Growth slowly returns in North Africa

06 October 2013

Algeria, Egypt and Libya offer strong EPC opportunities, but need stability

Corruption and political instability are restricting the ability of North Africa’s oil and gas producers to drive forward their energy projects.

With EPC contract awards of more than $1bn forecast to be awarded this year, Algeria’s oil and gas engineering, procurement and construction (EPC) market is the biggest in North Africa.

Algeria growth

Algeria’s energy projects activity peaked in 2009, when the country signed a raft of EPC contracts and development deals worth more than $12.9bn. The figure fell to just $920m in 2010 and has averaged only $1.3bn a year over the past three years.

In the first nine months of 2013, Algiers has signed $1.1bn-worth of energy sector EPC contracts and another $1bn-worth of contracts are at the bidding stage, and could be awarded by the end of the year, potentially taking the 2013 total to $2.1bn. This is almost double the country’s 2012 figure, but still well below the 2009 peak.

The fall off in activity was due in large part to investigations launched in early 2010 into alleged corruption in the award of deals by Algeria’s main client, state oil and gas company Sonatrach, which accounts for 57 per cent of the $27.6bn of contracts signed in the country since 2008.

The investigations resulted in the sacking of Sonatrach’s president, Mohamed Meziane, and a number of senior executives. The country’s oil minister also lost his post in a cabinet reshuffle shortly after. The Sonatrach investigations resulted in a long lull in the award of oil and gas projects, with no new major schemes launched in 2010.

However, Algeria’s energy sector is now starting to turn around. A new management team is now in place at Sonatrach, and changes have been made to the hydrocarbons law, which the government hopes will stimulate a revival of interest in upstream oil and gas.

In 2011, Algeria set out ambitious spending plans for the sector, announcing $80bn of investments between 2011 and 2015. Three years later, much remains to be done. Looking ahead to 2014, some $4.8bn of projects are either at the design or bidding stages, or have been offered for prequalification. This could mark another year of improvement for the industry.

$4.1bn-worth of schemes are expected to be awarded by the end of 2015 in Algeria. The majority of these are still in the study phase, while only one – the full-field development of the Mouiat Oulad Messaoud field – is under bid.

The country’s second-largest client is Algerian Omani Fertiliser Company – a joint venture between Sonatrach and Oman’s Suhail Bahwan Group. The firm awarded a $2.4bn deal in 2008 to a joint venture of Japan’s Mitsubishi Heavy Industries and South Korea’s Daewoo Engineering & Construction for the construction of an ammonia fertiliser complex in the Arzew industrial zone near Oran, on the Mediterranean coast. The project was completed in March this year.

Egypt investment

While Algeria has focused on upstream development schemes, international EPC firms have looked to Egypt’s downstream sectors for potential new projects.

Egypt’s oil and gas sector has been hit by political turbulence since the overthrow of former leader Hosni Mubarak in 2011, and the ousting of his successor, Mohamed Mursi, in August, just a year after becoming the country’s first democratically elected leader. The country awarded only $965m of EPC deals in 2012.

But while the Egyptian market has been disrupted in the short-term by the uprisings, the long-term outlook for the country’s refining and petrochemicals sectors looks positive.

Two schemes in particular could act as a catalyst for further developments, bringing much-needed investment into the industry. The first is the $3.6bn Egyptian Refinery Company project in Cairo, first launched in the mid-1990s by local private equity firm Citadel Capital. The refinery scheme plans to process fuel oil produced at the nearby Mostorod facility to make lighter products for the local market. EPC contracts were awarded in 2007 and design work has commenced.

About $4.2bn-worth of projects are at the design, study or bidding stage in Egypt

The second project marks the first stage of a major chemicals scheme in Alexandria led by Egyptian Ethylene & Derivatives Company (Ethydco). The $1.3bn scheme will involve building a 460,000-tonne-a-year (t/y) ethylene and butadiene plant by 2015. EPC deals were awarded to Japan’s Toyo Engineering in March 2012.

Some $4.2bn-worth of projects are at the design, study or contract bid stage in Egypt, with awards expected before 2015. At the same time, two major chemicals schemes valued at a total of $5bn have been placed on hold.

Carbon Holdings, a local chemicals development company, is seeking funding for a major project at Ain Sokhna in Suez. The scheme was conceived in 2007 and will include a 3.5 million-t/y naphtha cracker, which will be the first such facility in Egypt. The project will also manufacture 1.4 million t/y of polyethylene, as well as 600,000 t/y of propylene, 210,000 t/y of butadiene and 420,000 t/y of benzene.

Germany’s Linde has been appointed to lead the EPC and technology provision for the petrochemicals complex in a consortium with South Korea’s SK Engineering & Construction and the UK’s Petrofac. Linde will also provide the cracker and recovery technology.

Carbon Holdings had planned to break ground on the scheme in 2013, with construction work due for completion in 2016, but has been unable to secure financing due to Egypt’s ongoing political instability.

Libya plans

In Libya, the outlook for the hydrocarbons sector is difficult to predict. The country awarded a mere $180m of EPC contracts in 2012, having just emerged from a nine-month-long civil war at the end of 2011. About 19 projects worth a total of $16bn have been placed on hold. Most of the schemes had only reached the conceptual or design stages, and it is unclear whether many of them will be revived.

Setting aside the country’s political crisis, state-owned National Oil Corporation (NOC) is currently undertaking a sector-wide strategic study that will set Libya’s future ambitions and investment requirements. The government has been working on tentative plans to increase oil production to about 2.2 million barrels a day (b/d) by the end of the decade through the use of enhanced recovery techniques, a novelty in Libya, as well as the reworking of existing fields.

The downstream segment of the study was expected to be completed in July, but has yet to be published. It is expected to address the inherent inadequacies in Libya’s oil transport, distribution and storage infrastructure.

One of the major downstream plans that could be resurrected by the study is the $54bn scheme to turn the Gulf of Sirte into an industrial and energy hub. Energy Cities Development Company, a local privately owned firm, is in talks with potential investors to resurrect the project, which will develop downstream units near the Brega and Ras Lanuf refineries. Launched more than three years ago, the scheme has faced many problems and has so far failed to advance past the planning stage.

In the upstream sector, Libya is looking to exploit its offshore fields, which until now have only played a limited role in energy production. So far, the only major project that has come close to being tendered is a new offshore platform and onshore gas processing facility at the NC-41 concession in the Mediterranean. The concession is jointly operated by NOC and Italy’s Eni through the Mellitah Oil & Gas venture.

The planned offshore platform will include gas separation and dehydration facilities, which will process 160 million cubic feet a day of gas. Once processed, the dehydrated gas and partially stabilised condensate will be exported to the onshore Mellitah complex in the northwest through two dedicated subsea pipelines for final treatment. Gas from the Mellitah facility is transported to the Greenstream gas compression facilities, based at the same site.

Looking ahead, several foreign firms have resumed exploration in Libya, but turning discoveries into producing assets and building the facilities to process the oil will depend on the government’s ability to impose a level of security across the country that it has so far failed to achieve.

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