EPC engineering encompasses various disciplines under its banner, namely; Engineering, Procurement & Construction. It is an eminent form of contracting agreement in the construction industry. Similar to how the construction industry works in tandem with most of the other operations-oriented industries; EPC engineering forms an intangible component of the Oil and Gas industry as well.
The EPC engineering and construction contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or developed asset to their clients. Various aspects and areas of work include engineering activities, monitoring supplies, construction management, and commissioning at the end of it all. But how is this different from the existing forms of contractual work? Read on, to find out.
How do EPC Companies work?
The EPC engineering phase of a project is also known as the Execution Phase. It is the phase that follows the conceptualization or initiation phase, which is commonly known as, “FEED” or Front-End Engineering Design phase. The FEED is a basic engineering design used as the basis for the EPC phase, wherein companies design process flows, piping and instrumentation, etc. The FEED can be segmented into packages covering different areas of the project. The FEED packages are used as the basis, on which bidding is done when the client offers the EPC work to the market.
Generally, an EPC engineering Contractor has to execute and deliver the project within a pre-decided deadline and budget, commonly known as a Lump Sum Turn Key or LSTK Contract. An EPC engineering contract establishes the risk for sticking to the schedule and budget on the EPC Contractor, the principal or owner enters into a contract with the EPC contractor, who will, in turn, enter into various subcontracts with subcontractors for the performance of specified portions of work. All this is indicative of the assertion that they will not only be privy to orchestrating the engineering aspects of the tender; but also cover the procurement and construction verticals of the project.
How is EPC Engineering different from other contracts?
A significant benefit of EPC engineering contracts is that it establishes a channel of much-required communication, which allows the owner to engage with a single contractor, who will in turn manage all the relationships with subcontractors.
This assignment of work can make it easier for the owner to oversee the project, whilst also effectively evaluating the progress based on performance as the contractor carries out the project. This contract arrangement also benefits contractors who will have more control over the design and selection of subcontractors, as they will be given more authority over the entirety of the project. While contractors accept more risk with the coordination of the design, they can work more efficiently to lower construction costs by laying out a suitable plan at the very outset. In addition to this, improved communication and reduced exposure to cost overruns give contractors more reasons to opt for this method. An EPC engineering contractor is responsible for overseeing the implementation process of projects, thus establishing his prominence as the most essential part of the entire chain. This could succor the planning and collaborative operations of an overall project. And many other fallacies like, the connection problem between planning, designing and construction could be solved effectively, reducing the intermediate link between purchasing and construction. In this way, the contradiction among practicability, technicality, security could also be eliminated.
The Oil and Gas EPC Engineering Market
On the basis of the type of operations, the Oil and Gas market can be classified into upstream, midstream, and downstream. The upstream sector includes searching for potential underground or underwater crude oil and natural gas fields, drilling exploratory wells, and subsequently drilling and operating the wells that bring crude oil or raw natural gas to the surface. The midstream sector majorly involves transportation by rail, pipeline, barge etc. The downstream sector is where the refining of crude oil and processing of natural gas takes place, to further convert them into processed products.
On the basis of location, Oil and gas EPC engineering activities are divided into offshore and onshore facilities. The major market driver for the global oil and gas EPC market is demand. As demand increases, the market starts prospering. Major factors driving the market studies are the declining operating costs of oil & gas fields, expansion in the downstream sector, increasing demand for LNG infrastructure, among others. While writing, the world is observing a slump in oil prices; thus, severing the conditions for the EPC engineering market. Owing to this, a lot of contracts have been annulled.
According to Mordor Intelligence,
“The market for oil & gas EPC is expected to grow at a CAGR of more than 5.35% during the forecast period of 2020 – 2025.”
The flexibility, value, and certainty that arises out of an EPC engineering contract, compared to other types of contracts (such as work orders, the supply of equipment, or construct-only-contracts, is a significant advantage in the construction industry. The clarity in communication and a clearer definition of risks makes this procedure flawless. Most EPC engineering contracts provide for a fixed contract price, fixed completion date, and a single point of responsibility. Moreover, the parties often include performance guarantees to ensure the facility or plant performs as required in terms of reliability, output, and efficiency.
(The views and opinions expressed in this article do not necessarily reflect the views of Energy Dais.)