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Global recession takes toll on petrochemical projects in the Middle East

 

The Middle East is probably the most important influence on the global petrochemical industry and will remain so for many years to come. The region's unparalleled production cost advantage and the willingness of its governments to diversify their oil-based economies have fostered exponential growth of an industry that may forever change the commodity petrochemical business. From being insignificant 20 years ago, the region has grown to become home to about 10% of global ethylene capacity today. For Europe and USA, the region is both threat and opportunity, gobbling up the export market on the one hand and presenting a profitable place to invest on the other. For Asia, the Middle East is a threat but also an important emerging source of petrochemical products. But the Middle East's success isn't unbridled. New projects in the Middle East are slowing down. According to ICIS, the economic meltdown in the US has finally hit this region. Bank lending has fallen, credit availability has tightened and project proposals are being subjected to greater scrutiny. Project sponsors are finding that the number of banks willing to lend has fallen. International banks that were actively lending in the region during the past few years are focusing on setting their own houses in order. Local banks also face problems. Dollar funding is an issue as liquidity is tight globally and interbank borrowing is not as easy as before. Interest rates for local currency loans are higher than dollar-denominated ones. It is a difficult time for lending across all industries as lending is at a standstill globally. There is a complete credit squeeze, and bankers have become extremely selective of choosing to finance a project. And when they do lend, banks are demanding a higher spread in view of tight liquidity and heightened credit risk.
The challenging financing environment has already forced state oil company Qatar Petrochem (QP) and Korea-based Honam Petrochemical to defer their joint venture (JV) cracker and derivatives project.
Saudi Aramco and US-based Dows JV at Ras Tanura, in Saudi Arabia is running into finance problems. The integrated refinery petrochemical project, estimated at US$26 bln (21 bln), is one of the biggest in the sector so far. Both partners are looking to replace Royal Bank of Scotland as the lead financier for the project as there are doubts over its capabilities following recent huge losses. Doubts are also being expressed on whether the Ras Tanura project will be able maintain its schedule of completion by 2014, as Dow is currently struggling to find solutions to some other major problems.
Though financing will not be easy, lenders are still interested in projects that are state sponsored. Middle East and North Africa (MENA) region state-driven investor feasibility studies are still progressing, even if the time from feasibility to development phase is taking longer, due to the changing economic climate, points out a UK-based petrochemical consultant.
Among the projects moving forward is the plan for a $20bn-plus chemical industrial city in Abu Dhabi, the United Arab Emirates (UAE), that will be managed by Abu Dhabi National Chemicals Co. (ChemaWEyaat) and Borealis. But progress at some other projects has slowed. This includes Saudi petrochemical company Petro Rabigh's second phase in Saudi Arabia and the ExxonMobil-QP JV cracker and derivatives project in Qatar. The FEED contract to be awarded in late 2008 that was postponed to Q1-09, has not yet materialised.
While governments in the region remain interested in supporting petrochemicals it is likely that more critical sectors such as power will be prioritized over petrochemicals. Governments can afford to delay petrochemical projects as construction and equipment costs are falling. Construction companies are faced with clients who are renegotiating engineering, procurement and construction (EPC) contracts and asking for a 20% reduction. This is delaying many projects, and also making project negotiations tougher than last year. The slump in the real estate sector, especially in Dubai, UAE, has eased the upward pressure on prices of construction materials. Falling cost of steel has led to expectations of lower [construction] costs. Costs have fallen by only 8-10% now, and could fall further Q3-09.
                                                    
MAJOR PROJECTS IN THE MIDDLE EAST
Country/Company Product Targeted completion Status
Saudi Arabia
Arabian Industrial Fibers (Ibn Rushd) propylene and derivatives 2012 planned
Saudi Kayan olefins, aromatics and derivatives Q1 2011 under construction
National Chevron Phillips ethylene and derivatives Q4 2011 under construction
Petro Rabigh II olefins, aromatics and derivatives - under study
Saudi Aramco/Dow Chemical ethylene, aromatics and derivatives 2014 FEED stage
Saudi Aramco/Total propylene and aromatics post 2012  
Abu Dhabi
Borouge II olefins and derivatives H2 2010 under construction
Borouge III polyolefins 2014 feasibility study stage
ChemaWEyaat olefins, aromatics and derivatives 2014 under preliminary engineering
Qatar
ExxonMobil/Qatar Petroleum ethylene post 2012 FEED award delayed
Honam Petrochemical/Qatar Petroleum olefins and derivatives post 2012 decision on project deferred to H2
Oman
Duqm Refining & Petrochemical refinery, olefins and derivatives post 2012 delayed
 Source: ICIS

 
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