , leaving water as the waste product - not expected to happen in any volumes yet, but if it did, hydrogen demand will explode.

Petrochemicals
The Petrochemical Project Market has continued to shift from the US and Europe to low feedstock cost region of the Middle East and high demand growth countries such as China and South East Asia. Projected global chemicals sales growth through to 2020, offers a bright outlook. Global ethylene demand is growing much faster than demand for oil and gas and ahead of average GDP growth, probably at 4-5%. Absolute growth is still significant in the maturing markets of the world - in Europe and North America. But in relative terms, the growth in Asia - and particularly in China - is staggering. Consequently in 2005 we have seen a staggering number of world scale Ethylene / Petrochemical complexes in Saudi Arabia and the Gulf States, with more to come. Clearly its feedstock driven with Ethane the predominant feedstock of choice- this year I have calculated +15 MTPA of grassroots awards in the Middle East. Propylene demand is also growing healthily and is expected to overhaul both gasoline and ethylene by 2007. There of course new routes to propylene - some of which will be commercialised by then. What of the Ethylene Club - well it is unchanged- although the choice of EPCC partner can be a major factor is ultimate success and we have been seeing some second tier contractors entering this arena of late.

At this stage it is probably worth mentioning that the current boom has thinned out bidders list in moth numbers and quality. All the major EPC contractors are full of work and loathe pursuing too many hard price projects in the Middle East. This then lets in second tier (or worse) contractors who don't have the level of expertise or experience or perhaps even financial muscle to execute the work successfully. This cycle is just underway - hopefully by next year I may be able to tell you weather my unhappy premonition has come true or not - but I fear it will not be good news.

The major IOC's have, as in 2005, continued to ride the high oil price wave and all have produced very large profits (not large enough for some commentators though) - their capital expenditure budgets continue to increase. Their reserves continue to decline and the search for new ones continues unabated. This clearly will keep the long list of new projects in the 'pipeline' very healthy and good news for the E & C contractors and that takes us back to the first few paragraphs of this account. As I said at the start of the report this year it’s about resources (on both sides of the industry), escalation of labour costs (still only 11% of a project) and more so materials, equipment, and construction costs. Our clients are hopefully coming to terms with these unusual escalation levels and its our job to manage these unreal circumstances - be sure it won't last forever - something will happen in China and / or India that will bring these levels back to 'normalcy' as Warren Gamiel Harding once said. It did not do him or his successor much good so maybe we will think of another word that can describe these abnormal times and its return to stability!

Have a great year - remember its a very good to be a young person in our industry at this time ( we must do all we can to grow our leaders of tomorrow ) and as I was going to say 'it's also a good time to be 'grey' in the industry - good if you want to work a little bit longer - as we say enthusiasm is everything ( if you don't have it, it's time to throw in the towel), and our generation (like never before) must be prepared to pass on all we know to the next generation. Demographically we are as high in numbers as we ever will be (relative to the size of our industry) - so it’s now or never.

So hang on in there and hopefully you will receive some of the answers next year - I hope to still be here or at least somewhere to send them to you!

So there it is - 2006 was a better year than 2005 for many of us but what of 2007? As long as the contractors can execute what they sell with predictability of schedule and cost and within the best HSE parameters it a good few years. There should be enough work for everybody from the super giants to the bottom fishers and even some for the plankton. Save for the 60’s and 70’s when the industry was really taking off globally never have the opportunities been greater. There are however a few dark clouds out there - there has been a strand passing through many of the above paragraphs which says Cost, Cost and more Cost! As we know backlogs which seem healthy at the start of the year can look very thin if not replenished through the year. It could happen!

However keep your fingers crossed and enjoy the ride.

Best Wishes

Rod Dean

The statements in the above account are solely the personal views of Roderick J Dean and may not be attributed to any organisation or other person.