Oil and gas projects stall as costs spiral

Lump sum contracts, skills shortages and lack of resources are hitting the industry hard

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By  Angela Giuffrida Published  October 21, 2006

A surge in construction costs within the oil and gas and power generation sectors is forcing some clients to postpone or abandon projects. An insider at Japanese oil and gas contractor, JGC said project costs frequently ran over budget, mainly due to fixed lump sum contract conditions and having to pay higher salaries to attract key staff. South African group Sasol has also revealed that its gas-to- liquids project in Qatar will also face delays because of contractor problems. There are about 100 exploration and production projects currently underway or planned in OPEC countries alone, with a total price tag of around US $100 billion. And according to a report by the Organisation of Arab Petroleum Exporting Countries (OAPEC), some projects are now being mothballed as a result of the costs and capacity crisis. “The high costs, particularly those relating to engineering, procurement and construction, have become a critical issue for the world oil industry – and the gas, petrochemical, and power generation industries in the last two or three years – in light of the global trend toward implementing projects aimed at adding capacity in all sectors,” said the report. “It is one of the major factors behind the reconsideration of some planned projects in certain regions of the world, leading either to temporary postponement or total shelving in some cases.” The report added that the increased number and growing complexity of energy-related projects had led to a shortage of skilled staff and equipment, while the rising cost of basic materials such as iron and cement is also having a major impact. The boom in the liquefied natural gas (LNG) industry, particularly in the Middle East, is also placing a strain on costs and resources, according to Michael Stoppard, senior director for Global LNG, Cambridge Energy Research Associates. Qatar, which sits on the world’s third biggest gas reserve, is leading the growth with almost half of all current global LNG construction. Oman, Egypt and several other countries are also increasing capacity on the back of rising demand in Europe, the US and Asia. LNG plants cost several billion dollars to build but their technology is proving popular with countries looking for a way into the gas market without building pipelines and facing political issues. “The strain of growth globally is starting to show,” said Stoppard. “Evidence is mounting of cost inflation and budget overruns, of project delays and operational hiccups, of shortages of specialised labour and expanding lead times for specialty parts – and all this within a broader context of more strained global geopolitics.”

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