When the US’ ExxonMobil Corporation surprised the market by abruptly pulling out of a major gas-to-liquids (GTL) project in Qatar last year because of spiralling costs, the state-run Qatar Petroleum (QP) immediately announced a replacement project for the world’s largest oil major.
While the move was partly to reward Exxon for its years of loyalty in helping to develop the state’s energy sector, it was also a reassuring nod to the watching world that Qatar’s hydrocarbons masterplan was on track.
At the time of the pull-out in February last year, Exxon deemed the hi-tech GTL project with QP at Ras Laffan Industrial City too much of an investment risk, with costs for the plant thought to have hit $18bn, from an initial budget of about $7bn.
While Exxon’s replacement gas project, Barzan, has already been expanded to become another sizeable investment among the US firm’s Qatari ventures, doubts are surfacing over a related series of petrochemicals projects under construction at Ras Laffan, including one being promoted by Exxon itself.
In recent weeks, contractors have expressed doubts to MEED over plans to expand the multi-billion-dollar petrochemicals complex at Ras Laffan, after QP said it was temporarily suspending work on a key project. The state-run firm told contractors that a common seawater cooling system to be built at the industrial city was no longer going ahead because of a lack of demand from petrochemicals companies for the plots of land it would have served.
When Exxon and the UK/Dutch Shell Group signed memorandums of understanding with QP in 2004 and 2005 respectively, it seemed the small Gulf state could feasibly rival Saudi Arabia for supremacy in the region’s petrochemicals sector.
Under a masterplan set out by Qatar’s Energy & Industry Minister Abdulla bin Hamad al-Attiyah in early 2005, both companies were primed to deliver considerable volumes of ethane from existing gas schemes at Ras Laffan, which would support one new cracker by 2010, with a second expected in 2013. In addition to the oil majors’ plans, QP initiated talks with Kuwait’s Petrochemical Industries Company (PIC) and the US’ Dow Chemical Company to create a third cracker, although nothing came of the venture.
More than three years on, little progress has been made on the Exxon or Shell ventures. Exxon’s scheme, to be completed in 2012, was to comprise a 1.3 million-tonne-a-year (t/y) cracker, a 570,000-t/y linear low-density polyethylene plant, a 420,000-t/y low-density polyethylene unit and a 700,000-t/y ethylene glycol plant, a first for Qatar.
Al-Attiyah told MEED in February that the Exxon project could be delayed for a few months, but insisted this was normal, saying discussions were ongoing between QP and Exxon on the scale of the facilities. However, the lack of news has left industry insiders speculating that it could be delayed indefinitely.
The US’ Foster Wheeler was widely expected to receive the contract and, six months on, sources in the contracting community are puzzled about the absence of an award. “The project seems firm but the timing is indeterminate,” one senior executive close to the discussions tells MEED. “One of the big issues here at the moment is that Qatar Petroleum is stretched and its decision-making capabilities are compromised.”
However, the executive says he expects it to be a delay rather than a cancellation. “Things are going more slowly than anticipated but it is a question of how much QP and the international oil companies can build at any one time, and also what they can do with the North field,” he says.
In 2005, Qatar halted the development of its fast-growing gas industry by introducing, and recently extending, a moratorium on the country’s prized North gas field to study the valuable reservoir, curtailing local suppliers of feedstock.
Doubts have also resurfaced over Shell’s cracker, which was to take gas liquids, in particular ethane, from its $16-20bn Pearl GTL development to support petrochemicals production. France’s Total held talks with QP last year over establishing a world-scale petrochemicals complex at Ras Laffan by 2012, similar in size to the one planned by QP and Exxon.
While plans for the project are still at a much earlier stage than Exxon’s planned facility, executives in the sector expect only one plant to be built in the next five years.
The sidelining of growth at Ras Laffan Industrial City was not part of Qatar’s master-plan. Petro-chemicals projects in Qatar were expected to be split between the industrial cities of Mesaieed in the south and Ras Laffan, north of Doha, to best use existing infrastructure and feedstock opportunities. To the surprise of many in the industry, the smaller Mesaieed complex has now taken the lead, with Ras Laffan, home of Qatar’s burgeoning liquefied natural gas (LNG) industry, taking a back step.
A joint venture of South Korea’s Honam Petrochemical Corporation and Qatar Intermediate Holdings Company, a subsidiary of QP, are pressing ahead with contract awards for the polymers complex at Mesaieed, which is due to come on stream by 2011.
Other projects due to come on line at Mesaieed include the construction of a 60,000-t/y melamine plant and a 250,000-t/y low-density polyethylene plant.
Stuttering expansion plans at Ras Laffan are regarded by analysts as symptomatic of a wider malaise set to hit the Gulf’s fast-growing petrochemicals market.
Part of the problem is a shortage of ethane. In Saudi Arabia, only the Sipchem and Saudi Aramco/Dow Chemical Company cracker at Ras Tanura are under consideration. Yet crucially, neither has yet reached a final investment decision. Even in gas-rich Qatar, the Honam project is set to use mainly naphtha feedstock, largely derived from oil refining.
The majority of Qatar’s gas is diverted into LNG. Given that LNG can be sold on inter-national markets for up to $10 a million BTUs, extracting ethane, which is currently sold to projects in Qatar for $1-2 a million BTUs, remains uneconomic. This means producers rely heavily on associated gas from the state’s 800,000-barrel-a-day (b/d) oil production.
Petrochemicals analysts claim that the combination of these high prices and feedstock constraints are fuelling price pressures on previously sustainable projects. “We have definitely seen a switch in the readiness of international companies to commit to hard budgets and deadlines in Qatar’s petrochemicals sector,” says one London-based analyst.
The original cost of the Honam project, which will use a 25:75 ethane-to-NGL feedstock mix, was a competitive $2.7bn, which is since thought to have nearly doubled in price.
Doubts about the rate of return on other Ras Laffan projects are thought to have stalled the decision of Exxon and Shell to proceed. “The big question mark with these projects has always been about capital costs,” says the analyst. “Exxon already has cracker plans in China and Singapore, and will slow things down if necessary in other parts of the world, such as Qatar, to meet its requirements.”
He says the expected rate of return on a project is no longer a given in Qatar. “You generally want to see a 15-20 per cent return, but at the moment you are struggling to get to those types of figures,” says the analyst.
While Shell and Exxon were unavailable for comment, one source close to the discussions says the companies are more concerned about implementing existing projects than committing to new capital expenditure.
“Both companies are aware that now is not the time to be taking a new project to their respective boards for approval,” says the Doha-based industry source. “Qatar is content to let these projects pause given the crunch it already has delivering on its other projects.”
Recently, the US’ Dow Chemical Company raised eyebrows when it announced a 20 per cent increase in the price of some products as it struggled to cope with rising feedstock costs. It spent $8bn on feedstock in 2002. At the current rate, those costs will climb to $32bn this year.
The global credit crunch has also caused problems, making project financing more expensive and difficult to obtain. “The industry is looking at a period of oversupply and growth rates are set to slow sharply,” says the Dubai-based analyst.
Another Dubai-based petrochemicals expert points out that with so much capacity due to come on stream from the Middle East over the next two years, the world market is set to enter a cyclical trough as it struggles to absorb it all.
“The slowdown in planned activity at Ras Laffan does not surprise me because expansion could not continue to run and run given the constraints coming in to the industry,” says the Dubai-based expert.
With rising engineering, procurement and construction costs showing no sign of easing off, Ras Laffan appears to be set for a period of consolidation rather than growth.
“Qatar has defied many of the sceptics by getting its petrochemicals industry to this point in such a short space of time, but now is not the time to launch more billion-dollar ventures at Ras Laffan,” says the petrochemicals expert. “In my opinion, they are playing a smart game by pausing for breath.”