The United States’ aspirations to become a dominant force in the global liquefied natural gas (LNG) market are facing a significant hurdle: a surge in labor costs. A confluence of factors – a shortage of skilled workers and robust wage growth – is squeezing project budgets and threatening to delay or even derail some LNG developments.
The US Gulf Coast Labor Squeeze
The US Gulf Coast, a focal point for LNG development, is grappling with a tight labor market. The COVID-19 pandemic exacerbated pre-existing skilled worker shortages, leaving companies struggling to fill crucial positions. This scarcity, coupled with strong economic growth and high demand for skilled labor across various industries, has fueled a significant increase in wages for construction workers in the oil and gas sector.
The consequences of this labor crunch are becoming increasingly apparent. Several LNG projects under construction are facing delays and budget overruns. Golden Pass LNG, one of the largest US projects, exemplifies the challenges. The project encountered significant cost increases, leading its main contractor to file for bankruptcy, and work on the facility largely stalled. Sempra LNG, another major player, is reevaluating its approach for the Cameron LNG expansion project, reportedly considering a different contractor in a bid to control spiraling costs.
Data underscores the severity of the situation. Wages for construction workers in Louisiana’s oil and gas pipeline sectors, a hub for LNG development, skyrocketed by 19% in 2023 compared to the previous year. Skilled workers like welders and pipefitters are reportedly in high demand, commanding wages of up to $60 per hour, often accompanied by signing bonuses. Industry analysts estimate that engineering, procurement, and construction (EPC) contracts for new LNG plants have ballooned by 18% to 25% between 2021 and 2023.
EPC Contractors Seek to Mitigate Risk
EPC contractors, facing mounting financial risks due to rising labor costs, are exploring ways to mitigate these challenges. Shifting from fixed-price, turnkey contracts to cost-reimbursable models is a potential strategy being considered. In such arrangements, contractors would be reimbursed for their actual expenses, potentially reducing their upfront financial burden. However, this approach could also lead to higher overall project costs for developers.
The current scenario casts a shadow over the previously bright prospects for the US LNG industry. The ability of companies to attract investors and complete projects on time and within budget remains a critical question. Finding effective solutions to address the labor shortage and manage construction costs will be paramount to ensuring the continued growth of the US LNG sector and its ambitions of becoming a major global exporter.
Source: Reuters
