27 JAN16_Whitpaper - US PetChem Construction-2016

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    2016 US PetrochemicalConstruction Outlook Whitepaper

    Key analysis into the state-of-play of North American petrochemical project

    landscape, with detailed analysis on the opportunities and challenges facing

    the market

    BROUGHT TO YOU BY PETROCHEMICAL UPDATE

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    Featuring insights from

    Matthew CzubaVice President, Manager of Projects, WorleyParsons

    Rodney Landry

    Project Manager, Maintenance and Turnaround

    Division, Turner Industries Group, L.L.C.

    Peter Subtelny

    Senior Mechanical Engineer, Ineos Olefins

    & Polymers USA

    Brett Schroeder

    Managing Director, Asset Performance Networks

    Daniel Groves

    Director of Operations, CURT

    Sai Sawant

    Project Engineer, CH2M

    David Sheffield

    Capital Projects Coordinator, Process Technology Group,Huntsman Advanced Technology Center

    BROUGHT TO YOU BY PETROCHEMICAL UPDATE

    2016 US Petrochemical

    Construction Outlook Whitepaper

    The whitepaper covers:

    • Construction cost estimates for ethane crackers on the Gulf Coast and the US Northeast in the first and secondconstruction waves

    • Labor supply and demand projections

    • Trends in procurement and contracting strategies in the current project environment

    • Lessons learned in mitigating budget and schedule risks early in the project lifecycle

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Introduction

    While about 80% of production expenditures in the petrochemical industry dependon the cost of the feedstock, companies that are building new facilities can savemillions of dollars in capital expenditure or gain a competitive advantage by ensuringthat their projects are completed on schedule and within budget.

    With falling crude oil prices depressing profit margins in the ethane value chain,

    petrochemical owners in the US are focusing on bringing costs down by strippingunnecessary expenses and improving productivity and reliability. Projects in the nearand mid-term will have to be staged, paced and executed well if they are to recouptheir investment and maintain good market share domestically and abroad.

    To assist petrochemical owners and engineering, procurement and construction

    (EPC) companies in planning for the next wave of ethane-based projects, thiswhitepaper presents a market outlook and industry players’ insights on the

    construction challenges and opportunities through 2020, with a focus on:

    • Construction cost estimates for ethane crackers on the Gulf Coast and the USNortheast in the first and second construction wave

    • Labor supply and demand projections• Trends in procurement and contracting strategies in the current project

    environment

    • Lessons learned in mitigating budget and schedule risks early in the projectlifecycle

    Market Outlook: 2016-2020

    US ethane production is currently outpacing expected US demand growth and isforecast to reach a surplus of nearly 700,000 barrels per day (bpd) by 2020. Themajority of the new ethane demand will come from ethane steam cracker projects,

    which will add nearly 10 million metric tons of additional annual ethylene production

    capacity by 2020, according to Petrochemical Update’s US Ethane, EthyIene &PoIyethyIene: Exports & Markets Report, released in December 2015 (see Table 1).

    Sasol

    ExxonMobil

    Chevron Phillips

    Dow Chemical

    Formosa

    Formosa

    Total

    Oxichem/Mexichem

    Axiall/Lotte

    Shell

    Braskem

    Shin-Etsu

    Williams

    PTT/Marubeni

    1,500,000

    1,500,000

    1,500,000

    1,500,000

    1,200,000

    1,590,000

    900,000

    544,000

    1,000,000

    1,500,000

    1,100,000

    500,000

    1,500,000

    1,000,000

    Louisiana

    Texas

    Texas

    Texas

    Texas

    Louisiana

    Texas

    Texas

    Louisiana

    Pennsylvania

    West Virginia

    Louisiana

    Louisiana

    Ohio

    N/A

    2017

    2017

    2017

    2017

    N/A

    N/A

    2018

    2018

    2020

    N/A

    N/A

    N/A

    2024

    2018

    2017

    2017

    2017

    2017

    2022

    2023

    2018

    2023

    2021

    2019

    2022

    2025

    2024

    NEW CRACKERS

    COMPANY

    Source: US Ethane, EthyIene & PoIyethyIene: Exports & Markets Report

    Table 1: New US ethanecrackers

    CAPACITY (TONS) LOCATION ANNOUNCED START UP INDUSTRY PROJECTED

    START-UP

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    There are currently 16 companies that are investing in a US-based ethane cracker orhave announced a project to assess a US-based ethane cracker. Eight of the projects

    are investments by foreign companies – three are under construction, one is beingupgraded, one is awaiting approval, two are planned, one is approved andundergoing a FEED stage, and three are undergoing study.

    In addition, there are a number of ongoing and announced ethane crackerexpansions (Table 2).

    Corresponding with the increases in ethane cracker capacity, more than 8 millionmetric tons of new additional polyethylene production capacity is announced to

    come online, which will increase North American polyethylene production to more

    than 24.49 mtpa (54 billion pounds per year) by 2020, up from 19.95 mtpa (44 billionpounds) at the end of 2014 (see Table 3).

    This increase assumes that 75% of the announced polyethylene projects will be builtand commissioned by 2020. In addition, industry sources cite the potential additionof another 2 billion pounds of capacity over the same period. Petrochemicalcompanies are controlling both the supply and the demand of ethylene, and as theywork to maximize their value chain, they can extract the most value from exportingethylene derivative products such as polyethylene.

     

    Source: US Ethane, EthyIene & PoIyethyIene: Exports & Markets Report

    Table 2: Announced US

    Ethane Cracker Expansions

    INEOS

    Williams

    Westlake

    LyondellBasell

    Chevron Phillips

    Westlake

    LyondellBasell

    LyondellBasell

    Huntsman

    BASF

    Indorama

    115,000

    272,000

    82,000

    363,000

    100,000

    100,000

    125,000

    375,000

    25,000

    150,000

    370,000

    Texas

    Louisiana

    Kentucky

    Texas

    Texas

    Louisiana

    Texas

    Texas

    Texas

    Texas

    Louisiana

    2014

    2014

    2014

    2014

    2014

    2014

    2015

    2015

    N/A

    2014

    2017

    5.708613

    13.50211

    4.070489

    18.01936

    4.964011

    4.964011

    6.205014

    18.61504

    1.241003

    7.446016

    18.36684

    Started Up

    Started Up

    Started Up

    Started Up

    Not Sure

    On-Schedule

    On-Schedule

     

    Upgrading

    Cracker

    acquisition,renovation &

    restart

    90%

    90%

    90%

    90%

    90%

    90%

    90%

    90%

    90%

    90%

    10%

    10%

    10%

    10%

    10%

    10%

    10%

    10%

    10%

    10%

    EXPANSIONS PROPANEETHANE

    COMPANY CAPACITY(TONS)

    LOCATION START UP MBPD STATUS PROJECTED FEEDSTOCK

    PERCENTAGE

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    Besides the current wave of ethane crackers under construction, a number of

    specialty chemicals projects – mainly polymers and specialty polymers – are alsoslated to begin construction in the next year.

    The key ratio of the crude oil price ($/bbl) to the natural gas price ($/mmbtu) largelyindicates the competitiveness of US ethane crackers with naphtha crackers in the

    export market. Petrochemical Update’s forecast suggests the 2016 ratio will rangebetween about 12.5 and 14.8 in a low oil price scenario ($38-45/bbl Brent), betweenabout 17.9 and 21 in a medium/reference scenario ($48-54/bbl Brent), and between23.7 and 28 in a high scenario ($67-79/bbl Brent) (See Figure A and Figure B).

    Falling crude oil prices and other factors have crushed margins in the steam

    cracker/olefin unit segment of the petrochemical industry in the last year. Margins

    per pound of ethylene have declined from more than 60 c/lb in October 2014 toless than 20 c/lb in November 2015 for NGL feedstocks, including ethane, accordingto RBN Energy.

    Table 3: New Polyethylene Projects

    Badlands NGL

    Braskem

    Chevron Phillips

    Dow Chemical

    Dow Chemical

    ExxonMobil

    Formosa

    Formosa

    LyondellBasell

    Nova Chemicals

    Odebrecht

    PTT/Marubeni

    Sasol

    Sasol

    Sasol/INEOS

    Shell

    1,500,000

    N/A (1,000,000)

    1,000,000

    400,000

    650,000

    1,300,000

    400,000

    525,000 + 600,000

    450,000

    430,000

     

    700,000

    450,000

    420,000

    470,000

    1,500,000

    Unspecified

    HDPE/LDPE

    HDPE, LLDPE

    LDPE

    LLDPE

    LLDPE

    LDPE

    LLDPE, HDPE

    HDPE

    LLDPE

    Unspecified

    HDPE

    LLDPE

    LDPE

    HDPE

    HDPE/LLDPE

    N. Dakota

    West Virginia

    Texas

    Texas

    Texas

    Texas

    Texas

    Texas, Louisiana

    US

    Alberta

    West Virginia

    Ohio

    Louisiana

    Louisiana

    Texas

    Pennsylvania

    Unspecified

    2016 (2022)

    2017

    2017

    2017

    Late 2016 (2018)

    2017 (2018)

    N/A (2022)

    Mid-2017 (2019)

    3Q 2016 (early

    2017)

    Unspecified

    2020 (2024)

    2016 (2018)

    N/A (2018)

    2016 (early 2017)

    2018 (2022)

    COMPANY

    Source: US Ethane, EthyIene & PoIyethyIene: Exports & Markets Report (December 2015).

    CAPACITY (TONS) GRADES LOCATION ANOUNCEDSTART-UP

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    Figure A: EIA Brent Oil Forecasts by Case

     

    Source: US Ethane, EthyIene & PoIyethyIene: Exports & Markets Report (December 2015).

    Figure B: EIA Natural Gas HH Forecasts by Case 

    Source: US Ethane, EthyIene & PoIyethyIene: Exports & Markets Report (December 2015).

    Even though margins remain favourable and spending in the US is still robust,especially for pure-play chemical makers, many large petrochemical projects are not

    moving as fast as planned and some of the planned projects are likely to come out

    smaller than originally anticipated, according to Matthew Czuba, Vice President,Manager of Projects at WorleyParsons.

    Moreover, many of the announced projects that are awaiting final investment

    decision are currently being re-evaluated in light of the projected marketenvironment.

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    Ethane Cracker Construction Costs: First and Second Wave

    Controlling construction costs will be key to US petrochemical producers in the nextfive years, especially to companies that will be exporting much of their productionand need to offer very competitive prices. Margins are occasionally very tight, and

    companies need to ensure construction costs remain under control if they are to

    recoup their capex investment.

    There are currently five new crackers and five ethylene expansions under or aboutto begin construction in the US. These projects are considered to be the first wave.It is estimated that the total cost for the first wave will be more than $18.4 billion,excluding extensive site preparation and logistics – such as rail sidings and rail cars –according to Petrochemical Update’s US Ethylene Plant Construction Costs Report

    2015-2020, released in June 2015.

    This estimate does not include a number of specialty derivatives, such as elastomers,EPDM and oxo-alcohols, as costs for these plants were not available due to theproprietary nature of individual processes. These additional costs would add more

    than $3 billion, giving a total cost of more than $20 billion.

    Sasol, for example, has allocated approximately $800 million for site development atits ethane cracker and derivatives complex in Lake Charles, Louisiana. Two othercompanies are in the same range but have not released their site preparation costs.

    As seen in Table 1, there will also be a second wave of investments by a number ofcompanies that had announced new cracker investments but not finalized approvalsand started construction before the oil price collapse in the latter part of 2014. With

    construction probably not starting until 2016, these projects would not be likely tocome on stream before 2020.

    Three crackers have been announced for the Northeast/Mid-Atlantic: a 1.0 mtpacracker by Braskem Americas and Odebrecht in West Virginia, which is currentlybeing re-evaluated; a 1.0 mtpa cracker by PTT Global and Marubeni in Ohio, which isawaiting a final investment decision (FID) in 2016; and a 1.5 mtpa cracker by Shell inPennsylvania, which is awaiting FID by the end of 2015.

    In addition, Badlands NGL has also proposed a 2.0 mtpa cracker and polyethylene

    facility in North Dakota. The company signed an ethane supply agreement with

    Continental Resources in October and has also signed licensing agreements with

    unnamed technology companies and closed on other agreements.

    It is unclear how many of the projects announced for the second wave will go

    ahead. Moreover, a few producers have told Petrochemical Update they are

    considering more facilities but have not made announcements yet.

    The construction cost data featured in this whitepaper has been developed using abottom-up analysis of costs for:

    • Major equipment (such as compressors, towers, heat exchangers andinstrumentation, among others);

    • Bulk materials (such as buildings, piping and structural platforms, etc.);• Indirect costs (contingency costs, contractor fees, equipment rental, freight, field

    supervision, overtime, temporary field support, scaffolding, taxes on plant sitematerials, tools and miscellaneous items);

    • Detailed design and engineering, EPC warranty, project management and controlsand procurement.

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    As a reference case, a typical 1.0 million metric tons per year cracker on the Gulf

    Coast is estimated to cost between $1.17 billion and $1.6 billion during the first wave.

    The highest costs for bulk materials are associated with piping systems, which haveboth the highest materials cost and labor cost. Of the indirect costs, the majority areassociated with labor costs, but heavy lift cranes still carry a significant materialscost, while construction equipment costs are estimated at $69 million (see Figure 1).

    Figure 1: Ethylene Plant Construction Costs by Key Element (1.0 MM tons/year) 

    Source: US Ethylene Plant Construction Costs Report 2015-2020

    The base case estimated cost for a 1.0 million metric tons per year cracker is $1.37

    billion, compared to $1.17 billion for a low estimate and $1.6 billion for a highestimate. The cost estimates for a 1.25 mtpa cracker are $1.71 billion, $1.46 billionand $1.97 billion, respectively. By comparison, a 1.5 mtpa cracker is estimated tocost around $2.1 billion (base case), $1.75 billion (low case) and $2.36 billion (highcase).

    These costs are projected to rise steadily between 2015 and 2020 (see Figure 2).

    Figure 2: Project Cost Forecasts 1.0 MMTPY Cracker (Gulf Coast)

    Source: US Ethylene Plant Construction Costs Report 2015-2020 (June 2015).

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    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    At the same time, a 200 KTA expansion on the Gulf Coast in the first wave isestimated to cost around $285 million in a base case scenario – approximately 31%

    for bulk material costs, 30% for total major equipment, 29% for indirect costs and10% for detailed design.

    The comparative economics between the first and the second wave shows overallproject costs for the second wave are likely to be higher compared to costs forcorresponding capacities in the first wave. The costs for projects in the Northeast

    are also expected to be higher than corresponding capacity additions on the USGulf Coast during that timeframe (see Figure 3).

    The total cost for a 1.0 mtpa facility in the Northeast, exclusive of greenfield sitepreparation for the announced capacity, is projected to be around $1.38-1.85 billionin the second wave.

    Figure 3: Second Wave Comparative Cracker Costs: Gulf Coast and Northeast 2020 

    Source: US Ethylene Plant Construction Costs Report 2015-2020 (June 2015).

    All of the crackers proposed in the Northeast will produce only polyethylene. These

    cost analyses are for brownfield sites. The cost for site development for a greenfieldlocation has not been developed as it greatly depends on the topography of the site.Assuming that there are no major impediments, the site development could add

    another $1 billion to the project cost and would require a substantially higher laborpool.

    The second wave will likely be different in a number of ways. Interviews withindustry players from major EPCs and owners in the US suggest that labor andinfrastructure costs are likely to be higher in the Northeast and that these projectsmight face longer regulatory approvals.

    The US Gulf Coast cost model featured in this whitepaper uses 2015 Open Shop(Non Union) labor rates from the Houston, Galveston and Freeport area while the USNortheast cost model uses Union Labor wage rates, which are in the order of 10%above the Houston, Galveston and Freeport area.

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    The overall cost of the skilled craft labor in the Northeast will likely be higher than onthe Gulf Coast, primarily due to the higher union labor wage rates and the higher

    projected per diem utilization, but the total quantity available should be enough tomeet construction schedules (exclusive of other construction delays) despite themore limited local labor and vendor supply base.

    Labor costs for Northeast projects could be as much as 35-40% higher than for GulfCoast projects, according to Rodney Landry, Project Manager, Maintenance and

    Turnaround Division at Turner Industries Group, L.L.C. though the labor productivityfor some crafts will also be higher in the Northeast.

    At the same time, projects in Ohio and Pennsylvania are likely to benefit from lowerethane costs and the proximity to consumer markets as about 50-60% of thedomestic polyethylene market is in the Northeast and North Central US.

    Though labor costs, availability and productivity will continue to be a majorchallenge for the petrochemical construction industry in 2016-2020, by the timeeither of the projects in the second wave move to construction, there will be alarger pool of trained, skilled workers on the Gulf Coast from the crackers and

    multiple expansions currently underway.

    Construction challenges 2016

    Meeting budgets and schedules has been a challenge for many industrial projects inthe US in the past decade. Almost two thirds of the major capital projects in the

    United States do not meet their budgets and schedules, and most industryexecutives are not happy with the performance of their systems, according to Brett

    Schroeder, managing director of strategic consultancy AP–Networks.

    Some 72% of more than 800 capital projects (over $25 million) in AP–Networks’database executed since 2002 have failed to satisfy all of their performance goals(+/10% of budget, +/- 10% of planned schedule and no major operability failuresafter start-up).

    One in four projects in the firm’s database grossly exceeded one or more of theirsuccess criteria metrics, meaning that they either overran their budget or scheduleby 30% or had a major operability failure that prevented them from achieving steadyoperations.

    The US petrochemical industry is facing similar risks as it prepares to add some 10

    mtpa of new ethylene capacity by decade’s end amid a heated downstreamconstruction market, looming skilled craft labor shortages and increasingly complexprojects involving multiple contractors and locations. Several of the ethane crackers

    currently under construction are reportedly experiencing delays and/or budgetoverruns.

    “Everybody will be extremely challenged to deliver these projects on budget and ontime. And my view is that project costs are likely to increase, and schedules are likely

    to slip given that situation,” Schroeder said.

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    1. Labor

    Labor will continue to be a major cost factor for projects in the next five years. Totalcompensation for skilled craft workers on the Gulf Coast has been growing 2-4% peryear on average since 2012 and is expected to continue growing over the next fewyears even if at a slow rate, according to Daniel Groves, Director of Operations at

    the Construction Users Round Table (CURT) and CEO of the Construction LaborMarket Analyzer (CLMA). Groves expects wages for skilled trades in industrialconstruction to continue to grow in the next 3-5 years, but at a slower pace ofabout 1.2-2.5%.

    Table 4: Annual Craft Wages, 2014 NCCER Survey 

    *Not including overtime, benefits, extras. Source: NCCER.

    Total labor costs, including design, engineering, procurement and construction, varyby project but typically comprise about 45-50% of total capital expenses, accordingto Rodney Landry of Turner Industries Group, L.L.C. and could be some of the mostvolatile capital project cost items.

    One major EPC operating in the Gulf Coast told Petrochemical Update it had

    updated its wage rates for pipefitters and welders five times in the last eight months

    alone.

    Per diem utilization rates – a good indication of labor availability – are likely to beone of the major budget risks for the second wave of projects, particularly forfacilities outside the Gulf Coast. The per diem utilization in the Greater Baton Rougearea in Louisiana, for example, was around 40% in mid-2015, while per diem rates

    ranged from $65 to $100, for an average of about $72. Per diem rates on the GulfCoast averaged $70-75 in summer 2015, according to WorleyParsons’ MatthewCzuba.

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    According to a senior construction manager at a major petrochemical operator in

    the US, companies that plan to build in Ohio and Pennsylvania should budget per

    diem payments for about 70% of their skilled craft workforce, depending on theexact site location.

    Meanwhile, low crude oil prices and the overall slowdown in upstream oil and gas

    activity will not significantly change the overall trajectory of supply and demand

    among skilled crafts in the US energy sector, at least in the short term, though the

    longer effect remains uncertain, according to Groves.

    The slowdown in upstream project activity has so far had only a limited effect on the

    availability of craft labor for petrochemical and refining projects, primarily becausemost skilled trades don’t move from the upstream to the downstream sector. Yet,

    cutbacks in offshore oil & gas companies might have a bigger impact on theavailability of engineering and design professionals at petrochemical projects, Landry

    said.

    The main challenge moving forward will be the high attrition rates in theconstruction industry. Even with aggressive recruitment and training, the

    construction sector is seeing and will continue to see a precipitous reduction in

    skilled, experienced workers as more baby boomers reach retirement age over thenext 10 years. According to the Construction Labor Market Analyzer (CLMA), ananalytics tool that produces real-time labor market intelligence, an estimated 17% ofthe construction workforce in the US will retire in the next eight to 10 years.

    Meanwhile, the average age for skilled workers in the industrial trades, such as

    ironworkers, electricians, pipefitters, heavy equipment operators and millwright, is

    42, with an expected employment attrition rate of 11% in the next couple of years,17% in the next five years and 28% in the next 10 years, according to Groves.

    Moreover, productivity rates will likely continue to deteriorate as workforce

    challenges persist. A lot of contractors in the Gulf currently report productivity rates

    of 2.4-2.5 and “2.1 productivity [as a] new average” for the Gulf Coast, according toGroves. As a result, some Southeast projects routinely see 95-100% labor costoverruns, doubling and tripling of hours on projects, as well as significant weldfailure rates.

    The labor supply-demand curve is expected to begin to balance out by the secondwave. The demand for skilled labor in the US chemicals industry, in particular, isexpected to peak around mid-2016, based on committed projects and subsequentpayroll projections tracked by the CLMA.

    WorleyParsons’ Czuba expects that by 2018-2020 there will be a closing of the gapbetween labor supply and demand in some parts of the US as many of the newrecruits in the skilled trades accumulate 2-3 years of training and field experience.

    2. Procurement

    In spite of the high demand for ISBL equipment – ranging from major items such asethylene furnaces, polyethylene reactors, high-pressure compressors for LDPE units,

    high volume extruders, etc. to minor items such as pumps, valves, pipes, etc., andfor OSBL equipment such as boilers –equipment procurement will not be a major

    cause of delays. While there will be some equipment delays, global procurementand modular units, if executed well, could alleviate much of the problem.

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    2016 US Petrochemical

    Construction Outlook Whitepaper

    Petrochemical

    Engineering &

    Construction

    June 7-8th New Orleans,

    USA 2016

    http://www.petchem-up-

    date.com/petrochemicals-con-struction/

    Global outsourcing and the increased use of modules has the potential to reducethe wait and delivery time for the full range of equipment, from furnaces to pumps,

    and is increasingly being used for a wide range of items in complex megaprojects –from upstream oil & gas, through midstream, to refining and petrochemicals. Asiahas become a viable source for a wide range of items, often at a lower cost and withquicker delivery times than US suppliers, which are running at capacity. Similarly,offshore engineering is increasingly moving to low-cost labor environments such asMalaysia, China and India.

    ExxonMobil, for example, is having eight ethylene furnaces for its Baytown, Texascracker built in Thailand, while Dow Chemical is also modularizing part of its newFreeport, Texas cracker project.

    Honeywell, meanwhile, is completing a lot more of its engineering and detailed

    design overseas, primarily in China and India. Sourcing from abroad has allowed the

    company to cut costs for certain equipment and materials by about 25%, even afteraccounting for inspection expenditures, according to a senior director capitalprocurement at Honeywell.

    Global sourcing means petrochemical owners should routinely assess theengineering and fabrication shops’ productivity, rework rates, weld rejection ratesand other metrics for quality assurance early in the project cycle. This in turn willalso determine the size of the quality control teams – front-line inspections – andquality assurance teams during fabrication, transportation and installation.Companies that use global engineering centers should also adjust their staffingstrategies to ensure good communication between the different project interfacesand locations.

    Companies on the Gulf Coast are also increasingly using or considering offshore

    engineering and modular construction to flatten the peak demand of craft labor ontheir sites. Several petrochemical producers told Petrochemical Update they are

    assessing the economic viability of modular construction on future projects largelybased on skilled workforce availability.

    Sasol, for example, is using modular construction for a portion of its Lake Charlescomplex to reduce the number of direct-hire craft workers on the field to 1,000 at atime. The company expects to employ about 7,500 workers at peak construction inLake Charles over the next three years and generate 400-500 full-time operationsand maintenance positions.

    3. Contract strategies as risk mitigation tools

    The heated downstream construction market and looming shortages of skilled craft

    and engineering labor are driving more petrochemical owners in the US to shift frompure fixed-cost, lump-sum contracting to more cost-reimbursable, conversion, andother hybrid and more sophisticated contracting strategies.

    Even though many petrochemical owners still prefer EPC lump-sum contracts as a

    first choice, the only option considered by most contractors in the current marketenvironment might be a negotiated lump-sum with carve-outs for labor wages andother options to reduce the risk premium. In most cases, contractors are willing to

    consider construction-only lump-sum arrangements.

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    Czuba said he is seeing a higher preference among owners for an EPC model andless focus on pure EP contracts as investments in new petrochemical facilities are

    increasingly coming from Tier 2/Tier 3 companies and developers, rather than fromthe petrochemical majors. Many of the smaller developers and foreign investors stillprefer to lock in less risky lump-sum pricing so that they can get access to bankfinancing, Czuba said.

    More and more companies are also considering conversion contracts, whereby theowner brings in a contractor early on under a cost-reimbursable agreement todefine the scope of the project and then switches to a lump-sum contract.

    The EPCM model is becoming very popular again, though some producers havetold Petrochemical Update they are also considering split options for smaller

    projects.

    To control quality and costs, Sasol, for example, is pursuing a mixed contractingstrategy for its Lake Charles complex. The company initially went out for lump-sumbids for several of the project’s components and found the premium exorbitant,according to company sources.

    A lot of the construction and management work for the facility is under

    cost-reimbursable contracts, while smaller packages, such as cooling towers andsubstations are being constructed under lump-sum arrangements.

    Dow, which typically opts for lump-sum contracts, is pursuing a reimbursablestrategy to build a propylene dehydrogenization (PDH) unit, a 1.5 mtpa ethylenecracker and four world-scale polyethylene facilities in Texas. The company is using

    the contract arrangement to ensure it has the resource pool to implement the firstproject and then roll it over to the cracker project.

    According to Schroeder, more petrochemical owners may are also likely to start

    considering the so-called “alliance” contracts – often including a bonus based onmeeting pre-established cost and schedule targets– whereby the owner andcontractor form an “alliance” that is responsible for the full EPC scope and share inany under-runs based on a pre-defined formula. Though this contracting is harderto administer, it can allow the two parties to better align their interests and executethe project.

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    USA 2016

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    date.com/petrochemicals-con-struction/

    deliverables list. The deliverables list indicates “what is to be done” and the executionplan dictates “how you are going to execute the work.” The work packages

    (engineering and construction), including costs and schedule targets, should be welldefined going into detailed design.

    According to Subtelny, the capital projects team should emphasize reliability andengineering as much as costs and schedule because reliability will ultimately drivethe plant’s long-term profitability. In some cases, particularly in larger or megaprojects, petrochemical owners should keep a core engineering capability, such asproject directors, in house, even as they or outsource a lot of the other engineering

    disciplines to third-party providers.

    Looking ahead

    The decline of the oil-to-gas price ratio is raising critical questions around thecompetiveness of ongoing and planned ethylene cracker projects in the US. With

    global competition from alternative feedstocks expected to intensify in the comingyears, petrochemical operators and contractors in the US alike will focus on

    understanding the construction cost environment in the US as a key strategy to

    manage project cost escalation, benchmark their bids and optimize their capitalbudgets.

    Based on experience with the current wave of ethane-based debottleneck projects,plant restarts and new production units under construction on the Gulf Coast,

    meeting capital budgets and schedules in the next 3-5 years is likely to be achallenge. The companies that finalize their engineering, procurement and fundingstrategies early will have the highest chances of seeing their projects through to

    completion.