Boom Times For Megaprojects
The world's hunger for energy is fueling giant backlogs for engineering and construction firms
"The need for modification and expansion is very real across the whole energy market-upstream, downstream, petrochemicals, and power-every part of that sector is seeing significant spending," says Fluor's Boeckmann. In that sense, this boom differs from previous up cycles. In the late 1990s through 2001, when oil and gas prices were cheap, there wasn't much investment in heavy energy infrastructure. But there was a frenzy of natural-gas-turbine power plant construction in the United States-widely welcomed as less polluting than coal and designed to take advantage of what many mistakenly predicted would be a perpetually cheap fuel.
As natural gas prices soared over the past two years, utilities turned back to coal in a big way, with 12,000 megawatts of new capacity planned in the next three years-roughly enough to power 12 million homes-after years of virtually no coal generation expansion at all. And for construction firms, today's coal boom is better news than the best days of gas-turbine mania. Alex Rygiel, engineering industry analyst with Friedman, Billings, Ramsey, estimates that turbine stations cost $100 million to $300 million, while the price tag of a new coal plant is $1 billion. "The projects in this new power-generation cycle we're witnessing are far larger," he says.
Washington Group International, which just added a new major coal project to its portfolio-expansion of the Springerville Generating Station serving greater Phoenix-says the opportunities don't stop with coal. "With the passage of the Energy Policy Act [in 2005], nuclear plants are beginning to be contemplated," says George Nash, who heads up power development for WGI, which has worked on 40 existing nuke plants in its history. "That's an area that we haven't seen active for quite a while."
Of course, a nuke revival would have to compete for resources with the coal and refinery revivals and a host of other energy projects. One nuclear industry newsletter recently reported that the projected cost of a new plant has risen to as much as $2,000 per kilowatt, 80 percent higher than the industry was touting only a year ago. It's easy to see why engineering companies would salivate-a 1,000-megawatt plant at that price would be $2 billion-but most analysts are not counting on any new nuclear plants in the United States soon.
Pricey. The high cost of engineering services is becoming an issue even for oil companies flush with cash. Tesoro, the No. 2 refiner in the western United States, this summer canceled the much-anticipated overhaul of its Anacortes, Wash., facility because the $250 million price tag of the project (which was being constructed by Fluor) had risen 50 percent since just the start of the year. Costs are spiraling not only for crucial materials like steel but also for skilled workers. "It puts engineers in a very strong position to write contracts moving risk back to the customers," says Rygiel.
Fixed-price engineering and construction contracts are a relic of "the old days," says Lynn Westfall, Tesoro's chief economist. "That was the traditional way in our business over 25 or 30 years and probably longer," he says. But now, all of the big engineering firms assure their shareholders they are moving to cost-plus or cost-reimbursable contracts, meaning the customer pays more if material or labor costs increase. "You don't know the true cost of a project until it's over," says Westfall.
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