Saudi Aramco: Finding the funds, and the time
- Pipeline
- Saudi Aramco News
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Author: Middle East Economic Digest (MEED)
Released 3 January 2006
SAUDI ARABIA, December 16, 2005 - Salim al-Aydh, senior vice-president engineering and operations services, Saudi Aramco, is not known for mincing his words. "Mega projects and contracts may grab headlines, but we know most of our work goes on behind the scenes, far from the glare of spotlights and cameras," he told an industry conference in Bahrain in late November. "All across the region, we are depending on skilled professionals to keep our plants and pipelines fit for service, sustain production and delivery systems and prevent disruptions due to unplanned shutdowns. This is important, as the equipment in many of our existing plants is maturing, while our new facilities have grown considerably in both scale and complexity."
With the benefit of hindsight, Al-Aydh’s comments are particularly apt. A recurring issue for Aramco in 2005 has been major cost hikes for engineering, procurement and construction (EPC) contracts. The first instance was in March, when it awarded contracts worth up to $5,000 million for the 500,000-barrel-a-day (b/d) Abu Hadriyah, Fadhili and Khursaniyah (AFK) oil field and the Hawiyah natural gas liquids (NGL) recovery programme. Soon after, it was the turn of the bulk products storage plant contracts. Industry officials estimate the awarded contracts were at least 30 per cent above budget.
However, the biggest cost over-run was in August, when Aramco and Japan’s Sumitomo Chemical Company signed the joint venture agreement for integration of the Rabigh refinery. At that time, Sumitomo admitted an upward revision in project costs to at least $8,000 million, against the original estimate of $4,000 million.
Looking ahead, Al-Aydh’s comments are no less valid, as Aramco presses ahead with plans for a total investment of about $43,000 million by 2010 in new projects to increase up and downstream capacity. About $23,000 million has been identified for investment in services, including construction, engineering, well logging and maintenance, while a further $20,000 million is due to be spent mainly on materials. The aim will be to increase oil production and refining capacity by 32 per cent and 30 per cent respectively and boosting the capacity of the master gas system (MGS) by a staggering 67 per cent.
In the oil sector, the lion’s share of the planned investment will be under the Khurais crude increment programme. Some $11,000 million alone is planned for investment at the mothballed onshore oil field to deliver 1.32 million b/d of Arabian Light crude. An equal amount is planned for investment to build two new greenfield export refineries at Yanbu and Jubail, while $14,000 million will be spent on increasing the product slate of the existing Rabigh and Ras Tanura refineries.
The task will be challenging, with pressure already mounting due to the availability of engineers and the growing cost of construction materials, equipment and manpower. Al-Aydh estimates the total engineering workload in the Gulf’s oil and gas sector over the coming five years will be 533 million man hours (MH), of which Aramco will account for 58.5 million MH or 11 per cent. The scenario is a bit more acute for construction workload, where Aramco’s demand will be 1,360 million MH or 14 per cent of the total Gulf demand of 10,000 million MH. In both cases, the highest demand will be in 2008, when project activity will be at its peak.
Aramco is aware of the issues and has recently taken steps to reduce cost over-runs. In late November, it announced the award of five-year procurement contracts, worth at least $2,500 million, covering more than 2 million tonnes of line pipes. "The agreements allow us to reserve plant capacity to guarantee price, quantity and optimum delivery terms to support our capital [investment] programme and operational needs. We will no longer compete for a share of the highly competitive and volatile global market using spot-bid methods," said an Aramco statement.
The agreement was the first ever signed by a Gulf national oil company. "Global demand for pipe has caused pressure on supplies and resulted in mills increasing production capacities to keep pace. Ultimately, that led to longer delivery periods… for example, two or three years ago, pipe deliveries took six-to-eight months. They now average more than 12 months, depending on supplies," the statement added. Aramco is also weighing other options, including the indexing of steel and other related materials and the hedging of commodities and currencies.
Changes have also been introduced in the contracting strategy. For the Khurais project, prequalifiers have been given new bidding options. Besides, the traditional EPC and the lump-sum turnkey (LSTK) models, contractors can now choose between convertible LSTK and bid target price, with a fee. "The new contracting strategy will ensure a fast delivery schedule and is an indication that the client is willing to share risk," says a Gulf-based EPC contractor.
The convertible LSTK option was once again offered in early November, when Aramco invited contractors to respond to an initial inquiry to bid for the Shaybah project – the kingdom’s next major oil field development scheme, aimed at increasing production capacity by 250,000 b/d.
If the past few months are any indication, Aramco’s initiatives have yielded results: 22 companies, including several newcomers, applied for prequalifications for the main packages on the Khurais oil field development. However, it remains to be seen if the interest will be sustained.
These are difficult times for EPC contractors, with ever-increasing constraints on their capabilities. "The global petroleum industry is confronting unprecedented challenges, given its responsibility to supply oil and gas to a worldwide market with an ever-increasing energy demand. We have responded by increasing capacity through new projects, upgrading and debottlenecking. Throughout the region there is an understanding of the magnitude of the challenge. But with those challenges come opportunities of an equal magnitude," Al-Aydh said. It remains to be seen if EPC contractors will take up Aramco’s challenge.