Deluge of refinery expansions run risk of cost overruns, delays, report finds

A worker at Valero Energy's refinery in Three Rivers, Texas, Oct. 12, 2012. Refining, once regarded as a low-margin, accident-prone part of the energy industry, is doing better in part because of cheaper natural gas and domestic crude oil. (Michael Stravato/The New York Times)
A worker at Valero Energy’s refinery in Three Rivers, Texas, Oct. 12, 2012. (Michael Stravato/The New York Times)

Refineries are expanding for the first time in years to soak up a wave of cheap crude unleashed by the U.S. shale boom, but their lack of in-house construction experience puts the projects at greater risk for cost overruns and delays, a new report finds.

More than 30 refining expansions worth $14 billion total are under development across the United States as the industry hustles to take advantage of the oil glut, according to a new analysis by Petrochemical Update, which analyzes construction trends for the industry.

Texas alone has three refining projects under construction, including Kinder Morgan Energy Partner’s $369 million condensate splitter in Galena Park slated to come online at the end of this year.

But the industry has a shortage of workers with experience managing such massive investments, which can make it difficult for companies to accurately estimate how much a project will cost and how long it will take to build, the report said.

“The industry is suffering from a depleting resource pool of highly-experienced project managers and project support personnel,” Stephen Cabano, president of Pathfinder, a project management consulting firm, wrote in the report.

That’s problematic because it’s critical for refineries to fully understand all the risks associated with building an expansion, Cabano wrote. For example, the flurry of new petrochemical and refining construction projects happening across the U.S. Gulf Coast has created stiff competition for skilled construction workers, materials and equipment, which in turn can drive up prices, the report found. However, those problems may be easing amid falling oil prices, the report said.

Companies can avoid cost overruns and delays by planning around these risks, but those mitigation skills are in short supply, the report found.

The ability to manage risks is often developed over time through “experience and lessons learned, both of which are weak in today’s marketplace,” Cabano wrote in the report.

The report suggests that companies suffering from a lack of experience on their project teams should look for workers within the company, or hire outside experts and consultants, to help manage the projects, the report suggested.

“With the application of goodly amounts of research, applied experience, sound ideas from in-house and outside experts and an eye always on company objectives, capital projects can be completed on time and on budget,” the report found.