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U.S. oil and gas projects set to face 10% increase in wages and supply chain inflation through 2023


U.S. oil and gas projects are expected to face higher costs in the future as wages rise and the supply chain grows.

The Engineering, Procurement, Construction and Installation (EPCI) segment could be the “first to record double-digit percentage cost increases,” according to a new analysis from Rystad Energy.

Domestic EPCI costs, driven by increases in wages and materials, are expected to increase by around 10% in 2023 from current levels. U.S. business capital spending (capex) for the EPCI in 2023 could reach $ 15.5 billion, about $ 1.4 billion more than under the current cost status quo.

“If EPCI players fail to keep up with rising costs, those who execute lump sum contracts and use outdated assumptions for procurement and construction indices will see their margins shrink,” said Robert Mathey, analyst at Rystad, expert in supply chain. “To mitigate the effects of rising costs, entrepreneurs will need to be creative in how they source engineering and procurement services. “

“Hindered” by supply constraints

The devastating impact of the pandemic on public health may have passed, but numerous supply chain issues are expected to hamper the economy at least next year. This was made clear in the third quarter earnings season, when oil service operators (OFS), as well as exploration and production companies (E&P), said inflationary concerns were on the rise.

During the quarterly call, Baker Hughes Co. CEO Lorenzo Simonelli told investors that the US and global economies were recovering, but the pace was “hampered” by “global ship shortages, supply chain and energy supply constraints in several parts of the world “.

Halliburton Co. CEO Jeff Miller told the quarterly call that “the job market is tight.” He underlined the “real challenges” which the giant OFS is facing. However, he said “Halliburton’s” scale, speed and systems have enabled him “to recruit talent nationally and deploy it quickly to our clients.”

On the E&P side, Devon Energy Corp., which works in several basins in Lower 48, is trying to stay ahead of “inflationary pressures that are affecting not only our industry, but all aspects of society in general.” , COO Clay Gaspar told investors on the quarterly conference call. “The supply chain team works hard to anticipate issues, mitigate bottlenecks and work with the asset teams to adjust plans to optimize our cost structure and future investing activities. “

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Pioneer Natural Resources Co., a pure Permian Basin company, has reported “upward pressure” on “tubes, diesel, cement, sand, chemicals,” CFO Neal Shah told investors. Plus, “It got a little tighter on the work side. Overall, Pioneer “expects to see average single-digit inflation for the year with… closer to 10% inflation… Looking to 2022, we’re probably looking at something in the middle figures from an inflationary point of view. “

Where are wages increasing?

According to Rystad, the rise in construction wages is expected to account for around $ 1 billion of additional capital spending in the 2023 EPCI budgets. The remaining $ 400 million comes mainly from increased capital spending on building materials. bulk and additional engineering labor.

This year, US investments for EPCI are estimated at $ 12.6 billion, according to Rystad. This means that the segment “is poised to experience a significant increase in spending in 2023, regardless of the increase in costs.” Investments are expected to increase in 2024 to reach around $ 18 billion.

Other supply segments are also expected to face higher costs in 2023. Subsea supply costs are expected to increase by 8% from 2021, with maintenance and operations increasing by 7%, as contractors of 6% drilling and 5% seismic, Rystad researchers said.

“Overall, our projections indicate that U.S. oil and gas investment spending will rebound from a low of $ 91 billion induced by Covid-19 in 2020 and an expected amount of $ 99.3 billion this year. year to more than $ 112.7 billion in 2023 and 2024. “

At the same time, robust growth in EPCI investments is expected to peak at around $ 18 billion in 2024, a half increase from $ 12 billion in 2020.

“Although the current trend of high oil prices indicates a more favorable economic outlook, the growth in EPCI costs is a source of concern in the near term,” analysts said. “Costs are expected to increase further after 2023, with increases in subcontractor and submarine costs becoming the biggest headache for oil and gas operators. “

In their EPCI cost breakdown, Rystad researchers said engineering costs for US-based projects will increase 3-5% in 2022 and 5-8% in 2023, from current levels.

“This projection is consistent with previous research from Rystad Energy indicating the growing workforce challenges in the oil and gas industry, particularly in attracting and retaining skilled workers,” they said.

Pinch purchases too

Projects that are “later in the life cycle” will also feel the effects, as “the impact of global supply chain issues will trickle down to the energy sector and inflate procurement spending.”

For example, the Port of Los Angeles now sees shipments that must wait to be unloaded. The containers remained stacked while waiting for the trucks to take delivery. As a result, Rystad noted, distribution centers nationwide are struggling to fulfill orders.

“The price increases will have a huge impact on US projects requiring large quantities of cables and pipes from US markets,” according to forecasts. Over the past year, cable prices have increased by around 20-50%, and pipe costs have increased by 15% to 70%, depending on the type of pipe material.

“Estimates also show price increases in the high-end segments of the North American service industry most exposed to increases in raw materials, particularly in purchases of processing equipment, which are expected to increase by about 7% by 2023 from current prices, ”analysts said. . “However, if Brent crude oil hits $ 100 a barrel, that rise could be closer to 15% by 2023.”

Projects under construction face particular cost challenges, according to the research. Construction wages “in all industries” are expected to jump about 5% from current levels by 2023.

“This trend is expected to be more pronounced in the oil and gas industry, with increases expected to be closer to 15%,” analysts said.

As construction services account for almost half of all EPCI costs, mainly due to labor expenses, the wage hike could lead to more than $ 1 billion in additional investment for projects. U.S. oil and gas companies in 2023.

In recent years, the EPCI industry has used engineering centers to complete design work, especially as remote working has become prevalent during the pandemic, Rystad noted. Companies also “research and validate” suppliers in lower cost regions to ensure projects are economically viable.

However, Rystad noted that the EPCI sector “needs to be very careful about attracting and retaining talent, as the pandemic has resulted in a shortage of manpower in the oil and gas and construction sectors.

“While cost is an important factor in the success of a construction project, these companies will also need to consider the impact of skilled labor shortages and labor turnover on schedules, quality and safety of the project. “