Escalating project costs jeopardizing expansion of Middle East oil and petrochem sector?

06-Apr-07

Despite an increase in industry cost estimates by two times to US$22 bln, Saudi Aramco and Dow Chemical Co are determined to continue with building a large-scale refinery and petrochemicals complex in eastern Saudi Arabia. Industry estimates put the cost for the complex at US$10 billion when it was first mulled over by Aramco and at US$15 billion last July when Aramco announced that it had selected Dow to enter into exclusive negotiations on developing the project. Current estimates peg the cost of construction at as much as US$22 billion. Governments in the Middle East are spending record oil revenues on building and expanding industries and infrastructure, leading to a shortage of contractors, raw materials, equipment and qualified labor, which in turn has driven up project prices. Though a memorandum of understanding (MOU) was due to be signed at the start of this year, but neither company would be drawn on when this will now happen. The two are in the scoping and negotiation phases of the project, and will announce more detail as decisions are finalized. The project is scheduled to come on stream in Q2-2012 and will integrate Aramco's existing refinery at Ras Tanura with a new petrochemicals complex. Aramco plans to float a 30% stake in the Ras Tanura complex in an initial public offering later this year. This is not the only project that seems affected by escalating costs. Aramco and Sumitomo Chemical Co. of Japan, in 2005, signed a joint venture agreement to develop a similar complex at Rabigh on the Red Sea at a cost of US$4.3 billion. That project is now estimated to cost the two companies up to US$10 billion to develop Total SA (TOT), due to rocketing costs on a planned US$10 billion liquefied natural gas project in southern Iran, seems to pose a serious threat to its viability A proposed new 615,000 bpd refinery in Kuwait, Al Zour was estimated to cost around US$6 billion, but contractor consortia came in with prices in excess of US$15 billion, forcing a rethink. In February, ExxonMobil Corp. and partner state-run Qatar Petroleum agreed to abandon a gas-to-liquids partly due to spiraling cost. Aramco and Dow declined to provide details on the Ras Tanura project's latest cost