For Construction, Far From Wellhead Is Better Than Near
After 21 months, collapse of oil and gas prices unevenly affects energy construction costs
Historically low oil and gas prices are having vastly different effects on the diverse segments of the energy industry. Power-plant construction has been affected less than the oil and gas industry, where oil and gas price reductions spell opportunities for construction tied to lower feedstock costs. The oil price in January 2016 was 75% below its mid-2014 peak, sending labor streaming from the oil patch and shale beds as producers suffered a wave of bankruptcies. Downstream, on the other hand, the refinery-and-chemicals industry boomed as plants were built to gorge on cheap feedstock.
Momentum Shift
Construction of upstream oil and gas facilities has been sustained by momentum, says Sheila Moore, analyst at IHS Upstream Capital Cost Service. But that is beginning to change. “What we’ve seen are projects that were sanctioned before the downturn, or even in 2015 and 2014, [when] there was already money invested,” she says. “We’ve seen a lot of the orders in the yards for rigs and all the larger structures decrease significantly in the past year.” Employers have responded with cuts to benefits, including per diem, travel and certain training benefits. This year, companies may start reducing wages, she says. For engineering project management, “they’re doing more with less people, so they’re getting a reduction in costs by reducing the head count on projects.”
Materials prices have fallen significantly. At the end of 2015, steel prices were at their lowest point because of oversupply, largely because Chinese steel mills added supply to the market, Moore says. That move drove some American and European steel mills out of business; however, the oversupply persists, keeping prices low. Some bulk materials prices also have declined. IHS is forecasting only a small increase in upstream capital spending in 2017.
Downstream oil and gas has done better than most other segments of the industry. Methanol plants, ethylene crackers, fertilizer plants, and storage facilities for coal, gas and oil all are benefiting from low natural-gas prices, says Conrad Bourg, president of James Industrial, a Primoris Services Corp. unit. “Lower natural-gas prices provide opportunities for many large-diameter pipelines for gas-utility customers,” he says, adding that the low price of gas is encouraging cogeneration construction.
Customers tell Bourg he should be helping them lower prices, but he doesn’t have much to give. “We have one direct impact [from cheap oil], and that’s on the cost of fuel,” he says. “There’s still more demand on craftsmen—steel craftsmen, particularly—than the market can support, and we’re not able to pass much wage-rate savings on to our clients.” Equipment also is at peak demand, and if materials prices are softening, “that’s still a small part of the pricing on a construction job,” he says. Bourg doesn’t see much correlation between the lower commodity price and the cost of construction.
More than 80% of electricity-generating capacity retired in 2015 was coal-fired, says the U.S. Energy Information Administration, but that has not led to a boom in construction of natural-gas-fired power plants.
“There’s a lot of capacity in the gas market out there already built. It’s not a one-for-one replacement,” says Tom White, chairman, president and CEO of Sargent & Lundy. “Most of the activity has been in the transmission business. That’s really increased.” He attributes this uptick to utilities’ wanting to build the rate base and upgrade a grid that is “kind of old and kind of rickety.”
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Low fuel prices are helping, but they’re not a decisive factor in capital investment decisions, White says. On the other hand, “higher pricing usually leads to more volatility in electricity pricing, which usually leads to more investment on the new-generation side,” he notes.
“From a generation perspective, our top three sectors are solar, wind and natural gas,” says Tom Dodson, president, AMEC Foster Wheeler Power & Process Americas. The projects are taking advantage of favorable regulatory policies, lower commodity and natural-gas pricing, and free solar and wind energy. Dodson anticipates “more wind [construction] in 2016 than in 2015” and an increase of 100% to 150% in solar-energy construction.
