Workforce issues, supply squeeze cracker construction costs

Total construction costs for a U.S. Northeast cracker project are estimated to be about $193 million higher than for U.S. Gulf Coast projects, and construction costs are up in both regions as a result of reduced supplies and skill shortages, according to Petrochemical Update’s most recent Indicative Costs of US Ethylene Projects report.

Cracker construction costs are up at least 5% in 2018. Image: Shell

Total project costs for a 1.25 mtpa ethane cracker on the Northeast would total about $2.848 billion in a base-case scenario, compared to $2.655 billion on the Gulf Coast, according to the report.

Northeast cracker costs for 2018-2020 estimates are up about 4% from 2017’s estimate of $2.737 billion. U.S. Gulf cracker costs for 2018-2020 are up about 5% from 2017’s estimate of $2.539 billion. 

The seemingly endless escalation of construction costs and productivity debits is not limited to a single event or short-term impacts but also includes potentially more significant circumstances such as a diminishing pool of experienced/qualified work force, the industry’s failure to anticipate and accommodate cyclical marketplace conditions and a failure to apply innovation and technology in an effective manner, according to the report. 

“These topics have a negative influence on industry participants that manifests itself as a continual deterioration in construction productivity, performance and associated cost effects,” the report states.

A cracker built in the U.S. Northeast would have higher labor costs. Total labor costs are expected to be about $171 million or 15% higher in the Northeast than in the U.S. Gulf Coast.

Building a plant in the Northeast United States using union labor will result in higher wage rates, and additional work hours associated with work rules, and variations in craft productivity, but the poorer productivity now being experienced in the Gulf Coast could even this out.

The highest major equipment costs for a 1.5 mtpa cracker are for piping systems, which also have the highest labor cost. The highest bulk material cost is for construction equipment rental and fuel. Highest labor costs are for piping systems, field supervision and contingency within bulk material.

Over the past five years, U.S. Ethylene projects have ridden a wave of new construction spurred on by U.S. shale gas production and cheap ethane and propane which are ethylene production feedstocks.

Most of the additional capacity is produced for export to Asia, mainly China and India to cover plastic demand. In support of this demand, there has been dramatic increase in capital project execution over this same time period.

The number of petrochemical projects constructed simultaneously had significant impact in the marketplace, with many of the “first wave” projects coming on line or nearing completion. “Time to market” was the primary driver for these projects as everyone wanted to capture the early market opportunity. This resulted in a fast track planning and Construction driven project environment. This strategy caused many plants to be built with higher cost and schedule delays.

Specific impacts resulted from labor shortages, raw material shortages (steel, alloys), immature design (Weak FEL) with implications in EPC scope and change orders, poor planning during construction which impacted labor productivity, and a competitive labor market to hire skilled workers

During the first two years of the wave, the U.S. petrochemical industry maintained an advantage with its shale gas price. Plants in Asia and Europe mostly use Naphtha, which is a derivative of crude oil, as feedstock. With the decline of crude oil prices in 2014 - 2015, some projects were delayed or canceled with the changing economics of Naphtha vs Shale Gas.

Recent stability of crude oil pricing, coupled with a forecast of continued increase in demand, is motivating a new wave of ethylene and propylene derivatives. Petrochemical producers are confident that the availability of cheap gas is a long-term event, with some analysts predicting favorable conditions into the 2030 timeframe.

In some cases, projects planned for development during 2018 have been deferred or delayed as owners gauge the effects of higher costs on profitability and the potential impacts of increased competition from overseas projects. In other cases, owners have re-scoped projects as smaller scale expansions of existing facilities versus mega-scale grassroots projects.

Sasol has pushed back the estimated start-up date for its new cracker in Lake Charles, Louisiana to July, a five-month delay from its most recent estimate, as projected costs of the petrochemicals complex continue to rise.
Sasol has raised its overall capital cost estimate for the Lake Charles Chemical Project (LCCP) from $11.13 billion to a range of $11.6 to $11.8 billion, the company noted in a trading statement on February 8, for the six-month period ending Dec. 31, 2018.

Some of the more successful “first wave” projects took deliberate steps to mitigate Construction Cost impacts by consistently applying/increasing levels of: modularization, preassembly, Advanced Work Packaging (AWP), earlier/more in-depth planning, RFID supported procurement and materials management and other approaches. These approaches were previously encouraged but under-utilized for several years.

Unfortunately, long term solutions such as technology advancement and revised construction processes take time and are unlikely to have any material impact on the current generation of Ethylene projects, but if Lessons Learned from the “first wave” of project completions are effectively integrated, the “second wave” of projects are likely to reap the benefits.

By Heather Doyle