Matt Zborowski
Assistant Editor
The rain may have let up on southeast Texas since record quantities hit the region earlier this year, but heavy clouds still hang over Chevron Phillips Chemical Co. LLC's $6-billion Gulf Coast petrochemicals project currently under construction at Cedar Bayou and Old Ocean.
Just as OGJ was wrapping production on last week's Worldwide Construction Update, Fluor Corp.-responsible for the Gulf Coast project's engineering, procurement, and construction work in partnership with JGC Corp.-held its third-quarter earnings call, and, as expected, the massive project was the primary topic of discussion. Pertinent to project stakeholders, financial analysts, investors, and the special report itself was news that Fluor took a third-quarter impairment charge of $154 million on the project, which has been beset by weather delays and construction inefficiency.
"We are very disappointed in the construction progress on a fixed-price Gulf Coast project that led to a significant charge this quarter," said David Seaton, Fluor chairman and chief executive officer, in an accompanying news release. Coming into the quarter, the project had already suffered "an out-of-sequence work schedule" created by "the impact of several heavy rain events and abnormal site flooding," he noted in the Nov. 4 call.
The charge relates "to additional craft hours and indirect costs required to complete the aboveground portion of the project," with most of the issue concerning "piping productivity," Seaton said. As cited in last week's Worldwide Construction Update, regional data from Westney Consulting Group for the US Gulf Coast show a 72% increase in work hours per linear foot of pipe between 1997 and 2015.
Seaton said the ordeal "is evidence of what can happen with complex stick-built projects" when afflicted by "unusual weather conditions and other site disruptions…. And everybody that's been in this business knows, when you get out of sequence, the costs go up and that's what we've seen here."
As it stands now, "the project is scheduled to be mechanically complete in late summer-early fall of next year," Seaton said, confirming that it's now "a loss project."
A time of reflection
Seaton acknowledged Fluor "could've done a better job in terms of mitigating some of those risks earlier-but it would still have been a bad project" given the "uncontrollable events." He emphasized "these circumstances are currently not evident" on any of Fluor's other projects.
"I will mention that this project was bid prior to some of the changes that we've made and some of the innovations that we've applied in the integrated solutions model," he added. "So, when you look at where we're going, we shouldn't have these [kinds] of issues in our backlog or in the projects that we win.
"As we move into 2017, I remain concerned that this lower-for-longer mindset on the commodity prices is starting to distort the [engineering and construction] contracting market," he said. "We are now seeing customers not only expecting lower prices without addressing capital efficiencies, but also demanding contractors take on risk that is in some cases outside of the contractor's control. This along with an increased level of irrational bidding in feed pricing creates an unusual and challenging marketplace."
During Rice University's 19th Global E&C Forum held in September in Houston, Ron Corn, CPChem senior vice-president of projects and supply chain, reflected on the Gulf Coast project up to that point, saying his firm's board made it clear that "if we want to do another project like we're doing today, then we better have a better answer to the question on how to take some cost out."
Seaton said customers "that are willing to get beyond the price war and can actually look at value are looking at us very favorably. Those that cannot and don't want [to] change, if they're good key customers and the risk profile is right, and it matches with our discipline, we'll build a stick-built for them again. But they won't enjoy the benefits of some of the learnings that we've had."