When is on-budget over-budget?

The Louisiana governor joined Incitec Pivot and Dyno Nobel last week for a “dedication event” for the new ammonia plant at Waggaman, LA. The festivities included a ribbon-cutting and the unveiling of a ceremonial plaque, despite the fact that the plant is not quite finished with its commissioning process.

“This plant is a transformational event for our Dyno Nobel business in the U.S. and for our company. It is the first ammonia plant to have been built in the state in over 25 years …”
Office of the Governor of Louisiana press release, 09/29/2016.

The press release is odd: it doesn’t know whether to use the past or future tense.

WALA ribbon cutting ceremony. Source: Incitec Pivot
WALA ribbon cutting ceremony. Source: Incitec Pivot
Is the plant finished? “The dedication of this new plant is the culmination of the months and years of cooperation …”

Or is the plant unfinished? “The ammonia production facility … upon completion will rank among the most-efficient ammonia plants in the world.”

Of course, it takes time to plan an event like this and get governors and CEOs from across the seas, but my point is that Waggaman was supposed to be up-and-running by now, not still “deep in commissioning.” In May, Incitec’s CEO James Fazzino described his attitude toward the start-up schedule: “Frankly, this is a 50-year project and I’m fairly indifferent whether it’s July, August or September. It will be sometime in those … months and we’ll take our time and we’ll get it right.” It’s now October, but they’ll get it right.

With uncanny timing, the day after Waggaman’s dedication, KBR sent out its own press release to announce “updated earnings guidance for 2016 to reflect expected increases in costs to complete engineering, procurement and construction (‘EPC’) projects.”

An EPC ammonia project in the Company’s Engineering & Construction business segment has continued to experience unforeseen costs during startup and commissioning related to mechanical failures of a vendor-supplied compressor and pumps. These issues have further delayed expected completion of the project to October 2016 resulting in increased construction and repair costs and the recognition of contractual liquidated damages. This project is in the final stages of completion and start-up in anticipation of performance testing.
KBR press release, 09/30/2016

KBR never gives specifics but it isn’t crazy to assume this refers to the Waggaman plant (see my previous commentary on KBR and Waggaman from May 2016).

The total cost increase in KBR’s earnings guidance comes to $130 million, but most of that relates to a power plant. So, by how much is Waggaman over budget: $20 … $40 … $60 million? And does it matter?

To Incitec Pivot, this doesn’t matter much because it won’t pay the additional cost: as long as the finished plant performs as promised, it’ll be content. However, its dedication event was marred, as that was surely supposed to celebrate a finished plant.

To anybody looking to develop or finance an ammonia plant, it matters greatly. This is one of many botched engineering jobs to have unfolded over the last year (El Dorado, Greeneville, Wever). Financiers demand that projects are de-risked before funding, requiring a lump-sum EPC contract – but, given the EPC companies’ recent experience, these cost-guaranteed contracts are hard to come by.

In any case, these ongoing problems cast serious doubts on our industry know-how.

Leave a Reply

Your email address will not be published. Required fields are marked *