INTERVIEW: Fluor increasingly optimistic on North American projects

By Ben DuBose
Online Editor

HOUSTON -- Earlier this week, we caught up with Peter Oosterveer, president of the energy and chemicals (E&C) segment for Fluor, along with E&C vice president Matthew McSorley.

The pair spoke in a 30-minute interview at the St. Regis Houston hotel, where Fluor held its annual November media day.

Topics discussed included company business as well as industry topics such as shale gas, crude oil prices and their downstream and contractor effects.

Highlights of their observations are as follows:

1.) Fluor is becoming “much more bullish and comfortable in North America”.
The trend began in 2010 and 2011, said Oosterveer, and has continued into 2012. “We’re not just listening to what other people have to say, but judging by the amount of work we have to do right now,” he said. “If all goes well, assuming nothing disastrous happens, we’re seeing real opportunities."

With most North American projects, Fluor is in the front-end engineering and design (FEED) phase. “Those typically reach a decision point where clients either say yes or no,” Oosterveer said. “Looking at way these things shape up, it’s starting to look more and more promising. That’s different than a year ago.”

2.) Outlook improves for completed US ethylene crackers. About a year ago, Oosterveer said he expected “2 or 3” new ethane-based crackers to actually be constructed by the end of the decade. Now? “That would probably on the low side,” he said. “I would not be surprised if it’s more like five.”

Fluor is presently working on three US cracker projects and tracking several others, he said. “They could still fail, but that’s not our feel.”

McSorley believes several of the major projects on the US Gulf Coast will be approved into the engineering, procurement and construction (EPC) phase in the next 12 months. “Some of them will be approved or at least on the verge of,” he said. “The construction capacity could start to get very strained.”

3.) Canada more likely than US to become major LNG exporter. On the gas side, Canada’s British Columbia province may soon become a hotbed for LNG export activity to Asia. “I think the chances that Canadians are going to export LNG are bigger than the US,” said Oosterveer. Though one US export permit (Sabine Pass LNG) has been granted, Oosterveer believes Canada will have the greater export presence “because for them, politically, it is much more acceptable than the US”. For the US, it is much more important to be used for domestic consumption, he said.

McSorley expects the uncertainty over the numerous proposed LNG export projects in the US to be sorted out within a year or so. “Economic studies will get done, and we’ll find out whether it’ll be British Columbia or Gulf Coast,” McSorley said. “The companies like ExxonMobil and Shell, they need to be able to make their plans and move on.”

4.) US Democrats begin to “see the light” on energy development. The recent re-election of President Barack Obama wasn’t particularly surprising or critical to Fluor because the company didn’t see an enormous difference in the policies of Obama and Republican challenger Mitt Romney.

“Obviously Republicans are more bullish on energy, but don’t think it’s drastic,” said McSorley. “Things may take a little bit longer to get permitted or things of that nature, but I believe the Democrats are seeing the light that [domestic production] is something that needs to happen in terms of energy security and jobs. Would things maybe move faster on Republican side? Yeah. But I don’t see a huge dramatic difference between the two. We’re not hung up at Fluor on the election.”

McSorley added that Fluor was most concerned with the permitting process for an individual facility. “Do they have any risks that are abnormal compared to other facilities and how do we help them get through it? That’s what we’re more focused on from a regulatory standpoint.”

5.) Europe searches for alternative to Russian gas supply. With production stagnant in Western Europe, the Europeans are now very dependent on Russian gas, said Oosterveer. “And that gas is not cheap, to say the least. I think Europeans are looking at opportunities to get gas from anywhere in world for cheaper, because they don’t want to be held hostage by the Russians every winter.

Oosterveer noted some developments on shale gas in Europe, mostly in Poland, but not nearly as much as in the US. As a result, he said it’s “not necessarily going to solve the need to try and get cheaper gas”. The US has the potential to export some less expensive gas to Europe, he added, but cautioned that it’s at least five or six years away.

6.) Can China follow US lead on shale development? Shale gas in the US is starting to become more known and accepted, according to the Fluor executives. “Acceptance of fracking is increasing,” said Oosterveer. “The industry is taking away public concerns.”

Like the US, other locations such as Latin America and China have large shale reserves. However, questions remain on prospects for development. “I think the US has strong infrastructure in place to export,” said Oosterveer. “China has gas, but in a region where they don’t have a lot of water. They have to build that infrastructure.

“It’s hard to know what the landscape will look in 10 years, but I certainly subscribe to the notion that gas is king for the foreseeable future,” he said.

7.) Long-term fate of Australia LNG projects tied to North American export decisions. At present, Fluor is working on several LNG export projects in Australia, with most tied up in long-term shipping commitments to China, Japan or Korea. However, rising local costs are becoming an issue. “It is an expensive place to do work,” said Oosterveer. “It is a challenge.”

Going forward, the question of whether Australia’s LNG industry will develop further may depend on decisions made in North America, where costs are lower. “Once the current facilities are built, they have long-term agreements,” said McSorley. “They’re fine. But will there be more? That’ll be a challenge.”

8.) Crude prices likely to hover between $80/bbl and $120/bbl for next two years. “Anything below $80/bbl I would say is highly unlikely,” said Oosterveer. “I think we’ve found some stability.”

9.) Demand outlook for China and India. The outlook for Chinese economic growth has dropped slightly from the 8-9%/year rates seen in recent years, Oosterveer noted. “Our outlook is a little more modest than a year ago,” he said. “We would be pleased with 7%/year growth.”

India, meanwhile, is a “different story altogether”, he said. “The potential is clearly there, but the way to control and influence their economy is just not like it is in China. The Chinese move fast, while India doesn’t go that fast. It’s not to say we don’t expect growth, but probably won’t be as sustained and as high as China over the next 10 to 15 years.”

10.) Producers, contractors turn to formal partnerships. Fluor has seen an increase in umbrella agreements in recent years, culminating with a new downstream pact with Shell for Europe, the Middle East and Africa. The company has a similar agreement in three regions with BASF, a global services pact with Dow Chemical, and informal relationships with Chevron and ExxonMobil.

“When you look at demographics in the engineering industry, particularly in the Western world, it can be troublesome,” said Oosterveer. “You have people that came into industry 30-plus years ago, soon to be retired. Clients look at capital investment and say they have a problem, unless we can form alliances and partnerships with people like Fluor and join forces. They’re looking for a presence in all regions.”

11.) Chemicals and upstream lead company business. Fluor has four business lines, according to the executives. Those are upstream, downstream, chemicals and offshore. “ We’re pretty bullish about all four, but in the short-term, we’re most optimistic on upstream, including LNG and pipelines, and petrochemicals, driven largely by the US,” said Oosterveer.

He did note, however, that opportunities are starting to pick up for downstream refiners. “It seems like refiners are starting to make money again, which is a good thing for them,” he said. “We have been watching refining opportunities in a number of places in the world, but they will be in different places - like China, Argentina and Colombia. We still see opportunities for refineries, but in new locations.”

12.) New joint ventures add to project capability. For years, Fluor has had a successful and established venture in Mexico named ICA Fluor Daniel, and it is seeking to expand that concept to other markets. In recent months, the company has launched joint ventures in the Philippines and Brazil. “It brings you instant relationships and a localized presence,” Oosterveer said.

Over the next year, the company expects to add to its workforce and potentially to its regionalized services. “It’s very possible that we might have new capability somewhere else in the world,” he said.

For more details on Fluor, check out their company website by clicking here.

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