In a region possessing more than 50 per cent of the world’s proven oil reserves, it is no surprise that the oil, gas and petrochemical sectors form a vital component of the GCC’s projects market. Even during the time of the Dubai-driven regional real estate construction frenzy, the GCC still delivered an estimated $193bn-worth of major contract awards in the oil, gas and petrochemicals sectors between 2006 and 2011. This represents just under a quarter of all work in the total projects market awarded in that period.
A significant pick-up is forecast for 2013 with estimated awards totalling just over $50bn
Various factors have driven, or in some cases restricted, investment in the industry. Clearly a major driver has been the need for national oil companies to increase their oil and gas production capacities either to meet rising demand, at both home and abroad, or the need to replace production lost through natural depletion.
Saudi Arabia, and to a lesser extent Abu Dhabi, Kuwait and Qatar have all raised sustainable capacity, while Oman has managed to reverse a slump in output through the implementation of a major enhanced oil recovery (EOR) programme.
Expanding upstream gas handling capacity and boosting supplies have become major priorities for GCC governments as they seek to meet domestic demand growth of up to 15 per cent a year from the power, industrial and oil sectors. With an increase in associated gas production constrained by Opec quotas on oil output, the focus has been on developing non-associated gas fields in Saudi Arabia and Kuwait, and on sour and tight gas deposits in Abu Dhabi and Oman. The high cost of developing more difficult gas plays, coupled with the ongoing moratorium on Qatar’s North Field, has resulted in Kuwait and Dubai building LNG receiving terminals and Abu Dhabi and Bahrain planning ones of their own.
Similarly, investment in refining has largely been driven by three factors: a desire by some states, most notably Saudi Arabia and the UAE, to increase refined product exports, which fall outside Opec quotas; a need to meet domestic demand that has been increasing by up to 11 per cent a year in some parts of the region; and an acknowledgement that product specifications, especially at older refineries, have to be improved through a significant reduction in sulphur content.
The lack of new ethane allocations outside Qatar has also forced the GCC petrochemicals industry to focus much more on integrating new capacity into existing refinery complexes, where naphtha feedstock is readily available. Saudi Arabia, which has been the leader in this area, has also sought to develop downstream specialty chemicals production, as part of plans to establish an automotive industry and create much-needed employment.
But while capital spending in the industry over the past half-decade has been high, it has by no means been uniform.
The GCC’s oil, gas and petrochemicals markets have always tended to buck the regional trend. When the general projects market was in the middle of its most active period (between 2006 and 2008), spending in the hydrocarbons sector was minimal, with a low of just $11.8bn recorded in 2008. But when the global economy collapsed in 2009, capital spending in the three sectors reached a record high of $52bn.
The extremes were largely attributable to the price of oil, which slumped in 2009 as global consumption fell in the face of recession. As demand for commodities fell, there was an estimated 30 per cent drop in construction costs from their mid-2008 peak. This prompted Abu Dhabi in 2009 to award an estimated $30bn-worth of contracts, more than the total it awarded in the previous five years put together. Saudi Aramco also exploited lower costs to award some of its major pending schemes.
However, since the 2009 high, new project activity in the GCC has been on a downward spiral and more than halved to $25bn in 2011. This year is not likely to prove much better, with some $27bn-worth of contracts expected to be awarded. This is in large part thanks to awards on the Jizan refinery, the Sadara and PetroRabigh petrochemical complexes in Saudi Arabia, and major schemes offshore from Abu Dhabi.
This relative unpredictability of the market makes it challenging to forecast future spending patterns. Not only are individual projects prone to delays, budgetary issues, retenders, cancellations and reconfigurations, but politics also plays a key role. In many cases, long-touted projects never get off the drawing board, whether it be due to a lack of gas feedstock or because the foreign partner gets cold feet, to give just two reasons.
A significant pick-up is forecast for 2013 with estimated awards totalling just over $50bn, roughly in line with the 2009 peak. However, this is dependent on two major projects proceeding: the $14bn fourth refinery in Kuwait and BP’s $15bn Khazzan tight gas scheme in Oman.
While Kuwaiti bureaucracy and politics are the main obstacles in the path of the refinery project, the final investment decision on Khazzan will not be taken until the first quarter of 2013. As such, there is much uncertainty.
A slight downturn is anticipated in 2014, although again developments in Kuwait and Oman are likely to determine whether the $50bn forecast is met. The figure includes awards on Kuwait’s $18bn clean fuels programme and Oman’s proposed $6bn Duqm Refinery. As for 2015, contract volumes are expected to be around the historical average of $35bn-40bn.
Saudi oil and gas market
From a country perspective, Saudi Arabia is set to remain the most stable oil and gas projects market, with total awards ranging between $10bn and $15bn a year. The 2015 total may even go above this level, as Aramco was preparing to roll out a new programme of work under its general engineering services plus programme in the final quarter of 2012.
The biggest rise in contract activity is forecast for Kuwait, but this will be dependent on its two aforementioned flagship refining projects finally proceeding after years of delay. Oman is also set to see a significant injection of work with two major refinery projects, the Khazzan scheme and three major EOR developments planned by Petroleum Development Oman (PDO).
New downstream petrochemicals capacity in Qatar will result in a pick-up in contract awards in 2014-15, while the UAE’s focus will be on Abu Dhabi offshore oil projects and onshore gas schemes. Finally, hopes in Bahrain will almost entirely rest on the go-ahead of the $6bn Sitra refinery expansion.
|Projects under execution, by contractor*|
|Daelim Industrial Company||10,116|
|GS Engineering & Construction||8,634|
|SK Engineering & Construction||7,824|
|Hyundai Engineering & Construction||4,650|
|Daewoo Engineering & Construction||2,095|
|*=As at September 2012. Source: MEED Insight|
On the contractor side, the GCC oil and gas projects sector has traditionally been dominated by European and Japanese engineering, procurement and construction (EPC) contractors.
However, the market has been turned on its head since 2008-09 when South Korean contractors were allowed for the first time onto oil and gas prequalification lists across the GCC. Almost immediately, they demonstrated their intent by undercutting their rivals by 15-20 per cent on a series of major projects.
This aggressive bidding has not been a flash in the pan either. In 2011, Samsung Engineering and SK Engineering & Construction won all the onshore contracts on Aramco’s Wasit gas and Shaybah NGL programmes, while in 2012, Samsung undercut a host of South Korean contractors by an estimated $500m to win the $2.5bn carbon black project in western Abu Dhabi for Takreer.
Such contract successes have transformed the EPC landscape. As of September 2012, four of the five biggest contractors in the region’s oil and gas sector were South Korean. In terms of contracts under execution, the largest was Samsung Engineering at $12.4bn, followed by Daelim Industrial Company at $10.1bn and GS Engineering & Construction at $8.6bn.
Each picked up substantial orders in the first nine months of 2012, with Daelim Industrial Company being particularly successful, winning work on the Sadara, PetroRabigh 2 and the Kemya elastomer projects in Saudi Arabia.
South Korean contractors would have occupied all four top spots had it not been for Japan’s JGC Corporation edging out SK Engineering & Construction into fifth place. Two other Seoul-based firms featured in the top 15 ranking. Well-established Hyundai Engineering & Construction came in at number seven, while relative newcomer to the regional oil and gas market Daewoo Engineering & Construction was ranked 15th.
South Korean contractors did not have it all their own way in the first nine months of 2012, however. All the established European EPC contractors picked up work on the three downstream petrochemical projects in Saudi Arabia, with Spain’s Tecnicas Reunidas being particularly successful. The award of the aromatics package on Sadara ensured that Italy’s Saipem was the highest placed European contractor, occupying sixth place in the ranking. It continues to benefit from offering a broad range of services in the onshore, offshore, upstream and downstream segments of the market. The UK’s Petrofac, which has also started bidding on offshore work, was one spot behind Saipem having won additional contract work in 2012 in its core markets of Kuwait and Saudi Arabia.
Whatever happens, the good news for contractors is that after a tough 2011, prospects are looking brighter for the GCC oil and gas projects market. With more than $170bn worth of projects either at the study, planning, engineering or tendering phase, there will be more than enough work to go round.
Saudi Arabia is set to remain the most stable projects market, with total awards ranging between $10bn and $15bn a year
The GCC Oil & Gas Report 2013 is the latest premium research report released by MEED Insight. It provides a complete and comprehensive analysis and overview of the GCC oil, gas and petrochemicals projects market.