Related Articles
Forward article link
Share PDF with colleagues

Mideast NOCs take another look at expansion projects

The global economic downturn is starting to have a deflationary effect on Middle East energy projects, increasing the chances that upstream investment will continue

The Mideast Gulf's two largest oil companies, Saudi Aramco and Abu Dhabi National Oil Corporation (Adnoc), have taken steps in recent weeks towards launching schemes that just two months ago appeared unlikely to proceed.

Adnoc's upstream division, has opted to increase initial payments made to contractors on the Sahil, Asab and Shah field development by 50%, in return for a reduction of around $1bn in the overall engineering, procurement and construction (EPC) costs. It has also cut by at least a third fines levied on contractors that miss deadlines and has extended project time-scales to ease the financial burden on contracting firms. As a result of estimated savings of $1bn, the 60,000 barrels a day (b/d) scheme is expected to cost $3.5bn.

Similarly, Aramco has cut the cost of its $10bn Karan gasfield development by at least 15%, having secured lower bids for the project, which is designed to produce 1.5bn cubic feet a day of gas in 2012. The saving largely arises from lower EPC costs as a result of falling commodity prices and intense competition between contractors for a smaller pool of projects. Big declines in steel prices have had a significant influence on project economics.

Cost reductions are not confined to large upstream developments. Aramco is also hoping to achieve savings of more than $1bn on its planned 400,000 b/d export refinery at Jubail, a joint venture with Total. To secure more competitive bids and lower the estimated $10bn cost, the partners have extended the February bid deadline to 20 April.

Total, despite reporting a $0.989bn loss in fourth-quarter 2008, says it remains committed to the Middle East, a sign that international oil companies (IOCs) may look to the downturn to secure valuable entry positions in a region that mostly remains closed to the private sector. The company says large "construction projects are continuing, notably ... the Jubail refinery in Saudi Arabia and the start-up of the Qatofin cracker in Qatar [a joint venture between Total, Qatar Petroleum and Qatar Petrochemical]."

There is other evidence to support the view that the economic decline may not have such a drastic effect on Middle East oil and gas projects as once feared. Contax, an energy consultancy, forecasts that the energy sector will spend around $70bn in 2009, compared with an estimated $60bn in 2008.

State budgets for 2009 in the main oil-producing Gulf states are all on an expansionary trend, with governments ready to go into deficit to keep essential economic projects on track. Gas developments, seen as critical to the functioning of local economies, are priorities.

This should not imply that the region's energy strategists are ready to press on with the full slate of projects that were on the cards just a year ago. Some rationalisation will occur, particularly with Opec in no rush to boost capacity. For example, a final investment decision was still being awaited in late February on Abu Dhabi's Shah sour-gas scheme, for which ConocoPhillips was awarded the contract last year.

The high cost of that scheme – an estimated $12bn – will test the appetite for expensive, technically ambitious energy projects. But the Middle East's governments and national oil companies appear ready to capitalise on easing costs to keep big energy projects on track.

Also in this section
Latest licensing rounds
17 April 2019
The industry's most comprehensive list of current and recent rounds for onshore and offshore licenses
ExxonMobil gas discovery boosts Cyprus’ energy hopes
28 February 2019
The find may revive interest in establishing an LNG plant on the island
Egypt's gas gold rush
28 February 2019
February's oil and gas conference in Cairo attracted firms from around the world for one simple reason: Egypt's gas sector is booming