Primed For Action
Al Mashariq Trading and Contracting has positioned itself to thrive in a tight market
These are uncertain times for companies earning a living from infrastructure developments in the Gulf. Recent years have witnessed economic growth on an unprecedented scale, underpinned to a large degree by strong global demand for the region’s chief export.
But flagging oil prices are threatening to put the brakes on the breakneck pace of economic expansion. Governments are closely monitoring their budgets and a sustained drop below $50 per barrel could see some projects shelved.
This is just one of a number of challenges facing Al Mashariq Trading and Contracting, a Saudi EPC contractor engaged primarily in the utilities sector. Saad Mohamed Al Zahrani, owner and president of the company his father founded, says business has not been hit yet, but he admits the lower oil price could eventually take its toll.
As evidence that government spending is being more tightly controlled than ever, any project that exceeds SAR 100mn ($26.65mn) now needs special approval from a higher authority before being signed off.
“We have won two substations with the Ministry of Education six months ago, and they have still not confirmed the projects because of funding,” he says. “The number of government projects will shrink in the medium term, but Saudi Electricity and Aramco can manage their finances, because they have the budget for new projects.
“There could be a delay in payment, and contractors are anticipating this,” Saad adds. “It hasn’t really hit yet, but it will if the oil price continues at this level. We are hopeful that within a year or two the oil price will rise back above $60 per barrel. The government will be safe if it’s above $63 per barrel.”
In such a tight market, companies that are well organised and have established a reputation for reliability and quality, will be best placed to navigate choppy waters and position themselves to take advantage of the inevitable changes in the energy landscape, such as the shift towards more renewable energy.
Saad’s father established Al Mashariq in 1978, undertaking MV Distribution Works for state-controlled utility Saudi Electricity, then known as DEPCO. After his father’s death in 1980, the company carried on with some partners until Saad graduated from the King Fahd University of Petroleum and Minerals (KFUPM) in 1992 with a degree in Industrial Engineering. Today he remains the major shareholder and, though he has partners on the board, they are not active in the day-to-day management of the company.
Upon taking charge of Al Mashariq, Saad immediately set about expanding the business into HV substations, water works and the telecommunications sector. The company’s main activity is building EHV/HV Substations as Turnkey Projects throughout the Kingdom of Saudi Arabia. Most of these substations are built for Saudi Electricity (National Grid Sa), oil giant Saudi Aramco, the Royal Commission for Jubail & Yanbu, and government ministries who build their own substations independently, such as the Ministry of Finance, Ministry of Higher Education, Ministry of Water & Electricity, and Ministry of Defence & Aviation.
Al Mashariq’s Transmission & Distribution Division is also involved in MV substation works, HV U/G cabling, and consumer connections for Saudi Electricity in the Eastern and Central Regions.
Recent contract awards include a 380kV substation for Saudi Electricity-National Grid in Qassim region, a 132kV substation for Saudi Industrial Property Authority (MODON) in Qassim, a 132kV substation for the Ministry of Defence & Aviation in Dawadmi, and two HV U/G Transmission Lines contracts in the Central Region. This work is worth in excess of SAR 1bn ($266mn) to Al Mashariq.
In the water sector the company builds pumping stations, water treatment plants, and sewerage schemes for the National Water Company, Ministry of Water & Electricity, Royal Commission for Jubail & Yanbu, and Marafiq.
Its Energy Services Division handles SCADA works, protection schemes, rehabilitation of electrical systems and engineering, testing and commissioning. Project references for these disciplines include sizable contracts with Saudi Aramco, the Royal Commission, Saudi Electricity, and Jubail Port Authority.
For telecommunication works, Al Mashariq executes Inside-Plant (ISP) and Outside-Plant (OSP) Fiber Optic Cable networks and installations for Saudi Telecom.
On the civil engineering side, the company’s experience includes major infrastructure contracts executed for Al-Khafji Joint Operations (KJO) and the Royal Commission either independently or in association with other contractors. Al Mashariq recently completed a KJO Building Complex whose value exceeds SAR600mn ($160mn).
The company frequently collaborates with multinationals. In particular ABB, Siemens, Alstom, Hyundai Heavy Industries and Thales have been long-standing suppliers of substation and security equipment (transformers, gas insulated switchgear, substation automation systems) and on occasion Al Mashariq executes some of its major projects in association with them.
“Al Mashariq has a good relationship with these multinationals,” Saad says. “They often subcontract specific scopes of their projects to us such as testing & commissioning for EHV substation works.”
Even without the potential effect of lower oil prices, Al Mashariq is facing challenges on a number of fronts. The company is pursuing many projects in spite of the competition from newcomers entering the market from India, China and Korea. But being long established and having streamlined its operations, Al Mashariq can still compete on price with these newcomers.
“The company is continually improving its management procedures and policies and has established the Project Management Office (PMO) which reports directly to me,” says Saad. “In this way, we are able to follow up and monitor more effectively our project managers’ productivity and maintain the quality while keeping to schedules.”
Finding people with the right technical skills is a familiar problem across the world and Saudi Arabia is no exception. “Now it is becoming more difficult to recruit skilled manpower from countries, such as India, Nepal, Pakistan, and the Philippines, and attract them to the Kingdom due to an increase in demand for their skills in their own countries. As a result, we end up paying more in order to get qualified workers to the Kingdom,” Saad says.
One problem the company doesn’t have is in securing access to finance thanks to longstanding support from its lenders. “Companies like Al Mashariq that have been established for a long time have built up a strong credit history,” Saad says. “We have good support from our banks. They will support companies that are doing well and will continue to do so.”
Renewable energy has begun to gain traction in the Middle East with large scale procurement in Jordan, Egypt and the UAE already underway thanks to rapidly falling costs. Now that the economics of solar photovoltaic power in the Gulf have been firmly established by Dubai’s 200MW solar park, which is being developed for a world record price, many predict that Saudi Arabia will quickly follow suit.
In 2013, the King Abdullah Centre for Atomic and Renewable Energy (KACARE) unveiled plans to develop 41MW of renewables in Saudi Arabia by 2032 in addition to large capacities of nuclear power. However that deadline has since been revised to 2040 and Saad says he doesn’t expect to see significant movement for another three to five years. “The lack of regulations in the Kingdom that encourage foreign investment in renewables as well as the absence of a regulatory agency that decides on the tariff (per kWh) and the connection rates are delaying further development in this sector,” he says. “Nevertheless, at present, some medium-sized projects are being executed by Saudi Electricity and Aramco. In due time, these projects will increase in number and size.”
Thanks to rapid economic growth, Saudi Arabia consumes ever greater volumes of oil domestically, including for power generation. The development of large capacities of alternative energy would allow the country to prioritise its oil production for the international market as well as for the petrochemical value chain. However the recent drop in the price of oil has perhaps removed the urgency for a shift towards clean energy.
“The cost of producing a unit of power from crude oil is still relatively much lower than solar now,” Saad says. “It needs a political decision. Once you have invested in good technology, it will pay back. Then, we can divert oil for something other than power generation.”
Having said that, renewable energy clearly remains firmly in Saad’s thinking as he prepares the company for the next stage of its evolution. “We have started investing in people to enhance our engineering capability and to tackle renewable energy in the future,” he says. “We are thinking about the possibility of developing solar plants or substations on a Build- Own- Operate (BOO) basis.”
There are also plans to expand the Operation & Maintenance Division it set up to take care of all big projects it has constructed. “For Saudi Electricity and Aramco, that’s not their core business, so we expect them to contract this type of work out to other companies,” he says.
As Al Mashariq approaches its fifth decade, Saad is confident that he has positioned the company on a sustainable footing, equipped to meet the challenges of today’s market head on. “We are a dynamic company investing heavily in our people and committed to enhancing our internal systems by applying the latest technology to improve efficiency and remain competitive in the market for the next 30 years.”