Three of the Middle East’s biggest oil and gas projects face delays and cost overruns as the impact of acute shortages in equipment and labour hit the region’s energy industry.
In Saudi Arabia, the development of the 500,000-barrel-a-day (b/d) Khursaniyah oil production facility is expected to miss its end-of-year deadline by up to six months.
The budget for Kuwait’s Al-Zour refinery, plagued by spiralling costs in 2007, is understood to have hit $15bn, compared with the official $14bn figure given earlier in December.
In Oman, the $10bn, 300,000-b/d refinery being proposed by the government at Duqm could now be scaled back to half that size, as concerns grow over the feasibility of the project in its current form.
The most startling lapse is on Aramco’s Khursaniyah oil field development, which forms a key part of the company’s drive to boost crude production to 12.5 million b/d by 2009.
Earlier this month, Abdullah Jumah, chief executive officer of Saudi Aramco, said he would “shortly be commissioning” the crude oil increment project, but declined to give a date.
An international contractor close to the project says the 500,000-b/d Arabian Light crude increment will be delayed until March from the December target, while installation of the gas component may not be completed until June. The contractor says several shortages in equipment are hampering the final stages of the project. Aramco was unavailable for comment.
Kuwait’s troubled 615,000-b/d refinery is also under renewed pressure, with the latest estimate putting the cost of constructing the refinery at $15bn, compared with the project’s official $14bn budget.
Kuwait National Petroleum Company (KNPC) was forced to cancel the original tender after bids came in at more than double the original budget of $6.3bn (MEED 23:2:07).
The state-owned firm then developed a revised contracting strategy and is expected to make an award by the second quarter of 2008.
Companies vying for the contract have been given an extension until 26 December to submit bids.
An executive working on studies for the refinery says although the project’s scope is not expected to change, costs are escalating.
“We will not know the exact figure for some time yet, but people working on this project put it at $15bn,” he says.
Cost pressures are also affecting Oman’s Duqm refinery and petrochemicals complex, the planned centrepiece of a new industrial city in the port town.
Muscat is expected to give responsibility for the project to the state-run Oman Oil Company (OOC) early in 2008. The long-running feasibility study being conducted by the UK office of Jacobs Engineering is set to be completed shortly.
It is understood that the initial planned capacity of 250,000-300,000 b/d to process heavy Omani crude could be lowered to as little as 150,000 b/d as a result of the study.
However, a source close to the project says there is still strong government support for the refinery. One option being considered is for the OOC to link up with several international partners to help fund the increased project costs. A decision is expected by mid-2008.
Jacobs Consultancy has estimated that an extra 700,000 workers will be needed in the Gulf by 2011, to construct about $450bn worth of planned oil and gas processing plants, refineries and petrochemical plants. This would comprise 100,000 engineers and contractors, and another 600,000 labourers and construction workers.
Anne Keller, an analyst at the consultancy, says the worker shortage is a critical issue as the industry struggles to cope with project costs increasing by 50-60 per cent over the past two years.
Oil and gas consultant Cambridge Energy Research Associates (Cera), which tracks upstream and downstream capital costs, estimates that inflation in upstream capital costs has risen by 11 per cent in the past six months.
Cera estimates that in the past two years the capital required to build facilities has doubled. The firm says tight manufacturing capacity is creating longer lead times for large equipment such as pumps and compressors.
“Our survey of manufacturers indicates that in the past six months, lead times have increased by 30-50 per cent for specialised oil and gas equipment such as the flexible flow lines used in offshore projects,” says Pritesh Patel, upstream researcher at Cera.
Cera warns that the downstream sector is not immune to the rise in inflation. Costs for building refineries and petrochemicals plants are increasing rapidly, reaching a high in the three months to the end of October.
The energy consultant estimates lead times for engineering equipment have increased by up to 50 per cent in the past 12 months, with prices also rising.
“Further compounding the problem is the raw materials and shipping situation,” says Jackie Forrest, downstream researcher at Cera. “Both of these sectors have experienced recent increases, ultimately passing through costs to projects.”