Cost inflation will hit the US oil and gas supply chain for years to come, starting with a sharp increase in the EPCI

OSLO – Supply chain costs are expected to increase for oil and gas projects in the United States in the coming years, with the Engineering, Procurement, Construction and Installation (EPCI) segment being the first to record a double-digit increase in percentage costs, according to a report from Rystad Energy. forecasts. EPCI costs, mainly driven by rising wages and material costs, are expected to rise around 10% in 2023 from current levels.

As a result, U.S. capital spending on the EPCI in 2023 is expected to end at $ 15.5 billion, $ 1.4 billion more than it would be under the current cost status quo. The higher expected construction wages account for about $ 1 billion of that additional cost, with the remaining $ 400 million coming primarily from the rising cost of bulk materials in addition to engineering labor.

This year’s EPCI investments are estimated at $ 12.6 billion, which means the segment is set for a significant increase in spending in 2023, regardless of the rising costs – and the figure will climb even more. in 2024 to reach $ 18.0 billion.

Other supply segments will also experience higher costs in 2023, but not at the pace of the EPCI. Subsea supply costs are expected to increase by 8% from 2021, maintenance and operations by 7%, drilling contractors by 6% and seismic by 5%.

Overall, our projections indicate that U.S. oil and gas capital spending will rebound from a COVID-19-induced low of $ 91.0 billion in 2020 and from a projected $ 99.3 billion. this year to over $ 112.7 billion in 2023 and 2024. At the same time, EPCI spending is expected to experience robust growth, peaking at $ 18 billion in 2024, up 50% from the $ 12 billion mark. last year.

While the current trend of high oil prices portends a more favorable economic outlook, the growth in EPCI costs is of concern in the near term. Costs are expected to rise further after 2023, with increases in the costs of drilling contractors and submarines becoming the main headache for oil and gas operators.

“If EPCI players fail to adjust to rising costs, those who execute fixed price contracts and use outdated assumptions for procurement and construction indices will see their margins tighten.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

A breakdown of EPCI costs

Operators should expect engineering costs for US-based projects to increase between 3% and 5% next year and 5% to 8% in 2023, from current levels. This projection is in line with previous research by Rystad Energy indicating the growing workforce challenges in the oil and gas industry, particularly in attracting and retaining skilled workers.

Projects later in the life cycle will also feel the effects of increased costs, as the impact of global supply chain issues spill over into the energy sector and inflate procurement spending. The Port of Los Angeles in California is a good example of this: cargoes wait to be unloaded, containers remain stacked while trucks take deliveries and, as a result, distribution centers nationwide are struggling. to fulfill orders.

The price increases will have a dramatic impact on US projects requiring large quantities of cables and pipes from US markets. Rystad Energy estimates indicate that cable prices have increased 20-50% over the past year, while pipe costs have increased 15-70%, depending on the material of the pipes.

Estimates also show price increases in the upper-tier 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 around 7%. % by 2023 from current prices. However, if Brent crude oil hits $ 100 a barrel, that rise could be closer to 15% by 2023.

The rise in costs is also calling into question projects in the construction phase. Construction wages in all industries will increase by about 5% by 2023 from current levels. This trend is expected to be more pronounced in the oil and gas industry, with increases expected to be closer to 15%.

Construction services account for nearly half of all EPCI costs and are driven primarily by spending on labor, meaning rising wages could lead to more than $ 1 billion in spending. additional capital for U.S. oil and gas projects in 2023.

In recent years, EPCI players have increasingly turned to high-value-added engineering centers to carry out more design work, especially as remote work has become widespread during the pandemic. . On the purchasing side, companies also seek and validate new suppliers in regions at lower cost to maintain the economic viability of projects.

EPCI companies need to be keenly aware of attracting and retaining talent, as the pandemic has resulted in a labor shortage 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. , the quality and safety of the project. – Rystad Energy

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