L&T gearing up to tap $60-bn oil-to-chemicals opportunity in Middle East, says energy head

Subramanian Sarma, whole-time director & president (energy), L&T

With $50-$60 billion worth of projects anticipated to come up for execution starting FY25, Larsen & Toubro (L&T) expects to make significant investments in converting oil directly to chemicals (O2C) and petrochemicals.

The engineering giant is gearing up to tap this opportunity on its own, but is keen to form joint ventures with global engineering, procurement, and construction (EPC) majors for bigger projects, Subramanian Sarma, the company’s president, energy, and whole-time director, told Moneycontrol.

Sarma added that while the pipeline for conventional projects remains strong, green energy projects are gaining traction. He sees opportunities in blue ammonia and carbon capture projects in the Middle East, while green hydrogen development is more prominent in Europe.

L&T, which has focussed on its asset-light engineering business for many years, will also be developing green hydrogen projects.

The company has a multi-pronged strategy for green hydrogen, which includes electrolyser manufacturing, EPC projects, and manufacturing for India and for exports.

Edited excerpts:

What’s your pipeline of potential energy projects in the Middle East, especially when companies are balancing between petroleum production and energy transition? 

There are three running themes. One is accelerated development of conventional oil and gas. More for gas, because gas will remain the bridging fuel for energy transition till the transition happens. But they are also producing oil because there is demand. I don't know the reason why they're accelerating some of the projects. Maybe they want to monetise quickly. Also, there's huge focus on maintaining the current output. There are continuously-changing variables like increase in water cuts, drop in reservoir pressure, etc. So, the maintenance of the reservoir to maintain the oil and gas output too requires a huge amount of capital.

The second theme is about maximising value, wherein oil is directly converted to chemicals (O2C). Lastly, green energy development, which is gaining traction.

What is the total value of the order you have from Jafurah in Saudi Arabia? 

We have four contracts in Jafurah — the Jafurah gas plant, Jafurah phase I compression, Jafurah phase II compression,  and the Jafurah downstream pipeline —they add up to $7 billion. But it is also getting executed. So, the remaining order book will be about $5.5 billion. This would be executable over 2.5 years from now.

What energy transition projects are seen in the Middle East?  

There are transition projects, particularly in the blue ammonia space, in the markets we operate in the Middle East. This includes carbon capture projects. We are also seeing some traction related to green projects, but not much; people have started talking about it. The green projects are more likely to be in Europe, while the blue will be more in the Middle East and USA. That's the way we see it, at least for the next two-three years.

What is the scope of O2C projects in the coming years? 

There are a lot of O2C prospects. Those are still in their early days, but we have seen some five-six mega projects launched; each of them could be $10 to $15 billion. So, there’s a $50 to $60 billion opportunity in O2C projects. I expect these to come up for execution maybe in FY25, or sometime next year.

Between now and March, you will see conventional projects, but beyond the next financial year, we will see a lot of new development in oil-to-chemicals and petrochemicals, new crackers, etc. This is very exciting and interesting.

We will have to do some kind of partnership there because these are large projects and you will need multiple players to join hands to handle those $5  to $6 billion contracts, maybe even larger.

These potential EPC partners will possibly be your competitors. Would you rope them in as sub-contractors or as joint venture (JV) partners? Have you already started talking to people regarding these partnerships?

We are talking, but these are not sub-contractors, more like joint ventures. These will be project specific. It is very common in the industry to work with competitors and partners.

What is the ticket size beyond which you feel you would need to tie up with partners? Also, are you looking for local partners in the Middle East, or international ones? 

Local EPC companies in the Middle East are very small.  It has to be international, could be from the east or west, depending on the specific opportunities and who brings what to the table. Generally, we will do projects up to $4 billion by ourselves, unless I have specific gaps to fill. So, purely based on the financial size of the contract, $4 billion could be the threshold. But it could be lower or higher depending on the circumstances and other factors. The partnerships will be with tier-one EPC companies.

Will we see an increase in the share of energy transition projects in FY26?

Difficult to say, but equal share is quite likely.

What are the skill gaps you are facing and you foresee given the order pipeline. What is the plan for skilling your workforce?

Building our capabilities is a continuous process. A second name for L&T can be learning and training; that's something we keep doing.  One, we bring in laterals who have experience in the industry. Then we have those who are homegrown.  We have very elaborate development programmes for leadership and technical expertise. We have very systematic learning and development systems, processes, and frameworks.

Many manufacturers and EPC companies are believed to be getting Chinese engineers to work on projects in India, and their visa applications are pending. Are you also engaging engineers from abroad, especially China?

There are multiple reasons for this. The economic growth we are seeing has led to high demand for talent. Another reason is that Covid changed the behaviour of people in terms of flexibility to move and work in different places. Thirdly, many state governments are extending social benefits, which are attractive for many people. People want to be closer to their families now. I think it’s a combination of factors that is affecting the aspirations of the people and the choices they have.

Also, the Chinese economy is slowing down. So, the talent is available and their work culture is pretty good. But the Chinese are not allowed to work here freely because of geopolitics. We have not yet made an effort yet (to hire Chinese workers).

In the green hydrogen space, you have your electrolyser sales coming up in September. What has been the advance order activity, and how much revenue is expected from the sales?

I can’t give you revenue projections, but we had a good start. We got our first order from a very different industry — pharmaceuticals. We  have identified more users and opportunities. The green hydrogen revolution will happen in the next two-three years. You will still see smaller megawatt (MW) scale projects, not gigawatt (GW) scale. This is because the cost of green hydrogen continues to be far higher than hydrogen from other sources. Until we reach price parity, we will see these smaller projects, because people want to sort of experiment.

Once the price gap closes, then it will really pick up. I think it is very important for us to have a presence on the ground and participate in all these developments, so that when they take off in a big way, we are fully positioned to benefit from that. That has been our strategy and it is working quite well.

What are the other developments awaiting in the green hydrogen space? 

We have a multi-pronged strategy for green hydrogen. One is the  electrolyser itself. We are now moving ahead with setting up the manufacturing facility. It is a state-of-the-art factory, with robots. We will have full capacity available in a few months at our electrolyser project. We will also look at EPC projects, and play the developer’s role in the domestic and export markets.

In the domestic market, we will operate through our joint venture — GH4.  We participated in IOCL’s tender for their Panipat project and are still awaiting their decision.  If we win it, that could be our first (green hydrogen project).

We are also looking to export green ammonia. We will not invest in a facility until we have a definite off-take agreement. We are speaking to many end-users, mostly in Korea, Japan, and Europe, and hopefully we will have an agreement in place soon.

There are supply-side incentives and policies for ammonia and green hydrogen. But do you think enough is being done on the demand side  to stimulate the ecosystem?

The government has chosen to incentivise the supply side. But they have not addressed the demand side. That needs to be done.  It can happen through refineries or steel plants, or pharmaceuticals — through industries which can afford that additional cost. It may not be full-fledged, but it will be through blending or something like that for going fully green, but partly.

Abroad, a premium is given for substituting fuels. Hence,  currently, the export possibility is greater than the domestic potential. However, it can flip very soon once you have a technological breakthrough in terms of energy storage solutions.

What the government is doing is right in my view, because first you have to incentivise supply. It is a bit of a wait and watch game, but it is very important that you play and have a presence so that you are not left behind.

What is your strategy on the development model? What kind of investments will go into that business? 

Current investment is relatively small. We have not spent much money in electrolyser manufacturing.  We are talking about less than Rs 1,000 crore. The development will happen against offtake agreements, and we will evaluate that based on our own metrics of return on investment, etc. It depends on the size of the project, maybe it could be about Rs 7,000 to 8,000 crore.  Most of the off-take agreements are for export, so we may have to spend maybe 10-15 percent of that (Rs 7,000-8,000 crore)  because the balance will come from the end-users themselves.  We are talking about Rs 1,000- 2,000 crore to start with.

According to reports, L&T is among the companies that have secured land parcels at Deendayal port for setting up a green hydrogen plant. Can you confirm this?

If you want to go into the export or even the domestic market as a developer, you need land.  So we are going ahead and positioning ourselves to acquire those land parcels, so that whenever the opportunity comes, then we are not searching for land. We have been allocated around 500-600 acres at Kandla port. The land is leased out for 99 years. Port land can be used for both domestic as well as export purposes. We are also looking for land in Odisha.

Is there a bigger plan at an L&T level to unlock value in the energy vertical? 

The opportunity is always there, but I think we are not chasing value or unlocking value as of now. Our focus is to build strong business fundamentals and a sustainable, sound long-term business model. Then we will see whether there is a need to keep it or to unlock something.

Are you expecting anything to come through in the budget with respect to green hydrogen / ammonia? 

I am not expecting, nor have we done any big advocacy, because we want to focus on what is already available.

How is energy transition changing L&T's revenue profile?

The percentage of revenue from green projects is continuously increasing for L&T on a standalone basis, and is nearing 50 percent. It will continue to grow as we undertake many more solar generation EPC projects. We already have more than 15 GW of projects in our portfolio and there are many more opportunities. Also, we are pursuing offshore wind farm projects in Europe and the Atlantic. We are hopeful of building this portfolio over the years as it fits into our long-term strategy. We have some upcoming offshore wind farm projects in India as well, though of a smaller scale.