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    'Look at Quality, not Costs', Say Contractors

Summary

Focus on the long-term and share the risks fairly between customer and contractor, say engineering giants active in the upstream and LNG sectors.

by: William Powell

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'Look at Quality, not Costs', Say Contractors

A looming shortage of engineers and top-rank construction site teams and long lead-times for supplies could delay the building of US LNG export projects, the heads of engineering, procurement and construction (EPC) companies said at the Gastech conference in Barcelona September 20. “Are we ready for the boom?” asked Fluor’s CEO David Seaton.

Signing up for major contracts might be tempting but execution risk remains high if the customer focuses solely on the dollars/ton-installed ratio, they said. And the consequences of using poor quality components or of company failure could damage the perception of the whole industry.

Being the cheapest was not necessarily the answer: saving $50mn early on could cost hundreds of millions of lost revenue later in terms of commissioning delays running for months, warned Bechtel’s oil, gas and chemicals head Alastair Cathcart: "What matters is the ultimate performance." 

Apart from the US LNG export capacity that could be built to meet the projected supply shortfall in the first half of the next decade, there are also major petrochemical, mining and other heavy engineering and construction projects in the US and Saudi Arabia, for example, that need the same kinds of pumps, compressors and other equipment.

A partial solution would be to move towards standardisation instead of bespoke parts; and to extend the range of manufacturers on the customer’s list of acceptable counterparts.

The panel also warned against rushing into signing contracts without considering the risks and whether their customers’ balance sheets might be better able to manage these. “We do not have a crystal ball to see what will happen in the next four or five years,” said McDermott’s CEO David Dickson. “We have concerns about the supply chain, the construction of equipment and the delivery of services.” He said project developers needed to put numbers in a spreadsheet but these did not allow for subsequent events, such as hurricanes.

Fresh from the takeover of CB&I  which completed in May, Dickson said that company had lost a lot by wrongly estimating the costs and the schedules. “We want to avoid the mistakes made in the past,” he said. And he compared today's young engineers with his own generation, which was prepared for difficult assignments. Today, their expectations of comfort and security are much higher, he said.

David Seaton also said that US immigration laws could limit the number of skilled workforce and hence the EPC sector’s ability to execute. “We have the obligation to attract and train staff, we need the ability to put them into the fray early on,” he said.

KBR CEO Stuart Bradie said that the industry had been slow to pick up on innovation: customers have been driving down the $/mt cost but what was really wanted was mature customers who were looking for certainty. “This last cost cycle has honed the EPC: we will not sign up to unachievable costs or schedules. Most heroes die on the battlefield,” he said, agreeing with Seaton’s remark that “enthusiasm is not a strategy." Moreover the message that EPC firms should not be expected to take on the unachievable did not only come from the sector's US giants.

The CEO of Spanish Tecnicas Reunidas Juan Llado Arburua too said the EPC sector was trained to take risks but it was not trained to act as insurance companies.

(Banner photo: The Shell-operated Malampaya phase 3 development in the Philippines, for which Fluor is EPC contractor - credit: Fluor)