US ethane cracker construction costs rise a further 1% in Q4 2016
Total project cost estimates for a typical 1.5 million ton-per-annum (mtpa) ethane cracker on the U.S. Gulf Coast rose by $14.2 million (0.7%) to $2.1 billion in the period September-December, according to Petrochemical Update’s U.S. Ethylene Plant Construction Costs Quarterly Update.
Costs rose 3.1% over the whole of 2016 as rising materials costs drove up overall project estimates. The official U.S. inflation rate was 2.1% over the same period.
As at the end of December, the base case cost estimate for a typical 1.5 mtpa ethane cracker on the U.S. Gulf Coast stands at $2.14 billion, the low-case scenario $1.82 billion, and the high-case scenario $2.45 billion, according to Petrochemical Update estimates.
There are currently eight ethane crackers under construction on the U.S. Gulf Coast. Six of these are slated to come on stream by the end of 2017, representing more than 7 million tons per annum of new ethylene capacity. Ten more ethylene facilities have been proposed for the Gulf Coast and the U.S. Northeast, eight of which are in development.
Petrochemical Update’s cost estimates have been developed using a bottom-up analysis of four major components: major equipment, bulk materials, indirect costs and detailed design.
The fourth-quarter cost increase was driven by higher construction costs which are up by $12.5 million to $1.79 billion, mainly a result of bulk material costs rising by 0.9% or $5.4 million.
Bulk material costs represent 28% of the total to build a 1.5 mtpa ethane cracker. The highest bulk material costs for a 1.5 mtpa cracker on the U.S. Gulf Coast are associated with piping systems, which have the highest materials cost and the highest labor cost.
Bulk material costs consist of buildings, concrete, demolition/removals, insulation, piling, piping, site preparation, structural steel/platforms, painting and miscellaneous items.
Labor costs for a base case estimate rose 0.6% in the fourth quarter to $1.06 billion. Construction labor costs rose 0.7% to $718 million. Construction labor costs are 67% of total labor costs.
Total labor costs, including design, engineering, procurement and construction, for a 1.5 mtpa project on the U.S. Gulf Coast vary between 49% and 51% of the overall capital project for the three cost scenarios.
Total labor costs for a 1.5 mtpa ethane cracker on the Gulf Cost in a base case scenario are estimated at slightly over $1 billion, representing a total of about 11,714,245 man-hours.
In the U.S. Gulf Coast cost model, the study has used current Open-Shop (Non-Union) labor rates from the Houston, Galveston and Freeport areas. Bulk materials were also used from this region of Texas, supplemented with RS Means & Richardson Engineering unit values.
Indirect costs, which represent 27% of the total cost to build a 1.5 mtpa ethane cracker, increased by 0.7% from the previous quarter.
Indirect costs comprise contingency costs, contractor fees, equipment rental, freight, field supervision, overtime, temporary field support and scaffolding, among others. Major equipment costs include compressors, electrical, heat exchangers, instrumentation, pumps, reactors, tanks, towers and vessels, among others.
1.5 MTPA Gulf Coast cost by segment
Source: U.S. Ethylene Plant Construction Costs Quarterly Update
Of the indirect costs, contingency plans, contractor fees and equipment rental and fuel carry the most significant costs. Increases in construction equipment rental continue to outstrip other line items, rising by $647,000 in the fourth quarter.
Total major equipment costs, which represent 29% of the total costs of a 1.5 mtpa ethane cracker, increased by 0.5% in the fourth quarter.
Detailed design costs, which represent 10% of the total project budget, rose by 0.5%, the data shows.
Fourth-quarter estimated EPC costs for a 1.5 mtpa cracker on the U.S. Gulf Coast stand at $1,427/ton for a base case scenario, up from $1,418/ton in the third quarter.
Low ethane prices make U.S. ethane-based exports highly competitive on the global markets, even though low oil prices have depressed U.S. producer margins.
The oil to gas price ratio is the key metric strategic decision makers follow for return on investment calculations. If there is an overrun on construction costs, the oil to gas price ratio can help to cover losses, or increase them.
The ratio of oil to gas prices in the fourth quarter of 2016 ranged between 13 and 20. The ratio hit a high of 20 in mid-November after the OPEC deal to curb production growth raised crude prices. It has since declined as oil prices have dropped back down to $52/barrel as U.S. oil production continues to increase.
Ethane based plant operators are looking for a higher ratio for return on investment. The crude to gas price ratio averaged 27 from 2009 to 2014 when the majority of the ethane construction plans were announced, according to the U.S. Energy Information Administration (EIA).
Price ratio of oil to natural gas
By Heather Doyle