Despite abundant availability of cheap feedstock, the petrochemicals sector in the Middle East and North Africa (MENA) is likely to witness higher engineering, procurement and construction (EPC) costs as per the latest report by National Bank of Kuwait. The EPC costs, which include factor inputs, contractors' margins and systematic pricing of project risk by the contractor, make up as much as 70% of the total project cost. EPC prices are projected to head north due to rapid expansion and aggressive economic growth in most parts of the world, leading to mounting construction material prices. The rising EPC costs are forcing MENA petrochemical players to re-examine their growth plans, as escalating project costs are also extending projected completion time. A research has projected a 52% increase in capital spending between 2007 and 2011 without any increase in number of projects undertaken.
Although the region is endowed with easily available, abundant and cheap feedstock as well as rising demand from the East, the rising project costs will compel developers to progressively tap primary equity and debt markets for their capital requirements. From 2007 to 2011, in the MENA, over US$80 bln will be invested in the petrochemical and fertiliser sectors, while another US$93 bln will be invested in the integrated refinery-petrochemical sector. More than 70% of the capital investment in the Mena petrochemical and fertiliser sector will be raised through the debt route, translating to an annual debt requirement of US$11 bln every year from 2007-2011. This amount exceeds the US$7.5bn raised in 2006.
MENA will account for 31%, 60% and 76% of expected new capacity additions of benzene, ethylene and methanol respectively. Most of the new ethylene capacity is expected to come online in 2008, leading to a possible risk that demand from emerging economies may not catch up with supply. Hence, the petrochemical sector in MENA, risks capacity overbuilding and product imbalances. The cyclic nature of the petrochemical industry is bound to result in a global slowdown, sooner or later. In case of a global slowdown, new capacities expected to come online in the near future might depress utilisation rates and profitability of petrochemical plants.
Also, the portfolio of petrochem products from the MENA is mainly skewed toward natural gas-based products, and countries such as Qatar and Egypt have less ability to diversify away from natural gas-based products because their hydrocarbon reserves were more gas rich than oil rich.
Despite its vast hydrocarbon reserves, MENA's petrochemical industry focuses more on using natural gas - methane, ethane and propane - rather than refining by-product, naphtha. This is mainly due to abundance of flared gas from oil wells, efforts from upstream oil producers and the relatively small refining capacity in the Middle East and Africa.
Capacity overbuild in the region, has been triggered by both macroeconomic and microeconomic factors. Among the macroeconomic factors were the huge budget surpluses from rising crude oil sales and available for allocation to the oil and gas industry, including the petrochemical industry. The microeconomic factors included increased profitability of petrochemical investments fueled by a strong demand for the petrochemical products.
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