Special Report: Construction project costs increase due to risk insurance

Nov. 25, 2002
According to the latest studies, refining and petrochemical companies will have to pay more for risk insurance on upcoming engineering and construction, although help is on the way.

According to the latest studies, refining and petrochemical companies will have to pay more for risk insurance on upcoming engineering and construction, although help is on the way.

Recent global events, including an increase in worldwide terrorism, the insolvencies of several high-profile energy firms, and various war risks, along with the continuing troubles caused by asbestos and environmental losses, have necessitated an increase in the cost of risk coverage due to varying degrees of restrictions on insurance and reinsurance capacity and coverage. This increase includes newbuild projects as well as ongoing business operations.

"All large projects are having more difficulty obtaining full coverage risk insurance as compared to a year ago," said Peter Jones of the Multilateral Investment Guarantee Agency, World Bank Group, Washington, DC. "Premiums have increased."

In fact, according to the September 2002 insurance market overview report by Jardine Lloyd Thompson Group PLC, London, "premium increases on energy construction risks have forced a number of Lloyd's syndicates to cease writing new risks to avoid exceeding their underwriting capacity." Also, insurers have attempted to impose refinery exclusion clauses to avoid bundling downstream operations into comprehensive risk schedules for energy companies. Direct coverage can be restricted when refineries are evaluated as separate risk entities.

A large part of the problem is terrorism insurance coverage. A few years ago, terrorism insurance was included in most risk policies at no additional charge. Now, however, according to global insurance broker Aon Corp., Chicago, a majority of insurance and reinsurance companies have imposed a global terrorism exclusion clause on all new and renewal business and others are offering insureds terrorism coverage only to a specified limit.

But help is on the way. The US government is working on an indemnification program for insurance and reinsurance companies. Several energy associations, including the National Petrochemical & Refiners Association, are part of a coalition supporting a federal backstop for terrorism insurance.

Last fall, the US House of Representatives passed R-3210 and this June the Senate passed S-2600. Both bills concern terrorism insurance. Basically, these laws allow the US government to support insurance and reinsurance companies in the event of a major terrorist incident.

Both bills offer up to $100 billion maximum recovery at 80-90% after deductible, limit coverage to damage within US borders or on a US air carrier or vessel committed by foreign individuals or organizations, and set up a federal court for dispute jurisdiction.

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One main difference between the two bills is that the House bill requires repayment to the government by the industry and policyholders through an assessment, whereas the Senate bill does not.

At this point, however, almost any form of Congressional terrorism insurance support would be welcome to the industry.

In other construction news, projects continue around the world in all areas of the downstream sector.

Refining

Major US refiners continue to firm up strategies to comply with the US Environmental Protection Agency's upcoming low sulfur motor fuels rules.

Some organizations have been granted extensions. Independent refiners, Giant Industries Inc., Scottsdale, Ariz., and Farmland Industries Inc., Kansas City, Mo., requested and received more time to meet the low sulfur diesel fuel specification, while National Cooperative Refinery Association, McPherson, Kan., and Wyoming Refining Co., Newcastle, Wyo., have been granted more time to meet low sulfur gasoline fuel specifications.

Other refiners are continuing with engineering studies to determine their optimal course of action based on feedstock and existing refinery configurations. Many of these plans involve new construction in refining and petrochemical facilities.

ConocoPhillips, Houston, the third largest US integrated oil company after ExxonMobil Corp., Irving, Tex., and ChevronTexaco Corp., San Francisco, Calif., plans no less than two expansions and four new units, ranging from FCCUs to desulfurization units, throughout their holdings. The majority of the projects are expected to be completed by 2003 yearend.

Another major refiner, Marathon Ashland Petroleum LLC, Findlay, Ohio, plans a flurry of expansion projects among its seven refineries, dividing up engineering studies on FCCU's and hydrotreaters between Fluor Corp., Aliso Viejo, Calif., Jacobs Engineering Group Inc., Pasadena, Calif., and International Alliance Group, Houston.

Site preparations are under way for Papua New Guinea's first refinery. Photo courtesy of InterOil Corp., The Woodlands, Tex.
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Elsewhere, Motiva Enterprises LLC, Houston, and Shell Oil Products US, Houston, continue to work with Bechtel Group Inc., Houston, for engineering work for their CDTech hydrodesulfurization, low-sulfur gasoline projects.

On the other hand, Citgo Petroleum Corp., Lake Charles, La., a unit of Petroleos de Venezuela SA, has delayed a planned 100,000-b/d expansion to its refinery because the cost of complying with US environmental regulations, coupled with crude supply cuts, made the project uneconomical. The refinery estimated the cost of compliance to be $1 billion should the expansion have taken place as scheduled.

Outside the US, refinery expansion plans continue. Abu Dhabi Oil Refining Co., Ruwais, expects to complete its $480 million, 500,000-b/d refinery-wide expansion by 2005. New processing units will be added for the production of unleaded gasoline and low sulfur gas oil.

One of the leaders of low sulfur fuel technologies, Axens Technologies, Rueil-Malmaison, France, can lay claim to 20 license contracts, grouped in Europe, Asia, and the Middle East, for its Prime-D low sulfur diesel technology. Projects awarded to Axens by Saudi Aramco, Saudi Arabia, include the planned 95,000-b/d hydrotreater at Yanbu, and the 45,000-b/d hydrotreater at Riyadh.

Axens also won a licensing agreement for a light naphtha hydrotreater and an isomerization unit for Pertamina, Indonesia's state oil company. Pertamina plans to invest more than $3 billion in refinery upgrades in the coming years as part of the government's Blue Sky Project. The upgrades, expansions, and new units are needed to gradually phase out leaded gasoline production in Indonesia.

InterOil Corp., Sidney, Australia, will put together the first crude oil refinery in Papua New Guinea at Port Moresby with a projected completion cost of $200 million. The projected completion date is late 2003.

Also, the government of Trinidad and Tobago has granted conditional approval for the construction of a $2 billion, 224,000-b/d refinery to be built near the Atlantic LNG export plant. Along with the refinery, the government plans accompanying port facilities and a 17.4 million bbl storage terminal. Crude supplies would be imported via tankers passing through the Caribbean region and products would be exported to Europe.

In notable merger activity of E&C firms, Uhde GMBH, Dortmund, Germany, a company of Thyssen/Krupp Technologies, acquired the engineering and plant construction company of Tessag Edeleanu GMBH, Alzenau, Germany, from RWE Solutions Group, Frankfurt, Germany. This merger will strengthen and expand Uhde's market presence in refining and petrochemical process technology worldwide. Particularly attractive to Uhde is Tessag Edeleanu's 25 year history in Asia and its subsidiaries in Singapore and Malaysia.

In divestiture activity, engineering group ABB, Zurich, Switzerland, plans to sell off its oil, gas, and petrochemical division assets to slash debt and strengthen its balance sheet after its shares plunged to a record low due to continuing asbestos liabilities. The price tag is reported to be between $1.5 billion to $2 billion, and Aker Kvaerner, Oslo, Norway, and Technip-Coflexip, Paris, France, are regarded as possible buyers.

Petrochemicals

China dominates the petrochemical projects listed in this report with 39 projects slated for completion by 2007. China is closely followed by Iran's 34 projects, most projected for completion by 2004.

There are 12 ammonia-manufacturing projects listed this year, mostly in Asia-Pacific, representing more than 7 million tonnes of additional capacity online by 2008.

Two major petrochemical projects involving Petronas, the state oil company of Malaysia, have been completed this year. Petronas along with Dow Chemical Co. inaugurated its Optimal Chemicals Sdn. Bhd. butanol plant. Petronas also completed the Petronas Petroleum Industrial Complex (PPIC) in Kertih. The PPIC has 41 installations, took 20 years to complete, and includes a petrochemical complex with 11 processing units, an oil refinery, and six gas processing plants.

Gas to liquids

Although OGJ previously listed three gas-to-liquids (GTL) facilities planned for construction in the US, the list is down to two, due to a canceled plan by Rentech, Denver, to revamp a Commerce City, Colo., methanol plant into an 800 b/d GTL production facility. That facility is for sale.

On the other hand, National Petrochemical Co., (NPC) Iran, plans two new GTL complexes of commercial size production. A 70,000 b/d plant for Assaluyeh is currently under study and a 30,000 to 50,000 b/d plant is being considered for Bushehr. NPC has not estimated a completion date for either project.

In Alaska, BP Exploration (Alaska) Inc. has nearly completed its GTL demonstration plant in Nikiski. The plant incorporates a compact reformer and new processing and catalyst technology to process 3 MMcfd of natural gas into 300 b/d of sulfur-free, low-aromatic synthetic crude. The syncrude will then be sent to the Tesoro Alaska Co., Kenai, refinery as feedstock. Completion of instrumentation, wiring, and other commissioning issues are under way.

"We have no plans to convert the demonstration plant into a commercial facility," said David MacDowell, director of external affairs, Alaska Gas, BP PLC, who also indicated that the pilot plant-tested technology should prove applicable anywhere in the world where there is stranded gas.

Syntroleum, Tulsa, and Marathon Oil, Houston, in connection with the US Department of Energy, are assembling a 70 b/d GTL plant in Tulsa to provide demonstration fuels for testing in Washington, DC, buses and Denali National Park vehicles. This is a relocation of the demonstration plant that ran for over a year at the BP Cherry Point, Wash., refinery. Syntroleum may suspend its Sweetwater GTL project in Western Australia due to lack of funding.

Gas processing

LNG continues to grow in popularity as a solution to worldwide expanding natural gas demand. LNG's share of the global gas trade could grow from the current 21% share to 30% by 2010 (OGJ, Aug. 12, 2002, p. 56). Various industry and government analysts predict demand in the US alone will grow 2.5-3%/year over the next decade, possibly reaching 30 tcf/year in 10 years.

The following survey lists eight new LNG projects, including three regasification terminals in Spain, and two LNG export facilities in Norway. There are six new or expansion LNG import terminal projects planned for the US but, with the recent contraction of the energy equity market coupled with possible competition from a pipeline from Prudhoe Bay, some projects may be placed on hold or canceled due to lack of funds.

Atlantic LNG Ltd. has commissioned Train 2 and is continuing engineering and construction on Trains 3 and 4 of the massive LNG complex in Trinidad and Tobago, with two more trains planned for completion by 2010. Atlantic LNG is owned by a consortium of companies including BP PLC, BG Group, Repsol, Cabot, and National Gas Co. of Trinidad and Tobago, and uses a ConocoPhillips processing technology.

China National Offshore Oil Corp. (CNOOC) plans to build its first LNG receiving terminal and regasification plant in Guangdong, southern China. CNOOC also tentatively plans a second LNG receiving terminal at Fujian, China, and, if built, intends to begin operations at both plants by 2007.

Camisea LNG Co., Peru, has appointed Kellogg Brown & Root, a division of Halliburton Co., Houston, to conduct an FEED study for its proposed plans to build an LNG plant at Pisco in the Paracas province on Peru's south coast. If all goes well, construction is expected to begin this year for a projected 2004 commissioning date.

Sulfur

The sulfur survey reports more than 50 sulfur-recovery projects worldwide, more than 30 newbuilds among them. Technip-Coflexip of France, Siirtec Nigi SPA of Italy, and Parsons Energy & Chemicals of Pasadena, Calif., hold the majority of engineering contracts for these projects.

Two major projects are under way in Kazakhstan. Agip Petroli plans three trains of 1,900 tpd recovery each at the Kashagan field, and expected completion is 2006. TengizChevroil plans a new 2,400 tpd Claus and tail gas unit to manage sulfur from Tengiz field sour natural gas. Expected completion there is 2005.

INA Industrija Nafte DD of Croatia plans new sulfur units at its Rijeka and Sisak refineries to support its ultra low sulfur gasoline and diesel fuel projects. After completion, the Rijeka refinery will have a 20,000 tpd sulfur recovery unit and the Sisak refinery will have a 15,000 tpd sulfur recovery unit. Both refineries will include hydrocrackers and reformers as part of the upgrade packages.

Kuwait National Petroleum Co. plans two new sulfur units, one at Shuaiba and the other at Mina Abdullah to recover more than 2,500 tpd collectively.

Saudi Aramco is expanding its sulfur recovery facilities at Hawiyah with the addition of two 700 tpd trains to support its natural gas processing facilities there.

In the US, the Sunoco Inc. refinery at Marcus Hook, Pa., will build and operate a sulfur-recovery plant to treat acid gases now processed at the General Chemical plant nearby. According to Sunoco, when the volume of acid gas exceeds capacity at General Chemical, Sunoco is required to safely incinerate them through a flare stack at the refinery. Sunoco has taken steps to reduce flaring while working on a long-term solution.

Pipelines

Dow Chemical Co., Midland, Mich., has started construction on a new olefins pipeline project in Germany. The 230-mile pipeline will connect Dow's sites in central Germany with its Stade site in northern Germany. In addition to connecting the two major Dow sites, the pipeline will ultimately link Dow's salt dome storage caverns in Teutschenthal, near Schkopau, and Ohrensen, near Stade.

The bidirectional pipeline will be capable of transporting ethylene and propylene. Rohrleitungs-und AG GMBH of Germany is the engineering, procurement, and construction contractor, and Dow is handling construction supervision. Dow expects completion by the fourth quarter of 2003.

Click here to view Worldwide Constuction: Refineries, Petrochemicals, Gas to Liquids, Gas Processing and Sulfur PDF

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