Meltdown in the energy sector

Rising costs have been felt across the construction industry over the last year, but nowhere has the pain been more acute than in the oil and gas sector. With skilled manpower in short supply and the price of key construction materials rising, some clients are now being forced to mothball projects. Angela Giuffrida and Nicholas Wilson report.

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By  Angela Giuffrida Published  October 21, 2006

The abundance of contracts in the Middle East’s energy sector might spell good news for engineering and construction contractors. But the sheer number of new projects being procured and their increasing complexity is beginning to put serious strain on the industry’s supply chain. The dwindling availability of capital equipment, materials and human resources supply is now being blamed for many projects busting their deadlines and budgets. “All of these factors have pushed up the cost of new projects and inflated their final costs, sometimes to more than double their initial estimate, in most regions of the world, including OAPEC member countries,” according to a recent report by the Organisation of Arab Petroleum Exporting Countries (OAPEC). And this situation is unlikely to abate over the next few years as countries in the Middle East aim to ensure there is enough energy to supply an estimated yearly demand of 7 trillion kWh by 2010, according to figures from the International Energy Agency. Output of oil and natural gas in the region is therefore poised for rapid expansion, at a forecast cost of US $458 billion between now and 2030, with Saudi Arabia and the UAE experiencing the fastest rate of growth over the next four years, at least. As a result of the boom in the construction of power plants, petrochemical facilities and LNG plants, clients in the industry are having to cope with an increasingly stretched supplier base. One such company is South African petrochemicals group, Sasol. It recently announced that its gas-to-liquids (GTL) project in Qatar was likely to be between nine months and a year behind schedule due to ‘contractor problems’. In addition, all of its other major projects were either behind deadline or running over budget. The start of operations at the Oryx GTL plant has now been delayed to the fourth quarter of this year due to damage to a steam superheating plant during early commissioning. In September last year, Sasol said it expected the GTL plant to be on-stream in the first quarter of 2006. General manager Lean Strauss said that Oryx’s operating costs were now expected to soar between 50% to 60% due to the rise in commodity prices, while other Sasol projects had been delayed or hit by cost overruns, which was becoming a global phenomenon. The company’s chief executive, Pat Davies, said that one energy company, which he declined to name, had been hit by cost overruns of between 30% and 110% on capital projects. He added that Sasol’s projects were being affected by a shortage of engineering service capacity and were also under strain from increases in commodities prices, especially oil. Company spokesperson, Johann van Rheede, said: “The phenomena of commodity price increases, and engineering and construction skill shortages, is global and not limited to South Africa or Sasol. As a result, quality suffers, costs go up and schedules tend to move out.” Other projects that have been hit by delays include Iran’s Arya Sasol Polymers and the synfuels catalytic cracker project, Project Turbo. Another Sasol venture, The Escravos GTL, in Nigeria, has been affected by a cost overrun of around 20% more than previous estimates. One area experiencing a surge in activity amid growing costs is the liquefied natural gas (LNG) industry. According to Bechtel Corporation, 14 new LNG production plants are under construction globally, with a further 25 plants proposed. Qatar is leading the boom, with Nigeria, Oman and Egypt also expanding capacity. LNG technology is also proving to be a popular option for companies keen to get gas to market without building expensive pipelines or coming up against political opposition, although this is having an impact on manufacturers of essential components such as motors, pumps and valves, and leading to longer waiting times for parts. “However, the supply difficulties that projects face – and that will intensify – are not evidence of the inability of LNG to respond. Rather they should be interpreted as the natural friction that comes from growing momentum and the pressures that are affecting the entire energy industry,” said Michael Stoppard, senior director for Global LNG at Cambridge Energy Research Associates. He added: “Much of the upward pressure on costs is linked to a more general inflationary trend across the oil and gas industry. Part of it is exacerbated by characteristics more specific to LNG, notably shortages of key specialty materials and a select set of engineering, procurement, and construction companies with proven track records on large-scale LNG projects.”

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