Increasing costs hit petrochemical projects

 

Gulf states have pumped nearly $70 billion (Dh257bn) into petrochemical projects within an ongoing economic diversification drive and the total cumulative capital could reach $120bn by 2012, according to official figures.


But the industry, including petrochemicals and refining, could be hampered by surging expenses because of high oil prices and a sharp increase in the costs of construction materials and contracting companies.

According to Qatar’s Minister of Energy and Industry, the sharp increase in the expenses of contractors has become a “nightmare” for the Gulf states. Figures by the Gulf Organisation for Industrial Consulting (GOIC), which oversees manufacturing policies in the GCC, showed the six members have invested $52bn in petrochemical projects by the end of 2000 and the projects soared to nearly $70bn in 2006.

“In 2012, the total investments in the chemicals and petrochemicals projects in the GCC could rise to $120bn,” GOIC said in a statement at the GCC petrochemical industry conference in Abu Dhabi yesterday.

“But the industry faces serious challenges despite the sharp rise in the profit margins of the petrochemical industry in the region because of the surge in prices in global markets.

“These challenges include the large increases in construction, engineering and contracting costs, which have reached record levels not only in petrochemicals and but in refining and other projects.”

A breakdown showed Saudi Arabia has remained the largest GCC petrochemical investor, pumping nearly $43.9bn into such projects by the end of 2006. Investments stood at nearly $9.6bn in Qatar, $6.18bn in Kuwait, $5.86bn in the UAE, $3.14bn in Bahrain and $1bn in Oman.

By the end of 2006, nearly 1,969 petrochemical ventures have been established in the GCC, employing more than 155,000 people.

Outlining such projects and other industrial ventures in the UAE, Minister of State for Finance and Industry Dr Mohammed Khalfan bin Kharbash said industrial investments jumped from Dh44bn at the end of 2003 to Dh73bn at the end of 2007, a staggering 66 per cent increase. Industrial units also grew by more than 37 per cent to 3,852 from 2,995 during the same period, he said.


“The GCC states are pushing ahead with their industrial drive to reduce reliance on oil but we are now facing big challenges,” Qatari Minister of Energy and Industry Abdullah Al Attiyah told the two-day conference.

“The main challenge is the sharp rise in costs of construction of projects, including petrochemicals, refining and other energy sectors,” the minister said.

“Today, these projects have become very expensive. Look at what happened in Kuwait, where they raised the estimated cost of the Zur refinery to $14bn from $7bn. That is also the case in the UAE and Saudi Arabia.

“The contractors have become a nightmare for us. Our main concern now is such a sharp rise in costs and the big shortage in skilled labour during construction. Contractors are complicating our efforts.
This is the worst challenge for us now.”

According to the Saudi-based Arab Petroleum Investment Corporation (Apicorp), the costs of energy projects in the region have nearly tripled. During its five-year periodical review of energy projects in the Arab world, it estimated their costs at $150bn between 2004 and 2008.

But the costs were revised up to $175bn for the 2005-2009 period, nearly $220bn for the following period, $345bn for 2007-2011 and a record $420bn for the latest 2008-2012 review period.

“The current review highlights a further acceleration of capital requirements in the energy sector in the Arab region,” said Apicorp, an affiliate of the Kuwaiti-based Organisation of Arab Petroleum Exporting Countries.

“The factors most responsible for the escalation of project costs include notable changes in the scope and scale of key projects and soaring EPC costs due to rising cost of factor inputs, higher contractors’ margins and systematic pricing of project risks.”
 
 
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