Massive Gigaprograms Come with Layers of New Risk
The big are getting bigger. Growing economies around the world and unforeseen global events—from financial shifts to earthquakes—are generating such huge demands, particularly in natural resource development, that owners and contractors are pushing out construction at record size and speed, participants say.
Even long-term industry veterans think the trend is unprecedented. “The growth in the southern hemisphere is more than I've ever seen before at any one time,” says Bill Dudley, president and chief operating officer of Bechtel Group Inc.
Australia's still untapped resource reserves have made it a hot spot for an array of giant projects now under way or soon to develop in oil and gas expansion and mine development. Boosting supply of liquefied natural gas (LNG) to feed China's seemingly insatiable appetite for resources and other countries' needs has pushed more projects well into the double-digit billions of dollars.
India is seen as a larger LNG consumer, as is Japan, and possibly other countries, in the wake of the quake-generated Fukushima disaster in March that has begun to alter nations' reliance on nuclear power.
Giant jobs include the Chevron-led Gorgon LNG project at $37 billion and set to grow, and the Browse LNG site, being eyed at $40 billion. Both are located off Australia's western coast in areas of major natural gas finds. The multi-facility Gorgon program could eventually produce nearly 25 million tons of LNG annually and is set to include what the oil company says will be a world leader in carbon sequestration, able to inject underground about 3.4 million tons of carbon dioxide per year. A KBR-led joint venture is now doing major work there.
Double Digit
Other gas and mining projects are fast moving into the double-digit group. A recent article in Forbes magazine claims that energy firms have identified enough natural gas near Australia for $200 billion of LNG development. “Looking at LNG awards in particular, there are many developments, particularly in Australia, which are accelerating,” Credit Suisse construction sector analyst Jamie Cook told investors in June.
She sees 2011 and 2012 as key years for front-end engineering and design (FEED) work that industry participants hope will generate larger-scale and more lucrative engineer-procure-construct (EPC) contracts. Fluor CEO David Seaton announced a “historic” $40-billion backlog Aug. 5, noting that the firm is working on 25 oil and gas FEEDs worth in excess of $30 billion.
Major projects are growing in other places as well, from Canada to Peru to Mongolia. The $6-billion Oyu Tolgoi mine in Mongolia's Gobi Desert, about 80 kilometers from China, is touted as the world's largest undeveloped copper-gold project, with a current work force of more than 14,000, according to Ivanhoe Mines, which is developing the project with mining firm Rio Tinto. The project, which is co-owned by the Mongol government, is pushing to start commercial production in 2013. The Fluor-managed construction program now is at one-third completion, says Ivanhoe. About 100,000 cu meters of concrete had gone into building its concentrator complex by early May.
Infrastructure programs, such as Abu Dhabi's estimated $30-billion transportation buildup, also are in the giant project mix. Firms have even coined a new term for the category: gigaprojects. “We are moving into a world where the frontiers of scale and complexity will no longer be characterized by megaprojects and megaprograms but increasingly by what I call gigaprograms,” says Robert Prieto, senior vice president in Fluor Corp.'s industrial and infrastructure group. “We see new sets of non-linear scaling effects as we move from the hundreds of millions to the tens of billions. Gigaprograms require you to think about things differently.”
Speed to Market
Indeed, there is little familiar or simple in executing work in the gigaproject generation. “We have picked the low hanging fruit in terms of natural resources,” says Santo Rizzuto, general manager of mining and metals for Australian engineer Sinclair Knight Merz. “We are now having to exploit areas that are much more challenging, such as parts of Africa and South America.” Simon Naylor, president of natural resources Americas, AMEC Inc., says the jobs demand more logistical infrastructure and environmental controls. SKM's Rizzuto points to speed-to-market demands.
Keeping gigaprojects supplied with materials, equipment and labor is a more daunting proposition. “Supply chains are longer, like an octopus; they stretch around the world,” says Ryan Orr, executive director of the Collaboratory for Research on Global Projects at Stanford University, Palo Alto, Calif. “It really is an exercise in coordination.” He and two other university professors just released a book that analyzes political and institutional issues on nearly 100 global projects.
Umberto della Sala, CEO of Foster Wheeler's engineering and construction unit and interim corporate chief, sees a stronger push for safety on LNG and other major projects, and more required “local content” in labor and sourcing decisions.
“We refer to some of our current jobs as logistics-driven rather than in the more traditional representation as construction-driven or commissioning-driven,” says Mitch Dauzat, president of the gas monetization unit for Houston-based contractor KBR Inc. “Everything must be planned and scheduled in painstaking detail to succeed.”
Della Sala says the logistics of modular construction are challenging because shipping schedules for inbound materials and outbound modules must be precise. He and Dauzat use new project and risk management tools to that end. “Our in-house project completion, commissioning and turnover program is the industry standard,” claims Dauzat. “For these large, complex, remote and expensive projects, the ability to effectively identify, quantify and manage risk is paramount.” SKM's Rizzuto also points to mining technology advances “such as in-pit crushing and conveying, which decreases the need for vehicle movements on site.”
Blood Tests
With the mammoth work force needed to execute and manage gigaprojects, staffing is a bigger challenge. “Young people are not as eager today to build resumes at remote sites,” says Rick Koumouris, senior vice president and general manager of Fluor's mining and metals business, although he contends that “allocation is not a huge issue” for the firm.
Bechtel's Dudley says some of the firm's mine construction sites in South America are at locations up to 17,000 ft. “You need a blood test just to visit the site,” he says, which checks a person's ability to adapt to high altitudes.
“The availability of skilled labor is probably the No. 1 issue,” says della Sala. “If you can get the workers locally, you must be sure they have the proper skill level to execute the work.”
At an LNG project in Peru last year, Netherlands-based engineer CB&I directly employed more than 13,000 workers and indirectly supported another 25,000 local jobs, says Lasse Petterson, executive vice president and chief operating officer. He says the firm invested 1 million hours in safety and skills training for local workers, many of whom were farmers. “We will leave a good footprint behind when we leave,” says Petterson.
Australia's super-heated marketplace and restrictions on importation of labor poses a particular challenge for gigaprojects. SKM has broadened its use of “virtual teaming” by using global forces more efficiently through high-definition video conference, teleconferencing and interactive file-sharing, says Rizzuto. “In cases where there are tight time frames and critical deadlines, virtual teams have worked around the clock across different time zones, speeding up the project delivery,” he says.
Mergers and acquisitions also are heating up in gigaproject hot spots, as engineers and contractors seek to boost their foothold and competitive position in growing market sectors and geographies. Avram Fisher, analyst with BMO Capital Markets, says Jacobs Engineering took such an approach in Saudi Arabia in 2008. “Three years later they're the first firm to win projects under Aramco's GSE+ contract that requires work to be performed by local engineers,” he says.
But gigaproject participants still face risks in global economic uncertainties that may affect progress. More projects are requiring owner joint ventures that can complicate participant relationships.
Strategic Delays
Marketplace risks also are prompting owners to delay decisions on moving LNG and other projects into construction phases. In June, Perth, Australia-based Woodside Petroleum Ltd. announced schedule delays and cost increases on its Pluto LNG project because of slower-than-expected site progress and an increased contingency.
“Clients seem to be taking much longer to make a final investment decision,” says della Sala. “When the market was very strong, we would often be asked to make a quick and seamless rollover from [FEED] work to the EPCM phase of the project. Today, this does not happen as often.” Adds Fluor's Seaton: “Oil prices are stable, but projects have gotten so big” that many companies have to gain multiple approvals.
“These are tougher capital spending decisions.” Fisher says. “Projects are not built on the spot price of a commodity but rather on long-term demand expectations,” he says. “And global demand in developing countries looks sustainable.”
Fluor's Prieto says managing gigaprograms now requires an understanding of how project scale, duration and complexity can amplify risk. “Gigaprogram success is very much driven by management frameworks and awareness of the 'white spaces' between projects where the opportunity for much mischief exists,” he says.
“On a one-to-two-year program, you could manage risks of cost changes, but in a 15-year program, your assumptions will be wrong. Gigaprograms move us to a new neighborhood where black swans nest and breed,” Prieto says.
