Authors: John Auers and Ryan M. Couture
In addition to the pluses Glen Frey sings about “We got blue jeans and rock ‘n’ roll”, the refining industry has also become “Better in the USA”. Figure 1 below shows some of the main reasons for this. We have previously discussed many of these, focusing more recently on the benefits that the “light tight oil revolution” has wrought– lower crude and natural gas costs. But domestic refiners have developed several other advantages over the years, not least of which is the ability to execute capital projects in a more timely and cost effective way than their international competitors.
Refineries are very complex and there are a variety of factors which play into the cost and schedule required to build refinery projects (see boxes in green). Regional workforce (availability, skill set/experience, wage rates, work rules), quality of management and technical staff, proximity to suppliers, local/national politics, economic stability, regional climate, and many other elements can all have very serious impacts on project success. In this week’s blog we will delve into this subject, discussing some of the problems major projects in other countries have encountered recently, allowing the refining industry to remain “Better in the USA.”
We Got the Friendly Skies in the USA
Geographic location and the related climate can make for a challenge to cost effective project execution. Building in the bitter cold of northern Canada or in the sweltering heat of the Middle East can dramatically increase costs and extend completion schedules. The U.S. has its own share of bad weather, but the impacts, especially in the refining –centric Gulf Coast with moderate winters and only a couple months of potentially work slowing summer days hold a significant advantage in this regard over many other parts of the globe. Other geographic factors can also pose a challenge. Logistics associated with moving in critical pieces of industrial hardware can be increasingly difficult in regions with limited infrastructure. In the U.S. we take for granted the ability to use public roads and well developed rail facilities to move goods around freely; advantages not present in many parts of the world, particularly in developing areas. It should also be noted that most U.S. refining capacity is located in coastal areas (the Gulf Coast, West Coast and Atlantic Coast) and many others in the MidContinent have marine access through the Great Lakes or navigable rivers, removing the need for long overland routes for critical pieces of large equipment that must be imported
We Got Freedom, We Got Soul
Much more important than weather or other geographic advantages, is the underlying free market structure and political stability that prevails in the United States. These benefits result in the most effective refinery workforce in the world. For as much as some may criticize the U.S. educational system’s faults, we have a workforce of literate and intelligent workers, many with skilled trades. Locations in more remote or less developed regions lack this, and must import labor, sometimes from abroad. This is especially true when it comes to highly skilled project management and engineering tasks, which are often managed remotely. Without adequate management, schedules rapidly slip and costs begin to skyrocket, as experienced in several recent worldwide projects.
U.S. competitors in other developed countries are often disadvantaged in many ways, as a result of inflexible work rules and difficulties in managing labor costs due to strong unions supported by restrictive government labor policies. While U.S. refinery workers receive excellent pay and benefits, their employers are able to deploy them more efficiently because of less restrictive employment and work rules. Strikes are also less prevalent and disruptive. While the industry saw its first nationwide strike in over 30 years in 2015, the impacts to operations were minimal with ultimate settlement terms very reasonable.
The U.S. Gulf Coast, in part because of its large concentration of refineries and chemical plants, has a high concentration of not only skilled and empowered workers but also companies that employ them. The suppliers, service providers, fabricators, engineering contractors and consultants are consolidated here, and means in both North America and in the Gulf Coast in particular, you don’t have far to go to get the supplies and support you need.
It is impossible to overestimate the positive benefits to project execution of the political stability and strong “rule of law” that really does prevail in the U.S. (notwithstanding some of the craziness of this election year). In the U.S., you do not need to worry about having to pay for “protection” or “favors” to ensure your investment will be there. There is confidence (barring a total global meltdown) that assets will not be expropriated or otherwise commandeered when a regime change takes place. This allows for industries to continue to invest (and acquire critical financing) without fear of loss and they also don’t have to appropriate extra funds for “gifts” to public official to make sure things go smoothly.
If You Could See Behind the Curtain, Life is Cold and Gray – The Sad Story of Recent Projects in Latin America
With the decline in domestic demand in recent years (not withstanding a resurgence from the lower price environment), the ability to export refined products has become critical to the United States refining industry. And they have certainly been very successful in this endeavor. In fact, in just the last few years, the U.S. has moved from the world’s largest importer to the largest exporter of products. The majority of these exports are going to Latin America, which is becoming more and more dependent on the U.S. to meet their growing product demand. Countries throughout Latin America have made significant efforts to help reduce that dependence by developing plans for expanded refining capacity; but those efforts have been largely disappointing.
In late 2015, Colombia’s Ecopetrol finally began the start-up process of their long awaited expansion of the Cartegena refinery. The project, which was announced in 2009 and originally scheduled for completion in 2012, had an estimated cost of $4 billion. Based on a recent update, the project will not be fully completed until later this year, with initial commissioning targeted to begin in October 2015. While the project was very all encompassing, more than doubling the size of the original refinery and bringing online substantial clean products capacity, it also managed to run $3-4 billion over the original budget and fall nearly 4 years behind schedule. And all this is coming from a project sponsored by Ecopetrol, a company thought of as one of the better national petroleum companies. This is naturally turning into a real “political football” in Colombia and the finger pointing between the Colombian government and their contractors is escalating into potentially serious legal battles with the main contractors on the project.
Colombia is not alone, as a similar theme of significant overruns in both schedule and costs, or even the inability to get projects off the ground, has prevailed in most recent Latin American projects. Neighboring Ecuador has been planning a 300 MBPD grassroots refinery since 2007, ambitiously called “The Refinery of the Pacific”. Originally planned as a joint project with Venezuelan state oil company PdVSA, the national oil company, Petroecuador substituted China’s CNPC as a partner in 2013. This has not appreciably advanced the project, and despite a publicly announced completion date of 2018, only very minimal civil infrastructure reportedly has been constructed to date. The price tag for the project continues to escalate (the latest figure is $13 billion), and no clear financing plan has been announced. The fact that oil production in Ecuador continues to stagnate makes it even more unlikely that this project will get off the ground in the near future, if ever.
Peru’s national oil company, Petroperu, is showing a bit more progress with a $3.5 billion upgrade of their Talara refinery, increasing capacity to 90 MBPD from the current 62 MBPD (at a staggering cost of $125,000/bbl). While the project is moving forward, this is only after multiple delays. The project was initially put to bid in 2008, but irregularities in the bidding round, which led to the resignation of the Energy and Mines Minister and the head of Petroperu led to a delay in bidding. A contract was finally issued in 2014, but hit with more delays, the project is not scheduled for completion until 2019.
Even smaller and less complex projects in Central and South America have encountered significant delays and cost overruns. An example is a project Trinidad and Tobago’s state owned Petrotrin has been building over the last few years. Due to inadequacies in the construction (structural and seismic concerns) of their $500 million, 40 MBPD ULSD project, the unit which has been built, has yet to be commissioned. The company began attempting to work with the contractor to resolve the issues with the project as early as the first half of 2015, but the project at that point was already 1.5 years behind schedule and a firm start-up date has not been announced.
Saving the biggest for last, we move to Brazil. Petrobras, which has been embroiled in a variety of highly publicized scandals over the past several years, has had several high profile cost overruns. Two of the largest involve the Abreu e Lima and Comperj refinery projects. The Abreu e Lima project is running over four years behind schedule, and is projected to cost $20 billion, a far cry from the original $4.3 billion estimate. While Petrobras began commissioning of one of the two unit trains in 2014; the second has yet to be completed. The Comperj refinery/petrochemical project has faced a similar and potentially much more costly fate. The original $6 billion estimate has grown to $21 billion and scope was reduced, as estimates of the original project scope put the total at an astounding $47 billion. Despite the fact that a reported $14 billion has already been spent on the 165,000 BPD plant, Petrobras recently announced that the refinery will not meet their previously announced start-up date of late 2016, and in fact would not be ready to start up until at least 2023! Both projects became entangled in extensive corruption that has threatened to take down the company. Petrobras announced write-offs of $17 billion due to losses from graft and overvalued assets, including $2.1 billion in bribe payments in the wake of these scandals, and the accounting is no where near complete.
Conclusion
The few projects above are just a list of the “major” projects, with many smaller projects never taking off, or running far behind schedule and over budget. Mexico’s PEMEX has announced several delays and cancellations due to in funding troubles due to low crude prices and their restructuring. Venezuela has struggled, especially with downstream projects, as very limited budgets have been shifted to upstream projects, leaving other projects with little to no progress despite spending millions. It is important to note that Latin America is not alone in struggling with overruns, corruption, and financing troubles. In a future blog, we will take a look at some other regions such as Africa, the Middle East and Asia, and their project challenges. While all this lack of success in building refining capacity is bad news for these regions, it has been very beneficial to the U.S. refining industry, which has truly shown that refinery project execution is “Better in the USA”.
Turner Mason & Company continually monitors the status of global refining projects, and their implications for U.S. refiners. We analyze these developments and how it will impact both supply and demand and refining profitability in our recently released 2016 Crude and Refined Products Outlook. In addition, we have a supplemental 2016 Comprehensive Construction Outlook which is updated on a biannual basis. In this study, we provide details of every legitimate proposed refinery project across the globe, handicapping the likelihood that these projects will be built, and estimating both the incremental volumes of the different grades of crude that will be processed and the volumes of the different types of products that will be generated. Details on the units constructed, the cost of the projects, and an estimate of start-up are also included. For more details about these or other publications or other TM&C services, please visit our website or give us a call.