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
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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
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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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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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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
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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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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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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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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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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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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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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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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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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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8/20/2019 27 JAN16_Whitpaper - US PetChem Construction-2016
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8/20/2019 27 JAN16_Whitpaper - US PetChem Construction-2016
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BROUGHT TO YOU BY PETROCHEMICAL UPDATE
2016 US Petrochemical
Construction Outlook Whitepaper
Petrochemical
Engineering &
Construction
June 7-8th New Orleans,
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http://www.petchem-up-
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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.