Pearl will be by far the largest GTL plant ever built, easily surpassing the 34,000-b/d Oryx facility at Ras Laffan: as a result, it will mark a new chapter in the development of the nascent GTL industry. But the scheme could also prove to be the most expensive project in the history of Gulf gas.

Although Shell has declined to give a precise cost estimate, it announced following the final investment decision (FID) on 26 July that the scheme would produce 3,000 million barrels of resources over the course of its lifetime at a cost of $4-6 a barrel. That implies total project costs of $12,000 million-18,000 million, which is more than double the original cost estimate of $5,000 million.

Even in todays inflated market, the surge in the cost estimate has been dramatic. For Shell, already in the public spotlight over the huge cost overruns on the Sakhalin liquefied natural gas (LNG) project in Russia, the upward revision on Pearl GTL was not what it needed.

Revision

Shell maintains that the Sakhalin and Pearl GTL cases are very different: the cost of the Russian LNG development shot up after the FID was taken, and not before as was the case with the Ras Laffan project.

In addition, it contends that there were some very logical explanations for the GTL revision. ‘We did publish figures back in 2003 when the HoA [heads of agreement] was signed, but that was at a very preliminary stage,’ says Andrew Brown, managing director of Pearl GTL and Shell country chairman.

‘Since then, the scope has changed, certain parts of the product levels have increased and some of our valuable products have risen in volume. We have also managed to appraise the offshore reservoir and understood how to develop it.’

Like other major oil and gas projects, Pearl GTL has been hit by a significant shift in the regional projects market over the past two years, which has seen materials prices rocket, contractor capacity squeezed and bid prices soar.

‘We are in a market that has not been seen for a generation,’ says Brown. Indeed, market conditions led Shell to alter its contracting strategy in 2005.

Out went the plan to let just one engineering, procurement and construction (EPC) contract for the entire onshore works. Instead, the company decided to award the core element on an engineering, procurement and construction management (EPCM) basis to the Japanese/US joint venture of JGC Corporation and Kellogg Brown & Root and break up the remaining onshore works into smaller EPC packages.

‘The strategy has worked,’ Brown says. ‘We got the competition, secured the resources and we have not compromised at all on quality.’ The main EPC packages went for tender a year ago.

By the time bids were submitted in the first quarter, speculation was growing that spiralling costs could significantly delay implementation.

In early May, Shell sought to reassure the EPC bidders by sending out letters stating that the project was on track and that key long-lead items and the first construction contracts had already been placed.

‘We made it very clear to the contractors that we were content to take the right position to support the overall schedule, which meant some pre-investment. It was important so that people didnt get cold feet,’ says Brown.

Prior to the FID being taken, Shell had a much better grasp of the estimated costs. It had completed the front-end engineering and design (FEED), the main EPC packages were ready to be awarded and a thorough benchmarking exercise had been undertaken of front-end loading. ‘I would urge people to understand that we had a preliminary estimate on an early scope of works’ says Brown. ’ Now we have the FIC taken on a far more accurate estimate based on a final scope.’