Oil and gas contract awards slump as costs soar in Gulf

28 March 2008
Value of awards in the Gulf oil and gas sector has fallen by almost two-thirds over the past year.

The number and value of contracts awarded in the Gulf oil and gas sector has fallen by almost two-thirds over the past 12 months, compared with the previous year, as a lack of contractor capacity and soaring costs take their toll.

The value of engineering, procurement and construction (EPC) contracts awarded in the hydrocarbons sector in the GCC, Iran and Iraq was just over $15bn in the 12 months to the end of March, according to MEED Projects, which tracks projects valued at more than $50m.

This is about one-third of the $45bn worth of contracts awarded in the same period to March 2007, and less than half the $35bn awarded in the 12-month period to March 2006.

It comes despite the overall project market enjoying a period of unprecedented boom. The value of major projects in the Gulf hit the $2 trillion mark in late March, twice the level it was just four years ago. According to MEED Projects, in the past 12 months alone, it has grown by more than 40 per cent, or more than $500bn, as the projects market accelerates.

There are several reasons for the slowdown in oil and gas contract awards. The large number of deals over the previous two years has meant that clients and contractors are working at full capacity with little ability to take on more work.

Tenders out to bid are continually delayed as contractors ask for more time to prepare their offers, while clients are struggling to put tenders out to schedule.

Rising EPC costs are another major factor, with some clients postponing or even cancelling their planned projects as soaring materials and personnel costs make their schemes commercially less feasible.

However, the lull is only expected to be temporary. Some $296bn worth of projects in the sector have been announced or are planned, including $58bn worth of schemes that are due to be awarded over the next 12 months.

Across the entire projects marketplace, the largest single market remains the UAE, with more than $765bn worth of projects announced or under way. It is followed by Saudi Arabia, with projects worth $454bn, and Kuwait, with $265bn.

The largest sector continues to be construction, with more than $1.2 trillion worth of projects, followed by oil and gas and petrochemicals respectively.

Of the $2 trillion total, only $490bn worth of projects are at the construction phase, indicating that at least 75 per cent of announced projects in the region are yet to get under way.

Some countries have yet to really get started. Oil-rich Kuwait has only 5 per cent of its announced schemes under construction, while the figure is less than 25 per cent for Saudi Arabia.

Even if only 80 per cent of planned projects actually mat-erialise, the current levels of construction activity are likely to be sustained for at least another five years.

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