The U.S. construction market is in a slump, which usually is a signal for domestic contractors to take up the slack by looking abroad. But the international market last year provided even worse returns for ENR's Top 400 Contractors than they experienced at home. Many of the same factors that hurt the U.S. market in 2002 simply crossed borders.
The Top 400 report 2002 revenue of $19.60 billion from projects outside the U.S., down 10.9% from the $22.03 billion in 2001. This downturn is part of a continuing trend that began in 1999, the high-water mark for the Top 400, when international revenue hit $29.63 billion. In 2000, international revenue dropped to $25.45 billion.
One reason for the slump is financial volatility in international petroleum and industrial process work, two markets that have long dominated the Top 400's overseas revenue total. These sectors accounted for $19.1 billion in international contracting revenue for the Top 400 in 1999, but only $11.4 billion in 2002.
Contractors point to big changes among owners. "One of the big concerns I see is the change brought about by industry consolidation among the big oil companies," says Pete Leathard, president of VECO Corp. That trend has slowed down work as merged oil companies rationalized their need for new facilities and upgrades.
The fluctuating price of oil in light of rapidly changing politics in the Middle East has added to market complications. "One of the biggest issues in the energy business is the evolving situation in Iraq," says Ken Allen, senior vice president of sales and marketing for Kellogg Brown & Root. "The uncertainty has resulted in less investment by oil companies. The current world economic condition has not been matched by equity investment." As a result, projects are being delayed. "Companies are saying to me, We have no reason to invest,'" says Allen. Click here to view chart
Global turmoil also has been taking its toll on oil prices, throwing oil company decision-making into flux. "The uncertainty in oil prices definitely has an impact on projects," says Leathard. He notes that OPEC has been working hard to stabilize prices at about $25 a barrel. "That would help give the oil companies a decent return and help consumers here in the U.S.," Leathard says.
TOP 50 CONTRACTORS WORKING ABROAD
|1||Kellogg Brown & Root (KBR)||4348.1|
|4||ABB Lummus Global||1320.8|
|5||Foster Wheeler Ltd.||1293.0|
|7||PCL Construction Enterprises Inc.||973.0|
|9||Peter Kiewit Sons' Inc.||473.8|
|10||Chicago Bridge & Iron Co.||396.0|
|11||Washington Group International Inc.||384.4|
|12||Willbros Group Inc.||335.3|
|14||The Shaw Group Inc.||273.6|
|15||Black & Veatch||191.7|
|16||J.A. Jones Inc.||149.6|
|17||Contrack International Inc.||148.3|
|18||B.L. Harbert International LLC||132.1|
|19||Structure Tone Inc.||127.0|
|27||Great Lakes Dredge & Dock Corp.||55.9|
|28||TIC Holdings Inc.||50.9|
|30||Paragon Engineering Cos.||44.0|
|34||CH2M HILL Cos. Ltd.||37.5|
|35||William A. Berry & Son Inc.||35.8|
|36||The Facility Group||32.1|
|37||The Turner Corp.||30.7|
|39||The Austin Co.||29.2|
|40||Parsons Brinckerhoff Inc.||29.0|
|42||Morganti Group Inc.||24.5|
|43||The Stellar Group||24.0|
|46||Aker Kvaerner Inc.||22.0|
|47||CCC Group Inc.||21.9|
|48||Manhattan Construction Co.||20.9|
|49||Caddell Construction Co. Inc.||20.8|
|50||American Sports Products Group Inc.||20.1|
* 2002 revenue in $mil.
But the VECO executive points out that oil companies remain gun-shy about major investments. "You're seeing a lot of upstream projects in the big growth areas like West Africa and the Caspian region in Russia, but the cost of discovering and producing a barrel of oil has gone up," he says. "All the easy oil has already been found." That will likely make upstream projects more tenuous and remote.
The trends are prompting some oil companies to change the way they do business. Exploration and oil field development has become a consortium business, where several global oil companies may combine on a single project. This is causing some contractors to rethink their operations. "In the offshore market, we continue to win some business, but we announced that we will no longer pursue EPC [engineer-procure-construct] on a lump-sum, turnkey basis," says KBR's Allen. "We've advised our customers." He adds that "the risk-reward profile on those projects is totally out of balance. Other companies have taken a similar position, but have not been so outspoken."
The owner consortium approach to oil and gas field development can be problematic for contractors. "If [owners] have agreed on a contracting approach it gets difficult to change," says Allen. He says KBR is talking with oil and gas companies about how the firm will work with them in the future and is making progress in changing the commercial approach with some customers.
The power market abroad also continues to be slow. However, Black & Veatch is seeing new opportunities in nuclear power. The firm currently is working on the Lungman Nuclear Power Project in Taiwan, which consists of two units, each 1,350 Mw, says Craig Wright, vice president of construction.
B&V predicts new opportunities in Europe as well. "We see the potential for a new plant in Finland, where we have an active proposal," says Wright. He notes that the country has long experience with nuclear power and could go forward with additional projects. "We are also looking at Eastern Europe, but they have money issues," he says.
The U.S. market may be slow, but it still may beat prospects in the rest of the Western Hemisphere. "Mexico is experiencing the greatest slowdown, followed by Canada and then the U.S.," says Robert McCoole, CEO of Alberici.
Many general contractors with international experience caution that going abroad takes a whole new mind set. "We do follow a specific market," says Richard J. Haller, president of Walbridge Aldinger. "And we do see opportunities for auto plant work in places like China." Click here to view chart
But Haller notes that working as a contractor abroad is different. "We export intellectual capital. The challenge is to understand the local contractors and labor situation," he says. "We realize that having a global capacity is important, but we also realize that working globally is not business as usual."
Some niche contractors are finding that exporting expertise can pay off. "We do heavy directional drilling around the world, particularly in South America," says Tim Healy, vice president for industrial projects of ARB Inc. He says the firm owns rigs that generate up to 1 million ft-lb of torque. "You need that kind of power if you're pulling a thousand feet of 42-in. pipe."
ARB also has pipeline work in the Oriente region of Ecuador, pulling oil out of the rain forest, says Healy. The firm's need to transport equipment into the jungle has led to another niche. "We are also doing logistical support, moving equipment for the oil companies," he says. "After all, there are no highways in the rain forest."
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