Surge in materials prices drives up cost of projects

Cement, steel and manpower prices are all jumping, meaning that the cost of projects is rising by 10-20%.

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By  J Shankar Published  August 15, 2005

Upcoming oil & gas projects will cost clients at least 10 to 20% more than in previous years, contractors have told Oil&Gas Middle East. Engineering, procurement and construction (EPC) contractors in the region have felt the heat of rising cement and steel prices and have revised project outlays for planned and ongoing ventures. Technip, one of the largest EPC contractors, confirmed that it was impacted by losses incurred on projects last year. Rolf Baumgartner, deputy proposals manager, says that the company is now far more cautious with cost estimates. “We now have a team closely assessing raw materials costs, forecasting the outlook and coming up with an in-house assessment of each project,” he said. Technip is also extra careful in its negotiations with raw materials suppliers, as rapidly fluctuating costs are hurting EPC contractors. Baumgartner says that the planned bids for various projects will definitely be higher than in previous years, although he does not attach a figure to the possible price hikes. However, he says the big leap in prices last year is definitely having its effect on project costs for this year. Petrofac a major EPC contractor in the region, is sure of at least a 15% increase in its bid prices. “Steel prices saw a 40% increase last year and an average oil & gas project will have about 40% steel cost, so an increase of 15% is definitely seen in the overall pricing,” said a senior project manager from Petrofac. Across the industry, costs are surging. The price of steel used for pipelines and rigs has, in some cases, doubled since 2002. Petrofac, the project manager says, has had to swallow the unprecedented steel price increase, which happened last year. This year, even though the prices look like they are stabilising, expenditure continues to go up. Offshore projects will see as much as a 20% increase in cost, as they use much more steel than the onshore ones. The recent increase in the price of ‘316’ stainless steel is also inflating budgets. This grade of stainless steel is used mainly for plants that require non-corrosive environments. In an effort to bring prices down, contractors like Technip are trying to offer stainless steel equivalents. Rising steel costs alone cannot be blamed for the rocketing cost of projects, argues Barry Gregg, operations manager at Costain. Gregg says that Costain usually has clients supply the raw material for projects. His company’s costs are still on the rise, however, because of high labour rates. “Rising steel prices are having their effect on the oil & gas industry, but the dearth of labour, I would say, is affecting us more, as we are paying exorbitant rates to entice people to the Middle East market,” he said. Atkins, a project design consultant, has also noticed the steep increase in costs. Atul Mulkar, resident manager, confirms that the costs in local projects have gone up by at least 10 to 15%. The Middle East’s experience reflects what is going on in the rest of the world. Just last month, Shell revised the cost of its Sakhalin project in Russia to US $20 billion, twice as much as the original budget, because of soaring metal prices and contractor fees and a declining US dollar. Many EPC contractors in the region are now re-tendering projects, owing to clients’ scepticism about high costs. Contractors say they are not overly worried about cancellations, as high oil prices should make operators overlook escalating costs.

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