In the midst of a burgeoning global energy demand and the United States’ aspiration to maintain its position as the foremost liquefied natural gas (LNG) exporter, challenges loom large for developers along the U.S. Gulf Coast. A shortage of skilled labor, exacerbated by robust wage inflation, is exerting immense pressure on LNG projects, leading to delays and financial uncertainties.
Currently, there are five LNG plants under construction in Texas and Louisiana, with an additional 16 in various stages of planning across the U.S. Combined, these developments are poised to contribute 86.6 million metric tons per annum (MTPA) of LNG capacity, ensuring the U.S. retains its top exporter status for years to come.
However, the path to completion for many of these projects has been fraught with setbacks. Escalating labor costs, which have surged by as much as 20% since 2021, have disrupted construction budgets and dampened projected returns. For instance, Golden Pass LNG, a significant project, faced substantial delays after its primary contractor exceeded the budget by $2.4 billion, culminating in bankruptcy proceedings. Sempra LNG, grappling with similar challenges, reconsidered its construction approach for the Cameron LNG expansion to mitigate rising costs and reduced its stake in the Port Arthur LNG venture.
NextDecade, advancing with its Rio Grande LNG terminal, navigated financial hurdles by enlisting new investors, albeit at the expense of diluting original stakeholders’ shares. This strategic move was necessary following unforeseen escalations in engineering, procurement, and construction (EPC) expenses.
The root of these difficulties can be traced back to the aftermath of the COVID-19 pandemic, which triggered a surge in construction costs across the industry. Skilled workers such as welders, pipefitters, and electricians now command wages reaching up to $60 per hour, alongside attractive sign-on bonuses, underscoring the competitive landscape for labor in Texas and Louisiana. The pressure to retain workers has compelled companies to offer per diem rates universally, irrespective of workers’ residency, further inflating project overheads.
In response to these challenges, companies like Venture Global LNG have adopted modular construction methods to shield themselves from labor shortages and inflationary pressures. This approach has proven effective in minimizing disruptions compared to traditional construction models.
Looking ahead, EPC contractors are adjusting their strategies to mitigate risks associated with escalating costs. This includes potentially shifting towards more flexible, cost-reimbursable contract structures rather than lump-sum turnkey agreements, which had been the norm. Analysts from Poten & Partners project a substantial increase of 30% to 40% in EPC contract values between 2021 and 2023, reflecting these evolving dynamics.
As the industry navigates these turbulent waters, the ability to effectively manage labor shortages and cost escalations will be crucial for the successful realization of LNG projects along the U.S. Gulf Coast. Stakeholders remain cautiously optimistic, balancing the imperatives of securing investments, meeting environmental standards, and delivering LNG to global markets amid evolving economic conditions.
In conclusion, while the U.S. maintains its strategic advantage in LNG exports, the journey towards expanding capacity is fraught with challenges that demand innovative solutions and resilient strategies from industry participants.