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OIL AND GASQ1 2016

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MEED Business Review / 71

The Middle East oil sector started off this year as it ended 2015 – with prices falling further and uncer-tainty increasing over

future investments.On 18 January, the Brent crude

price fell to a 13-year low of below $28 a barrel as the market prepared for a glut of additional exports from post-oil-sanctions Iran.

Although the lifting of nuclear embar-goes against Iran will put further down-ward pressure on prices, the opening up of the Middle East’s second-largest economy provides new opportunities for international oil companies (IOCs) willing to take risks.

Iranian media reported that European IOCs had sent representatives to Tehran to meet government officials ahead of

the announcement on the suspension of sanctions.

Iran was not the only country in the Middle East preparing to open up its oil and gas sector to new private sector investment at the beginning of 2016.

Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman al-Saud re-vealed in an interview that the kingdom is planning to float shares in the world’s largest oil company, Saudi Aramco. Other companies, including oil refining operations, could also be privatised as part of a programme to raise state reve-nues amid a plummeting oil market.

In the UAE, UK/Dutch Shell announced it was pulling out of the estimated $10bn Bab sour gas project, citing the market climate. This could be a sign of things to come for the region’s ambitious projects. Mark Watts

Oil & gasThe region’s oil market depression continues as crude prices plummet to 13-year lows, but new opportunities still present themselves as Iran opens up for business

New Year woes for oil sector

Business Outlook

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72 \ MEED Business Review

Business Outlook

Saudi chemicals sector hit by feedstock increasesEthane prices more than double as kingdom cuts subsidies on gas prices

Saudi Arabia’s decision to reduce subsidies on gas prices is set to push up production costs for the kingdom’s petrochemicals

industry, shrinking its feedstock advan-tage over producers in other regions.

New research by Arab Petroleum Investments Corporation (Apicorp) de-tails the potential increase in produc-tion costs for some of Saudi Arabia’s largest industrial companies.

“Sabic [Saudi Arabia Basic Industries Corporation] said that as a result of fuel and electricity price hikes, its an-nual cost would increase by more than 5 per cent,” Apicorp said in a research note release on 11 January.

Saudi Arabia Fertilisers Company’s (Safco) production costs are expect-ed to increase by 8 per cent, while Yanbu National Petrochemical Com-pany’s (Yansab) costs are set to rise 6.5 per cent. Saudi Cement Company announced that its production costs would rise by SR68m ($18.1m).

“Higher energy costs increase input costs for industries, reducing profits,” said Apicorp. “This is especially true for energy-intensive industries that are not able to pass on the cost increase to end buyers, either due to the compet-itive structure of the industry (petro-chemicals) or the imposition of price controls (cement).”

Renewed competitionGCC petrochemicals producers are already struggling with a significant drop in prices and renewed competi-tion from North American producers on the back of the unconventional gas boom.

Saudi Arabia increased fuel prices with immediate effect as part of its 2016 budget announcement in late December. But Riyadh also plans to roll out a gradual five-year reform that covers a wide range of fuels, including natural gas, gasoline, diesel and elec-tricity, as well as water.

Competitors in Europe and Asia largely use naphtha feedstock, which is heavily tied to the global crude price, making them more competitive in the low-oil-price environment. Methane was raised to $1.25 a million BTUs from $0.75 a million BTUs, while the ethane price was increased to $1.75 a million BTUs from $0.75 a million BTUs.

MEED understands that the Saudi government has also increased the price of domestic propane feedstock. Propane prices in Saudi Arabia are already based on a lower discount than ethane, so any increase in feedstock prices for Saudi propylene producers

Saudi aRabiaMark Watts

MEED’s Oil & Gas Editor, with specialist focus on the UAE, Saudi Arabia, Iran and Oman

Product Old price New pricePercentage

increase

Natural gas ($/million bTus) 0.75 1.25 67Ethane ($/million bTus) 0.75 1.75 133Gasoline, high grade ($/litre) 0.16 0.24 50Gasoline, low grade ($/litre) 0.12 0.20 67diesel transport ($/litre) 0.07 0.12 79diesel industry ($/barrel) 9.11 14.10 55arab light crude ($/barrel) 4.24 6.35 50arab heavy crude ($/barrel) 2.67 4.40 65Kerosene ($/barrel) 23.00 25.70 12

Source: Apicorp

Saudi aRabia fuEl pRicES

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brings their costs closer to the global market level.

“Although it is a small increase, things were getting less competitive for [Saudi ethane crackers] anyway because of low oil prices. Lower production costs arising from low oil prices improves competitiveness in Western Europe and Asia,” says Raheel Shafi, senior consultant at energy and chemicals consultancy Nexant.

Global pricesGCC chemicals firms are facing a difficult market as low global prices for key products such as polyethylene squeeze profit margins. Sabic reported a 29.4 per cent drop in fourth-quarter net profits as sale prices slumped.

Sabic posted a net profit of SR3.08bn in the three months ending 31 De-cember, down from SR4.36bn for the same period one year earlier, saying it was also hit by a sharp decrease in metals prices.

While the change in ethane prices will affect the majority of large petro-chemicals producers in Saudi Arabia and the wider GCC, new projects will continue to be limited by a lack of low-cost feedstock volumes.

High volumes of cheap ethane is the main building block of the rapid growth in the GCC petrochemicals industry over the past decade.

Recent research released by the Gulf Petrochemicals & Chemicals

Association (GPCA) shows that pol-ymer production capacity increased by an average of 11.7 per cent a year in 2005-15. Polymer capacity tripled to 26.6 million tonnes a year (t/y) last year from 8.8 million t/y. Saudi Arabia represents 64 per cent of the total capacity.

The compound annual growth rate is forecast to slow to 3.2 per cent over the next five years for the GCC. Higher production in Oman (17.7 per cent) and Kuwait (7.1 per cent) is offset by no new capacity coming onstream in the UAE and Qatar.

Saudi Arabia is bringing the units of its $20bn Sadara Chemical complex in Jubail onstream, while the largest new project under way is Oman Oil Refin-eries & Petroleum Industries Compa-ny’s (Orpic) Liwa Plastics Industries complex in Sohar, Oman.

The contracts for the four engineer-ing, procurement and contracting packages were signed on 17 December for a total of $4.5bn.

However, Qatar’s Al-Sejeel and Al-Karaana projects, worth a total of $14bn, have both been shelved since the third quarter of 2014. The relative lack of new capacity coming onstream elsewhere in the region is a sign of significant slowdown in an industry seen as key to the GCC’s economic diversification and decreased reliance on crude revenues.

Despite the precarious outlook for petrochemicals producers in the region, prices for commodity plastics such as polyethylene and polypropyl-ene tend to be highly cyclical.

Producers in Saudi Arabia and its GCC neighbours must focus on increasing efficiency and productivity to ride out the down-cycle and absorb feedstock price hikes. Companies able to cut costs and optimise production in the current market environment will bounce back when commodity prices begin to strengthen.Mark Watts

GCC produc-ers using ethane gas as feedstock have enjoyed a global advan-tage for decades

0

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10000

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GCC plastiCs output CapaCityThousand tonnes a year

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Business Outlook

Largest gas project moves forwardAbu Dhabi has invited firms to express interest in designing a sour gas development on the offshore Hail and Ghasha fields

Abu Dhabi National Oil Com-pany (Adnoc) is moving ahead with its largest ever gas project as it invites inter-est in the design of a sour gas

development on the offshore Hail and Gha-sha fields, according to sources familiar with the scheme.

The Hail and Ghasha development has a planned capacity of 1 billion cubic feet a day (cf/d) of gas in addition to conden-sate, making it about twice the size of Abu Dhabi’s recently completed Shah sour gas development. The development is likely to cost more than $10bn

Bab projectThe news emerged as the UK/Dutch Shell Group announced it was pulling out of the onshore Bab sour gas development, saying it “does not fit in with the compa-ny’s strategy”.

Shell announced in April 2013 that it had agreed to take a 40 per cent stake in a new joint venture to operate the project, which is anticipated to be a similar size to Shah, with 500 million cf/d of sales gas.

The UAE does not produce enough asso-ciated gas to meet its domestic needs, and has undertaken a programme of sour gas developments to help plug the supply-de-mand gap. Sour gas fields contain signifi-cant volumes of hydrogen sulphide, which need to be extracted before use and either sold or used in chemicals industries.

Adnoc has invited several companies to express interest in undertaking the Hail and Ghasha project’s front-end engineering and design (feed) contract. These compa-nies include:■ Amec Foster Wheeler (UK);■ Bechtel (US);■ Fluor (US);

■ Technip (France);■ WorleyParsons (Australia).

Adnoc is expected to invite firms to bid on the feed work in the first quarter, and the contract should be awarded later in 2016.

US-based Occidental Petroleum (Oxy) – which has a 40 per cent stake in the com-pleted onshore Shah gas development – was awarded a $500m contract by Adnoc in February 2015 to carry out a technical evaluation at the Hail and Ghasha fields.

Oxy has cooperated with Adnoc on activi-ties including 3D seismic surveys, drilling appraisal wells and conducting engineering studies necessary for the fields’ develop-ment. It is expected to take two years to carry out the technical evaluation of the Hail and Ghasha fields. Oxy will likely be among the companies Adnoc invites to submit pro-posals for a new joint venture to carry out the Hail and Ghasha development.

The new capacity from Hail and Ghasha represents a near 18 per cent increase on the UAE’s existing production, which will give the country a significant boost in meeting future demand.Mark Watts

Further reAding

Aramco to let pipeline deals in late JanuaryState oil major Saudi Aramco is expected to award $1bn-worth of contracts to build pipelines for its Master Gas System Expansion project at the end of January.

Abu Dhabi sets 2022 target for upgrade of Upper Zakum fieldAbu Dhabi plans to expand the capacity of its Upper Zakum oil field to 1 million barrels a day by 2022, according to sources working on the project.

Bids submitted for Oman polyester plantOman International Petrochemical Indus-tries Company (Om-pet) has received bids from companies vying to build its planned polyester chemicals plant in Sohar.

Three teams to bid on Kuwait gas terminalThree consortiums are expected to submit proposals on Kuwait’s planned liquefied natural gas import terminal. Prices are due to be submitted on 31 January.

Read more about oil and gas on www.meed.com/energy

uAe

3

4

5

6

7

2014201320122011201020092008200720062005

uAe gAs output/demAndBillion cubic feet a day

Source: BP

Output Demand

7

6

5

4

3

20052006

20072008

20092012

20102013

20112014

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Jurassic gas project price struggleIndustry insiders say contractors are wary of taking on the reissued packages

State-owned upstream operator Kuwait Oil Company (KOC) will struggle to secure lower bids from contractors by reis-suing tenders for two of the

three contracts that form the second phase of the country’s Jurassic gas production programme, according to industry sources.

Tender reissuesKOC has reissued tenders for the project’s West Raudhatain and East Raudhatain packages. The third package, to develop the Umm Niqa and Sabriya fields, has not been reissued.

During the original tendering process, only three contractors bid for the scheme’s three packages out of the 19 companies that had prequalified.

It is understood the move to complete the scheme using a build-operate-transfer contract rather than an engineering, pro-

curement and construction basis put off many potential bidders.

The local office of the US’ Schlum-berger submitted the low bid for each of the three contracts. Saudi Arabia’s Al-Khorayef Group and the local Spetco International Petroleum Company also sub-mitted bids.Wil Crisp

KuwaiT

West Qurna-2 budget talks continueThe developers of Iraq’s West Qurna-2 (WQ2) oil field have yet to reach a final agreement on the 2016 budget for the project with Baghdad, according to field operator, Russia’s Lukoil.

“The elaboration with the Iraqi au-thorities of the final version of the WQ2 2016 budget is in process,” a Lukoil spokesperson told MEED in an emailed statement. “Lukoil is in constant dia-logue with the Iraqi side on this matter. We are making proposals and they are suggesting changes.”

The spokesperson added that Lukoil expects approval for the budget to be

granted in the near future, without setting out a time frame. Lukoil says uncertainty about the project’s budget has not affected production from the field, which stands at between 400,000 and 450,000 barrels a day.

The deliberations between Lukoil and the Iraqi authorities have been ongoing for more than two months.

There is increased uncertainty over the work schedule of projects in the south of Iraq amid a government budget crisis that has been sparked by persistently low oil prices.Wil Crisp

iraq

The build- operate- transfer contract for the packages has put off potential bidders

20142013

20122011

2010

iraq crude ProducTionThousand b/d

2,4

90

3,11

6

3,14

1

3,2

85

2,8

01

Source: MEED Projects

20102011

20122013

2014

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Business Outlook

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On 16 February, de facto head of Opec Saudi Arabia and the world’s largest non-Opec crude produc-er, Russia, announced

a preliminary agreement to freeze oil production at January levels.

The deal is unprecedented, marking the first time in decades that the two states have officially worked together to coordinate production. Other Opec members, Venezuela and Qatar, also said they were willing to limit production.

The announcement was met with ap-athy by the markets, with Brent crude falling by 3.6 per cent in the wake of the deal. The reaction is understand-able. In January, all of the countries involved in the deal were producing near-record volumes of crude and global stockpiles remain high. On the

supply side, the US shale boom and in-creasing supply from Iran will continue to weigh on global prices. At the same time global demand is weakening.

Although a dramatic increase in oil prices seems unlikely over 2016, the Saudi-Russia deal could affect oil prices over the long term, improving investor sentiment. The deal marks a significant change of heart for Riyadh, which previously said it wanted to see the oil market stabilise without imposing oil quotas on producer nations.

Whether or not the production freeze will take place remains to be seen, but the symbolic value of the deal between two oil superpowers should not be underestimated. If Saudi Arabia and Rus-sia continue to show a united front, it is likely to help prevent further declines.Wil Crisp

The recent agreement between de facto Opec head Saudi Arabia and the world’s largest non-Opec oil producer, Russia, to freeze oil production levels has the potential to realign market dynamics and improve investor sentiment Output freeze a turning point

Oil & gas

71 Oil And Gas.indd 71 18/02/2016 19:06


Business Outlook

Oil projects grind to halt amid Baghdad funding crisisBudget problems and violence cast a shadow over future oilproduction, but hope lies in foreign investment and exports

Over recent months, the out-look for large infrastruc-ture projects in Iraq has become increasingly bleak. The country has descended

ever-deeper into a fi nancial crisis driven by extra spending on its ongoing war with the Islamic State in Iraq and Syria (Isis) and lower revenues due to the falling value of global crude prices.

As the budget problems have wors-ened, the future of thousands of pro-jects across the country, worth billions of dollars, has become increasingly uncertain – in a development that could have dramatic ramifi cations for the wider Middle East economy.

Modernisation planAccording to regional projects tracker MEED Projects, Iraq is the third-largest projects market in the region after Saudi Arabia and the UAE, with $351bn-worth of projects planned or under way. Of these schemes, $90bn-worth are in the oil, gas and power sectors as the gov-ernment works to modernise its energy sector and increase output.

Already the country’s project market has shrunk by nearly a third due to the rise of Isis. Before the jihadist group’s lightning advance in June 2014, when it seized control of about a third of the country, the value of projects in Iraq planned or under way stood at $519bn.

This initial wave of project cancel-lations and delays was mainly due to security problems in the north and west of the country where Isis’ presence made the completion of construction projects impossible.

IRAQPodcast

New from MEEDListen to the Oil Talk pod-cast. Search for Episode One: Opec and Russia

Now, Iraq is threatened by a second wave of project cancellations and de-lays due to the fact that Baghdad is fast running out of money.

The Iraqi government relies on oil ex-ports for more than 80 per cent of state revenues and has faced a huge cut to its income as prices have dropped.

In October 2015, Iraq forecast that it would have a budget defi cit worth 11.9 per cent of GDP in 2016, but this fi gure is now likely to be higher due to further declines in the price of crude.

Since June 2014, global oil prices have fallen by two-thirds – with West Texas Intermediate crude slumping below $30 a barrel in January 2016.

Due to the severity of the fi nancial crisis in Baghdad, Iraq has been forced to suspend work on several key strate-gic oil projects.

This is reducing the potential for future production and threatening to initiate a cycle where lower revenues reduce output, which in turn reduces future revenues and limits investment in future production.

One key oil scheme that is being de-layed is the $4bn West Qurna-2 fi eld de-velopment project, which aims to boost the fi eld’s capacity to 650,000 barrels a day (b/d) in three development phases.

As of 14 January, the fi eld’s produc-tion stood at 400,000-450,000 b/d, according to its operator, Russian oil company Lukoil.

Lukoil says it has yet to reach a fi nal agreement with Baghdad on the 2016 budget for the scheme.

Another key oil project delayed by budget problems in Baghdad is UK-

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based BP’s $2.5bn scheme to develop the Rumaila oil field. Like West Qurna-2, this scheme is yet to have its 2016 budget approved by Baghdad, accord-ing to sources close to BP.

On 2 November 2015, Zaid Elyaseri, BP’s Iraq country manager, told MEED two of the project’s packages, worth an estimated total of $1.37bn, were on hold pending the approval of the 2016 budget.

These include a $500m package to build four cluster pump stations and an $865m package to build three central processing facilities (CPFs), a gas pro-cessing plant and associated facilities.

While the projects to increase output at West Qurna-2 and Rumaila are both crucial to securing future income for the Iraqi government, Baghdad is vir-tually powerless to push them forward due to its lack of access to funds.

Chinese investmentWhile the overall outlook remains bleak, there is one recent development that has given hope to those with a stake in large infrastructure schemes in Iraq.

At the end of January, Baghdad announced it had signed a deal with state-owned China Petroleum Pipeline (CPP) and other foreign companies to secure investment in its $13bn Common Seawater Supply Project (CSSP). CPP is a subsidiary of China National Petrole-um Corporation (CNPC) and specialises in engineering and construction.

Under the deal, CPP will form a consortium with other investors led by Jordan-based private firm Mass Global.

The CSSP aims to replace existing use of fresh river water at Iraq’s south-ern oil fields with seawater pumped through a network of pipelines. The scheme has seen significant delays since its conception in 2011.

Not only has the January deal kick-started the long-delayed CSSP, but it has also increased optimism that for-eign investors may be willing to provide funds for other stalling projects.

According to one source, Iraq is offer-ing firms deals that link investment in big infrastructure projects to opportuni-ties to develop oil and gas fields.

“If you invest in a big project then you will be given a favourable deal when it comes to developing oil and gas assets,” says the source.

“This is a very good idea for Iraq. Iraq needs so many schemes to be completed. Not just the CSSP, but also power projects to stop blackouts in the summer, when temperatures are high and electricity consumption peaks due to increased use of air-conditioning.”

Over the past three years, Iraqi oil exports have shown incredible resil-ience, hitting new highs despite the rise of Isis. In January, the country exported an average of 3.88 million b/d, includ-ing exports from the Kurdish region in the north of Iraq.

This is close to its highest level in three decades, and is 660,000 b/d more than Iraq was exporting before Isis’ advance across the country in 2014.

Iraq has the potential to push exports above the 4 million-b/d mark in 2016, but achieving this milestone will de-pend on several factors.

Production could easily be reduced if security problems increase in the south over 2016. Equally, output could be reduced if oil producers’ group Opec decides to reintroduce quotas and orders Iraq to lower its output.Wil Crisp

One key oil scheme that is being delayed is the $4bn West Qurna-2 field develop-ment

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Business Outlook

Local firm wins $1bn Aramco pipeline deal

Saudi KAD Construction has been awarded three pipeline packages on Saudi Aramco’s Master Gas Sys-tem Expansion (MGSE) worth a total of about $1bn, according to sources familiar with the project.

The Al-Khobar-based firm was vying with sever-al overseas firms for the engineering, procurement and construction (EPC) contracts after bids were submitted in May 2015.

The packages are part of the second phase of the MGSE, which is de-signed to increase Aram-co’s capacity to transport gas across the kingdom.

In November 2015, China’s Shandong Elec-tric Power Construction Corporation (Sepco) won an estimated $750m EPC deal on the compressor booster station for phase two of the MGSE. The second phase is expected

to be completed by the end of 2018.Aramco is understood to have favoured Saudi KAD

over a consortium of Italy’s Saipem and Athens-based Consolidated Contractors Company (CCC).Mark Watts

The awarded pipeline packages are part of Saudi Aramco’s Master Gas System Expan-sion

New facilities at Ruwais refinery will process crude from offshore fields

Abu Dhabi Oil Refining Com-pany (Takreer)

is assessing bids for an estimated $3bn project to upgrade its Ruwais refinery to process crude from offshore fields, according to sources familiar with the scheme.

Three companies are understood to have submitted com-mercial engineering, procurement and construction proposals, including from South Korean groups GS En-gineering & Construc-tion and Samsung En-gineering, and Spain’s Tecnicas Reunidas.

Takreer plans to up-grade existing units at the Ruwais refinery site in the Western Region of Abu Dhabi emirate. The work will include modifying existing units to process 420,000 bar-rels a day (b/d) of offshore crude.

The work will include upgrades on units completed in the Ruwais refinery expan-sion project.

Commissioned in 2015, the upgrade involves doubling the existing capacity of

the site to more than 800,000 b/d.

The new scheme, named the Processing Offshore Crude Project at Ruwais Refinery, will allow Abu Dhabi to pro-duce refined products from offshore crude.

Abu Dhabi is under-going a major expan-sion of the offshore

Upper Zakum field and carrying out greenfield developments at fields such as Nasr, Satah al-Razboot (Sarb) and Umm al-Lulu.

Most offshore crude is processed at facilities on islands in the Gulf before being exported. Mark Watts

Abu Dhabi mulls bids for $3bn refinery

SAuDi ArAbiA

0.8m b/dCapacity of recently expanded Ruwais refinery

0.42m b/dAmount of offshore crude refinery will be able to process

1.2m b/dEstimated capacity of Abu Dhabi offshore fields

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The pipeline pAckAgeS■ package 1: Western

Province pipeline. Main scope includes the construction of 422 kilometres of 56-inch pipeline on Aramco’s East West Pipeline 2

■ package 2: Central region pipeline. Scope includes the construction of 226km of 46-inch pipeline on the East West Qassim Gas Pipeline 1.

■ package 3: Eastern Province pipeline

74 Oil And Gas.indd 74 18/02/2016 17:50


Firms sought for $1bn gas plantLiquefied petroleum gas facility due to be constructed at Rhourde el-Baguel oil field

to the selected firms in the first quarter of 2016. Bidding companies must have executed at least two similar projects and have an average turnover of $1bn for the past three years.Wil Crisp

Algeria has invited contrac-tors to prequalify for the contract to build a liquefied petroleum gas (LPG) plant.It will be constructed at

Rhourde el-Baguel, an oil field located in the Ouargla province. Project owner is state-owned oil firm Sonatrach and the project’s budget is estimated to be $1bn.

Project scopeThe scope of the scheme includes:■ Booster compressors;■ Gas dehydration units;■ Gas treatment plant including liquids separation and stabilisation;■ LPG storage and export pipeline.

The invitation to prequalify was sent to contractors on 24 January. The dead-line for submissions is 7 February and engineering, procurement and construc-tion tender documentation will be given

Further reAding

Abu Dhabi seeks gas processing plant bidsAbu Dhabi has invited firms to submit propos-als to build a plant to process gas produced at the Al-Dabbiya oil field, according to sources familiar with the project.

Prices in for Dubai refinery expansionDubai’s state-owned Emirates National Oil Company (Enoc) has received technical bids from several companies on the expansion of its Jebel Ali refinery

UAE to commission floating gas terminal in second half of 2016State-owned Abu Dhabi National Oil Company (Adnoc) plans to oper-ate a new liquefied nat-ural gas floating import terminal in the second half of this year.

China Petroleum Pipeline signs Iraq pipeline contractIraq has signed a deal with state-owned China Petroleum Pipeline and other foreign firms to invest in its $13bn Common Seawater Supply Project (CSSP).

Read more about oil and gas on www.meed.com/sectors/oil-and-gas

AlgeriA

Koreans bid low for Kuwaiti gas terminalted bids, but were disqualified from the bidding process. These were:■ Fluor (US) and Daewoo E&C (South Korea);■ Petrofac (UK)/Entrepose (France)/Vinci (France).

The reason for the disqualification of the two consortiums is not known.

Bids were submitted in late January. KNPC has extended the bid deadline for the project three times. The first bid deadline for the scheme was 29 Septem-ber 2015. Originally, a total of 13 bid-ders qualified to submit prices.Wil Crisp

A consortium of South Korea’s Hyundai Engineering and Hyundai Engineering & Construction has sub-mitted the low bid on Kuwait Nation-al Petroleum Company’s (KNPC’s) planned liquefied natural gas (LNG) import terminal.

In early February, Kuwait’s Central Tenders Committee announced the team had submitted a price of $2.9bn.

The second-lowest bidder was a con-sortium of Spain’s Tecnicas Reunidas and South Korea’s GS Engineering & Construction. It submitted a price of $3.1bn. Two other teams also submit-

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20132014

75 Oil And Gas.indd 75 18/02/2016 17:50


Business Outlook

which comprises Turkey’s TAV Airports and local contracting firms Saudi Oger and Al-Rajhi Holdings. It was the first PPP airport in the kingdom.

While PPP has been considered before by GCC states, the complexities and costs mean it has never gained traction. But the IFC says that with oil prices at about $40 a barrel, change is coming.

PPP infrastructure and social infra-structure projects will need the support of international financiers. Despite re-cent downgrades and negative outlooks from ratings agencies, the GCC is still widely seen as investment grade.

Legal framework – or not?The next step is to get feasible PPP pro-jects off the ground. Kuwait has opted for a PPP unit, the Kuwait Authority for Partnership Projects (KAPP), similar to Egypt’s PPP Central Unit.

Others are pushing ahead on a more ad hoc basis. “Investors prefer to have a PPP law, and a PPP unit within ministries that speaks the same language, but as long as you have a good private sector and advisers you can successfully close very large transactions,” says Makhlouf.

This was the case with the expansion of Queen Alia airport in Jordan to a capacity of 9 million passengers a year, completed in 2013. A similar plan for New Aqaba Port broke down, but learn-ing experiences can be carried forward.

“A meaningful transaction can set the stage, practically set the law. If you do it once and agree a certain framework between the private and the public, this can be a successful model that the gov-ernment can follow and support in sub-sequent transactions,” says Makhlouf

Aside from PPP, the IFC also looks at concessions and tariffs as ways to boost the role of the private sector.

Jordan pioneered renewables feed-in tariffs in 2011, and 12 solar projects reached a financial close in mid-2015. The IFC arranged financing for seven of the projects, bringing in commercial lenders, such as Bahrain’s Arab Bank, on B-lending.

“Commercial banks typically don’t feel comfortable on the longer matur-ities that some transactions require – they don’t have the means. They come in at the shorter end of the financing plans and between us and them we complete the picture,” says Makhlouf.

The idea was to make commercial banks comfortable enough to finance the second round of projects. The results of this strategy will become clear as projects work towards financial close.

“We will keep encouraging commer-cial banks, but we are not seeing the uptake that we hoped [for]; it’s still a difficult market,” says Makhlouf. “A few will come, but not all the projects will be supported by the private sector.”

The financing challenge is even great-er in Egypt. Its feed-in tariff scheme is much larger and a shortage of foreign currency is discouraging developers and putting off commercial lenders.

However, the involvement of private equity investors is encouraging, and DFIs expect the currency issue to be short- rather than long-term.

“The biggest challenge is to mobilise commercial investors with us,” says Makhlouf. “These are large sums and there are very few willing investors. But we do have investors coming in and there are serious potential returns.”Philippa Wilkinson

Project Country Cost Status

Prince Mohammed bin Abdulaziz airport Saudi Arabia $1.2bn Operational

Taif International airport Saudi Arabia $1bn PrequalificationSeven <20MW solar photovoltaic projects Jordan $207m Construction

2000MW of solar photovoltaic projects Egypt $4bn Reviewing

contractsSulaimaniyah IPP Iraq $500m Construction

Zakho IPP Iraq $578m Negotiating finance

PPP=Public-private partnership; IPP=Independent power project. Source: MEED Projects

SeLecTed IFc-STrucTured PPP ProjecTS

69-70 Finance.indd 70 17/03/2016 18:16


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The Middle East’s oil and gas sector started 2016 under a cloud of low crude prices, leaving contractors con-cerned about spending cuts

by national oil companies (NOCs).Shrinking capital expenditure will

likely be a reality. Abu Dhabi Nation-al Oil Company (Adnoc), one of the world’s largest oil producers, revealed toward the end of last year that it was aiming to cut spending by 25 per cent.

However, the value of engineering, procurement and construction (EPC) contracts since the start of the year has been in line with the average for recent years. More than $10bn-worth of EPC deals were awarded in the Middle East and North Africa oil, gas and chemi-cals sector from 1 January to 8 March, according to regional projects tracker

MEED Projects. This compares with about $67bn and $54bn awarded for the whole of 2014 and 2015 respectively.

Major projects include the $2.93bn deal awarded on Kuwait National Oil Company’s liquefied natural gas import terminal at Al-Zour. Meanwhile Canada’s SNC Lavalin says it has won a contract on an $800m gas scheme in the Middle East, thought to be on Saudi Aramco’s shale gas development.

Although firms are rightly worried about the potential for new work to dry up, the projects market still appears to be robust more than 18 months after crude prices began to collapse. The real ques-tion is whether there will be a slowdown in new schemes coming to the fore after NOCs have finished awarding projects planned before the oil price crisis.Mark Watts

The value of engineering, procurement and construction contracts awarded in the Middle East and North Africa since the start of the year has been in line with the average for recent years

Hope remains for contractors

Oil & gas

71 Oil And Gas.indd 71 17/03/2016 18:42


Business Outlook

Frontrunners emerge for Aramco Hasbah gas field expansion

South Korean firm bids low for refinery deal

Saudi oil major assesses bids on major offshore project, with two low bidders in consideration

Mark Watts

■ Dynamic Industries (US);■ Larsen & Toubro (India)/Emas (Singapore);■ McDermott (US);■ Saipem (Italy).

The bids submitted by Dynamic Industries and Saipem are understood to be very close in terms of price, with McDermott the third-lowest bidder and Larsen & Toubro submitting the highest-value proposal.

Saipem is understood to be in a good position to win the deal after recently completing the offshore section of the $4.6bn Wasit gas programme for Ara-mco. The firm was awarded more than $2bn of work to bring online the first production of non-associated gas from the Hasbah and Arabiyah fields.Mark Watts and Ed Clowes

Two companies have emerged as frontrunners to win the main contract on Saudi Ara-mco’s Hasbah offshore gas field expansion, according to

sources familiar with the project.

Low bidders US-based Dynamic Industries and Ita-ly’s Saipem were the two lowest engi-neering, procurement and construction (EPC) bidders, and one of the two is likely to win the estimated $1.5bn deal, several sources have told MEED.

Aramco received four technical EPC proposals in November and has since opened the bid prices. The tender is part of the Long-Term Agreement signed between the state oil firm and four groups last year. The firms are:

Listen to Mark Watts and Wil Crisp discuss why Egypt and Abu Dhabi are prioritising gas by search-ing for ‘Oil Talk’ on www.meed.com

tender, according to sources. The other two bidders are South Korea’s Samsung Engi-neering and Spain’s Tecnicas Reunidas.

Impending decision Takreer, which is a subsidiary of state-owned Abu Dhabi National Oil Company (Adnoc), is likely to make a decision to award the contract in the coming weeks.

The work will include upgrades on units completed in the Ruwais refinery expan-sion, which was commissioned in 2015 and doubled the existing capacity of the site to more than 800,000 b/d.Mark Watts

South Korea’s GS Engineering & Con-struction (E&C) has emerged as the frontrunner to win an estimated $3bn-plus contract to upgrade the Ruwais refinery in Abu Dhabi, sources familiar with the project tell MEED.

Abu Dhabi Oil Refining Company (Takreer) is planning to upgrade existing units at the refinery site in the far west of the emirate. The work will include modifying existing units in order to process 420,000 barrels a day (b/d) of offshore crude.

GS E&C submitted the lowest commer-cial bid out of the three firms vying for the

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72 Oil and Gas.indd 72 17/03/2016 18:14


Contractors named for Zohr developmentAn estimated total investment of $12bn is required for Egypt’s largest-ever gas discovery

Delta North Alexandria concession, which is operated by the UK’s BP and is also expected to see first gas in 2017.

Subsea 7 says the contract is worth in excess of $750m, but has not given an exact value. The scope of work includes engineering, procurement, installation and pre-commissioning of subsea infrastructure for 12 wells located in the offshore oil fields Giza, Fayoum and Raven.

The contract scope also includes the installation of export lines from the subsea location to the Idku liquefied natural gas (LNG) export terminal.

Subsea 7 intends to start engineering and project management work immedi-ately. Offshore installation is scheduled to commence in two stages, with the first commencing in 2017.

Subsea 7 says its vessels Seven Bore-alis and Seven Antares will be used for the pipelay, while heavy construction vessel Normand Oceanic will be used for the other construction activities.

The West Nile Delta North Alexan-dria concession has proven reserves of 5 trillion cubic feet of gas and 55 mil-lion barrels of condensate.Wil Crisp

Italy’s Saipem and the local Belay-im Petroleum Company (Petrobel) have been selected as the main contractors for the development of Egypt’s giant Zohr gas field.

Minister of Petroleum Tarek el-Molla said the two firms had been nominated in cooperation with the local Engi-neering for the Petroleum & Process Industries (ENPPI) and Petrojet.

In February, Italy’s Eni released a statement saying Egyptian Natural Gas Holding Company (Egas) had been given approval to grant the necessary development lease, setting the scene for first gas to be produced in 2017.

Total estimated project investments are $12bn, according to the Minis-try of Petroleum. The value of deals signed by Petrobel and Saipem has not been revealed.

First gas Initial production is expected to start at a rate of 270 million cubic feet a day (cf/d) of gas. This is expected to increase to 2.7 billion cf/d over the following two years.

The discovery of Zohr was announced in August 2015, following the drilling of the Zohr-1 well. Eni says the Zohr field could hold 30 trillion cubic feet of gas, making it Egypt’s largest-ever gas discovery as well as the largest in the Mediterranean and one of the world’s largest natural gas finds.

Zohr is one of two major upstream gas developments currently seeing rapid progress in Egypt.

In late February, UK marine engineer-ing company Subsea 7 announced it had been awarded a major contract as part of the development of the West Nile

egypt

The Zohr field is one of the world’s largest natural gas finds

270m cf/dInitial production from Zohr gas field

2.7bn cf/d Production from Zohr field in following two years

30trn cfTotal gas reserves in Zohr fieldP

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73 Oil and Gas.indd 73 17/03/2016 18:10


Business Outlook

Farabi to tender chemicals plantPetrochemicals firm planning $1bn-plus linear alkyl benzene facility in Yanbu

Twenty-four grades of surfactant allied business chemicals, including detergents and wetting agents, are planned to be manufactured at the Yanbu facility.Mark Watts

Saudi Arabia’s Farabi Petrochemicals Compa-ny is expected to tender a contract by the end of March to build a new plant

in Yanbu, according to sources familiar with the project.

The firm is planning to construct a $1bn-plus linear alkyl benzene plant and units to produce speciality chemi-cals using diesel feedstock.

Farabi prequalified firms for the engi-neering, procurement and construction (EPC) tender in the fourth quarter of 2015. The companies are understood to include:■ CTCI (Taiwan);■ Larsen & Toubro (India);■ Petrofac (UK);■ Saipem (Italy);■ Sinopec (China);■ Tecnicas Reunidas (Spain).

Further reading

Adnoc buys Indorama stake in Tacaamol chemicals projectAbu Dhabi National Oil Company (Adnoc) has taken the minority stake in the Taacamol project after Thailand’s Indorama pulled out of the joint venture.

Zadco studies bids on Upper Zakum upgradeAbu Dhabi is said to be assessing bids for two projects that will increase the capacity of its largest oil field, the offshore Upper Za-kum field, to 1 million barrels a day.

Total/Aramco team considers expansion of Satorp refineryFrance’s Total and Sau-di Aramco are said to be looking at expand-ing the Saudi Aramco Total Refining and Petrochemical (Satorp) refinery by 10 per cent.

Penspen wins Abu Dhabi offshore dealUK-based Penspen has been awarded a project management consultancy con-tract for work on the offshore oil and gas hub of Das Island in Abu Dhabi.

Read more about oil and gas at www.meed.com/energy

Saudi arabia

State oil firm pushes suppliers for discountsets, according to an Abu Dhabi-based banking source.

Most suppliers have accepted the reduced payments to maintain future business with Adnoc, says the banker, who asked not to be identified as the information has not been made public. “When Adnoc tells you to take a dis-count on payment, you just take it.’’

Adnoc did not respond to several email requests and phone calls for a comment. Abu Dhabi is a staunch backer of the Saudi-led price war against US shale producers.Sarmad Khan and Mark Watts

Abu Dhabi National Oil Company (Ad-noc) is slashing payments owed to its suppliers by 20 per cent as it tries to save costs amid slumping crude prices and shrinking revenues.

The state-owned firm, which is re-sponsible for the extraction and sale of about 6 per cent of the world’s proven oil reserves, has asked its suppliers to accept 80 per cent of the billed amount, according to three people familiar with the matter.

The payments cuts were handed down across Adnoc businesses, includ-ing its upstream and downstream as-

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