MRO business in the GCC is favouring OEMs
Efforts to grow power generation capacities in the region have led to a steady increase in the the installation of gas turbines, which is in turn fuelling growth of the maintenance and servicing business.
No edition of Utilities Middle East would be complete without reference to the growing demand for power in the GCC, resulting in a massive expansion of power generation capacity across the region.
It is only natural that the subsequent increase of installed gas turbines in power plants across the Arabian Peninsula should lead to a burgeoning maintenance, repair and operations (MRO) market.
A study completed by consultancy Frost & Sullivan estimates total 2008 revenue in the GCC gas turbine MRO market across the different sectors of power, oil and gas and process industries at US$246.6 million, with 236 units in operation.
Lakshman Sutrave, senior research analyst at Frost & Sullivan expects the market to grow by 6.5 percent year on year through to 2013, when revenue will reach $337.3 million. The biggest markets are Saudi Arabia and the United Arab Emirates.
The market is so healthy that not even the global recession has done much dent its performance. “In 2008, the seven to eight percent growth of previous years declined to about five percent,” says Sutrave.
“The market completely depends completely on the installations that are happening, so there have been very few cases where the end user has postponed maintenance due to the recession.”
Privatisation and outsourcing
Apart from sector growth, a shift towards private investment has provided a huge boost to MRO service providers, thinks Dietmar Siersdorfer, CEO at Siemens Energy Middle East.
The deregulation of the energy market started when Abu Dhabi paved the way for Independent Power and Water Projects (IWPPs) with its privatisation programme in 2000.
The outsourcing of power generation by the state in the shape of public private partnerships (PPP) has in turn encouraged the outsourcing of repair works.
“The operating requirements of an independent power project (IPP) are different to those of government owned utilities. The financing model differs mainly for two reasons.
Firstly, IWPPs fund their projects through lenders, which expects operators to outsource the MRO with fixed contracts to have a better cost overview and secondly, insurances insist on reliable MRO through competent service providers to manage minimize their risk exposure,” says Siersdorfer.
While IPPs are providing a boost to the MRO market, they thus ensure that original equipment manufacturers (OEMs) such as Siemens or General Electric are capturing the biggest share of the market.
The owners of those power plants are required by their money men to go into long term service agreements (LTSA) with OEMs, according to Siersdorfer, who thinks that long term agreements also provide the best return on investment: “LTSA agreements provide long term planning and financing security for funding of big projects for around 15 to 20 years. Given this, banks and other funders of IPPs, as well as insurances in general demand LTSA for a project.
With the privatisation of the energy markets, lifecycle costs and return on investments have become major criteria in assessing service business.”
This is bad news for third party service providers, such as the Wood Group or MJB International, who do not produce gas turbines, and are limited to servicing works.
As well as being sidelined from the big driver in power generation, IPPs, they are also not the preferred partner of choice of oil and gas companies, or in the petrochemical sector, says Sutrave.
“Oil and gas companies prefer OEMs, because they have the perception that OEMs have the best knowledge about their product and are the best people to service turbines.”
Third party service providers will thus have to content themselves with servicing older gas turbines in plants run by state utilities, thinks Sutrave, and will witness a decline in market share.
As the installation of gas turbines will continue apace, however, even a smaller piece of the cake will represent increased
business. “They are going to grow in line with market growth,” says Sutrave.
“There has been an incremental increase and not all the service needs can be satisfied by the original service providers. This is where third party service providers will leverage their experience and get into the market.” Margin pressure, manpower shortages.
Sutrave believes that in spite of the unequal battle being fought, competition between third party service providers and OEMs will lead to increasing pressure on margins.
Siersdorfer remains to be convinced on this point. “It depends on how third party service providers will develop capabilities, expand capacities and enhance their engineering and R&D knowledge base,” he asserts.
“In the energy business it is vital to have strong engineering capabilities to be able to overcome the technical challenges faced by operators.” Finding the right people for the job is indeed a challenge for MRO providers in the region.
Because the region did not have a large power sector until recently, the pool of qualified local staff is still small, with key engineering personnel traditionally coming from Europe and the US.
“For third party service providers, finding skilled manpower will be a real challenge, they will probably have to depend on manpower from India and other South East Asian countries,” says Sutrave.
OEMs, on the other hand, will in future increasingly rely on training up local staff. Siemens for one are active developing local skills.”For this kind of business highly educated and experienced experts are needed.
Siemens is supporting this through its regionalisation program. Engineers from across the Middle East region are participating in a two year training program to prepare them for future deployments as field service engineers.
This training is an important piece in the puzzle to provide competent engineers for the region’s MRO requirements,” explains Siersdorfer.