Middle East and North African refinery new builds were initially anticipated to add up to 3.5 million barrels a day (b/d) of new refining capacity by 2012. But little tangible progress has been achieved. Paris-based International Energy Agency says 15.2 million b/d of new global refining capacity has been announced for completion before 2011, yet just 10.3 million b/d is expected to be completed.

In the Middle East, a sharp increase in investment costs threatens to derail several key projects. Kuwait’s 600,000-b/d Al-Zour refinery is the latest under the spotlight. From an initial estimate of $6,000 million for this project,the average of nine bids tendered came in closer to $15,000 million, shocking the Gulf contracting industry.

The decision to cancel the original tender was taken after evaluation by the project management consultant, the US’ Fluor Corporation, determined bids were inflated.

An independent evaluation carried out by another consultant for the client, Kuwait National Petroleum Company (KNPC), confirmed the analysis.

Citigroup now anticipates KNPC will either upgrade the much older Shuaiba refinery or issue a non-lump sum turnkey tender and instead go for a cost reimbursable option. It is expected to decide in May after approval from the board of directors.

The investment bank also singles out Norsk Hydro’s proposed Qatalum joint venture project in Qatar, comprising a new-build power plant and associated aluminium smelter. When the project was first announced in December 2004, the original cost was estimated at $4,500 million, with a target IRR of 8 per cent.

‘There has to be some risk that the decision is made to postpone the project until the over-heated contract market has abated,’ says Citigroup.

In Algeria, speculation continues that two major liquefied natural gas projects may be retendered or cancelled due to sharply rising costs. The projects at Arzew in the northwest and Skikda in the northeast are together worth about $8,000 million.

A consortium of Japan’s JGC Corporation and KBR of the US is carrying out front-end engineering and design work on the two projects - and has been in line for both construction packages.

But the group’s cost estimates for engineering, procurement and construction work have proved too high, with the prospect of the project being cancelled entirely.

Elsewhere, Russia’s Lukoil and Austria’s OMV both scaled back new refineries in Turkey in March after announcing ambitious plans less than a year ago.

OMV had planned to build a 200,000-b/d refinery at Ceyhan with Petrol Ofisi but this has now been sidelined. Russian producer Lukoil followed OMV’s lead, suspending a $3,000 million project to build a Turkish refinery due to high costs.