24 December 2007 02:33 [Source: ICIS news]
Correction: In the ICIS news story headlined “OUTLOOK '08: Mid-East builds on despite cost” dated 24 December 2007, please read in the sixth paragraph … under consideration … instead of … under construction…. A corrected story follows.
By Jeanne Lim
SINGAPORE (ICIS news)--Some upcoming petrochemical projects in the Middle East may see delays but most of them will largely be unaffected by escalating construction costs, industry sources said on Monday.
"I haven't heard [projects] being cancelled, I can't actually give any concrete examples of projects being cancelled," said Philip Leighton, London-based director at Jacobs Consultancy.
Delays in construction, however, are still possible.
Saudi Basic Industries Corp's (SABIC’s) CEO and vice-chairman Mohamed Al-Mady warned of project delays and "some cancellations" due to rising building costs during his keynote at the 2nd Gulf Petrochemical and Chemical Association (GPCA) forum held earlier this month in Dubai.
Rising construction costs are an industry-wide challenge, said Michael Dolan, president of ExxonMobil Chemicals over an-email in response to a query by ICIS news.
"ExxonMobil Chemical has already made the decision to move forward on two projects (Fujian and Singapore) and we remain optimistic about our projects under consideration in the Middle East," he said.
In November, Dolan had said in an interview that high construction costs have prolonged studies on its Saudi Arabia expansions and a new cracker project in Qatar.
Construction costs in the region have risen by 25-40% over the past 18 months, according to industry estimates.
For instance, Dow Chemicals and Oman Petrochemical Industries Corp's joint venture cracker and polyethylene (PE) project, which was scheduled to come on stream in 2009 may be delayed by a year or two due to rising engineering, procurement and construction (EPC) costs. The partners, however, have reaffirmed their commitment to building the facility.
SABIC’s projects, especially, will still go ahead in spite of rising costs, said a Dubai-based consultant who declined to be named for this story.
"As long as SABIC is concerned, whatever project that has been started cannot stall... But new projects on the drawing board may get delayed," he said.
Jacobs Consultancy's Leighton, however, said a distinction between refining and petrochemical projects must be drawn.
Referring to refining projects such as the one in Yanbu being cancelled, he said: "Refining margins are not the same. Petrochemicals are generally more profitable. However, people are complaining about the high costs, reassessing their economics and getting lower returns than budgeted for."
However, Leighton said he could not single out an example of any company cancelling projects on account of high costs.
Even delays, were not unexpected, he added.
"Delays are intrinsic in projects. The average quality [of construction] has gone down and EPC (engineering, procurement and construction) contractors are recruiting everyone they can get hold of. That is having some impact, he said.
"But having said that, we're not saying that anything has been inordinately delayed. Projects are still progressing. Certainly though, what used to take 36 months has gone up to 42 months," he added.
For instance, it was harder now to find skilled welders and fitters, Leighton said.
However, the situation has not been as bad as often made out to be as "people have found ways around this problem", he said, noting that in Saudi Arabia for example, there are now a lot of Chinese construction workers.
At the same conference in Dubai, Al-Mady had said he believed that the construction "bubble will deflate as it is not sustainable at present levels".
In 2008, construction could peak in the fourth quarter and the number of planned petrochemical projects may slow down, said Leighton.
"There'll be bigger projects but further spaced [out] in time," he said.
Meanwhile, in order to manage costs, many EPC contractors have pushed back responsibility back to project owners in terms of risks.
The old model was for project owners to get a lumpsum fixed schedule contract from contractors, but it is difficult to do that now due to high costs, said Leighton.
"The owner has to take a lot more cost and schedule risks... otherwise the price of EPC contractors will be high."
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