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Engineering & construction: Shale boom reinvigorates the industry, could lead to shortage of labor resources

2:06 PM MDT | June 10, 2013 | —Natasha Alperowicz

Meserole: Many investment opportunities.

Engineering and construction (E&C) firms serving the chemical industry are enjoying an upsurge in their fortunes. The abundance of cheap shale gas has ushered in a new wave of projects, particularly in North America, potentially stimulating more than $100 billion of related investment. Much of that investment will be on the US Gulf Coast. However, the boom could create labor shortages, particularly for craft workers.

The US shale bonanza is often compared with the boom years in the Mideast about two decades ago, which led to that region becoming a major exporter of petrochemicals. Contractors could also benefit in the United States from major liquefied natural gas (LNG) projects based on shale gas, provided that the US government ignores heavy domestic lobbying by Dow Chemical among others, and allows large-scale LNG exports.

ACC, in a shale gas study released last month, says that almost 100 US chemical industry investments based on shale gas, valued at a combined $71.7 billion, had been announced by the end of March—with about half from companies based outside the United States. Bulk petrochemicals account for 55% of that spending, followed by plastics at 22%, fertilizers at 14%, inorganic chemicals at 4%, and others at 5%. The US Gulf Coast will benefit from 78% of the capital investment, followed by the Ohio Valley at 13%, the Midwest at 8%, and other regions at 1%, the study says.

Benefits will flow downstream from contractors to equipment makers. Pressure vessels, distillation columns, reactors, heat exchangers, pumps, compressors, and other major process equipment will account for about 26% of the capital spending, ACC says (chart, p. 21).

Contractors expect the initial round of shale gas–related investment to peak in the United States in 2015–20. Pre-front end engineering design (FEED) and FEED on many major projects is already well under way. E&C on the announced projects should last from now until 2019–20, they say. There are currently eight announced US crackers under consideration.

One major concern is that the boom could squeeze the US labor market, particularly for craft workers, such as welders, pipe fitters, carpenters, scaffold builders, and construction hands, particularly on the Gulf Coast. Construction of these plants would require about 50,000 skilled workers, excluding maintenance workers, at the 2014–15 peak, contractors say.

Pouyanné: Examining a project to build a new ethane cracker at Port Arthur to capture maximum synergies.

Chevron Phillips Chemical (CPChem) says it expects to make a final investment decision on its 1.5-million m.t./year ethane cracker planned for its Cedar Bayou facility, at Baytown, TX, in the third quarter. “There is concern about the labor pool available to build, operate, and maintain all the units that have been announced,” says Peter Cella, president and CEO of CPChem. “The demand for welders, pipefitters, operators, and maintenance staff could be more than the demographic profile of the United States can provide.” Industry does have a role in addressing that shortfall, he says. “I’d personally like to see more industry efforts to encourage more to go into technology fields,” Cella says. CPChem recently established a workforce development scholarship program with Lee College (Baytown, TX) to help serve as a recruiting tool for CPChem’s Cedar Bayou facility and attract students interested in post-secondary education for a technical career in the petrochemical industry. CPChem estimates that its project will bring approximately 10,000 temporary E&C jobs and approximately 400 direct jobs to the US Gulf Coast.

“Timing and pacing of these projects is critical,” Cella says. “If we all go at once, there aren’t enough engineering, procurement, and construction (EPC) firms. Some queuing has to take place for this to work. We are watching EPC availability and costs very closely to insure that we don’t get stuck in a situation where we can’t get the labor needed to complete the project safely, successfully, and on time.”

One comfort to CPChem is that it believes it will have the first project completed. “We were first to announce and the first to file for permits. We still think we have the pole position and will maintain it through project completion. If this concern comes to fact and we do have a shortage of skilled labor, it will hopefully occur past our construction peak and impact projects three, four, and five and not us to the same degree.”

Analysts are concerned that the boom could result in an overheated market, making projects very expensive. “But the US market is already more expensive than any place else right now, so there will have to be different forms of project execution,” says one major European contractor. Prefabricated items will need to be produced elsewhere and shipped to the United States. “If you have a limited workforce, you have to take countermeasures,” he says.

Contractors are moving to avert expected shortages and, to keep projects on schedule, are turning to plant modularization. Modularization involves the construction of plant modules that can be assembled on-site after the receipt of construction permits.

Fluor, the world’s leading E&C contractor, formed a joint venture last year with AG&P (Muntinlupa City, Philippines), a company specialized in modular engineering and fabrication services, and earlier this year established a similar capability in Canada with Supreme Group (Edmonton, AB). The jv’s are being used worldwide for projects, depending on client needs. Fluor says it may add further modularization capability. The AG&P Fluor Joint Venture Co. provides a full range of integrated engineering, fabrication, module assembly, and construction services. Supreme Modular Fabrication, the 50-50 jv with Supreme Group, will serve the marketplace from its more than 50-acre module yard near Edmonton.

Richard Meserole, v.p./construction, energy, and chemicals at Fluor, says he is “not losing sleep worrying about whether [Fluor] will be able to attract enough craft workers to do the work.” He draws parallels with 2006–10, when Fluor was responsible for five of the six megaprograms in the markets it serves. The company was able to attract 25,000 craft workers to those megaprojects, he says. “We have a track record in the United States of being able to attract, train, and retain craft workers, and that is why our clients keep coming back to us in this next wave of work,” he adds.

However, the pending investment bulge is larger. Meserole estimates that if all of the projects go ahead, they would require twice as many craft workers, or roughly half of the entire craft workforce of the United States. “The question is can you get them all into the Gulf Coast to support the needs. … We certainly feel that we can.”

Craft workers in the United States are free agents who pick and choose where they work. It is difficult to hire foreign workers, Meserole adds. “In the Middle East, one can have literally thousands of workers from other countries—the Philippines, China, India, and the United States—but in the US there are only 66,000 visas/year that get issued, and that includes doctors, lawyers, engineers, and craft workers, so temporary foreign workers are not the preferred solution,” he says.

Meserole says that the key to keeping a productive craft workforce is to have a competitive compensation package and, more importantly, craft safety, training, and good working conditions, “because at the end of the day, the pay is going to be relatively close on any jobs.”

Modularization is another way forward. “We believe that we can significantly reduce the amount of craft needs for these projects but at the same time provide them [via modularization] with the same engineering, procurement, construction, and fabrication services,” Meserole says.

The unnamed European contractor also believes the situation is manageable. “There will, of course, be labor shortages, and there will probably be project delays. The trick will be to have sufficient labor for your project and contractual regulation to ensure that workers don’t walk away if someone pays $1/hour more, as we saw in Saudi Arabia in 2005–06. Contractors just walked away then because they were paid better at a different location,” he says.

Fluor has identified a raft of shale gas–related investment opportunities in the United States. These include four to six ethylene-based complexes, more than three propane dehydrogenation (PDH) facilities, two gas-to-liquids (GTL) complexes, and several stand-alone petrochemical derivative units. “We see a lot of opportunities worldwide, especially around natural gas, but more specifically we see a new wave of petrochemical projects in North America.”

About 49% of Fluor’s $38.2-billion backlog at the end of the first quarter of 2013 was in energy and chemicals, including oil, gas, petrochemical, and chemical projects. Another 43% was in industrial and infrastructure, including several mining projects.

Fluor’s involvement in the US investment boom includes Dow’s planned PDH unit and 1.5-million m.t./year ethane cracker at Freeport, TX. The cracker is slated to start up in January 2017. Fluor’s Sugar Land, TX, office is leading the EPC and self-perform construction phases of the project, with additional support from the company’s Asia/Pacific operations. Fluor is also engaged in a 1.5-million m.t./year ethylene project for Sasol at Lake Charles, LA, expected onstream in 2017. “We are involved in a significant number of the new projects in the US and … we are certainly optimistic that this new wave of petrochemical projects will contribute to our goals,” Meserole says. Fluor is working on more than $30 billion worth of capital value in FEED and feasibility for petrochemicals and gas liquids projects on the US Gulf Coast, some in the pre-FEED and FEED phases, and some further advanced.

KBR, another United States–based contractor, is also chasing shale gas opportunities, including many ammonia projects. Two ammonia-based fertilizer complexes are planned in North Dakota, based on the state’s Bakken gas deposits. KBR’s current contracts include the supply of a new furnace for the Ineos ethylene plant at Chocolate Bayou, TX, to add 465 million lbs/year of capacity; FEED for a fertilizer complex for Ohio Valley Resources; a purifier technology package for Iowa Fertilizer Co.; an EPC contract for Incitec Pivot’s Waggaman, LA, ammonia plant; and EPC services for Koch Nitrogen’s urea facility at Enid, OK. KBR is also providing technology for fertilizer plants in Indonesia, Nigeria, and Hungary as well as for a methanol-to-olefins (MTO) project in China.

Ethylene technology, following industry consolidation, is in the hands of just four players: KBR, Linde, Lummus, and Technip. European members of the so-called Ethylene Club are scrambling to build a better position in North America. Linde has formed an alliance with Bechtel to combine Bechtel’s EPC capabilities with Linde’s ethylene technology to provide a complete EPC-technology package for North American projects. The two companies worked together on a steam cracker for Borouge in Abu Dhabi more than a decade ago.

Technip completed in August 2012 the €225-million ($291 million) acquisition of Stone & Webster Process Technologies (S&W), including the S&W ethylene technology platform. The deal strengthens the position of Technip, a leading European contractor, in North America. Technip Stone & Webster Process Technology offers technologies in refining, hydrogen, ethylene, petrochemicals, and GTL.

A hive of activity: More than 20,000 contractors and subcontractors are working on Borouge 3.

S&W accounted for 35% of global ethylene capacity and 25% of licensing in the past 10 years, and Technip accounts for a further 25% of ethylene capacity installed in the past 10 years, including 7 EPC contracts, Technip says. Technip is currently working on CPChem’s 1.5-million m.t./year ethylene complex at Baytown, TX; Braskem Idesa’s Ethylene XXI project at Coatzacoalcos, Mexico; and Reliance Industries’ olefins complex at Jamnagar, India. CPChem is collaborating with Odebrecht and ICA Fluor, a Fluor affilate, on the Coatzacoalcos project.

E&C firms from other parts of the world are also focusing on the western hemisphere. Sinopec Engineering, China’s largest E&C firm, which recently floated on the Hong Kong Stock Exchange, is eyeing the United States. The company established a US subsidiary in 2012 and says it will use HK$1.64 billion ($211.2 million) of the proceeds from the flotation to improve its overseas marketing networks, including establishing an integrated operating center in North America. It also plans to establish an operation and maintenance center in Saudi Arabia and several subsidiaries or branches in South Asia and South America.

Samsung Engineering became in 2010 the first Korean contractor to win a contract in North America through competitive bidding. The contract covers work on a chlor-alkali jv between Dow and Mitsui Chemicals at Freeport. Samsung entered the Latin American market in 2012 with a major fertilizer contract in Bolivia.

Samsung Engineering’s rapid growth in sales and market share in recent years may have been bought at the cost of profitability, however. The company posted in the first 3 months of 2013 its first quarterly operating loss since 2003, blaming, among others, a combined 300 billion South Korean won ($265.9 million) of cost overruns on 2 projects, among which was the Dow-Mitsui chlor-alkali plant.

Propane dehydrogenation is another beneficiary of the US natural gas boom. PDH technology is held mainly by UOP and Lummus with their respective Oleflex and Catofin processes. Ascend Performance Materials (Houston) will build the largest of the new North American PDH facilities and use the UOP Oleflex process. The plant is expected onstream in the fourth quarter of 2015 at Chocolate Bayou, TX. It will be designed for more than 1 million m.t./year of propylene. Dow’s PDH facility at Freeport, also slated to be onstream in 2015, will be designed to produce 750,000 m.t./year of polymer-grade propylene and will also use the Oleflex technology.

Williams (Tulsa, OK) will use the Oleflex process in a planned PDH facility near Edmonton, the first such unit in Canada. Expected onstream in the second quarter of 2016, it will be able to produce about 500,000 m.t./year of polymer-grade propylene—with the capability to double capacity. Fluor has been awarded a contract covering preliminary engineering services for the plant. Fluor’s offices at Calgary, AB; and Greenville, SC—with support from the company’s office in New Delhi— will be responsible for design services. Propylene made at the plant will be transported to the US Gulf Coast for sale to petrochemical producers. Meanwhile, Enterprise Products Partners is building a PDH facility based on the Lummus Catofin process on the Gulf Coast. The 750,000-m.t./year propylene unit is slated to be online in the third quarter of 2015. Formosa Plastics is building a 600,000-m.t./year PDH plant at Point Comfort, TX, scheduled to be onstream in 2016.

North America’s fledgling liquefied natural gas (LNG) industry is also a fertile hunting ground for E&C contractors. If the US government approves major LNG exports, contractors’ work could include the reconfiguration of terminals originally designed to import LNG, to allow exports of gas.

Pacific NorthWest LNG (Vancouver, BC) has awarded lump-sum contracts to three separate contracting groups to carry out FEED and early detailed engineering work for a world-scale LNG export facility at Lelu Island, near Prince Rupert, BC. The contracts form part of a multiple-design competition scheme, and the client will eventually select one of the groups to proceed to the EPC phase. KBR and JGC form one consortium and Technip, Samsung Engineering, and China Huanqiu Contracting & Engineering (Beijing) form another. Bechtel is the third contender. The planned facilities will produce LNG from shale gas from British Columbia’s North Montney region. The contracts cover the installation of a 2-train LNG plant with a combined capacity of 12 million m.t./year together with associated shipping infrastructure, including utilities, storage, loading, and ship-berthing facilities. Pacific NorthWest plans to make a final investment decision at the end of 2014, after completion of the FEED. LNG production is slated to start at the end of 2018. Pacific NorthWest is a jv in which Petronas (Kuala Lumpur) holds 90% and Japan Petroleum Exploration (Tokyo) has 10%.

Williams also announced earlier this year that it is partnering with Shell in a jv that will provide services for gathering and processing gas extracted from the Marcellus and Utica shale deposits in northwest Pennsylvania. The venture, Three Rivers Midstream, will invest in infrastructure for wet-and dry-gas handling, including a 200-million cu ft/day cryogenic gas–processing plant. Williams expects the plant to be online by the second quarter of 2015 with expansions to follow as the business grows. Three Rivers will create a major supply hub in northwestern Pennsylvania and will benefit from a large-scale NGL pipeline infrastructure and expanded market options to support wet-gas production in the area. It will connect with two major developments proposed for Pennsylvania: Shell’s ethylene plant and a Williams-Boardwalk jv that aims to develop the Bluegrass Pipeline system, which would deliver Marcellus and Utica NGLs to the Gulf Coast and export markets.

Healthy E&C activity is not confined to North America, however. “The E&C market is booming. The most buoyant market now is the United States, but there are also projects in Russia and in the Middle East,” the major European contractor says.

But the Mideast, the main chemical investment region until a few years ago, is in a lull, analysts say. The region has faced a decline in feedstock availability for new projects and is diversifying its investments toward value-added products and job creation. Saudi Arabia’s feedstock situation, however, could improve because the country has its own shale gas prospects. But Iran, which has ambitions to become a major regional player, is heavily impacted by Western sanctions that have resulted in many project delays.

Only a few major petrochemical projects involving steam crackers have been announced in the Mideast in recent years. These include two petrochemical complexes at Ras Laffan, Qatar—one planned by Al Karaana Petrochemicals, a Qatar Petroleum (QP)–Shell jv; and the other by a QP–Qatar Petrochemical Co. (Qapco) jv. Oman Oil Refineries and Petroleum Co. is planning a cracker at Sohar to be onstream in 2018, and Kuwait is planning construction of its Olefins 3 complex—but sources do not expect approvals for Olefins 3 to be given soon.

Iraq is another country that could develop a sizeable petrochemical industry, but the political situation in that country needs to stabilize first. Iraq is flaring 50–60% of its associated gas, some of it ethane rich. Around Basra alone, ethane is being flared in quantities sufficient to support 1.5–2.0 million m.t./year of ethylene production. CPChem and Shell have signed separate agreements with the Iraqi government to develop cracker projects in the country. Iraq could host a 5-million m.t./year ethylene industry by 2030, with the first crackers coming online by 2020–25.

Projects in Qatar are moving. QP and Shell appointed Fluor earlier this year to carry out FEED work on the Al Karaana project, expected onstream in 2017. The complex is expected to include a world-scale cracker using local natural gas feedstock; a 1.5-million m.t./year ethylene glycol (EG) plant using Shell’s proprietary Omega technology; a 300,000-m.t./year Shell Higher Olefins Process unit; and a 250,000-m.t./year oxo alcohols plant. Bechtel has been appointed project management consultant on the QP-Qapco project, based on a 1.4-million m.t./year ethylene plant based on ethane, butane, and GTL naphtha. The complex, slated to be onstream in 2018, will also produce 850,000 m.t./year of high-density polyethylene (PE); 430,000 m.t./year of linear low-density PE; 760,000 m.t./year of polypropylene; and 83,000 m.t./year of butadiene.

Several projects under construction in the Mideast are expected to be onstream soon. Borouge, a petrochemical jv between Abu Dhabi National Oil Co. and Borealis, is slated to commission its third complex, Borouge 3, in the middle of next year. More than 23,000 contractors and subcontractors are working at Borouge’s Ruwais, Abu Dhabi, site. The project will increase Borouge’s polyolefin capacity from 2 million m.t./year to 4.5 million m.t./year. Meanwhile Sadara, a $20-billion jv between Saudi Aramco and Dow—claimed by the partners to be the largest petrochemicals facility ever built in a single phase—is slated to become operational in 2015.

Asia, where olefins demand is growing fastest, is a major focus for investment. Most of the new capacity will be in China, says Tony Potter, v.p., Asia/Pacific at IHS Chemical. Chinese companies could build up to 50 olefin plants through 2017, including 9 steam crackers, 7 fluid catalytic crackers, 9 PDH units, and 24 coal-to-olefin or MTO plants, he says

Contractors have traditionally viewed China as difficult to penetrate. Most EPC work there has historically been handled by Chinese E&C companies, with overseas firms limited to the licensing of technology and the provision of basic engineering packages. However, given China’s enormous potential, international E&C contractors have been considering reentry into the Chinese market on a case-by-case basis.

Linde is competing successfully in international markets. One of the company’s biggest projects is the Borouge 3 cracker. Recent Linde awards include FEED for Sibur’s 1-million m.t./year ethylene and 500,000-m.t./year propylene project at Tobolsk, Russia, and a large ammonia plant at Togliatti, Russia. Linde also has a contract to upgrade the BASF–Total Petrochemicals’ 1-million m.t./year naphtha cracker at Port Arthur, TX, to increase capacity and allow the plant to process ethane and other gas fractions. “Our strategy in the United States consists of consolidating our production base by taking advantage of market trends,” says Patrick Pouyanné, president of Total Refining and Chemicals. The Port Arthur cracker has, since April, been able to produce up to 40% of its ethylene from ethane and another 40% from butane and propane. BASF-Total has also begun construction of a 10th ethane-cracking furnace, supplied by Linde, which will be onstream in the second quarter of 2014 and will increase the cracker’s capacity by almost 15%. “Total is also examining a project to build a new ethane cracker that would be tied to the original Port Arthur cracker to capture maximum synergies while leveraging this cost-advantaged feedstock,” Pouyanné says.

Foster Wheeler, another contractor, says that it is seeing opportunities across all business lines and geographies, but there continues to be a “slippage in invitation to bid and in contract awards, particularly those driven by national oil companies.” The company has recently been awarded FEED contracts to revamp an oil refinery in Russia and for a new refinery in Latin America. It has also received a pre-FEED contract for a chemical project in China.

Foster Wheeler is working on an EPC contract for an ethylene propylene diene monomer rubber plant for Lanxess at Changzhou, China, and on Lanxess’s neodymium-catalyzed polybutadiene rubber plant at Jurong Island, Singapore. It is also providing engineering and procurement services for a para -xylene plant for Reliance at Jamnagar, India, and is developing a basic engineering package for Al Karaana’s EG facility.

Chemical-market watchers are skeptical about the more enthusiastic projections for shale gas–based petrochemicals in the United States. About 12 cracker projects have been announced, including expansions and demothballing of existing facilities, in North America. If all of the investments are completed, ethylene capacity would grow by more than 10 million m.t./year by 2018. Market watchers warn that, with expansions continuing apace in other regions, the market would not be able to absorb the volume of polymers that these new and expanded plants would produce.

IHS Chemical forecasts that worldwide ethylene and propylene demand will grow by an average of 9.8 million m.t./year in 2013–17, of which 5.6 million m.t. will be ethylene. This rate would require about five world-scale crackers to be built annually.

North America, already a net petrochemicals exporter, will need to expand its share of the international market to ensure that the new capacity is absorbed. The likely export targets will be Latin America; Europe; and Asia, above all China. Analysts say that cheap shale-based ethane will enable the United States to deliver PE to China more cheaply than producers in neighboring countries such as Japan, South Korea, Taiwan, and Singapore. Europe, midway between the Mideast and North America, will become the battleground between the two exporting regions, analysts say.

New cracker projects in North America
in thousands of m.t./year
Company Location Capacity Contractor Onstream
CPChem Baytown, TX 1,500 Technip* 2017
Dow Chemical Freeport, TX 1,500 Fluor 2017
ExxonMobil Chemical Baytown, TX 1,500 NA 2016
Ethylene XXI Coatzacoalcos, Mexico 1,050 Technip 2015
Formosa Plastics Point Comfort, TX 800 NA 2016
Occidental Chemical Ingleside, TX 544 Lummus
Shell Chemicals Monaca, PA More than 1,000 NA** 2017
Sasol Lake Charles, LA 1,500 Technip/Fluor 2017
Total Refining & Chemical Port Arthur, TX NA NA NA
*FEED, technology, and furnaces. **Competition between Linde/Bechtel and Technip. NA=Not available. Source: CW research.

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