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Growing Green Proves a Challenge for Foster Wheeler Amid Downturn
Demand for cleaner methods of producing energy will increase steadily globally
The global economic crisis of the past few years hit the international construction industry swiftly. As access to credit dried up, the ability for firms and sovereign entities to invest in large scale capital intensive projects to grow infrastructure was reduced.
Demand for cleaner methods of producing energy will increase steadily globally, but the majority of near-term nontransit-related energy increases are likely to come from fossil fuel burning power plants, specifically coal fired plants. Despite investments in renewable energy design capability, with almost 48 percent of the company’s current backlog related to oil and gas refinement, the structural incentives for FW to pursue current fossil fuel sponsored sales are not in place.
As the Copenhagen Climate Conference in 2009 proved, the developing world is not yet ready to openly embrace climate change and set specific emission reduction goals. While individual countries roll out specific targets for carbon reduction, the non-OECD countries continue to increase their demand for energy daily. Many of the G-77 specifically identified carbon reduction as a cap on their ability to develop economically.
With the cap-and-trade bill in the US Congress on the shelf, energy producers do not have economic incentives to increase investment in new energy construction. Globally the cost of ‘green energy’ is still higher in most regions of the world than energy created by fossil fuels. Moving forward, FW’s challenge is to compete for work within the G-77 and non-OECD nations with affordable and sustainable power generation solutions that mitigate environmental impacts.
FW’s Growth Strategy: Going Green
While global oil demand will soon outstrip supply, capitalizing on its current capabilities in the design and delivery of power generation systems, FW has an opportunity to branch further into alternative methods of energy generation. The potential opportunities within the developing world are very promising for FW.
Clean coal technology is one of the most cost-effective green alternatives within near term reach. FW’s expertise in large scale construction management and design will enable it to implement clean coal technology. Harnessing energy via heat to steam transmission is a core capability that can be leveraged.
As political and economic incentives mature globally, other forms of renewable energy will become more viable over the long term. Biomass (algae), solar power, methane gas recovery units and geothermal energy are methods of generation that fit within FW’s sphere of expertise. Experience with environmental remediation services and waste-to-energy conversion already set FW apart from its competitors in establishing sustainable solutions worldwide (3). With FW’s advanced technologies and design expertise, it is well positioned to grow through the construction of power generation facilities that utilize green technology (4).
As the non-OECD countries develop and increase their power consumption, being poised to provide sustainable solutions worldwide serves FW well. FW’s ability to maintain consistent quality in austere environments globally is a rare combination that positions it well for the future as the energy industry becomes increasingly focused on emerging markets.
Clean Coal: A Near-term Opportunity
In the near term, the growth of coal consumption worldwide is set to increase rapidly and FW can capitalize on this rapid growth. Clean coal is a widely used term that involves technology to reduce the environmental impact of coal powered plants through the removal of harmful pollutants from emissions. Carbon capture and sequestration (CCS) involves pumping emissions underground for permanent storage. While questions remain about the long term environmental effects of storing large amounts of emissions underground, many countries rich in coal reserves, like Germany and India, have moved forward aggressively with implementing CCS technology.
A competing technology, termed the “bixby process” within the clean coal industry, involves heating coal to extract trapped gases which are then used for electrical production. The fuel is similar to natural gas and emits roughly 35 percent of the pollutants of conventional coal powered electrical plants (10). Due to reduced infrastructure needs, bixby plants represent a 50 percent reduction in construction costs compared to conventional coal powered plants and are about 20% cheaper than conventional CCS technology (10).
It is expected that worldwide use of coal will increase by 2.3 percent annually, 95 percent of which will occur in the emerging market economies of Asia (2). In order to balance the politically sensitive need to reduce emissions while meeting their rapidly growing energy needs, it is projected that Asia, led by China, will increasingly look to clean coal technology (11). USEIA estimates that China will increase its coal powered electrical generation capacity by 55 percent by 2035, while simultaneously reducing its carbon output per GDP levels to 55 percent of 2005 levels by 2020 (12). An emissions goal that is estimated to require an investment of 30 billion USD through 2020 (13).
In the near term, this will create significant opportunities for companies like FW that can successfully deliver applied technologies such as CCS and bixby to meet the demand for clean coal power in emerging markets. It is also anticipated that the demand for clean coal technology will surge in less developed markets as capital from lenders such as the World Bank and developed nations become available.
Long-term Possibilities
FW’s focus on clean coal technology needs to be supplemented with an investment in research for energy production with renewable resources over the long term. Renewable energies are projected to increase in consumption by 4.5 trillion BTUs by 2035. Hydroelectric and Wind energy are predicted to be roughly 80 percent of the increase in renewable energies over the next 25 years (2). The remainder of this increase in production will be from renewable energy options including geothermal, solar, and biomass. FW’s current engineering and construction capabilities support expansion into these areas as complimentary solutions for its future growth.
Biomass is electricity creation through the burning of renewable materials such as solid waste, scrap wood, crops, algae and methane to create steam energy. Methane can be recovered from landfills which create this gas and can be used to burn much like liquid natural gas. Also, waste-to-energy plants alone currently produce enough electricity to power 3 million households (5). FW has already begun efforts in biomass power plants and this will only prove more useful in the future.
The geothermal process uses the earth’s natural thermal energy to create steam to power turbines is being used today to power oil drilling facilities. This use of geothermal energy to power oil fields could save companies as much as $2.5 million over 25 years (6). The close connection between oil fields and geothermal energy shows a strong application for FW to approach. The United States, for example, produced almost 15 billion kilowatt-hours of electricity in 2008 with geothermal power plants (5).
Solar energy is another area that fits FW’s capabilities well. The most common form of solar energy is the use of parabolic troughs. The Solar Energy Generating Systems (SEGS) in California’s Mojave Desert produce 160 megawatts and uses steam generation for turning turbines. FW should continue to build on its recently awarded contract to provide solar steam generators in Spain, which shows its emerging strength in this area. (7).
Future Prosperity
By leveraging its current capabilities with engineering and construction, and focusing on innovative ways to create sustainable clean energy, FW can separate itself from its competitors. A large portion of FW’s current portfolio consists of green projects and this sector representing the fastest growing part of its business. While many competitors are holding back on investment in green energy because of high costs and lack of capabilities, FW can position itself to take advantage of future trends and become a leader in global green energy creation.
FW’s current path toward green projects may be part of the reason that S&P recently increased its debt rating to BBB- and currently 15 of the 19 analysts that follow the company rate it as a buy (1). FW’s strong free cash flow and healthy cash position along with global financing opportunities available from governments and organizations will provide it the financial resources to follow this path of green energy solutions. Additionally, providing these solutions will build a strong reputation and positively attract stakeholders.
Although green energy generation can be challenging and costly today, the tradeoff is taking advantage of the vast current and future global opportunity. FW should continue its drive toward providing near term green solutions with clean coal and longer term sustainable green solutions with technologies such as biomass, geothermal and solar. FW’s future success and profitability lie in its ability to become a leader and to capitalize on the growing demand for sustainable green energy.
(1) “S&P Lifts Foster Wheeler Out Of Junk Territory” – AUGUST 9, 2010, 2:16 P.M. ET ; By Jodi Xu, Dow Jones Newswires; 212-416-3037; jodi.xu@dowjones.com;
(2)US Energy Information Administration: “International Energy Outlook 2010” http://www.eia.doe.gov/oiaf/ieo/pdf/highlights.pdf
(3) “Foster Wheeler AG | Company Profile from Hoover’s.” Hoovers | Business Solutions from Hoovers. Web. 20 Aug. 2010. .
(4) “Growing Green – Foster Wheeler.” Foster Wheeler – Global Engineering & Construction and Global Power Group. Web. 20 Aug. 2010. http://www.fwc.com/green/growinggreen.cfm
(5) U.S Energy Information Association. Energy Kids. http://www.eia.doe.gov/kids/index.cfm
(6) Groenenberg, Wyoma. Using Geothermal Energy in Oilfield Picking Up Steam. August 20, 2010. Wyoming Business Report. http://www.wyomingbusinessreport.com/article.asp?id=53165 .
(7) “Foster Wheeler Awarded Contract to Supply Solar Steam Generator Equipment in Spain.“ Foster Wheeler News. June 15, 2010. http://phx.corporate-ir.net/phoenix.zhtml?c=80422&p=irol-newsArticle&ID=1438162&highlight=
(9) Pew Center on Global Climate Change. http://www.pewclimate.org/technology/factsheet/ccs
(10) Bixby Energy. http://www.bixbyenergy.com/technology/economics
(11) “China Far Outpaces US in Building Clean Coal-Powered Plants”. NY Times. http://www.nytimes.com/2009/05/11/world/asia/11coal.html
(12) China Plans to Reduce Regional Carbon Emissions. Bloomberg News. http://www.businessweek.com/news/2010-08-10/china-plans-regional-goals-to-cut-carbon-emissions.html
(13) Emissions goal “will cost China 30b”. People’s Daily Online. http://english.people.com.cn/90001/90776/90882/6832210.html
This paper was written for the global strategy class of Thunderbird Professor Nathan Washburn, Ph.D.
[This article has been reproduced with permission from Knowledge Network, the online thought leadership platform for Thunderbird School of Global Management https://thunderbird.asu.edu/knowledge-network/]
