Силовой остров

20.04.2010 Пресс-служба ЭМАльянса (опубликовано на сайте RussiaEnergy.com)

In 2008 EMAlliance, the historic market leader in Russian boiler manufacturing launched the very ambitious investment strategy plan 2012, which is now at its halfway stage. In between, the economic situation has drastically changed. Could you please explain to our readers the main objectives of this strategic plan? How have economic factors altered your strategy?

EMAlliance plans to remain as the leading energy construction company in Russia and the CIS. As for new construction projects, our share of the pulverized-coal fired boiler market is around 60%, and the combined cycle boiler market is 35%. The company has always had a large share in the modernization and service market that it intends to keep, and — for heat recovery steam generators — even increase.

Of course, the crisis introduced some calibrations to the strategy. Because we are now in 2010, any long-term strategies are created with 2015 as a goal. It is possible that EMAlliance might prolong its strategic plan from 2012 to 2015. Every year, including 2008 and 2009, the company invested around 400 million rubles in development, with around 300 million rubles being invested annually in the facilities of Krasny Kotelschik.

As a rule, EMAlliance splits its investments between facilities and engineering. For engineering, the company is employing new teams of engineers and new employees with specialist skills, and invests in IT: we have installed a PDMS program that provides us with the potential to create 3D models. Also, EMAlliance is planning to implement the Ansys program complex, which means processes can be modeled dynamically – for example, we can design input parameters for a boiler model and see how these models work, before ever having to build them. This cuts unnecessary expenses.

EMAlliance is fortunate insomuch as large investments in production are not required. On the one hand, our production is not continuous, unlike in chemistry or metallurgy, which makes it easier to modernize where necessary and introduce new specialized technologies. We invest around $10 million USD annually in modernization and plan to keep on doing so until at least 2015.

Capital will mainly be spent on technology development, namely for creation of new companies on the basis of EMAlliance that will require investments in people and documents and, secondly, for buying licenses and technologies. This does not require investments in the ‘hardware’.

In today’s economic climate, power generators are looking for complete solutions for new construction needs, rather than simply purchasing boiler island units, and therefore taking a step towards EPC seems like a logical step for EMAlliance. However, it implies some risks. How difficult has it been for EMAlliance to enter the EPC market so far?

It should be noted that production, engineering and EPC are three different types of business. Not every company in the world can be successful in three different competencies. Moreover, the world leaders normally split these business lines into divisions or even separate companies, with their own risks and policies. What EMAlliance has to face as one of the first EPC contractors in Russia is that the subcontractors that we were attracting were not competent enough. This does not undermine the project, but increases the risks for the EPC contractors. As a result, it is now company policy is not to have more than one EPC contract at a time. Today we have one contract with TPP-26 (Thermal Power Plant 26) in Moscow for Mosenergo in cooperation with Alstom. We have also participated in a few tenders. During 2010, we’ll win another EPC contract, and by the time the current one is commissioned in the end of 2010, we’ll proceed to look for the second contract in early 2011.

If you look at the global leaders with competencies in both engineering and production, you’ll see that the number of their EPC contracts is also limited. Not a single company wants EPC contracts to make it bankrupt.

You apparently wanted EMAlliance to be able run EPC projects simultaneously. How long will it be until you can do that?

The average length of an EPC contract, from beginning to completion, is 2-4 years. Our task is to find contracts that will allow us use the knowledge of the local market, knowledge of the subcontractors and, after understanding the risks, find the optimum balance.

How has the first project been with Alstom? What lessons did EMAlliance learn, and how will this affect the way the company approaches future partnerships?

Currently, EMAlliance has no plans to create long-term partnerships but there is no doubt that both parties have really gained invaluable experience from the project. Firstly, EMAlliance now has the experience of working with a major foreign player, and Alstom gained invaluable experience working on the Russian market. Our conclusion from the project is that Western companies, regardless of its experience, would not manage on the Russian market without a Russian partner, due to differing approaches to design, different legal standards and, in general, different mentalities.

EMAlliance was created in 2005 as a holding company. At that time annual revenues stood at only $40 million dollars. How has the boiler market in Russia changed since that time, and what role has the holding in catalyzing this change?

In general, the power construction market in Russia and in the world has contracted. However, despite this, during the crisis year, EMAlliance managed to increase its order portfolio and increase its revenues. In the sphere of power equipment sales and construction of power generation sites, markets are never restricted to national competition: every national company faces global competition. Before the crisis, EMAlliance was competing in Russia with a lot of foreign companies. During the crisis, the number of projects decreased, but our company proved itself to be extremely competitive. With the same level of quality, the business managed to offer more preferable terms of supply, guarantee, price, and we also turned out to be more patient. During the crisis, customers were suspending payments, and looking for loans.

Today EMAlliance is anticipating the long-awaited renaissance in the power generation sector, which was due to start at the beginning of the crisis. A lot of tenders were stopped and postponed. Now the government and power generators realize the need for new construction.

EMAlliance seems well placed to capitalize on this renaissance, but how much of a threat are Chinese and Korean companies today in the Russian market?

Equipment bearing the EMAlliance stamp is installed at 80% of Russian power generation sites. This opens the door to the service and modernization market. So, if we talk about service or light modernization that does not imply replacement of equipment, the basic advantage is with the Russian manufacturers. What the company needs to offer today is not just replacement, but new, more efficient solutions. New construction and deep modernization implies replacement of basic equipment, with expenses reaching 50% of the costs of new construction.

There was a case recently where a Chinese company won a tender for equipment supplies for construction of Troitsk power station. Chinese equipment producers mainly use mass solutions that do not always match Russian designs, as it turned out to be in this particular case. Secondly, some types of coal used in Russia are very complicated in its chemical structure, and only Russians have experience of using it. In the power industry it is essential to have the experience and references for construction and proven successful operation. In cases all over the world, financially viable proposals were not proven to be successful by the end of construction because the power blocks would not show good performance. Of course, there are financial guarantees, but what the customer wants is not his money refunded in 2-3 years, but rather effective generation of electricity.

It seems that the Russian market can be a promising place: last year you mentioned that the market could be worth as much as $40-70 billion USD before 2026. At the same time, the national industry suffers from a lack of capital, prompting Prime Minister Putin to criticize industry heads in February 2010 for insufficient investments.

It is important to remember that such criticism will not go unheeded. EMAlliance will not have to turn away from the Russian market due to lack of investment, and the country will continue to be the company’s priority. However, in the long term, EMAlliance plans to increase its exports. Today, the company exports slightly more than 20% of its output, and in the future this will be increased to 50%. The potential priority countries are the CIS and Central Asia – Kazakhstan and Uzbekistan as the most solvent countries; Ukraine and Belorussia, and, of course, on a much smaller scale the Caucasian republics where, hopefully, political stability will develop the industry and need for power.

The second most important markets are India and the Middle East: Iran, Iraq and Pakistan.

There are also opportunities to develop within those markets through acquisitions and partnerships: how will this work in the long term, beyond 2020?

Today a range of external political agreement the developed, and historically it concerns 3 directions: weapons, production of natural resources and power generation. Countries like China have extensive cooperation with Russia — thermal generation is settled in China and only Russian nuclear equipment is needed. But countries like Venezuela provide a lot of potential for the leading Russian state power generation companies like Inter RAO. Given the implementation of interstate agreements in power cooperation, EMAlliance will be able to supply its equipment to these markets. In the last years, state policy has become clearer in terms of political support and trade relations.

If we talk about the entry into new markets, we think of partnerships in cases like India EMAlliance will need either EPC contractors with experience or the company will have to cooperate with a local company, well integrated in the local generation market. In some markets the company will use agents, like the Middle East market. This will be determined by the situation in each individual market.

We have to talk about the IPO, but before that, as a former banker arriving at a technically challenging moment for EMAlliance, do you think your background was an advantage or a hindrance?

My technical knowledge is sufficiently deep for the level of decision-making. I don’t do engineering, but no deeper technical knowledge is required. As for the banking background, I have worked with a lot of companies and, accordingly, I have seen different models of sales and financial structures. I was responsible for the corporate clients and, of course, my previous background helped me create ties with people and make agreements.

The IPO was long-planned but eventually it was delayed. Was this due to a technical delay?

If the market does not contract, EMAlliance will make its IPO in May. The exact timing of the IPO is linked to obtaining the international audit for 2009, as we saw from our negotiations with the potential counteragents, so this is really just a technical delay. Many companies do the same. The market is not yet as strong as it was supposed to be because the recovery has taken longer than anticipated. In any case, if the market is more or less the same, we plan to float 10-15% shares of the company. We regard it merely as a first step and not as a way to get a very attractive price. Afterwards, we envisage a lot of work with the world capital market. Today we’re doing an IPO on the Russian market.

Why was RTS chosen for the IPO?

EMAlliance is currently not yet ready for more. According to the corporate estimations, the company’s shares will gain a better reception on the Russian market than they would internationally.

How much you hope to raise, and how much has been allocated towards your development plan?

This is a very rough estimation that ranges from $350 to $650 million USD. We have targeted a launch of 10-15%.

Obviously, the attracted assets will help to more efficiently structure the company’s loans, and provide capital for M&As. Obviously, power generation is EMAlliance’s main market, but the company is also interested in the oil and gas industry. How important could this sector be for EMAlliance?

Firstly, we see our competencies as potentially useful in supplying waste-heat boilers to the industry. Today, many oil and gas companies are considering installation of gas turbines to burn natural gas to provide electricity. As I have said, we have two main directions of equipment supply: pulverized-coal boilers and (heat recovery steam generators. Our main partner for the second direction is Nooter / Eriksen – the world leader in design and production of HRSGs and waste-heat boilers that are supplied to the Middle East oil companies, to Saudi Arabia and the UAE. Waste-heat boilers produce steam for easier production of deep or heavy oil. Nooter / Eriksen has the required technical solutions, and EMAlliance will try to promote them to Russia’s oil and gas production companies.

The second direction is oil refining. The waste from deep oil refining, such as petcoke or bitumen-containing substances, can also be burned. Our experience in complicated fuel burning is also very useful: we can offer complex solutions. Today the need of oil refineries in these technologies is not too high but foreign refineries are ready for these solutions.

Actually, we bring technologies abroad from Russia as well: our preliminary negotiations with Venezuela included technological solutions for petcoke burning.

We also produce pipeline connectors for Gazprom, chemical water treatment equipment, and we also have the technology for neutralization of hydrogen sulphide. Obviously, our boilers can produce steam for any technical purpose. Before, the oil and gas industry did not consider efficient production, but more and more companies are turning to it now. For example, today the associated gas is simply burned; tomorrow a stream turbine with our waste-heat boiler will be attached to it.

How will that develop your Russian business? Will it be a specialized niche for you as a provider?

That depends on the need at power generation sites. This sector is only starting to develop in Russia, and it could take either a little to no time, or a lot of time. It depends on state regulation for oil production and refining and on the state regulation of the environmental issues.

Your final message for Oil & Gas Financial Journal readers about EMAlliance and hopes for the future?

Speaking in general about the market of Russian power machine construction, today all the Russian manufacturers have reached a sufficiently high technical level and are trying to sustain it. We are capable of competing with a few big international companies, and we position our company as a company that is not only capable of offering its own solutions and over a century of expertise but also as an internationally open company for implementation of new technologies and their adaptation for the Russian market. Given enough demand, we‘re ready to find technologies to be adapted in Russia. For circulating fluidized bed (CFB) boilers, the only site in Russia was constructed by EMAlliance with Foster Wheeler; EPC with Alstom; we produce heat recovery steam generators licensed by Nooter / Eriksen, and we’re also creating a joint venture for designing and production of rotary air preheaters with Howden. We’re negotiating a joint venture for designing and production of gas cleaning equipment with one of the world leaders. This shows that we’re good enough for technology transfer. Growth of our performance shows EMAlliance is successful in the business. Our company is extremely credible as a reliable and hi-tech partner.