INSIGHT: Middle East project delays set to continue

04 March 2009 18:17  [Source: ICIS news]

By Mailini Hariharan

Refinery at Ras TanuraMUMBAI (ICIS news)--Delays to project schedules are commonplace in the Middle East.

The industry is still waiting for projects due in 2008 to be commissioned. I

ndeed, companies have struggled since 2005 to execute plans in the midst of rapidly rising construction costs and a severe shortage of skilled manpower.

But there appears to be some relief in sight for those that intend to build refinery and petrochemical plants in the region.

The economic crisis has spread to this part of the world slowing down construction activity and easing the pressure on materials and manpower.

As a result, companies are now willingly deferring schedules to take full advantage of falling costs.

Negotiations have already started with engineering and construction (E&C) companies for a 15-20% reduction in construction costs.

Talks are getting tougher this year as clients have become more demanding, admitted one E&C source.

The trend was set by Saudi Aramco  late last year when it decided to renegotiate contracts for development of its Manifa oilfield. This was followed by delays in the bidding process for its joint-venture refinery projects with Total in Jubail and Conoco Phillips  in Yanbu.

The entire process of renegotiating or re-tendering of contracts can easily result in a six months delay to schedules. But companies are not too worried as any reduction in costs will only help improve project economics overall.

E&C sources protest that it is still too early to look for a 20% reduction. There has certainly been a softening in the cost of steel and cement but it is not to the extent that allows for such a heavy cut, they say. Additionally, equipment costs have yet to ease as workshops still have full order books.

But there are not many who dispute that costs are heading south and that the 20% figure would be achievable in just a few more months.

It might be tempting for companies to wait longer in expectation of even lower numbers. The road to global economic recovery promises to be long and the daily dose of bad news has yet to stop.

But this could be risky, believes one E&C source as the situation could easily change with the award of a few big contracts by companies such as Aramco.

“If you believe your project is good, then do it now. Don’t waste time; enjoy this period of low prices,” he advises.

But while costs are getting lower finding money is still a major headache and this could be another reason to look for postponements.

Project financing started getting difficult from the second quarter of 2008 and the situation has not eased since then.

The number of banks lending in the region has fallen. International banks are no longer queuing up for cross-border financing and those that are still active are scrutinising projects closely.

When they do lend, banks are demanding a higher spread and this is justified by tight liquidity and heightened credit risk, said a source from a regional bank.

And if it is any consolation, it is a difficult time for all industries.

“Any project coming to market faces a tough sell. Plus lenders may not want historical debt equity ratios. They will be asking for more equity,” says a source from another regional bank.

Putting together finances for mega projects such as the Aramco-Dow Chemical joint venture at Ras Tanura will be extremely challenging.

Front end engineering and design (FEED) preparatory work for Ras Tanura kicked off in early January, according to a source close to the project. The end of FEED and tendering of engineering, procurement and construction (EPC) contracts is not likely before early next year.

There are many who doubt if Ras Tanura will able to maintain its 2012-14 completion schedule given the problems at Dow Rumours abound in the region of Aramco increasing its stake in the venture or another company stepping in to take the project forward.

According to a recent local media report , Aramco and Dow are planning to drop the Royal Bank of Scotland (RBS), the lead financier for the project, as the bank is facing a severe cash crunch.

Ras Tanura might be delayed but the backing of Aramco and the Saudi government should help the project as lenders are still supportive of ventures with state sponsors.

There are now two sets of projects in the region according to a source from an engineering company. “The first set is of projects where financing can’t be done. So these are dead. The second category is of those that can be financed and where the plants are needed. But here clients are waiting for prices to fall,” he explained.

It is probably time to factor in delays of a year or more for Middle East projects scheduled to come on-stream post 2010. The delays would be welcomed as they would help restore market balance once the global economy recovers and demand returns.

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By: Malini Hariharan
+65 6780 4359

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