Supply chain costs in the US are set to surge in the coming years, with the engineering, procurement, construction and installation sector the first to record a double-digit percentage hike in costs, according to Rystad Energy.
EPCI costs, mostly driven by climbing wages and material prices, are forecast to gain about 10% in 2023 from current levels.
As a result, said Rystad, capital spending on EPCI work in the US in 2023 is expected to hit $15.5 billion, about $1.4 billion higher than where it would have been under the costs scenario that was in place until recently.
Higher expected construction wages account for about $1 billion of that extra cost, with the remaining $400 million coming mostly from the rising cost of bulk materials in addition to engineering labour.
“If EPCI players fail to adapt to the rising costs, those executing lump-sum contracts and using outdated assumptions for procurement and construction indices will see their margins squeezed,” said Robert Mathey, analyst and supply chain expert at Rystad.
“To mitigate the effects of rising costs, contractors will need to be creative with how they source engineering and procurement services,” he added.
This year’s EPCI capex is estimated at $12.6 billion, which means the sector is poised for a significant spending increase in 2023, irrespective of the cost rise. The figure will climb even further in 2024 to $18 billion, Rystad said.
Other parts of the supply chain will also see higher costs in 2023, albeit not at the rate in the EPCI business.
Subsea supply costs are expected to rise by 8% from 2021, maintenance and operations by 7%, drilling by 6% and seismic by 5%.
Overall, Rystad predicts that US oil and gas spending will rebound from a Covid-19-induced low of $91 billion in 2020 and about $99 billion this year, to hit over $112 billion in both of 2023 and 2024.
At the same time, EPCI expenditure is due to experience robust growth, peaking at $18 billion in 2024, up 50% from last year’s $12 billion.
Although the current trend of high oil prices indicates a more favourable economic outlook, said the Oslo-based research company, the growth of EPCI costs is a cause for concern in the near term.
Costs are expected to rise even further after 2023, with drilling contractor and subsea cost increases becoming the prime headache for oil and gas operators.
Going into more detail, Rystad said operators should expect engineering costs for US-based projects to rise between 3% and 5% next year and by between 5% and 8% in 2023, relative to current levels.
Projects later in the lifecycle will also feel the effects of increased costs as the impact of global supply chain issues ripple across the energy sector and inflate procurement expenses.
Price increases will heavily impact US projects requiring large quantities of cable and pipe from US markets.
Rystad estimates cable prices have risen between 20% and 50% in the past year, while pipe costs have increased by between 15% and 70%, depending on material.
Estimates also show a price increase in higher-level segments of the North American service industry most heavily exposed to raw material increases, most notably processing equipment, which is set to rise around 7% by 2023.
However, Rystad warns, if Brent crude rises to $100 per barrel, that hike could be closer to 15% by 2023.
The rise in costs also challenges projects in the construction phase because wages across all industries will increase around 5% by 2023, a trend set to be more pronounced in the oil and gas industry, with increases expected to be closer to 15%.
Construction services make up nearly half of EPCI costs and are primarily driven by labour expenses, meaning rising wages could result in more than $1 billion of additional capital expenditure for US upstream projects in 2023.
Rystad noted that EPCI players in recent years have increasingly used high-value engineering centres to carry out more design work, especially as remote working became prevalent during the pandemic.
On the procurement front, it said companies have also been seeking out and validating new suppliers in lower-cost regions to keep projects viable.
As for talent, the consultancy said EPCI players are “keenly aware” of attracting and retaining talent because the pandemic has led to a worker shortage in the oil, gas and construction industries.
“While cost is a significant factor in the success of a construction project, these companies will also need to consider how shortages in skilled labour and worker turnover will impact project schedules, quality and safety,” it added.
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