Capital's gas expansion costs to soar

Increase in construction costs, rising insurance and a sharp rise in fees by sub-contractors are factors pushing up costs of gas projects. (AFP)

Soaring construction costs are expected to sharply boost spending by Abu Dhabi on gas projects although the emirate has already allocated a staggering $20 billion (Dh73.4bn) for expansion in this sector, according to industry sources.

Nearly half of the investments would be pumped into the mega Shah field project, which is part of the emirate's ambitious plans to develop its sour gas resources to cover a growing supply shortage caused by a rapid rise in domestic demand.

Sources close to the Abu Dhabi National Oil Company (Adnoc), said the costs of the Shah project were estimated at around $10bn two years ago and they also involved the gas reserves at the giant Bab field.

"Considering the steady increase in construction costs, rising insurance and engineering costs, and a sharp rise in fees by sub-contractors, the estimated investment for these projects are now much higher," one source said.

"In my own estimates, they could now be higher by at least 50 per cent and in two to three years they could double. This means Abu Dhabi has to pump $15bn-20 bn into the Shah and Bab projects. And much more funds will also be required for other gas projects in the emirate, including Hail project, Gasco masterplan and other development plans, all of which will be completed in the next few years."

Abu Dhabi, which controls most of the UAE's gas potential, has been locked in a massive drive to expand its gas production to face a rapid growth in domestic consumption because of a steady expansion in power and desalination output.

In recent statements, Minister of Energy Mohammed bin Dhaen Al Hamli said gas development projects would boost the UAE total output by nearly 33 per cent to around 6.5 billion cubic feet per day by the end of 2008.

According to an official Arab report, energy investment needs in the UAE and all other Gulf and Arab oil producers have more than doubled over the past five years because of surging construction costs worldwide.

The report by the Saudi-based Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Oapec, showed the total energy investment requirements in the Arab World, mostly in Saudi Arabia, UAE and Qatar, peaked at $490bn during 2008-2012 compared with $395bn in the previous five-year review period and $260bn during 2006-2010.

They were put at $210bn during 2005-2009 and $180bn during 2004-2008.

During 2008-2012, gas projects are expected to attract $221bn compared with less than $100bn during the 2004-2008 review period.

Since a large part of the Arab energy projects are based in the UAE, estimated at nearly $47bn, the country is expected to be one of the main victims of the higher costs, according to industry sources. Apicorp figures showed the costs of gas and oil projects in the UAE were estimated at only $15bn during 2005-2009. They swelled to nearly $20bn during 2006-2010, to $32bn during 2007-2011 and $47bn for 2008-2012.

"The factors most responsible for the escalation of energy project costs in the region are the notable changes in the scope and scale of key projects, soaring EPC costs, rising cost of factor inputs, higher contractors' margins, and systematic pricing of project risk," Apicorp said.

The government-owned Adnoc launched its massive sour gas development masterplan in 2006 along with the $5bn Dolphin project, which began pumping Qatari gas into Abu Dhabi last year.

Dolphin itself could have cost in excess of $12bn had it been launched this year instead of six years ago, Dolphin sources said.

The masterplan is designed to narrow a widening gap between gas supply and demand caused by a 13 per cent rise in consumption because of a rapid population growth, a surge in power and desalination projects, and an increase in gas re-injection in enhanced oil recovery. Another factor is the surge in oil prices, which is encouraging the UAE to boost reliance on gas to export more crude.