After five years of frenzied contract awards in its energy sector, Qatar has experienced a year of relative calm to date.
Project awards in the downstream energy sector, which include refineries and petrochemicals plants, have been delayed by up to 12 months as a result of uncertain demand in the wake of the global financial crisis that hit the region in the middle of last year.
These delays could soon be coming to end, however, as the country seeks to take advantage of lower engineering, procurement and construction (EPC) costs, which are down by up to 45 per cent compared with the peak of the market in July 2008.
In June, state-owned energy company Qatar Petroleum (QP) invited contractors to bid for more than $10bn worth of work on two of its largest oil and gas projects: the Al-Shaheen refinery and the Barzan gas project, which is designed to provide gas for the domestic market.
In the coming months, QP will be reconsidering tendering key EPC contracts on the 250,000-barrel-a-day (b/d) Al-Shaheen refinery, after it was delayed in December 2008 as part of a review of EPC costs. The refinery, which will process crude from the offshore Al-Shaheen field, will produce distillates, bitumen and green coke, along with other hydrocarbons derivatives.
QP and its joint venture partner the US’ ExxonMobil Corporation could also soon be tendering construction contracts for their Barzan gas project, after stalling bidding on the scheme in March to assess how the drop in EPC prices would affect the local market. Ras Laffan Liquefied Natural Gas Company (RasGas), which is executing the Barzan project on QP’s behalf, said it would pause the project to benefit from changes in the market.
The delays look likely to yield some benefits for clients, which are in a strong position to take advantage of lower project costs. At the height of the boom, equipment and manpower shortages meant both suppliers and contractors struggled to cope with their workloads, and drove up costs.
Prices were further inflated by spiralling raw materials prices. Iron and steel prices reached a 13-year global high in 2008, with rebar (reinforcement steel bars) fetching $1,900 a tonne in July, a figure that fell to $400 a tonne in February due to global oversupply and a lack of demand.
According to Michel Govaerts, Middle East and Asia business development director at France’s Total Petrochemicals, his company has been able to secure reductions of 15-20 per cent in the cost of construction since the peak of the market in mid 2008. “There has been a slowing down of projects simply because the EPC market was so overheated over the past few years,” says Govaerts.
It is clear that a less expensive EPC market will provide plenty of opportunities to move projects forward. “It is a good time to start,” says one Doha-based contractor. “Abu Dhabi and the Saudis have already started moving ahead with projects”.
- $10bn – Value of Qatar’s largest oil and gas projects, Al-Shaheen and Barzan
- $40 – Hourly cost of Gulf construction projects in August 2009
- 20 per cent – Reduction in Gulf construction costs secured by Total Petrochemicals this year
However, the contractor says clients such should be wary of delaying too long, as EPC prices may begin to rise with any global economic recovery, eroding potential savings made from delaying projects.
“It depends on the contractor’s backlogs,” says Govaerts. “It could be a window of opportunity. EPC prices could even go back up.”
However, a return to the EPC pricing levels recorded in 2006 to mid 2008 is unlikely. “If you reach a new plateau or benchmark compared with where we were five or six years ago, then those days are not going to come back,” says the Doha source. “This is what all the contractors are saying,”
But given Qatar’s reliance on exports of liquefied natural gas (LNG) and petrochemicals, the outlook for the global markets may well put the brakes an any burst of activity, however healthy the Qatari economy.
“The problem at the moment is that the outlook for the petrochemicals market is not good and it looks like the overcapacity will persist until 2012,” says the Doha-based source. “So you will see clients hesitate a little until they have more clarity on how much demand there will be going forward.”
The long lead times involved in completing a petrochemicals plant – four to five years – mean the current drop in petrochemicals prices will not have an impact on long-term commitments to increasing production capacity.
“For clients, it is a question of managing the tension between timing, in terms of reduced EPC costs, and making sure everyone is comfortable with the outlook for petrochemicals,” says the Doha-based contractor.
“In the next six to 12 months, I would not be surprised to see at least one major petrochemicals project enter the engineering and design phase.”
Planned oil refinery projects face a similar problem in terms of whether their business plans stack up in the new economic environment since the global downturn. “The main issue for an export refinery is that the margins are poor, so they will question whether it is economically viable at the moment,” says the Doha-based source.
At the moment, downstream energy and petrochemicals sector activity in the Gulf remains subdued. “I cannot see much activity outside Saudi Arabia’s Ras Tanura project,” says the Doha-based source.
Even on Ras Tanura, the front-end engineering and design [Feed] phase will not now be completed until late in the second half of 2010.It was scheduled for completion in July 2009.
“Ras Tanura is politically rather than economically motivated,” says the Doha-based petrochemicals source. “These are big country-based political projects. If you look at the private sector, where the big international oil companies [IOCs] are looking to go forward, there are not many opportunities that we can see for new projects.”
QP has four major petrochemicals plants planned as joint ventures with IOCs. Between 2005 and 2007, the US ExxonMobil Chemical and the UK/Dutch Shell Group both agreed to develop major olefins complexes with state-run QP at Ras Laffan.
ExxonMobil plans to build a 1.3 million-tonne-a-year (t/y) ethane cracker, and Shell a 1.2 million-t/y ethane cracker. France’s Total is also planning to participate in a third olefins cracker project, but feedstock for this has yet to be secured.
A fourth project, a joint venture of QP and South Korea’s Honam Petrochemicals Corp-oration to build a 900,000-t/y mixed ethane/naphtha feed cracker at Mesaieed petrochemicals complex, is due to come on stream after 2012. Again, the complex was delayed by six to 12 months in December 2008 as EPC costs were reviewed.
Critical to the success of these projects is the availability of ethane feedstock supplies, which have caused concern to clients planning petrochemicals projects.
Despite being home to 25.46 trillion cubic metres of ethane at the end of 2008, according to the latest BP Statistical Review of World Energy, the majority of Qatar’s gas is converted to liquefied natural gas (LNG) and exported.The emirate’s petrochemicals industry therefore relies heavily on limited allocations of associated gas from oil production for its feedstock. Supplies are not expected to rise significantly in the next few years so securing supplies of feedstock will become increasingly difficult for new schemes.
“You will see some decline [in the avail-ability] of associated gas because of lower crude production,” says the Doha-based contractor. “When the big projects come on line, this will add considerably to the problem.”
Qatar’s potential for further growth in its downstream energy sector is not in doubt, but its moratorium on exploration of its giant North field gas reserves, which was first put in place in 2005, will hinder the growth of industry, especially in the petrochemicals sector.
“The country is strongly placed for further growth,” says Govaerts. “The biggest question over the past two or three years has been when the moratorium will be lifted.”
With the study to determine the condition of the North field due to continue until 2014, any planned surge in Qatar’s petrochemicals sector has become unlikely until this is resolved, with the four joint venture cracker projects with ExxonMobil, Shell, Total and Honam either on hold or in the early stages of discussion.
“Qatar wants to diversify its product portfolio,” says Govaerts. “At the moment it is all ethane crackers and ethylene. But it is going towards mixed-feed crackers.”
According to Phillip Leighton, former director of petrochemicals at the UK’s Jacobs Consultancy, while upstream projects have been affected by the North field moratorium, the changes to downstream plans seems to be more a reaction to developments in the financial market.
With its high reliance on project finance, particularly for its downstream developments, Qatar was the first country in the region to suspend or delay projects – one of the first was Al-Shaheen in December 2008 – following the global economic downturn.
“This source of funds [project finance] is effectively now closed,” said Leighton, speaking at MEED’s petrochemicals conference in Bahrain in July. “Hence the ability to raise the funds for a large project in the current market is untested, but is thought likely to be difficult or impossible”
However, there is optimism for the year ahead, in terms of downstream energy projects.
“Project delays were a feature of the Middle East in general for 2009,” says Govaerts. “The capacity that was due to come on line in 2009 will now only come on line in 2010.”
Regardless of the state of the project finance market, Doha is currently building and completing a string of downstream energy projects started over the past five years.
“Qatar is in no rush, and why should it be?” says Govaerts. “The key is to get its big projects up and running now, not to worry about the next phase before it is done.”