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Interview

with Kimiho Sakurai, General Manager, Chiyoda

28.11.2007 / Energyboardroom

Before coming to take charge of the Asia & Pacific regional business office in Jakarta in 2006, your other major international experience was in Qatar between 1997 and 2000. What do you consider to be the main difference between the two places in terms of doing business in EPC?

The years I spent working in Qatar were those before the beginning of the energy boom in 2003. At that time, that country had only two LNG plants (2MMTY x 2) in operation and three more were under construction. I was primarily taking care of Chiyoda’s projects there in methanol, and some other businesses.

Compared to doing business in Indonesia, the main difference in a country like Qatar is with regards to the decision making process. As the economy is dominated by oil & gas, top officials of government are also assigned to managements of oil & gas sector. Then, Middle Eastern governments are strong and tend to concentrate power, which allows for quick and concerted planning, evaluation and decision-making. The domestic population, and hence the market, is relatively small. Here in Indonesia, it is a more complicated economy. It is not enough for a company to offer a good and profitable project; in order to be successful there are many aspects such as autonomy requirements, domestic market obligations and local content incentives which have to be coordinated.

When oil prices reached $30-$40 in the early eighties, Chiyoda’s amount of orders and profits skyrocketed. With prices soaring the last several years and currently at around $90, has your company been able to capitalize accordingly?

The problem with the current boom is that not only the price of oil increasing, but the cost of investing in facilities has also skyrocketed, two or three times more expensive today than in 2003. For this reason, the trend in the EPC business is changing from a previous preference of lump sum contracts to reimbursable contract in an effort to reduce the investment cost for the clients. Clients would now rather take the risk of escalation than leave it up to us, the contractors, because they believe this helps reduce unnecessary contingencies in the lump sum plan.

An example of this trend is the contract Chiyoda recently signed with Shell in Singapore to expand its refining complex. They would only agree to a reimbursable contract type because they estimate that current market conditions do not make lump sum schemes favorable. Indonesia is a notable exception to this trend, as clients still prefer lump sum contracts. Even big international companies are working in the country continue with this system, such as ExxonMobil for their Cepu project. Under such a situation, management of risk is very important issue to contractors. Oil price soaring does not have a direct connection to contractor’s profit.

This Jakarta office is the base for Chiyoda’s regional biz activities in all of Southeast Asia. Why did the company choose this location instead of other more traditional choices like Singapore or Kuala Lumpur?

Chiyoda previously had a business office in Singapore, at a time when we had many opportunities / projects in that country. The decision to establish the main office for Southeast Asia in Jakarta is based on several reasons. First of all, Indonesia is a very important country from an energy point of view, which is the main focus of business for Chiyoda. Our office in Jakarta allows us to maintain a personal and direct communication with clients in Indonesia on call basis, something that is extremely valued in the local culture, while Singapore, on the other hand, is more business-oriented and I can go there on a business trip basis. In Singapore, we do have a local operating company with over 100 engineers, and they have already established a good relationship with clients.

Chiyoda is a multidisciplinary company, providing EPC in different industrial sectors. How important are the hydrocarbon-related industries in your overall portfolio of activities today in Indonesia?

Although our core business has traditionally been projects in the hydrocarbons industry, Chiyoda has recently begun looking into expanding its business portfolio. Indonesia is an ideal place to carry out this diversification, with opportunities in different sectors of interest to us like carbon capture storage (CCS), coal gasification, and environmental projects. CCS is an important issue for many big companies today, and we are in discussions on possibilities of working together. As for coal gasification, this is a very prospective activity in Indonesia given its natural abundance of coal and shortage of gas for its energy needs. Regarding environmental preservation, it is a field with great potential where Chiyoda already has a #1 seller of its own technology (CT-121, flue gas desulphurization) in the United States last year, for which we also have licensed to China and Europe. As regulations in countries around the world become stricter, our opportunities in these types of environmental projects are bound to grow. This is not yet the case in Indonesia at the moment, but towards the future this is sure to change.

Regarding the hydrocarbons sector, Chiyoda still sees Indonesia as an interesting market for future projects in refining and gas value chain, including LNG terminals.

Before coming to take charge of the Asia & Pacific regional business office in Jakarta in 2006, your other major international experience was in Qatar between 1997 and 2000. What do you consider to be the main difference between the two places in terms of doing business in EPC?

The years I spent working in Qatar were those before the beginning of the energy boom in 2003. At that time, that country had only two LNG plants (2MMTY x 2) in operation and three more were under construction. I was primarily taking care of Chiyoda’s projects there in methanol, and some other businesses.

Compared to doing business in Indonesia, the main difference in a country like Qatar is with regards to the decision making process. As the economy is dominated by oil & gas, top officials of government are also assigned to managements of oil & gas sector. Then, Middle Eastern governments are strong and tend to concentrate power, which allows for quick and concerted planning, evaluation and decision-making. The domestic population, and hence the market, is relatively small. Here in Indonesia, it is a more complicated economy. It is not enough for a company to offer a good and profitable project; in order to be successful there are many aspects such as autonomy requirements, domestic market obligations and local content incentives which have to be coordinated.

When oil prices reached $30-$40 in the early eighties, Chiyoda’s amount of orders and profits skyrocketed. With prices soaring the last several years and currently at around $90, has your company been able to capitalize accordingly?

The problem with the current boom is that not only the price of oil increasing, but the cost of investing in facilities has also skyrocketed, two or three times more expensive today than in 2003. For this reason, the trend in the EPC business is changing from a previous preference of lump sum contracts to reimbursable contract in an effort to reduce the investment cost for the clients. Clients would now rather take the risk of escalation than leave it up to us, the contractors, because they believe this helps reduce unnecessary contingencies in the lump sum plan.

An example of this trend is the contract Chiyoda recently signed with Shell in Singapore to expand its refining complex. They would only agree to a reimbursable contract type because they estimate that current market conditions do not make lump sum schemes favorable. Indonesia is a notable exception to this trend, as clients still prefer lump sum contracts. Even big international companies are working in the country continue with this system, such as ExxonMobil for their Cepu project. Under such a situation, management of risk is very important issue to contractors. Oil price soaring does not have a direct connection to contractor’s profit.

This Jakarta office is the base for Chiyoda’s regional biz activities in all of Southeast Asia. Why did the company choose this location instead of other more traditional choices like Singapore or Kuala Lumpur?

Chiyoda previously had a business office in Singapore, at a time when we had many opportunities / projects in that country. The decision to establish the main office for Southeast Asia in Jakarta is based on several reasons. First of all, Indonesia is a very important country from an energy point of view, which is the main focus of business for Chiyoda. Our office in Jakarta allows us to maintain a personal and direct communication with clients in Indonesia on call basis, something that is extremely valued in the local culture, while Singapore, on the other hand, is more business-oriented and I can go there on a business trip basis. In Singapore, we do have a local operating company with over 100 engineers, and they have already established a good relationship with clients.

Chiyoda is a multidisciplinary company, providing EPC in different industrial sectors. How important are the hydrocarbon-related industries in your overall portfolio of activities today in Indonesia?

Although our core business has traditionally been projects in the hydrocarbons industry, Chiyoda has recently begun looking into expanding its business portfolio. Indonesia is an ideal place to carry out this diversification, with opportunities in different sectors of interest to us like carbon capture storage (CCS), coal gasification, and environmental projects. CCS is an important issue for many big companies today, and we are in discussions on possibilities of working together. As for coal gasification, this is a very prospective activity in Indonesia given its natural abundance of coal and shortage of gas for its energy needs. Regarding environmental preservation, it is a field with great potential where Chiyoda already has a #1 seller of its own technology (CT-121, flue gas desulphurization) in the United States last year, for which we also have licensed to China and Europe. As regulations in countries around the world become stricter, our opportunities in these types of environmental projects are bound to grow. This is not yet the case in Indonesia at the moment, but towards the future this is sure to change.

Regarding the hydrocarbons sector, Chiyoda still sees Indonesia as an interesting market for future projects in refining and gas value chain, including LNG terminals.

What is the usual modus operandi of Chiyoda when it is executing a project in Indonesia?

Since the early nineties, our way of operating here in Indonesia is through collaboration with local companies, in particular our main partner IKPT. If there is no project at a given time then we will minimize our engineers in the country, and when one comes up someone from our base in Yokohama will be sent to Indonesia. This person will be stationed at our subcontractor or partner’s office and become a part of a joint team. This system allows us to be more cost-efficient and also meet country’s requirements of “maximize of local resources”. Throughout this approach, our averaged MH Rate could be competitive against other international companies.

Chiyoda is a world leader and pioneer in LNG, and has a long history of offering EPC services in Indonesia this sector. What opportunities do you see at a moment when the government is clearly leaning towards using gas for the growing domestic market?

The evolution of the LNG sector depends to a great extent on the Indonesian government’s policy decisions. For the moment, they have announced that gas will be used for the domestic market, and only surplus production will be allocated to export. This means that in the short term the possibilities in LNG for us in Indonesia are limited, and other countries like Papua New Guinea and Australia are more dynamic. Nonetheless, towards the future there is definitely still a high potential for LNG in Indonesia, and Chiyoda will continue watching closely. We could eventually participate in FPSO projects or gas feed development technology over the coming years. Regarding LNG receiving terminals, the chances of there being a project over the next few years in Java are high but Chiyoda would probably only be looking at a cooperation with a local company on specific technological aspects, since it seems that the possibility for Chiyoda to bring high value to overall scope of project are small.

Besides the special case of LNG, how can Chiyoda leverage its experience in the ‘natural gas value chain’ in Indonesia in order to help it meet its objectives of a new energy mix les dependant on oil?

The main opportunities we see in the gas value chain in Indonesia are in coal gasification. The situation is particularly interesting in the Bontang area, where the abundance of un-developed low calorie coal can be transformed into gas in order to supply the nearby petrochemical plant. By doing so, the natural gas of the area is left available for the LNG plant, and could thus be used to increase exports to Japan. Besides, we look for the opportunity for hydrogen power + CCS in using fossil resources.

Mr. Suroso VP of Pertamina Refining has talked to us about projects to revamp and expand facilities around the country. What kind of opportunities does Chiyoda see in Indonesia’s refining sector?

I cannot disclose any details for the moment, but we do see great opportunities in this sector.

What gives Chiyoda a competitive edge in Indonesia over other national and international EPC companies? What is your strategy to stay alive in such a crowded and cut-throat sector?

The main competitive challenge we will face over the coming decades will be a growing presence of Indian and Chinese companies on the market. This implies, as a basic first step, that Chiyoda has to find ways to reduce its costs. However, what is even more important is being able to offer our customers value that the others are incapable of. This refers to top-notch technology, an efficient business scheme, and compliance with the highest international standards.

Another key part of our strategy is to reduce our reliance on the hydrocarbon EPC sector, which is why we are developing innovative business lines such as the ones I mentioned earlier. This diversification builds on the know-how acquired through our long experience with our customers, so the company will go about it without drifting too far from our core business.

What characterizes Chiyoda in terms of safety standards and delivering projects on time?

Chiyoda is known for delivering projects on time and upholding the highest safety standards in the industry. In Indonesia this can sometimes be a challenge, since labor is not always professional. In order to compensate this, Chiyoda does in-house training and develops incentive programs together with clients in order to maintain the highest standards within the workforce. Maintaining a positive and respectful line of communication with our local partners is essential to Chiyoda’s success in assuring safety and timely completion of projects.

Chiyoda strives to be as professional as possible in its business in Indonesia, while at the same time remaining flexible and open to discussion. There are certain basic principles, however, on which we are not ready to compromise because it would be against our work ethics.

What is your ambition for Chiyoda 5 years down the road, in terms of specific projects in Indonesia?

I would like to see Chiyoda participating in coal gasification in Bontang and Sumatra, being an active player in refining-related projects, and developing its environmental business around Indonesia.

Chiyoda wishes to grow together with Indonesia and the other Southeast Asian countries. We will do so based on our corporate credo “Reliability No. 1”
Since the early nineties, our way of operating here in Indonesia is through collaboration with local companies, in particular our main partner IKPT. If there is no project at a given time then we will minimize our engineers in the country, and when one comes up someone from our base in Yokohama will be sent to Indonesia. This person will be stationed at our subcontractor or partner’s office and become a part of a joint team. This system allows us to be more cost-efficient and also meet country’s requirements of “maximize of local resources”. Throughout this approach, our averaged MH Rate could be competitive against other international companies.

Chiyoda is a world leader and pioneer in LNG, and has a long history of offering EPC services in Indonesia this sector. What opportunities do you see at a moment when the government is clearly leaning towards using gas for the growing domestic market?

The evolution of the LNG sector depends to a great extent on the Indonesian government’s policy decisions. For the moment, they have announced that gas will be used for the domestic market, and only surplus production will be allocated to export. This means that in the short term the possibilities in LNG for us in Indonesia are limited, and other countries like Papua New Guinea and Australia are more dynamic. Nonetheless, towards the future there is definitely still a high potential for LNG in Indonesia, and Chiyoda will continue watching closely. We could eventually participate in FPSO projects or gas feed development technology over the coming years. Regarding LNG receiving terminals, the chances of there being a project over the next few years in Java are high but Chiyoda would probably only be looking at a cooperation with a local company on specific technological aspects, since it seems that the possibility for Chiyoda to bring high value to overall scope of project are small.

Besides the special case of LNG, how can Chiyoda leverage its experience in the ‘natural gas value chain’ in Indonesia in order to help it meet its objectives of a new energy mix les dependant on oil?

The main opportunities we see in the gas value chain in Indonesia are in coal gasification. The situation is particularly interesting in the Bontang area, where the abundance of un-developed low calorie coal can be transformed into gas in order to supply the nearby petrochemical plant. By doing so, the natural gas of the area is left available for the LNG plant, and could thus be used to increase exports to Japan. Besides, we look for the opportunity for hydrogen power + CCS in using fossil resources.

Mr. Suroso VP of Pertamina Refining has talked to us about projects to revamp and expand facilities around the country. What kind of opportunities does Chiyoda see in Indonesia’s refining sector?

I cannot disclose any details for the moment, but we do see great opportunities in this sector.

What gives Chiyoda a competitive edge in Indonesia over other national and international EPC companies? What is your strategy to stay alive in such a crowded and cut-throat sector?

The main competitive challenge we will face over the coming decades will be a growing presence of Indian and Chinese companies on the market. This implies, as a basic first step, that Chiyoda has to find ways to reduce its costs. However, what is even more important is being able to offer our customers value that the others are incapable of. This refers to top-notch technology, an efficient business scheme, and compliance with the highest international standards.

Another key part of our strategy is to reduce our reliance on the hydrocarbon EPC sector, which is why we are developing innovative business lines such as the ones I mentioned earlier. This diversification builds on the know-how acquired through our long experience with our customers, so the company will go about it without drifting too far from our core business.

What characterizes Chiyoda in terms of safety standards and delivering projects on time?

Chiyoda is known for delivering projects on time and upholding the highest safety standards in the industry. In Indonesia this can sometimes be a challenge, since labor is not always professional. In order to compensate this, Chiyoda does in-house training and develops incentive programs together with clients in order to maintain the highest standards within the workforce. Maintaining a positive and respectful line of communication with our local partners is essential to Chiyoda’s success in assuring safety and timely completion of projects.

Chiyoda strives to be as professional as possible in its business in Indonesia, while at the same time remaining flexible and open to discussion. There are certain basic principles, however, on which we are not ready to compromise because it would be against our work ethics.

What is your ambition for Chiyoda 5 years down the road, in terms of specific projects in Indonesia?

I would like to see Chiyoda participating in coal gasification in Bontang and Sumatra, being an active player in refining-related projects, and developing its environmental business around Indonesia.

Chiyoda wishes to grow together with Indonesia and the other Southeast Asian countries. We will do so based on our corporate credo “Reliability No. 1”

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