Coronavirus Creates Supply Chain and Workforce Management Challenges for Oil and Gas EPC Projects

Following the coronavirus (COVID-19) outbreak, China – the world’s biggest importer of crude oil – has been forced to cut down on consumption. The resulting oil price crash is having a cascading effect on forward and backward industrial supply chains, as well as oil and gas projects across the value chain. These are likely to result in changes in project costing and timelines for ongoing and proposed engineering, procurement and construction (EPC) projects, according to leading data and analytics company GlobalData.

The company’s report, ‘COVID-19 Impact on Oil & Gas EPC Projects’, reports US$1.2 trillion capital expenditure (CAPEX) in announced/planned new build and expansion projects across the value chain, which are expected to commence operations during 2020-2022. Of these, projects, those worth approximately US$572bn are found in the refinery and petrochemical segments.

Pritam Kad, Oil and Gas Analyst at GlobalData, comments: “In this difficult situation, key challenges for EPC projects are the supply chain, workforce management, increased subcontracting work timelines dependency, and subsequent cost over-runs. There could be a need for contract renegotiation, with project owners due to contract compliance issues that might further strain the overall project financing for EPC companies”

The COVID-19 outbreak’s effects on Chinese market could have adverse impact on EPC projects – especially those for the petrochemical sector in China. In China alone, there are around 302 new or expansion petrochemical plant projects currently under construction or at the commissioning stage with a CAPEX of US$112bn. The probable delay in these projects could lead to a lower-than-expected throughput of petrochemical plants and limit the country’s production capacity.

Kad added: “A slowdown in EPC projects in the petrochemical industry could further have a ripple effect on multiple other industries such as the chemicals, plastics and automotive sectors. Some of the large projects that are likely to come on-stream in 2021 might also face further delays as 2020 projects execution will be under strict timelines and could also spill over to the first half of 2021.

“The COVID-19 outbreak, and the subsequent drop in oil prices, is creating a roadblock for future EPC projects as the oil and gas demand-supply metrics is putting pressure on the existing upstream projects itself. This situation is not lucrative for the new on-stream projects. Some of the current approval/FEED stage projects that are proposed to be completed by 2022 may also take the re-evaluation process. They may consider the specific clauses in contracts or negotiation with respect to unforeseen events, such as COVID-19 and future impacts, project timelines review/suspension, investment decision, and safety and risk management re-structuring.”