Petchems owners prioritize cost and schedule control to keep industry competitive

The North American petrochemical industry will continue to attract major capital investment in the mid-term, but controlling construction costs and schedules will be key to petrochemical producers in the next few years, especially to companies that will be exporting much of their production and need to offer very competitive prices, according to experts at Petrochemical Update’s Petrochemical Engineering & Construction (PEC) conference on June 7.

There are about 10 major ethylene projects currently underway in the U.S., with the peak of new capacity, labor, materials and equipment demand expected in 2016-2018, Bruce Burke, senior vice president Energy and Chemicals Advisory at Nexant, said during the first day of the conference.

Speaking to around 700 delegates at PEC and its co-located Gulf Coast Shutdowns and Turnarounds conference in New Orleans, Burke said that North America is projected to add 12 million tons of new ethylene capacity by 2020.

He projects about 7-8 projects will be built in total in North America in the 2020s, as well as about 7-9 crackers per year globally.

“That’s still a pretty vibrant industry going forward,” he said.

In the meantime, petrochemical projects in the U.S. are becoming larger and more complex, with labor risks on the U.S. Gulf Coast, improving overall project productivity for both mega and plant-based projects, and developing a robust project execution plan emerging as key topics at the conference.

Besides the effect on construction and project execution, the impact of the new capacity is that the U.S. industry is “fully satisfying the domestic market so trade will be important, especially for some of projects,” Burke said.

Nexant expects a sustained requirement for net trade exports going forward, including for polyethylene and other ethane-based derivatives, requiring U.S. producers to establish major derivative export positions in South America, Europe and Asia.

While many owners in the region are competing for domestic market share, there is still a lot of investment targeted at the export market, said Mike McAtee, senior vice president Engineering & Maintenance at BASF.


Announced ethane cracker projects. Source: U.S Ethylene Constructions Costs Report.

US competitiveness still strong

Even though the plummeting crude oil price is eating into the cost competiveness of U.S. ethane-based petrochemical players, it has not changed the fundamental advantage of U.S. ethane, according to speakers at the conference.

The key reason why North America is attracting capital investment is its competitive cost position on a global basis, Burke said. Based on a $60 per barrel (b) scenario, Nexant estimates that U.S. Gulf Coast ethane projects are some of the lowest-cost globally, behind Middle East producers, which have the lowest production costs.

From a project owner’s point of few, the availability and volume of low-cost natural gas and light derivatives are some of the key dynamics that are affecting the market in the U.S., according to McAtee.

Though there are many factors and risks at play, “the real wild card is Asia, particularly China,” he added.

According to McAtee, over the last 6-8 months, even as the oil price has come down substantially and the global economic growth has softened, Chinese producers have not taken non-competitive assets out of production and are instead pushing cheap material into the market.

“It is going to have a somewhat disruptive effect on the overall import-export arbitrage that a lot of those are being built when [some markets are being forced to reduce capacity] because they have built tremendous overcapacity in the last decade,” he said.

In the mid-term, if oil prices move up substantially over the next couple of years, McAtee expects the arbitrage to spread again. However, for the time being as new plants continue to come in, there is going to be more pressure on the overall system, requiring stronger cost control on investments, he said.

“My personal opinion is that it will ultimately cool down the marketplace in the 2020-2025 time period, because the capacity utilization needs to catch up with the installed base,” McAtee added.

Project execution challenges

For the past 25 years, owners and contractors in the U.S. downstream energy sector have been optimizing front-end loading (FEL), using electronic process design and scheduling tools, applying lessons learned and implementing other best practices, yet construction project performance has not visibly improved.

Remarkably, design-stage innovations such as three-dimensional isometric projections delivering extra detail to engineers and field craft, AutoCAD software and other technologies designed to improve efficiency have seen a wide adoption in the sector, yet engineering & design as a percentage of a capital project’s total investment cost (TIC) has not changed much on average compared to 20-25 years ago.

New projects are faced with core issues such as owner-contractor interface integration, project scope creep, price volatility and loss of project experience as owner & contractor personnel – from skilled crafts and superintendents to engineers and plant operators – is retiring or transferring to other industries.

Capital efficiency and schedule and cost certainty are some of the major challenges in the petrochemical industry, especially for some of the larger projects currently under construction, according to Dan Spinks, vice president & general manager, Houston Office at Fluor Corporation, which serves as a contractor on several major petrochemical projects on the Gulf Coast.

The availability, quality and productivity of skilled construction crafts and supervisory personnel is the biggest challenge for Fluor, in particular, he said.

Mitigation strategies

Controlling capital costs, managing risk and dramatically improving project performance in the current market environment will take more than adopting new technology and best practices, according to speakers at the conference.

With increased emphasis on cutting costs and condensing schedules, minimizing the business, cost and project risk by improving the overall approach to planning between the different project interfaces is also becoming a key differentiator for projects, according to a panel of experts from Asset Performance Networks, Sasol, Freeport LNG and Wood Group Mustang.

Companies should begin aligning their business units and capital projects teams, starting very early in the project, the panel said.

To control costs and construction risks, Fluor, for example, is working to minimize the number of hand-offs and interfaces throughout the lifecycle of a project to drive the certainty and predictability that owners are looking for in their projects, Spinks said. The company is also pushing forward a more integrated and construction-driven approach to its projects that starts as early as the front-end development phase.

Project owners should also begin exploring the best execution approach for their business – from the business plan all the through execution and construction to hand-off and start-up – taking into consideration the complexity and size of the project, contractors availability and owners’ own ability to manage costs, according to a panel featuring speakers from BASF, Valero, LyondellBasell, Pathfinder and Cajun Engineering.

“There is no size fits all,” said Steve Cabano, president and COO of Pathfinder.

To mitigate some of the construction risks, Fluor and other contractors are also moving a lot of their engineering and fabrication work offsite, and looking at new modularization approaches and innovation around “how to increase modules and what goes into modules,” Spinks said.

According to him, moving the work to a “more controlled environment” is often more cost-competitive and could drive more efficiency around the capital investment projects even as it creates additional project logistics and planning requirements.

Using high-value engineering centers abroad, especially Asia, has become “absolutely crucial” to how Fluor delivers its projects, and the the amount of utilization of these offices is increasing as their capabilities also continue to rise, Spinks said.

The company is starting to push more work, including front-end engineering, to its offshore offices, he said.

Even though the slowdown in upstream construction activity has opened up more engineering capacity, the need for cost control means that many companies will still leverage lower-cost engineering even when they have abundant resources locally, according to McAtee.

While many project owners on the U.S. Gulf Coast are not familiar with modular construction approaches, modularization is often the only way to offset the impact of falling productivity rates in the U.S., he added.

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