Saudi Aramco’s new Red Sea refinery project at Yanbu may cost 20-25 per cent less to build than an almost identical project the state energy giant is developing on the opposite Gulf coast. Engineering, procurement and construction (EPC) costs continue to fall despite a raft of contract awards in the region.

The main EPC contracts for the two 400,000 barrel a day heavy oil export refinery projects were awarded almost exactly a year apart. Aramco announced the Yanbu awards on 7 July 2010 and those for its joint venture refinery with France’s Total at Jubail on the Gulf coast in June 2009.

At that time, Aramco estimated that the total cost of the 15 EPC contracts for the Jubail project would be $9.6bn.

To date, the company has only awarded eight contracts on the Yanbu refinery, worth a total of around $3.8bn, but project sources say the only major deals which remain to be cut is for a solids handling unit, worth approximately $350m and subcontracts for the offsites and utilities at the Yanbu complex.

The cost of Yanbu is significantly lower than Jubail, or the [$11.8bn] Ruwais refinery [in Abu Dhabi]

The US’ KBR, which designed the Yanbu refinery, is overseeing detailed engineering work on the offsites and utilities for the project, which will cost a total of around $2bn, according to sources close to the scheme.

Meanwhile, the Jubail scheme also included a $900m aromatics unit, while Aramco is yet to tender a construction deal for a similar plant on the Yanbu project although it has mooted the idea with some engineering firms. In total, MEED estimates that EPC costs for the refinery will be $6.2bn at most, rising to around $7bn if Aramco decides to add an aromatics unit.

The cost of the EPC contracts for the refineries do not reflect the overall budget value of each project, engineering and banking sources say. Normally, they represent around 75 per cent of the overall cost of the scheme, with financing, advisory, design, procurement and management costs adding the remaining 25 per cent.

In the case of the Jubail refinery, Aramco and Total have arranged $12.8bn of financing for the project, with EPC costs fitting perfectly into this 75:25 rubric.

Using the same logic, and accounting for the addition of an aromatics unit, the overall cost of the Yanbu project would run to $9.4bn, making the project 26 per cent cheaper overall.

Contractors attribute the sharp fall in costs to an increasingly competitive market, the gradual completion of existing orders and fears over the number of major projects being planned in the region.

In October 2009, a senior executive from French engineering major Technip said that oil and gas construction costs had fallen 45 per cent since their July 2008 peak. Industry sources had expected to see costs increase in 2010 as commodity prices rose and regional oil companies awarded a record-breaking number of deals, but this has not played out.

In July, the chief executive of state-run Abu Dhabi Gas Development Company said that construction costs on its estimated $10bn Shah gas development had fallen by as much as much as 50 per cent as a result of an incredibly competitive May bid round.

“The cost of Yanbu is significantly lower than Jubail, or the [$11.8bn] Ruwais refinery [in Abu Dhabi],” says one UAE-based oil and gas European business development executive. “What you are seeing is people trying to get orders on to their books and keep work going while they can, because there will not be as many big projects around in the future as there have been this past year.”

In June, MEED reported that clients in the Gulf had awarded a record-breaking $46bn of new EPC deals in the year to April 2010 as they moved to capitalise on falling construction costs and boost their local economies.

According to tracker MEED projects, $25bn of projects will be awarded in the region in the same period of 2010-2011.