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Challenges Amid Gulf Coast LNG Boom: Labor Shortages and Rising Costs
Amidst burgeoning LNG developments on the U.S. Gulf Coast, developers are grappling with skilled labor shortages and inflationary pressures stemming from escalating wages. Currently, five LNG plants are under active development in Texas and Louisiana, with an additional 16 projects in the pipeline, all vying for investment and customers. These five projects together aim to boost U.S. LNG output by 86.6 million metric tons annually, solidifying the country’s position as a global leader in LNG exports.
Budget Overruns and Project Delays
Rising labor costs have significantly impacted construction budgets, complicating efforts to attract new investors and secure financial commitments. For instance, the Golden Pass LNG project experienced a substantial setback when its main contractor faced a $2.4 billion budget overrun, leading to bankruptcy. This led to a halt in construction, raising concerns about the project's future.
Similarly, Sempra LNG has taken steps to mitigate costs for its Cameron LNG expansion by reconsidering its contractor, Bechtel Corp, and has reduced its stake in Port Arthur LNG in Texas due to higher construction costs. NextDecade’s $18 billion Rio Grande LNG export terminal managed to proceed by bringing in new investors to offset increased engineering, procurement, and construction (EPC) costs.
Wage Inflation and Labor Challenges
The surge in costs is largely attributed to the aftermath of the COVID-19 pandemic, with wages for skilled workers, such as welders, pipefitters, and electricians, increasing by 20% over the past three years. Gulf Coast contractors are also resorting to per diem payments to retain workers, regardless of their residential proximity to the project sites.
"Welders and pipefitters are being offered up to $60 an hour with sign-on bonuses to ensure they stay through the project completion," revealed Travis Woods, president of the Gulf Coast Industrial Group. This labor crunch has led to staffing challenges, with over 20,000 workers on site for the five projects, minus the 4,000 workers sent home by Zachry at Golden Pass LNG.
Strategic Shifts and Cost Mitigation
Despite the prevailing challenges, some developers have found ways to navigate the turbulent landscape. Venture Global LNG, which is collaborating with Zachry on the Plaquemines plant in Louisiana, reported that its modular construction approach has helped buffer against labor and inflationary challenges. Moreover, wage data from the U.S. Bureau of Labor and Statistics shows a 19% increase in wages for construction workers in Louisiana’s oil and gas pipeline sectors from 2022 to 2023.
Contractual dynamics are also shifting within the EPC landscape, with contracts experiencing an 18% to 25% increase between 2021 and 2023. Poten & Partners, an LNG shipping and consulting firm, noted that EPC contractors are now likely considering a 30% to 40% price increase in their lump-sum turnkey contracts to mitigate risks. Bechtel Corp, a prominent contractor in the sector, remains a key player despite these rising costs, having historically delivered projects for top U.S. LNG exporter, Cheniere Energy.
In conclusion, the U.S. Gulf Coast’s LNG sector is at a critical juncture where labor shortages and inflation are pushing developers to reassess financial strategies and construction plans. Adaptations in contractual terms and strategic partnerships appear vital as these projects move forward, underscoring the complex landscape of LNG development in today's economic environment.
