Rising EPC Costs

EPC (engineering, procurement, construction) costs have surged rapidly in the GCC.

Costs on the Qatalum Project in Qatar were recently revised upwards to $5.6 billion from an original $4.8 billion estimate mainly because of rising EPC prices.

Other major projects that have experienced cost inflation include -

1. Pearl GTL Project (Royal Dutch Shell), Qatar
2. Ras Tanura Petrochemical Complex (Dow Chemical & Saudi Aramco), KSA
3. PETRORabigh Complex (Saudi Aramco & Sumitomo Chemical), KSA
4. Qatar Petroleum and ExxonMobil scrapped plans earlier this year to build a large GTL plant.

The EPC costs, which include factor inputs, contractor’s margins and systematic pricing of project risk by the contractor, make up as much as 70% of the total project cost. The following make up the factor inputs -

1. Materials - Costs for materials such as steel, copper and concrete have increased dramatically in the last three years.
2. Manpower - Shortage of skilled workers has pushed up the cost of hiring or contracting qualified personnel.
3. Services/equipment - Costs for energy-related services, such as contracts for offshore drilling rigs, have nearly doubled within the last year in some locations due to the sharp rise in industry activity.

Pearl GTL Project

In July 2006, Qatar Petroleum (QP) and Royal Dutch Shell announced the launch of the Pearl Gas to Liquids (GTL) project in Ras Laffan Industrial City, Qatar. The project will accelerate the strategy of diversifying natural gas usage and will serve to promote Qatar's ambition of being the GTL capital of the world.

Facts & Figures -

1. The Pearl GTL project comprises the development of upstream gas production facilities as well as an onshore GTL plant that will produce 140,000 barrels per day (bpd) of GTL products as well as approximately 120,000 bpd of associated condensate and liquefied petroleum gas. The project includes the development of a block within Qatar's vast North Field gas reserves (the largest single non-associated gas field in the world).
2. The plot size of 1.6 x 1.4 kilometres is more than 450 football fields.
3. The project will require 3000 items of equipment including - pumps, compressors, columns, and vessels.
4. The project will cost anything between $14bn and $18bn before its 2010 opening. Costs have skyrocketed since the project was first initialed (original estimate - approx $6bn). With inflation now at the highest levels, the prices of every resource (material, manpower, equipment) that goes into the construction of what promises to be a modern day marvel have shot up multifold.
5. During the construction phase, the project will employ around 35,000 staff.

Oil at $100/barrel?

The price of oil has surged since the start of 2007 (approx $55/barrel). The rise can be attributed to the following factors -

1. Political instability in the Middle East i.e US-Iran relations, Iraq
2. Supply disruptions in key producers such as Nigeria
3. Strong demand from emerging nations such as China and India
4. Weaker dollar (makes oil cheaper for holders of other currencies)
5. US crude inventories