The total budget for construction projects under way in the Middle East reached almost $1 trillion (Dh3.67trn) last year, according to UAE-based industry intelligence provider Proleads.
But the region-wide expansion drive is being hit by massive delays. In addition, soaring engineering, procurement and construction (EPC) contract costs have prompted most project sponsors to postpone or even cancel some of their capital projects on the grounds of expected lower returns. The number of projects has declined by 10 per cent across the region, except in the UAE.
More than 240 projects with a combined project value exceeding $150 billion were awarded in 2007, figures from Proleads show. The bulk of these were in Saudi Arabia ($75bn) followed by the UAE ($30bn) and Qatar ($18bn). The majority of these were in the oil, gas and petrochemical sectors with more than 160 projects valued at $120bn.
“This represents an increase of 20 per cent compared with 2006,” said Proleads’ Director Emil Rademeyer. “In 2007 the capital expenditure was $67bn, a whopping 148 per cent increase compared to the $27bn in 2006. The forecast for 2008 is even higher and amounts to an enormous $82bn – and this is only for oil, gas and petrochemical projects.”
Billions of dollars worth of projects are still in the bidding phase, Rademeyer added. And while these figures speak for themselves as an indication of the current boom in the construction business, the heightened activity across the Gulf Co-operation Council region has brought some adverse effects that have resulted in skyrocketing costs.
With the oil price continuously hovering around the $100 per barrel mark despite the slowing down of stock markets, the Middle East is under pressure to increase oil output to calm the market.
The region – home to two-thirds of the world’s proven reserves – is expected to expand its oil and gas facilities to meet the growing energy demand. But contractors, manufacturers and service providers in the region are pushed to meet this goal. Almost all the key industrial players are overbooked and can deliver only at exceptionally high prices.
The outlook for material prices is unlikely to improve in the next five years. Since January 2003 prices of world metals and minerals have increased at a rate of 52 per cent, according to World Bank estimates. The International Iron and Steel Institute said global steel consumption is set to rise by 6.8 per cent to 1.2bn tonnes this year.
International industrial consultants EC Harris said the problem will continue in the short- to mid-term. The firm, in a report on construction costs in the UAE, said material prices were 19 per cent higher than 12 months ago.
A 45 per cent increase was recorded in steel beams and 33 per cent in cement prices. But labour cost increases have slowed – the rise is just two per cent compared to a year ago.
In addition, an estimated 40 per cent of industry employers worldwide report difficulties in filling skilled-worker positions, says a recent report prepared by consulting firm Booz Allen Hamilton. “The cost to organisations for skilled workers are increasing,” said Dr Raed Kombargi of Booz Allen Hamilton. “The salary of a geologist with 10 years experience increased more than 25 per cent between 2003 and 2006. Salaries for oil drilling rig jobs increased by 60 per cent during the same period.”
Companies have been driven to hire retiring staff at twice the price, he added. Due to these problems delays have become common in the energy construction business. EPC contractors undertake to hand over the keys to a project at an agreed price. But delays and rocketing EPC costs are haunting mega projects in the region.
A Saudi mega project scheme has joined the growing number of delayed projects in the region due to an overheating market. The development of the 500,000 barrels per day (bpd) Khursaniyah oil production facility, which is a key part of Saudi Aramco’s drive to boost crude production from 10.8 to 12.5 million bpd by 2009, has missed its December 2007 deadline. The development will now be finished in March 2008 or even later.
But Aramco’s senior vice-president for exploration and production, Amin Al Nasser, said other expansion projects through to 2009 remained on schedule. “We are going up to 12 million bpd [oil production capacity] in 2009,” Nasser said during a presentation to an energy conference in Riyadh earlier this month.
THE DELAY LIST
The announcement that some of Saudi Arabia’s massive projects will be delayed has startled industry analysts. Until October 2007 Saudi Aramco was notably the only oil company immune to delays, a trend that has plagued the industry for a few years. In fact in the first half of 2007 the firm – the world’s largest oil company – reported that three of its mega projects were ahead of schedule.
Qatar, which also used to finish its mega-projects on time, has lately succumbed to the trend. In November last year it was revealed that the start up of a project to export gas from Qatar to the United Kingdom will be delayed to summer 2008 from the first quarter.
Under the original schedule, Train 4 was supposed to be ready for the 2007-2008 winter season. The slippage means the South Hook LNG terminal, which is being developed by Qatar Petroleum in the Welsh town of Milford Haven to supply the British market, will not factor into the UK gas supply this winter as expected. Last year ExxonMobil and Qatar Petroleum abandoned plans to build what was going to be the world’s largest gas-to-liquids (GTL) plant because of spiraling costs. The Palm project was originally planned at $7bn – the cost today is estimated at $15bn.
Like the Palm project, Shell’s Pearl GTL initiative has experienced significant cost escalation. Originally budgeted at $4bn, industry sources believe the Pearl facility will now cost about $18bn.
In Kuwait, the 615,000bpd Al Zour oil refinery – designed to be the biggest downstream facility in the Middle East by 2010 – will be hit by a one-year delay.
In Oman the $10bn, 300,000bpd refinery being proposed by the government at Duqm could now be scaled back to half that size as concerns grow over the feasibility of the project in its current form.
Kazakhstan has been pressuring Italy’s Eni to urgently address the delays and cost inflation at the huge Kashagan oil development as further delays will stymie the Central Asian republic’s economic growth. The government is seeking compensation for a two-year delay to production and a doubling of costs of the first phase of the project.
The Arab Petroleum Investment Corporation (Apicorp) has recently sharply revised upwards its estimates for the required capital in the hydrocarbon sector in the region because of rising costs. It said the investment required for the period 2008-2012 had increased by nearly 24 per cent to $490bn from the $395bn figure for 2007-2011. It warned that such increases had started to adversely affect expansion projects in the region.
“Despite higher capital budgets, Middle East and North Africa energy investments appear to be loosing momentum,” said an Apicorp report. “Policy makers and project sponsors who, until recently, have been boasting ambitious investment plans, have voiced concerns about two critical issues that can seriously impede future development prospects.”
On the one hand, project costs have been escalating unrelentingly and show no sign of abating. And problems in the international credit markets, which are looming larger, may also constrain capital flows into the region. Past reviews up to 2006-2010 had shown that rising capital investment was mostly matched with an increase in the number of projects.
“The 2007-2011 review established that the number of project had levelled off,” added the Apicorp report. “In the present review the number of projects has for the first time declined by 10 per cent across the whole region and, except for the UAE, for all countries.”
Nearly half of the planned energy investments are located in three countries – Saudi Arabia, Iran and Qatar, the report said.
“Saudi Arabia has continued to top the energy investment ranking with a $105bn mark. Obviously, several factors can affect the investment outlook. As already anticipated in previous analyses, soaring EPC costs have prompted most project sponsors to postpone or even cancel some of their capital projects on the grounds of expected lower returns.”
Assuming oil and gas export prices remain strong, retained earnings are expected to provide project sponsors with enough funds to self-finance the upstream and associated midstream. By contrast, funding prospects for the highly leveraged downstream are uncertain. The required annual volume of debt of $49bn exceed by 25 per cent the previous all-time record of $39bn achieved in the loan market in 2006.
And current trends in international credit conditions and the consequent re-pricing of risk are expected to translate into tighter lending standards and higher borrowing costs.
$150bn: the combined value of 240 projects awarded in the region in 2007
$30bn: worth of projects were contracted in the UAE last year, mostly in the oil and gas sector
6.8%: the increase expected in global steel consumption at 1.2bn tonnes this year
$49bn: the required annual debt volume for the downstream
Massive delays plague region’s expansion drive