Oil Prices A Boon For Drivers, A Curse for Engineers

The drop in world crude oil prices, cheered by consumers, is causing pain for many engineering firms that help build the world's energy infrastructure. At Munich firm ILF, managers have shifted to other projects, like subway tunnels.
The plunging price of crude oil on world markets has caused difficulties for many German engineering firms, such as ILF, which is working on an oil pipeline project connecting Baku, Azerbaijan, Tiblisi, Georgia, and Ceyhan, Turkey.

If someone wanted to pinpoint the globe’s crisis areas, the huge map of the world in ILF Consulting Engineers’ entrance hall in Munich would do. Yellow and red markings indicate company offices and projects in Pakistan and Nigeria, Iran and Libya, Yemen and Kyrgyzstan.

The company's founder, Adolf Feizlmayr, is just back from a trip to Iraq, where he wore a bulletproof vest and traveled in armored vehicles to a site in Basra. The 77-year-old appears to know no fear. As long as his mental capabilities hold up, he is happy to contribute his experience to large projects.

Over many years, Mr. Feizlmayr nurtured ILF into an engineering company whose expertise is globally recognized and sought for almost all large pipeline projects. But just as initial preparations are underway for celebrating the firm's 50th anniversary in 2017, ILF is experiencing one of its most challenging years.

The business is risky in the best of times because it’s often conducted in difficult regions. But now there’s also the low price of oil.

This is causing oil and gas extractors to postpone investments. Since the middle of last year, the price has dropped by more than half. A barrel of oil (159 liters) now costs only about $41 in Europe.

“The price of oil is leaving large skid marks, especially in the value-creation chain,” said Stefan Bürkle, ILF’s managing director. “That affects us as well.”

In addition, there is political turmoil, including unrest in the Mideast and conflict in Ukraine. ILF, for example, had an extensive contract in connection to the now-abandoned South Stream Pipeline, which was intended to bring natural gas from Russia through the Black Sea and southeastern Europe to Austria.

Although Mr. Feizlmayr sees the necessity for a pipeline – preferably in European hands – through the western Balkans, his proposals haven’t gained traction in the political establishment.

Because of such external problems, ILF received almost no new orders at the beginning of the year. Company managers says the situation has improved since then. Managers are hoping that year-end revenues will be a stable €200 million, based on the work of Mr. Feizlmayr and his partner, Pius Lässer.

Oil and gas now bring in only about half of company revenue. ILF has taken over project management for tunnel safety of new subways in Munich and Vienna; hydraulic power plants in Pakistan and in Atdorf, Germany; a photovoltaic park in Dubai; and a large sewage facility in Warsaw.

“We try to strengthen each column,” Mr. Feizlmayer said.

The business is risky in the best of times because it’s often conducted in difficult regions. But now there’s also the low price of oil. This is causing oil and gas extractors to postpone investments.

The largest project is a $30 million order for planning a water pipeline that will cost billions and run from the Shatt-al-Arab river to oil and gas fields in southern Iraq. Two million cubic meters of water are to be transported daily. The project’s engineering challenges are immense. Because of the danger posed by unexploded ordnance and mines, it’s impossible to do soil tests.

Iraq’s immense bureaucracy is another obstacle. Diplomatic skills are a must, Mr. Bürkle said.

Company managers are convinced good deals in the oil and gas business are possible elsewhere.

ILF is hanging on to its 2,000 employees so when the market revives, the company can react quickly.

“We are firmly convinced that the projects currently on ice in the oil and gas industry will be taken up once again,” said Fred Wendt, the head of business development. Mr. Bürkle added: “This is a cycle that we are experiencing. We have to adapt to it.”

The opening-up of Iran offers great opportunities because the country has a huge backlog of work needed on its infrastructure.

Mr. Feizlmayr also is making corporate moves. A holding company is intended to simplify structures, and he plans to offer assistance from the advisory board. Chances are good that this often difficult shift will be successful at ILF. Mr. Feizlmayr wants to leave the company in the hands of its managers.

“He is the moral conscience of this firm,” Mr. Bürkle said.

Mr. Feizlmayr doesn’t intend to balk at other forays into crisis areas. But perhaps there will be time for other issues that also concern him.

Germany’s transition from traditional fuel sources is one of them. He has been tireless in calling for a “master plan for the energy transition.” He considers the crucial question to be: “With what share of renewable energies and with a complete guarantee of reliable delivery does the price of electricity remain affordable?”

For alternative mixes of energy, “it is imperative to develop the facility configuration for providing electricity, to give consideration to the realization of plans in a market economy and to evaluate advantages and disadvantages,” he said.

The current management of the energy transition is miserable, he said. “Unfortunately, politicians simply aren't good project managers.”

 

Axel Höpner is the head of Handelsblatt's Munich office, focusing in particular on Allianz and Siemens. To contact the author: [email protected]