Projects in the Middle East: The cost competitionby Martin Menachery on Apr 12, 2017
The real challenge faced by the EPC companies in the Middle East is the cost competition since there are only limited number of large-scale projects in the region and all the major global players are there from around the world.
On a global level, investments in the oil and gas sector are still struggling to recover, having recently witnessed one of the biggest falls in history. However, the energy investments in the MENA region over a five-year period are ahead of this trend.
While budget deficits and tightened public expenditure are realities across the region, in the medium term, the overall market growth will depend on improving geopolitics, the speed of the oil-price recovery and the ability of the governments to rationalise spending and to continue their efforts to introduce the much-needed structural economic reforms.
The MENA energy investments
According to the MENA Energy Investments Outlook published recently by the Arab Petroleum Investments Corporation (APICORP), the total energy investments in the Middle East and North Africa (MENA) could reach the one trillion US$ mark over the course of next five years. The MENA region is expected to see an increase of seven percent in the energy investment activity compared to data of the previous year, while global investments in the industry continued their decline in 2016, down by 24 percent as compared to 2015.
As the government in the MENA region continue to invest in the energy sector on priority basis, it is expected that a number of major projects will be executed and completed successfully over the course of the next five years. At the end of 2016, a total of US$337 billion had already been committed to projects under execution in the region. The APICORP outlook further notes that with an additional US$622 billion worth of developments in the planning stage, the committed and planned investments could add up to US$959 billion over a five-year period, compared to US$900 billion in 2015.
Out of the total of US$337 billion of committed investments for the five-year period, investment in the oil sector is at US$121 billion, gas investment is at US$108 billion, power investment is at US$91 billion and investment in petrochemicals is at US$17 billion. The GCC countries are driving investment in the region, representing US$174 billion in committed investments, which is more than 50 percent of the MENA total.
Out of the US$622 billion worth of planned investments over the five-year period, the power sector accounts for US$207 billion, the oil sector represents US$195 billion, the gas sector has a share of US$159 billion, and the investment in petrochemicals is projected as US$61 billion. According to the APICORP outlook, at US$289 billion, projects under study constitute the largest part of the pla-nned investments.
Out of the planned investments, Saudi Arabia represents 19 percent over the outlook period. In its drive to diversify and create more value, the Kingdom is also planning to continue investing in petrochemicals.
The GCC petrochemical industry
The petrochemical industry makes up the second largest manufacturing sector in the GCC region, producing up to US$108 billion worth of products per annum. Outpacing the global average growth of 2.2 percent, the petrochemical industry in the Arabian Gulf region grew at 3.7 percent in 2016, reaching 150 million tons of capacity, according to a recent annual study by the Gulf Petrochemicals and Chemicals Association (GPCA).
The GPCA study highlighted that the industry’s growth is largely due to new capacity added in Saudi Arabia, the region’s largest petrochemical producer with 99.1 million tons of capacity, accounting for 66 percent of the regional capacity. The report also highlighted a fall from the Gulf chemical industry’s growth rate of five percent in 2015, due in part to feedstock supply constraints and global economic uncertainty.
New, highly complex and ‘transformational’ projects in the region, such as the US$20 billion Sadara Chemical Company, a joint venture between Saudi Aramco and Dow, and Kemya Elastomer Plant, point to a positive medium-term outlook for growth. It is important to note that the drop from 2015 figures can also be attributed to new capacity additions coming from specialty chemicals, which tend to be lower in volume but higher in value compared to commodity petrochemicals.
As the GCC producers explore new and often unconventional sources of feedstock to drive chemical output, the Arabian Gulf region continues to make significant investments in greenfield plant operations as well as brownfield efficiency gains. The multibillion dollar project announcements, new technologies and capacity addition have contributed to a surge in job opportunities, apart from advancing investment and innovation in the industry. According to the GPCA study, in 2016, projects worth US$13 billion were announced in the region, coming online between 2020 and 2024, and adding eight million tons production capacity. The projects are expected to contribute as many as 4,000 new jobs.
With many major petrochemical mega projects making significant progress in 2016, large capacity is arriving on stream in the GCC region. These highly complex projects are expected to add considerable benefits to the local industry, providing a further push towards downstream development and industry expansion. A true game changer, the new projects will enable naphtha cracking, thereby enhancing downstream investment and creating more value-added jobs in the region.