High EPC costs boost Mena energy investment

Global inflation has allied with soaring EPC (engineering, procurement and construction) costs to sharply boost energy project investment in the Middle East and North Africa (MENA), an official Arab study showed on Sunday.

The study by the Dammam-based Arab Petroleum Investment Corporation (Apicorp) said it expects the costs of energy projects in the region, mainly large upstream projects, to continue rising in the future.

The study, sent to Emirates 24|7, cited figures by the International Energy Agency (IEA) showing the investment cost has doubled during the past decade due largely to rising prices of input factors, including skilled labor and specialized services.

In the upstream sector, costs have additionally been found to closely correlate with the complexity of projects while another study has established the same for power generation projects, with the nuclear generation component rising even higher.

“Cost inflation remains one of the most important factors driving the increase in investment. All research-oriented policy and consulting institutions have established that the costs of large-scale energy projects have been soaring,” said Apicorp, an affiliate of the Kuwaiti-based Organization of Arab Petroleum Exporting Countries (OAPEC).

“But we believe that in the context of MENA, escalating project costs have stemmed from the concurrent inflation of the main price components of EPC….therefore, to the IEA’s input factors, one should add contractors’ margins, project risk premiums and the cost of excessive largeness, with the latter implying a diseconomy of scale due to delays and cost overruns. Whatever reason, the likelihood is that costs will continue rising beyond general inflation.”

The study said it expects political turmoil in the region to have a long-lasting, negative effect on investment climate outside the six-nation Gulf Cooperation Council (GCC), which has remained immune to domestic unrest.

“In this context, we continue to take a pessimistic view on Iraq and Iran - the major potential sources of capacity growth….second, there is a strong likelihood that the costs of large-scale projects will continue escalating above and beyond general inflation.”

In a previous report, Apicorp estimated energy investment in MENA at a record high of USD765 billion during 2014-2018 compared with an investment forecast of USD740 billion during the previous 2013-2017 period and USD525 billion during 2012-2016.

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