Engineering & construction: The changing landscape
9:46 AM MDT | June 13, 2014 | —Natasha Alperowicz
Engineering and construction (E&C) firms are reaping the rewards of an upsurge in orders in the oil and gas, petrochemicals, and fertilizer industries, particularly in North America, thanks to shale gas. But, the E&C industry is facing many challenges caused by an overheating market. A shortage of craft workers and the rising costs of projects in the United States are among the most pressing issues. Leveraging first-mover advantage to secure E&C resources is vital, producers say. M&A and strategic partnerships are another feature of the E&C industry.
E&C companies are focusing on the United States and Canada for projects based on shale gas. They include liquefied natural gas (LNG), gas-to-liquids, olefins and derivatives, on-purpose propylene, methanol, and fertilizer plants. Overseas companies have joined local producers in planning to build steam crackers in the United States based on cheap gas feedstock. The companies include Hanwha Chemical (Seoul), Formosa Plastics (Taipei), Lotte Chemical (Seoul) in a joint venture with Axiall, Odebrecht (Salvador, Brazil), PTT Global Chemical (Bangkok), and Shin-Etsu Chemical. Sabic, too, says it is in talks with potential partners to participate in a shale gas–based cracker project in the United States and that it should make a decision this year.
The Mideast, meanwhile, continues to provide opportunities for E&C firms in refinery upgrades and petrochemical projects despite the dwindling availability of ethane feedstock in the region. New crackers in the Mideast will be increasingly based on mixed feedstocks.
Major petrochemical projects are also under way in several Asian countries, including Malaysia, China, Russia, Kazakhstan, and other former Soviet republics.
Projects based on natural gas will dominate the E&C market in the coming years partly because of the influence of North America. “For at least the next two decades, we expect gas to be an outsized monetization component of the fossil fuels investment portfolio,” says Fluor, the E&C industry’s leader. “Gas monetization projects will dominate the industry, and we are positioning Fluor to take full advantage.”
North America may be capturing most of the E&C industry’s attention, but contractors are cautious because of spiraling costs. “Contractors are enjoying a boom in the US, but that market is definitely overheating. Construction costs in the US have shot up and now account for 50–55% of a total petchem project compared with 25–30% before the latest boom,” one contractor says. A 1-million m.t./year gas-based ethylene plant in the United States, which cost $1.0 billion to build before the shale boom, now costs $1.5–1.7 billion. E&C firms, to reduce costs and circumvent the issue of labor shortages, are prefabricating facilities outside the United States and shipping modules into the region from wherever they can be produced at an advantageous cost. “Not much can be done about the labor shortage in the US because it is not possible to import labor into the country; the only thing one can do is to prefabricate outside the US or to cooperate with large local construction companies,” the contactor says. Fluor has strengthened its in-house fabrication resources and now provides these services through facilities in Canada, the Philippines, Mexico, and Australia.
However, E&C firms say projects are unlikely to be canceled because of rising costs, contrary to perceived opinion. “Projects will not be canceled because of investment costs. These do not matter too much in the overall economics of the project. It is the advantage of the feedstock price that drives the projects,” a major contractor says.
But, some senior chemical industry executives do not share that view. Jim Fitterling, Dow Chemical executive v.p./feedstocks, performance plastics, and supply chain, told the IHS World Petrochemical Conference earlier this year that “advantage goes to those who strike first. I see some of these projects mothballed or scrapped altogether.” Fitterling warns that shortages of skilled labor and the threat of higher feedstock costs arising from ill-considered and excessive US exports of LNG may cancel projects. If all of the 10 ethane crackers announced in the United States go ahead, ethylene capacity will increase there by almost 50%, Fitterling says.
Producers say investors must secure E&C resources in today’s overheating market to avoid delays. “The most significant constraint facing petrochemical industry growth sparked by shale-resource development is the availability of technically skilled workers to build, operate, and maintain the $100 billion of announced chemical projects,” says Peter Cella, president and CEO of Chevron Phillips Chemical (CPChem). Cella told the recent American Fuel & Petrochemical Manufacturers’ conference at San Antonio, TX, that industry projections show the need for almost 90,000 craft workers in 2015. CPChem broke ground recently on a 1.5-million m.t./year ethane cracker at the company’s Cedar Bayou complex at Baytown, TX. “As we’ve carefully planned this project, we’ve leveraged our first-mover advantage to attract the strongest workers from each of the contract companies working on the project,” Cella said at the groundbreaking ceremony. A joint venture between JGC’s (Yokohama) US operations and Fluor is responsible for the engineering, procurement, and construction (EPC) of the cracker, and Gulf Coast Partners, a partnership between Technip’s US business and Zachry Industrial, will handle EPC work for the plant’s two downstream polyethylene (PE) facilities. Technip is providing its ethane-cracker technology to CPChem.
Technip is also providing the technology for Sasol’s 1.5-million m.t./year ethane cracker at Lake Charles, LA, for which Fluor is the main front-end engineering and design (FEED) contractor. Sasol has awarded basic engineering packages for the project’s linear low-density PE (LLDPE) facility to Toyo Engineering, for the low-density polyethylene (LDPE) plant to Mitsui Engineering & Shipbuilding, and for the ethylene oxide–ethylene glycol unit to Samsung Engineering. WorleyParsons has been contracted to support Sasol’s project execution team.
Of the other major ethylene projects in the United States, Fluor is the contractor on Dow Chemical’s 1.5-million m.t./year ethylene plant at Freeport, TX, which will be based on Technip’s process; Linde Engineering is carrying out FEED work and providing ethylene technology for Shell Chemicals’ 1.5-million m.t./year plant at Monaca, PA; and CB&I has licensed its technology for the 544,000-m.t./year Ingleside Ethylene plant, a 50-50 jv between OxyChem and Mexichem at Ingleside, TX. BASF also recently announced two gas-based projects on the US Gulf Coast. The company has teamed with Yara in an ammonia jv project, which will be built at Freeport, and is planning a stand-alone, world-scale methane-to-propylene complex at a yet-to-be selected site.
The shale gas boom has led many overseas contractors to rethink their strategies for the United States. Toyo Engineering, hitherto a niche player in North America, is considering scaling up its presence significantly. “In the past, if the project was small or midsize, Toyo USA was utilized as the local office to execute the project. However, as the work in this market increases further, we will have to consider whether to collaborate with a US engineering company or create a group company with the necessary resources,” says Makoto Fusayama, executive v.p. at Toyo Engineering. Samsung Engineering also has ambitions to become a strong EPC player in the United States (p. 26).
JGC also plans to capitalize on shale gas by expanding its Houston operation to 500 employees. The company partners with Fluor in LNG, which Chevron’s Canada operations recently selected to build an LNG production facility and export terminal at Kitimat, BC. Fluor, which is positioning itself to be a major player in LNG, is progressing with FEED work on a large project with JGC for Anadarko in Mozambique, which will become one of the largest LNG facilities in the world.
Several other E&C tie-ups are targeting the United States. Linde, a major ethylene plant contractor, has entered into a collaboration agreement with Siluria Technologies (San Francisco), which has developed a breakthrough oxidative coupling of methane technology to convert methane directly to ethylene. The agreement will combine the companies’ respective technologies and expertise into an integrated package, which Linde would license for revamps or expansions of existing plants and for new world-scale ethylene complexes. Foster Wheeler’s US operations signed a collaboration agreement earlier this year with a US subsidiary of Maire Tecnimont covering FEED and EPC work on petrochemical, chemical, and fertilizer projects in the United States, Canada, and Mexico. In January, CB&I signed a cooperation agreement with Chiyoda to design and build LNG export facilities in North America. The two companies have worked together in the past on LNG projects in Australia, Russia, and eastern Africa.
Major projects in the Mideast include the $20-billion Sadara jv between Saudi Aramco and Dow Chemical, now at an advanced stage of construction at Al Jubail; a doubling of capacity at Petro Rabigh, a jv between Aramco and Sumitomo Chemical at Rabigh, Saudi Arabia; and several world-scale petrochemical projects in Qatar, including the $6.5-billion Al Karaana jv between Qatar Petroleum (QP; Doha) and Shell Chemicals and the $6.3-billion Al Sejeel jv between QP and Qatar Petrochemical Co. (Qapco) at Ras Laffan. Oman is planning a cracker and downstream units at Sohar as well as a large acetic acid plant. BP and Oman Oil signed a memorandum of understanding at the end of last year to construct the world’s first acetic acid plant using BP’s new synthesis gas–to-acetic acid process, Saabre. The proposed 1-million m.t./year unit will be built in the special economic zone at Duqm, Oman, by 2019 and forms part of a greenfield development of the Khazzan gas deposit. Jacobs is providing engineering, procurement, and construction management (EPCM) services for a large part of the gas project, using resources from its Mideast, UK, India, and US offices. Kuwait, meanwhile, is progressing with plans for a 615,000-bbl/day refinery and the previously announced Olefins III complex at Al Zour and expects to award contracts for the refinery by early next year.
Fluor completed FEED work in March on the Al Karaana jv project in which QP will have 80% and Shell 20%. The project is awaiting a final investment decision. The project will include a world-scale cracker based on natural gas from treatment plants in Qatar; an ethylene glycol plant of up to 1.5 million m.t./year capacity based on Shell’s proprietary Omega technology; a 300,000-m.t./year linear alpha-olefins unit based on the Shell Higher Olefin Process; and a 250,000-m.t./year oxo alcohols unit using Mitsubishi Chemical technology. Construction would take several years, given the scale and complexity of the project, Shell says.
Bechtel is the project management consultant on the Al Sejeel jv project, which has entered the FEED phase following Tecnimont being appointed FEED contractor in December 2013. The project, which includes a world-scale, mixed-feed cracker consuming ethane, butane, and naphtha, is on track, with commercial production tentatively expected in the fourth quarter of 2018. The jv project will produce a combined 2.2 million m.t./year of PE and PP. Univation Technology is providing its PE process and Dow its PP technology. Dow sold its PP licensing and catalysts business to W.R. Grace last year.
Meanwhile, Oman Oil Refineries and Petroleum Industries (Orpic; Muscat) has selected Engineers India (New Delhi) to provide project management services for Orpic’s Liwa Plastics Project (LPP). CB&I has been appointed FEED contractor and will provide technology for the ethylene plant. The Orpic complex will be built at the port of Sohar, Oman, adjacent to Orpic’s existing refinery and petrochemical plants. “The project will transform our company and deliver a ripple of economic value to the nation,” says Musab Al Mahruqi, Orpic CEO. LPP is scheduled for completion in 2018 and is expected to double Orpic’s profitability through better integration with the refinery and by using Oman’s gas reserves. LPP will produce a combined 1.4 million m.t./year of PE and PP. A natural gas–extraction plant will be built at Fahud, Oman, and be connected via a 300-kilometer pipeline with the Sohar complex. The Ministry of Oil and Gas (Muscat) has approved the natural gas allocation to LPP.
If the political situation improves in Iraq, several petrochemical investments are likley to occur there in the longer term, particularly around the Basra area, where large quantities of gas are currently being flared. Several companies, including Hanwha, Shell, Total, and Lukoil (Moscow), have expressed interest in the projects.
Sadara, the largest chemical complex built in a single phase, is at an advanced stage of construction at Al Jubail, with full production scheduled in 2016. It is of major strategic importance for Dow and Aramco. “Investing at the scale of Sadara and with such an advanced product slate is consistent with our intent to become the world’s leading integrated energy company in 2020,” says Khalid Al Falih, president and CEO of Aramco.
The Sadara complex will be based on a 1.5-million m.t./year, Technip-process cracker consuming ethane, liquefied petroleum gas (LPG), and naphtha feedstocks. It will include 26 process plants plus third-party facilities and produce a combined 3 million m.t./year of products, including polyurethanes, propylene oxide (PO), propylene glycol, elastomers, LLDPE, LDPE, glycol ethers, and amines. Sadara will generate $6–8 billion in annual revenues and support downstream and conversion customers in the PlasChem Park, also at Al Jubail. Dow provided a glimpse of the enormity of the project in a recent presentation. The company says that materials required to build Sadara include 114,000 m.t. of steel; 700,000 cubic meters of concrete; 2,500 kilometers of piping; and 5,400 kilometers of cables.
Most of the contracts for Sadara were awarded in 2012. Fluor is the EPCM contractor on the offsites and utilities; Daelim Industrial is also doing some of the offsite and utilities work. Jacobs, under its EPCM contract, is responsible for some of the chemicals manufacturing facilities; ABB is the project’s main automation contractor; Foster Wheeler is the EPCM contractor on the PO unit; Técnicas Reunidas has a contract for six product and auxiliary plants; Tecnimont is an EPC contractor on the PE facilities; and Linde, under a build-and-operate contract, is constructing industrial gases units and an ammonia plant plus storage units at the site.
Asia still represents a major opportunity for E&C firms. Many regional players, including Sinopec in China, however, are taking a second look at some of their projects in light of the US shale gas revolution. One of the largest petrochemical investments is in Malaysia, where Petronas and its jv partners announced the final go-ahead for the $16-billion Refinery and Petrochemical Integrated Development (Rapid) project at the beginning of April, after several months’ delay. The Rapid project will be established at Pengerang, Johor State, near the border with Singapore. Start-up is expected in early 2019, two years later than originally planned. The project will include a 300,000-bbl/day refinery and a petrochemical complex producing 7.7 million m.t./year of various products, including differentiated and specialty materials such as synthetic rubbers and high-grade polymers. At the peak of construction, it is expected to employ about 70,000 people. Fluor has been appointed project management consultant.
In January, following years of lobbying by local petrochemical producers, the Taiwan government approved construction of the controversial $15-billion Gulei Petrochemical refinery and petrochemical project in mainland China, subject to certain conditions. The complex, a 50-50 jv between Sinopec and a group of seven Taiwanese companies, will be located on the Gulei peninsula at Zhangzhou, Fujian Province. The Taiwanese partners are USI, Asia Polymer, Ho Tung Chemical, LCY Chemical, HsinTay Petroleum, Chenergy Global, and Lien Hwa Industrial. The Taipei government has stipulated that the Taiwanese investors commit to “relative investment and R&D” in Taiwan and that some of Gulei’s ethylene output be shipped to Taiwan in the event of a shortage there. The Gulei complex is expected to include a 16-million m.t./year refinery and a 1.2-million m.t./year naphtha-based ethylene and 800,000-m.t./year propylene facility. The complex will also include 26 downstream units. The configuration of the complex may change, however, in light of the capacity build-up in the United States.
Russia, too, offers opportunities for E&C firms. One of the largest investments in the country is the ZapSibNeftekhim project planned by Sibur, Russia’s leading petrochemicals player, at Tobolsk. A final decision on the complex is expected soon, with completion planned for 2018. The project will be designed to produce 1.5 million m.t./year of ethylene and 500,000 m.t./year of propylene, using ethane and LPG as feedstocks. Downstream units will include 800,000-m.t./year swing high-density PE (HDPE)–to-LLDPE plant as well as a 700,000-m.t./year dedicated HDPE unit, both using Ineos technology; and a 500,000-m.t./year PP unit based on LyondellBasell Industries’ Spheripol process. That unit will produce a full range of PP products, including copolymers. Linde is expected to provide the olefins technology.
Partnerships are increasingly important in the E&C industry as companies seek to share the workload and risks associated with large-scale projects. The giant Yamal LNG project in Russia is being handled by a jv in which Technip has 50% and JGC and Chiyoda each have 25%. The project operator, Yamal LNG, is 60% owned by Novatek (Tarko-Sale, Russia), with Total and CNPC (Beijing) each holding 20%. The contractors’ scope is to build three LNG trains of 5.5 million m.t./year each and all of the utilities, Thierry Pilenko, chairman and CEO of Technip, says. “We are going to build the modules in a number of shipyards around the world, mostly in Asia, and then ship those modules into the Yamal Peninsula so that we can minimize the on-site construction,” he says.
Sinopec Engineering, a company recently listed on the Hong Kong Stock Exchange, has ambitious targets outside its home market. The company increased revenues from overseas projects by almost 8% in 2013, to Rmb7.03 billion ($1.12 billion), accounting for 16% of its total revenues. EPC contracts include a $1.15-billion order for a purified terephthalic acid plant and polyethylene terephthalate bottle resin unit at Corpus Christi, TX, for polyester producer Mossi & Ghisolfi (Tortona, Italy); and a $1.85-billion contract to build propane dehydrogenation and PP plants for Kazakhstan Petrochemical Industries (Astana) at Atyrau, Kazakhstan. Sinopec Engineering hopes to triple overseas revenues, to $3 billion, in 2014 compared with expected revenues of Rmb45 billion at home.
There has also been a wave of M&A deals in the E&C industry. AMEC’s (London) $3-billion takeover of Foster Wheeler, expected to close in the second half of this year, is arguably the most significant. AMEC, which is active mainly in upstream oil and gas and minerals, aims to broaden its coverage of the market by adding Foster Wheeler’s primarily downstream activities, which focus on petrochemicals and refining.
In Germany, a reshuffle at the ThyssenKrupp group has caused the long-established name of Uhde (Dortmund), a venerable player in the E&C industry, to disappear. The amalgamation of ThyssenKrupp Uhde with ThyssenKrupp Resource Technologies has created ThyssenKrupp Industrial Solutions. The company is a leading supplier of chlor-alkali technology and is playing a major role in the mandatory conversion of Europe’s mercury-cell chlorine plants to the membrane process by the end of 2017. Euro Chlor (Brussels), the chlor-alkali industry association, says that about 25% of Europe’s 12.4-million m.t./year chlorine capacity is still mercury-based. Pressure to meet the deadline may squeeze resources in the E&C segment specializing in chlor-alkali technology, analysts say.