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The Big Petrochemical Building Wave Is On

The chemical industry braces for the start of a massive construction boom

by Alexander H. Tullo
March 17, 2014 | A version of this story appeared in Volume 92, Issue 11

Credit: Fluor
Engineering firm Fluor says labor will be the biggest concern for a new wave of petrochemical projects in the U.S.
Photo of a construction worker on a construction site of Fluor, the largest engineering, procurement, and construction firm serving the chemical industry.
Credit: Fluor
Engineering firm Fluor says labor will be the biggest concern for a new wave of petrochemical projects in the U.S.

New construction is presenting Pipe Fitters Local 211 with a happy problem. More work is coming into its territory—extending from Interstate 10 in Texas down to the Mexican border—than there are qualified welders and pipe fitters. Workers are migrating to the Gulf Coast from the Midwest and the East to fill jobs.

“With the billions of dollars’ worth of work that’s projected to come up, they’re flocking in here every week wanting to get in on it,” says Kenneth Edwards, Local 211’s business manager. For the first time in his more than three decades with the union, he saw work pick up between Thanksgiving and Christmas last year.

Edwards expects the boom to last about six years. Over that time, he predicts, his union’s membership will more than double from the 3,000 members it has today. “We are going to get jobs,” he says. “And good-paying jobs, with benefits.” One recent posting on the local’s website offered nearly $40 an hour.

The union has had to turn people away from its training programs because it can’t accommodate them all.

These workers will be building new chemical plants. Chemical companies seeking to exploit cheap natural-gas-based feedstocks from shale have promised more new capacity than ever before in the history of the U.S. chemical industry.

Preparations are under way. Chemical makers, engineering firms, and other organizations want to make sure that enough personnel, equipment, steel, and cement are in place to avoid the cost escalations and delays that often accompany building booms.

Today’s boom is a consequence of horizontal drilling and hydraulic fracturing to free natural gas from shale, a practice that has dramatically altered the U.S. energy landscape. Proved natural gas reserves have nearly doubled. Production has increased by about 25%, and prices have fallen precipitously. The U.S. is becoming a natural gas exporter instead of an importer.

For chemical makers, the flip in the U.S. energy picture has created an enormous opportunity. Companies in the U.S. predominately crack natural-gas-derived feedstocks such as ethane to make the building block ethylene. Producers in Europe, Asia, and Latin America crack petroleum-based naphtha. Uncompetitive a decade ago, North America is now the lowest-cost place to make ethylene outside of the Middle East.

Russell Heinen, senior director of chemical technology and analytics at IHS Chemical, projects that chemical companies will add 83 million metric tons per year of new U.S. capacity by 2020 for products such as ethylene, polyethylene, ethylene dichloride, methanol, and ammonia. He puts the cost at $82 billion. And that doesn’t include land purchases and infrastructure costs that could very well double expenses.

The position of the U.S. in the petrochemical world will change, notes Stephen Lewandowski, senior director of olefins research at IHS. The U.S. won’t be big enough to absorb all this capacity when it comes on-line around 2017. Exports, which represent 10–15% of U.S. ethylene-derivative output today, will swell. Finding new markets won’t be an insurmountable task. “The Middle East did it,” he says. “It is a proven model.”

But all this spending means an unprecedented amount of expansion activity centered on the U.S. Gulf Coast. Richard Meserole is the vice president of energy and chemical construction at Fluor, one of the largest engineering, procurement, and construction contractors serving the chemical industry. Standing in front of IHS’s annual petrochemical conference last year, he forecast that all the planned shale-related projects will require as many as 60,000 craft workers such as pipe fitters, ironworkers, and electricians. About 20,000 craft workers will be needed within a 50-mile radius of Houston alone.

Even in a region that is already home to a lot of skilled construction workers, getting that many reliable craftspeople will be a challenge. Wages and fringe benefits will need to climb. “Construction is not a part of the fabric of the U.S. like it used to be 30 years ago,” Meserole said. “A lot of our kids are really good at video games; they are not so good at swinging a hammer or using a welding torch.”

Heinen agrees that labor is emerging as the biggest concern for companies building new facilities. “In some cases, these plants are just down the street from each other,” he says. “There is an enormous concern about getting the labor in and retaining the labor once you have it.”

Much of the logistics of labor procurement for these projects is falling on state and local workforce boards that connect prospective employees with jobs and can act as facilitators for firms seeking to invest.

For example, the Texas Workforce Commission is making grants to community colleges so they can train students in plant operations. It is providing nearly $2 million to Alvin Community College, which has partnered with Ineos and Ascend Performance Materials to develop a curriculum. It granted a similar amount to Victoria College, which is working with Dow Chemical, Ineos, DuPont, and Formosa Plastics.

ExxonMobil, which is planning an ethylene cracker in Baytown, Texas, is providing a total of $500,000 to nine Texas community colleges. The Exxon­Mobil initiative will even have a booth at the Houston Livestock Show & Rodeo in the hopes of recruiting some of the spectators moseying on by.

The State of Louisiana will fund a $20 million technical training center at Southwest Louisiana Technical Community College. The center is part of a package of government incentives for Sasol, which plans to spend more than $16 billion on an ethylene cracker and a gas-to-liquids complex in Westlake, La.

In total, companies plan more than $65 billion worth of investment in five southwest Louisiana parishes, according to David Conner, vice president of the Southwest Louisiana Economic Development Alliance. The spending will lead to 7,000 direct and 14,000 indirect jobs and swell the population of 300,000 by as much as 60,000, he says.

The job of his organization, Conner says, is to “develop a game plan for what the impact will be and how to get prepared.” For example, over the next five years, the area will need as many as 18,000 residential units.

The strategy for the companies that are building multi-billion-dollar complexes is simple: Plan carefully, and keep ahead of the pack. “These are huge projects, and they require a considerable amount of coordination of multiple resources to execute,” says Ron Corn, senior vice president of specialties, aromatics, and styrenics at Chevron Phillips Chemical. “Just one or two things have to get tight and it can influence your schedule and ultimately your cost.”

In March 2011, Chevron Phillips was the first of 10 firms to announce a shale-based ethylene cracker in the U.S.

The Chevron Phillips cracker is going up at its Cedar Bayou plant in Baytown by 2017. The firm is also building a pair of polyethylene plants near its Sweeny facility in Old Ocean, Texas. The company has its permits in hand and has already bulldozed the terrain. “We will be driving piles and pouring foundations at some point in the second quarter at both sites,” Corn says.

For Chevron Phillips, early is better. The company long ago ordered specialized equipment such as compressors and reactors. Its planners wanted to get ahead of the backlog they were expecting at suppliers. “We were able to hit a lull in shop space,” Corn says.

Dow has taken a similar approach to its Gulf Coast projects. Construction is under way for a propane dehydrogenation (PDH) plant in Freeport, Texas, that will be completed next year. The firm is also planning a new cracker for the site by 2017. “Securing skilled labor will definitely be a challenge. That’s why Dow decided to lock in early,” a spokeswoman says. “Craft labor currently working on the PDH unit will be rolled over to the cracker.”

Companies are trying to avoid a repeat of what happened during the construction wave that swept the Middle East in the 2000s. Costs skyrocketed and delays were long because of intense competition for construction materials and labor. Saudi Aramco and Sumitomo Chemical, for example, saw costs double at their joint-venture complex in Rabigh, Saudi Arabia, to $8.5 billion. Many plants faced years of delays.

Chevron Phillips was involved in the construction of four crackers in the Middle East during this harried time. “One of the main drivers for achieving and maintaining a first-mover position was to learn from our experience in the Middle East,” Corn says. IHS’s Heinen doesn’t expect the U.S. to experience the cost run-ups that the Middle East did. “There were some projects there that got extremely out of control,” he says. “But the dynamic there was a little more complex. You had a higher underlying inflation rate. You had steel prices going through the roof.”

Ultimately, Heinen expects the cost of projects in the U.S. to creep up just 4–8% by the time they are finished toward the end of the decade. This won’t be nearly enough, he notes, for a company to cancel a project it has already sunk money into.

Delays and even cancellations are possible for projects still on the drawing board, however. Already, Nova Chemicals delayed a polyethylene plant it was contemplating for Ontario or the U.S. Gulf Coast, citing cost and timing issues. Shell backed off plans for a gas-to-liquids facility in Louisiana.

There will be hiccups, but they won’t prevent the U.S. from being one of the best places in the world to invest in petrochemicals, according to Heinen. The proof is that companies haven’t stopped unveiling plans for new capacity. “You wouldn’t see that,” he says, “if people didn’t think there was still potential for a reasonable economic return.”  

Map and table show locations of Gulf Coast ethylene crackers that are slated to start up in 2017.
Most new Gulf Coast ethylene crackers are slated to start up in 2017. a Because the project is not sited yet, it is not included on the map. na = not available. SOURCE: Company documents


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