Sasol’s Louisiana project controls capex via patchwork of supply, labor contracts
The near 50% drop in the crude oil price since mid-2014 has not delayed Sasol’s petrochemical construction projects in the United States “one single bit,” according to Rob Clark, vice president-project director, US Mega Projects at Sasol.
Speaking at Petrochemical Update’s Engineering and Construction 2015 Conference in New Orleans on June 16, Clark said Sasol is focusing on mixed contract arrangements, module planning, offshore engineering and new workforce development programs to control the capex for its 1,500 KTA ethane cracker and derivatives complex in Lake Charles, Louisiana.
The $8.9 billion facility will produce ethylene oxide, Ziegler and Guerbet alcohols, ethoxylates and linear low density polyethylene, and will roughly triple Sasol’s chemical production capacity in the US when it comes on stream in 2018.
“Keeping the lowest capital cost is our mantra, and that’s what we are trying to do for this project,” Clark said. “And as long as we have cheap gas in the region, then we are going to be doing a lot of business, going ahead and finishing up. So confusing the price of oil with the price of gas at this period is a misnomer.”
Even at the current oil-to-gas (naphtha-to-ethane) ratio, North American olefins are competitive in the export market compared to naphtha-based olefins. But the decline in profit margins spurred by the low crude oil price has prompted petrochemical owners to focus on cost coverage.
The resources of operators and contractors are under pressure from the surge in petrochemical projects along the US Gulf Coast despite many of the firms having large balance sheets.
Controlling construction costs will be key to the ethane projects underway as they will be exporting much of their production starting around 2018-2019 and need to offer very competitive prices.
Currently, US manufacturers are some of the lowest-cost producers globally, second only to the Middle East.
A suite of contracts
The heated downstream construction market and looming shortages of skilled craft and engineering labor are driving more petrochemical owners in the US to shift from pure fixed-cost, lump-sum contracting to more cost-reimbursable and conversion strategies.
To control quality and costs, Sasol is pursuing a mixed contracting strategy for its Lake Charles complex. The company initially went out for lump-sum bids for several of the project’s components and found the premium “exorbitant,” Clark said.
A lot of the construction and management work for the facility is under cost-reimbursable contracts, while smaller packages such as cooling towers and substations are being constructed under lump-sum arrangements.
Meeting budgets and schedules has been a challenge for many industrial projects in the US in the past decade.
Some 72% of more than 800 major capital projects 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 failures after startup), according to AP-Networks Managing Director Brett Schroeder.
One in four projects grossly exceeded one or more of their success criteria metrics, Schroeder said during Petrochemical Update’s conference.
At the same time, only 24% of megaprojects (over U$1 billion) meet their business objectives, according to Booz Allen estimates.
To optimize its budget, Sasol is also leveraging lower-cost construction options such as offshore engineering and fabrication (modularization), which still offers attractive pricing, Clark said.
The company is building 78 modules in China for its ethane cracker and is sourcing other project components from China and the US.
“We spent a fair bit of time on logistics and travel studies and how to get modules from China to Lake Charles effectively, how to move them, how to [stage] them, where to [stage] them,” he said.
Hedging labor risk
Sasol is also using modularization to meet its expected manpower demand amid a heated downstream construction market and an aging skilled craft workforce.
Shortages are looming for skilled crafts such as welders and ironworkers, as well as for instrumentation technicians and engineers across the energy sector.
The demand for skilled labor in the growing US chemicals industry is projected to peak in April 2016, at around 155,787 workers, according to Daniel Groves, workforce director at the Construction Users Roundtable (CURT) and chief executive of data provider Construction Industry Resources.
Sasol’s facility alone is expected to employ about 7,500 workers at peak construction over the next three years and generate 400-500 full-time operations and maintenance positions, according to Clark.
“It’s going to take a fairly large team of QA/QC and supervisory folks out there, but even with that folded in and the shipping costs, we feel like that was going to be the best situation in order to flatten the peak of craft labor demand at the job site,” he said.
Sasol expects that this strategy will mean up to 1,000 direct-hire craft workers on the field.
To hedge against potential labor shortages and construction delays, the company is also using more than one engineering, procurement and construction (EPC) company per discipline, according to Clark.
It has contracted Fluor Technip Integrated to perform the primary EPCM work for the Lake Charles complex, while WorleyParsons is in charge of project management.
Other Louisiana-based contractors at the site include Cajun Constructors, James Industrial Constructors, ISC Constructors, MMR Constructors and Turner Industries.
Sasol is combining its engineering and contracting strategies with new approaches for attracting skilled craft workers - from Facebook ads, local hiring and school programs, to providing better incentives and additional training for new hires, Clark said.
The company is also building a regional training center with a focus on industry/construction training, which is expected to be completed by November 2015.
Skilled craft jobs, which typically require technical degrees or training, are seeing wage increases in the US on the back of growing demand for these trades across the industry.
Average annual salaries – not including overtime, per diem and other incentives – for skilled craft workers ranged between about $51,500 and $66,500, according to the 2014 craft professional survey by the National Center for Construction Education and Research (NCCER).
Project supervisors and project managers topped the list, earning more than $79,000 and $91,000, respectively.
“The portion of the total compensation, what’s most volatile, is the per diem, and we are going to try to use that as a shock absorber rather than have the wages go out of control. Wage rates for welders were up 7% last year in Greater Baton Rouge,” Clark said.
The current per diem utilization in the Greater Baton Rouge area is holding stable around 40%, while per diem rates range from $65 to $100, for an average of about $72, according to Clark.
“Do I think the industry will be able to meet the manpower demand? No, I think it’s going to be very difficult,” he said. “And I think we are going to see wage escalation and per diem escalation. It just depends on the alignment of all the projects and the peak [of] craft labor manpower demand.”