Hurricane Harvey—What Does It Mean for Capital Projects?
The 2017 Atlantic hurricane season has forever affected millions of people. The losses to lives, homes, and possessions resulting from Hurricanes Harvey and Irma slamming into different parts of the United States Gulf Coast (USGC) are unbearably sad. The disruption to business operations has also been widely felt, with Houston being a critical hub for the oil and gas, refining, and chemicals industries.
For companies with capital projects and operations in the region, the aftermath of these hurricanes may last much longer than the initial turmoil. As rebuilding efforts get underway, companies have approached Independent Project Analysis (IPA) asking how to best forecast the likely effects of Hurricane Harvey (and to a lesser extent, Hurricane Irma) on the capital projects market. Business and project managers are asking questions such as:
- What crafts are likely to be in short supply?
- How much will construction labor costs increase?
- What is the overall impact on capital project costs likely to be?
- Outside of the USGC, what “ripple effect” is likely to be seen in other parts of the United States?
To answer these questions, IPA can draw on historical and recent data in its proprietary databases for both onshore and offshore capital projects. As shown in the table below, the hurricane season of 2005 represents a good analogue for 2017.
| 2005 | 2017 | |
|---|---|---|
| Hurricane(s) | Katrina (and Rita) | Harvey (and Irma) |
| Landfall | Katrina: August 29 Rita: September 24 |
Harvey: August 25 Irma: September 10 |
| Location | USGC (Louisiana and Texas) | USGC (Texas and Florida) |
| Estimated Damage | Katrina: $120 billion to $150 billion Rita: $15 billion to $20 billion |
Harvey: $150 billion to $180 billion Irma: $20 billion to $30 billion |
| Type of Damage | Mostly flooding | Mostly flooding |
| Pre-Hurricane Context | Significant labor shortages (heated market) |
Moderate labor shortages (somewhat heated market) |
Past IPA research shows that after Hurricane Katrina, project costs in the USGC rose by 10 to 20 percent on average. The major cost accounts—office, field labor, and materials—all increased, but to varying degrees. Although further analysis is needed, it is reasonable to say that this is a good initial proxy for the likely impact from the 2017 hurricanes. Also worth noting is that project schedules are similarly at risk. Although companies are usually alert to the risk of cost increases to their projects, IPA observed that many post-Katrina projects were caught off guard by other issues in the supply chain. Availability of construction equipment such as cranes and disruptions to transportation were two of the most common issues.
IPA has already begun re-examining post-2005 hurricane effects on the U.S. capital projects market and forecasting the likely effect of the 2017 hurricanes. To discuss participating in this research, please contact Phyllis Kulkarni, IPA Regional Director of North America.