26 February 2009 08:17 [Source: ICIS news]
By Malini Hariharan
MUMBAI (ICIS news)--New refinery and petrochemical projects in the Middle East are likely to see further delays as companies have started negotiating for a 15-20% reduction in construction costs, industry sources told ICIS news on Thursday.
"Clients are renegotiating engineering, procurement and construction (EPC) contracts and asking for a 20% reduction; many projects are getting delayed or put on hold for this reason," said a source at a leading engineering and construction (E&C) company.
Construction costs in the Middle East had risen sharply in the last few years as the economic boom in the region pushed up prices of materials such as steel and cement.
A tight labour market also contributed to make the region one of the highest cost destinations for construction of new refineries and petrochemical plants. Projects in the region saw frequent delays as companies adjusted to a tight construction market.
But the situation started changing in the second half of 2008 when regional economies significantly slowed. This has prompted companies with projects in the early stages of execution to re-assess schedules.
"The cost of steel has fallen and therefore people expect lower costs. Companies are re-visiting projects," said a project planner at a Saudi petrochemical company.
A source from a second E&C company said projects were typically being delayed by six months as companies hoped to get better prices.
He cited Saudi Aramco’s decision late last year to renegotiate contracts for its Manifa oil and gas project.
Costs had dropped and Aramco wanted contractors to share the advantage, he added.
In addition to the Manifa project, Saudi Aramco also delayed awarding contracts for joint venture refinery projects with Total at Al Jubail and with ConocoPhillips at Yanbu.
But sources from EPC companies also said that clients’ expectations for a 20% cost reduction were too high.
"Costs have fallen by only 8-10% now; they may fall further after the third quarter of 2009," said the first source.
A source from an engineering company also said that it would take a few more months to achieve the 20% mark.
"If clients can wait for five months they can get a 20% discount. Those that can wait will wait," he said.
He also pointed out that equipment costs had yet to fall. "Workshops are still running full as there is a backlog of orders."
But he added that with vendors not seeing many new orders coming in, the equipment costs would also ease.
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