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Advanced Process Control for the Refining and Petrochemical Industry

Vast energy projects feel heat from rising expenses

Published: Thursday, 22 February, 2007, 09:23 AM Doha Time LONDON: Multi-billion dollar energy projects are under threat from rising steel and labour costs – and the more ambitious the scheme the more vulnerable it is. ExxonMobil abandoned its plans on Tuesday for a $15bn plant to turn Qatari gas into ultra-clean fuel. Qatar’s Second Deputy Premier and Energy Minister HE Abdullah bin Hamad al-Attiyah said budget overruns lay behind the decision to scrap the gas-to-liquids GTL scheme. The decision shone a spotlight on other massive projects - Royal Dutch Shell’s $12-18bn Pearl GTL venture also in Qatar, ENI’s giant Kashagan oilfield in Kazakhstan, $20bn worth of Nigerian liquefied natural gas projects and dozens of refinery plans around the globe. It also highlighted a building tension in the 85mn barrels per day oil market. Consumer demand is growing, but so are the costs of projects to keep energy supplies flowing. “Right now, everyone around us is postponing and delaying projects,” al-Attiyah said. Fellow Opec member Kuwait told firms competing in a tender to build a 615,000 barrels per day refinery at al-Zour to go back to the drawing board yesterday after bids came in at more than double the $6bn budget. US oil major ConocoPhillips said last month it expected to delay the upgrade of its Wilhelmshaven, Germany, refinery from 2007 to 2008 at the earliest because of cost. The surcharge for the type of steel used by the oil industry has risen around 10% since the end of 2006, and more than doubled since this time last year. Oil industry steel, which has to be extremely tough to withstand high temperatures and pressure, accounts for less than 2% of steel output. A shortage of manpower has also resulted in soaring wage costs. Divers working in the North Sea oil and gas industry were awarded a 44.7% two-year pay rise last November. According to energy analysts CERA, the costs of major oil and gas production projects have risen more than 53% in the past two years and no significant slowdown is in sight. “This is central to every energy company’s strategic planning,” CERA chairman Daniel Yergin said earlier this month. Following ExxonMobil’s sudden exit from the Qatar’s GTL scheme, some industry insiders and analysts are questioning the wisdom of Shell’s Pearl project. “I don’t see Pearl as viable,” said an industry executive. Qatar’s energy minister also appeared to cast doubt on Pearl. “Gas-to-liquid technology is expensive and very technical,” Attiyah said. “Technology for the other projects is proven.” Citigroup analysts forecast Pearl would generate a 9% internal rate of return based on a $15bn cost. This is below the 10-15% firms normally target. “Further cost escalation obviously dilutes returns still further and is hardly conducive to further investment in this form of project,” Citigroup said in a report. Industry insiders note Shell is relying heavily on Pearl for production growth after it ceded control of the Sakhalin-2 oil and gas project to Russia’s Gazprom last year. Shell is also eager to strengthen its position in Qatar, which holds the world’s third biggest gas reserves after Russia and Iran. “Pearl was a ticket for Shell to get back into Qatar,” said one source. The ENI-led consortium that is developing the giant Kashagan oilfield in Kazakhstan - the world’s biggest oil discovery in 30 years - has already been delayed from 2008 to 2010. Industry newsletter International Oil Daily reported last week the $15bn project could be pushed back to 2011-2012. ENI CEO Paolo Scaroni has said he will talk about Kashagan at the annual results presentation tomorrow. Sceptical eyes are also turning to ambitious liquefied natural gas projects in Nigeria. With a fifth of the country’s oil output shut by militant attacks, analysts and investors are questioning the prospects for Brass LNG and OK LNG, worth a combined $20bn. ENI, Total and ConocoPhillips are partnering Nigeria in Brass, and BG Group and Centrica may join. “In terms of upstream, there are numerous world-scale projects that are under pressure because the contracting market is so tight,” said Jason Kenney, analyst at ING in Edinburgh. International Energy Agency refining analyst David Martin said rising costs associated with new refineries made the expansion of existing refineries a more attractive proposition. Some 15.1mn barrels per day of additional refining capacity is planned by 2011, the IEA estimates. The agency, adviser to 26 industrialised countries, expects almost 5mn bpd of the total to be delayed beyond 2011 or cancelled because the economics do not stack up or the firms involved do not have sufficient access to capital markets. “The industry view is that you need margins of $6.50 a barrel over 20-25 years to generate an internal rate of return of 10% for a relatively sophisticated cracking refinery with a 200,000 bpd capacity. The IEA takes the view you need at least $8 a barrel,” Martin said. “(But) some new refineries are being built for strategic reasons – for example, China and India where it is a strategic goal to expand the refining industry and 10% internal rate of return is of less importance.” – Reuters