the last word
WHENCE THE PROJECT PIPELINE? BY JANET NODAR
C Credit: Keith Necaise Photography
“New energy projects are not being brought forward. We see very few authorizations in our client base.” – Phyllis Kulkarni, Independent Project Analysis
apital projects spending sends its all-important ripple effects down the project logistics supply chain, populating what we characterize as the “project pipeline” – or not. The Baltic Dry Index is a leading economic indicator, a measure of demand for basic building blocks such as iron ore and forest products. The project logistics industry project pipeline can be considered a lagging indicator, because project pieces cross water and land to construction site or marshaling yard months or even years after the commitment to build was made. Thus, it took several years for the project pipeline to thin out, post-Great Recession, and the spending triggered by the high energy prices of a few years ago also took a while to dissipate. It’s safe to say the pipeline is emptying now. The commodities slump is roughly seven years old, while the oil slump is well into its terrible twos. Operators, EPCs and other project owners are cutting back on capital spend, saving their cash, consolidating, laying off staff and relying on contractors. “New energy projects are not being brought forward,” said Phyllis Kulkarni, director North America with Independent Project Analysis, a consultancy. “We see very few authorizations in our client base.” Kulkarni said that overall they’ve seen at least US$200 billion in capital expenditures deferred until perhaps as late as 2020. Many start dates will hinge on oil prices. Other than chemical projects on the U.S. Gulf Coast and refining in Asia, the overall growth picture for other sectors and parts of the world is modest at 2 percent to 3 percent annually, she said. PwC, another consultancy, recently published its 2016 edition of Capital Project And Infrastructure Spending Outlook: Agile Strategies For Changing Markets. The report summarizes the causes of global economic uncertainty as: falling oil and commodity prices, faltering economies in the developing world, China’s slowing growth, a surging dollar, and a range of geopolitical uncertainties.
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In the report, PwC explores three growth outlooks from 2016 through 2020: • A “baseline” that starts out with a slow trudge upward at about 2 percent, gradually expanding to 5 percent growth by 2020. • A “China hard landing” in which PwC estimates a slump to less than 1 percent global growth in 2017, with recovery beginning in 2018 to land at just under 6 percent by 2020. • A “global upturn” scenario that sees things picking up to almost 6 percent by 2017 and staying there through 2020. In the baseline scenario, PwC estimates global spending on capital projects and infrastructure at US$28.2 trillion through 2020. The upturn scenario adds US$600 billion to this spending outlook, while the China hard landing scenario cuts spending from baseline to US$27.1 trillion, a paring of US$1.1 trillion. However, risks for large projects do not all lie at the macro level. One-third of IPA’s clients consider procurement to be their first- or second-most important supply chain vulnerability, Kulkarni said during a keynote speech at Breakbulk Americas in Houston in September. She noted that it is becoming routine for detailed engineering time on many megaprojects to slip by roughly half, indicating that procurement problems may actually often be driven by upstream factors: i.e., procurement running late because engineering is not ready when scheduled. To cope, it would be wise to plan on longer engineering, she said. To avoid delays and supply chain problems, it would be best to involve procurement and logistics early in the planning and engineering process – in other words, to bring them in at the front of the project pipeline, rather than near the end. Music to the ears of every logistician I’ve ever spoken to, no question. Janet Nodar Content Director
ISSUE 5 / 2016