Bankers keen to meet Middle East capital needs

08 March 2007 07:20  [Source: ICIS news]

By Matt Kovac

SINGAPORE (ICIS news)--Razor thin margins and a spike in capital investment are unlikely to deter money flooding into Middle East petrochemicals sector, project financiers said recently.

Middle East bankers want to meet an estimated $180bn (€136.8bn) in capital needed for petrochemical and fertiliser projects over the next five years.

"The amount of money needed for capital expenditure is definitely increasing," Walid Amri, manager of project finance at United Arab Emirates-based Mashreqbank, said.

"But banks are not concerned as it has more to do with the sponsor and the willingness to inject equity," he added.

Recent research by Saudi Arabia-based Apicorp shows that up to $180bn will be needed for petrochemical projects from both the oil and gas feedstock chains between now and the end of 2011.

As the Middle East becomes an ever hotter destination for infrastructure, power, oil, gas and petrochemical investment, financiers from the region and the West are becoming more comfortable with offering loans.

"Lenders are getting more used to and aware of the Middle East risk profile," said John Dewar, a partner in the project finance division of UK law firm Milbank, Tweed, Hadley & MacCloy. "That’s good for the long-term business," he added.

Costs for new build projects have skyrocketed ,creating concerns among sponsors.

Research by consultants Nexant ChemSystems shows that a world scale ethylene cracker now costs $4bn to build, compared with around $1.5bn in 2000 highlighting the challenging economics.

Sponsors of projects are now having to tap a wider pool of finance beyond bank loans, such as Islamic finance and export credit agencies (ECAs) but are steering clear of project bonds despite a raft of issues coming up, said Dewar.

Saudi Arabia based Al-Waha Petrochemical was the first project to secure a 100% Shariah-compliant funding facility when it signed a contract with six regional banks last year.

Another trend to secure investment and keep costs from spiralling is to partner with other companies. Saudi-based Tasnee teamed up with Sahara Petrochemical, also from the kingdom, and Europe’s Basel to build world scale petrochemical complex.

But there are some who warn that EPC costs are simply too high and the economics are becoming less attractive.

"We see a lot of projects postponed or mothballed until the EPC issues are ironed out," said a prominent banker from Saudi Arabia, who wished to remain anonymous.

"As you add up the EPC costs on a monthly basis some banks realise they will only make single digit returns, which makes it less attractive than a couple of years ago," he added.

Petrochemical project builds in the Middle East, China and India are expected to create challenges for sponsors and bankers for the next three years.

($1 = €0.76)

By: Matt Kovac
+65 6780 4359

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly