Today the share of domestic companies in the Russian market of engineering and construction in the field of transport and processing of hydrocarbons amounts to 67%. In 2023 it may decrease to 51%, as a result, Russian vendors may lose up to 0.5 trln RUB per year. What is the cause of these risks? The answer to this question is provided in a new study by VYGON Consulting “Engineering and Construction in the Russian Downstream: Do Not Miss the Market”.
The transformation of energy markets and Russia's focus on products with high added value incentivize the development of new industries. Investments in transport and processing of hydrocarbons in the Russian Federation in 2019-2023 will double, reaching 3 trln RUB per year, note the authors of the study.
The main growth drivers are deep gas processing, petrochemical, methane chemical and liquefied natural gas (LNG) projects. Such plants are highly complex and stimulate the development of the practice of using EPC contracts in the Russian Federation, which determines the prospects of related industries, primarily machine building. At least 50% of all investments in LNG and petrochemical industries will be made with the application of this tool in the coming years.
For the implementation of large high-tech projects, foreign companies are usually attracted for the role of EPC(M) contractors. The share of domestic EPC contractors in investments, according to VYGON Consulting estimates, currently amounts to 20-25% and is not likely to exceed 50% in the coming years. Foreign players also serve as licensors of key technologies. Major Russian companies typically act as subcontractors of the 3rd and lower levels.
As part of the study, VYGON Consulting analyzed the Top-20 Russian companies in the engineering and construction market in terms of revenue. This analysis showed that 2/3 of proceeds is generated by enterprises affiliated with large fuel and energy complex and chemical companies, however their share is declining. This is due to the drop in revenue of vendors operating in the field of pipeline construction by 24% in 2019 from the peak of 2017 resulting from the completion of a number of large investment projects, the authors of the study point out.
Engineering and construction companies in the field of hydrocarbon processing and petrochemicals have strengthened their positions most significantly over the past five years, showing a stable annual revenue growth of 80% per year. Their share in the proceeds of Top-20 companies has grown from 6% to 35% over five years.
As mentioned above, the share of domestic companies in the Russian engineering and construction market in the field of transport and hydrocarbon processing is 67%. If they do not develop their competencies in the face of market growth and its shift towards high-tech industries, in the next 3 years this figure, according to VYGON Consulting estimates, may drop to 50%. In monetary terms, their losses could amount to 0.5 trln RUB per year. In addition, a comparable amount may not be received by the Russian economy from related industries – machine building, metallurgy, banking (in terms of loans provision), etc.
The executive summary of the study “Engineering and Construction in the Russian Downstream: Do Not Miss the Market” is available at: https://vygon.consulting/en/products/issue-1879/