When Qatar Fertiliser Company (Qafco) dropped its plans to issue a bond to help finance its $1.2bn Qafco V fertiliser complex in October, it blamed adverse conditions in the credit markets.
Doubts are being raised over the project’s initial funding package – to be used for the construction of a 3,500-tonne-a-day (t/d) urea train and two 2,200-t/d ammonia trains – as banks become increasingly wary of such financial commitments.
The tightening in financing has hit the industry worldwide but comes at a particularly difficult time for Doha’s petrochemicals sector. Base costs for building plants have increased by up to 20 per cent in the past year alone (see feature, page 46).
While high oil prices have made production of petrochemicals in Europe and North America more expensive in the past 12 Months, the cost of compressors, bulk materials and reactors has also started to affect budgets.
In early November, Qatar Petrochemical Company (Qapco), a division of Industries Qatar, estimated costs on its plant would rise by up to 15 per cent because of escalating prices charged by contractors. Others put the figure at closer to 25 per cent.
“Projects are looking more and more difficult to stand up,” a Doha-based contractor tells MEED. “Costs are rocketing and developers do not have the same access to cheap feedstock as they do in other Gulf states. It is no longer a given that a plant will work in Qatar in the current climate.”
Part of the problem stems from Doha’s decision to restrict allocations of ethane – the cheapest and most popular petrochemicals feedstock – because of a shortage of local production.
While Qatar is the largest liquefied natural gas (LNG) exporter worldwide, LNG is not converted into ethane. This means producers rely heavily on associated gas from the state’s 800,000-barrel-a-day (b/d) oil production.
Another factor affecting the petrochemicals sector in Qatar is the absence of generous feedstock subsidies, compared with other Gulf states. Qatar Petroleum (QP), which supplies feedstock to new ventures, only sells its natural gas liquids (NGLs) domestically at a slight discount to international market rates, compared with a 30 per cent domestic discount in Saudi Arabia.
Supplies of ethane, when available, are often sold in Qatar at more than double the price available to local producers in Saudi Arabia, Kuwait and the UAE.
These comparatively high prices, in tandem with feedstock constraints, are increasing cost pressures on project budgets in Qatar.
In October, it emerged that Qatar Fuel Additives Company (Qafac) would more than halve the size of its new methanol plant at the Mesaieed complex, from 6,750-t/d of methanole capacity to just 3,000-t/d, to cut costs.
Speculation is also growing about the cost pressures at the Honam Petrochemical Corporation/QP-sponsored petrochemicals complex at Mesaieed, which will use a 25:75 ethane-to-NGL feedstock mix.
The original cost was just $2.7bn, but is thought to have increased to as much as $4bn in the 22-month period since the agreement was signed. Honam was unavailable for comment, but a source close to the project says the South Korean company faces a struggle. “The return on capital will be too low for a project of this size,” says the source.
Despite these challenges, some projects are continuing as planned. QP, with the US’ ExxonMobil Chemical Company, is close to selecting a contractor to carry out construction and co-ordination for a new worldscale petrochemicals complex at Ras Laffan.
The complex will be completed in 2012 and will comprise a 1.3-million-tonne-a-year (t/y) cracker and production facilities for polyethylene and ethylene glycol.
Another petrochemicals plant is also planned for Ras Laffan, although speculation is increasing over which partner QP will select.
The plant is being promoted by the UK/Dutch Shell Group, which aims to take gas liquids, in particular ethane, from its future 140,000-b/d gas-to-liquids development to support petrochemicals production.
It is also understood that QP’s downstream division has been in talks with France’s Total about the possibility of constructing a 1.3 million-t/y cracker at Ras Laffan in a similar joint venture to the Exxon arrangement.
There is much interest in QP’s decision because it is widely regarded as the last petrochemicals plant to go ahead prior to the release of the results of the North field moratorium between 2010 and 2012.
“We do not see many more ethane projects in the pipeline,” a source close to QP tells MEED. “There is a feeling that QP needs to get these next two projects right and then take a step back for a breather.”
Ultimately, with oil prices approaching $100 a barrel, the economics of the petrochemicals projects remain sound.
Product prices continue to be buoyant and feedstock costs are still cheaper than in many countries outside the Middle East.
However, the events of the past few months have shown that Doha is not immune to external economic shocks, in financing and material costs.
The volume of low-density polyethylene produced by Qapco in 2006 was 409,000 tonnes a year, the most in the region.
Source: Qatar National Bank