Blowouts highlight boom-time pressures

MAJOR problems at four multi-billion dollar resources projects have delivered a blunt warning of the growing pressures on developers as the commodities boom gathers pace.

BHP Billiton, Citic Pacific, Fortescue Metals Group and Woodside Petroleum have all been embarrassed by major issues at their flagship Pilbara developments, likely to cost billions of dollars in overruns and deferred sales revenue.

The foul-ups have exposed the growing pressure on engineering and construction workers, development schedules and budgets resulting from the need to bring new capacity into production as quickly as possible to meet rapidly accelerating demand.

Most embarrassing are design foul-ups at BHP’s $6.3 billion Rapid Growth 5 iron ore expansion and Woodside Petroleum’s $13 billion Pluto liquefied natural gas project at Karratha.

BHP is now reviewing the scope of the project to confirm it will have sufficient rail unloading and ship loading capacity to boost exports by the targeted 50 million tonnes a year.

The revelation follows more than three months of rumours about progress of the upgrade being managed by the FAST (Fluor and SKM Team) joint venture. RGP5 rail contractor Macmahon Holdings last week also blamed delays and cost increases at an unnamed WA rail contract for wiping out its forecast profits for the current half.

Installing additional rail and ship loading capacity is expected to add tens of millions of dollars to the construction cost, while analysts believe completion could be delayed by up to a year, costing BHP billions more in deferred iron ore sales.

Meanwhile, Woodside has had to dismantle brand new flare towers at its Pluto LNG project for modifications because they do not meet its strict cyclone rating.

Though it has not yet indicated if first gas exports will be delayed beyond its March 2011 target, it is reviewing the schedule. With an unusually severe cyclone season about to commence, completion could be delayed until after the season ends in April.

Escalating labour and materials costs have also hit Fortescue, which told prospective US bond investors that its planned Solomon Hub development was now likely to cost more than $5.4 billion, $2 billion more than it had told Australian investors in March.

And early last week, China’s Citic Pacific Mining revealed it had sacked the local arm of contractor Austrian Energy & Environment hired to construct the 450-megawatt power station at its $5.2 billion Sino Iron magnetite project at Cape Preston in the Pilbara.

Citic accused AE&E of “failing to meet its material obligations under the contract”, in turn locking out 400 electrical contractors from the site.

AE&E was placed in the German equivalent of voluntary administration shortly afterwards in a bid to restructure its finances.

Citic maintains that the dispute will not affect its revised completion schedule at the project, which is slated to start commissioning by the end of the year and ship its first magnetite in the first half of 2011.

Critically, it confirmed that the electrical contractor workforce had returned to work under new arrangements.

Nonetheless, the dispute with AE&E comes after a bad 18 months for Citic marred by a $1 billion currency hedging loss on the project, a $900 million cost blowout due to rising construction and labour costs and friction between local contractors and China Metallurgical Construction Co, which is the lead construction engineer and a 20 per cent partner in the project.

The project was originally forecast to cost just $2.1 billion in 2007.