Middle East Projects Fight Against Inflation, Supply Chain Constriction and Schedule Creep

Reported by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--An increasing rate of inflation in the Persian Gulf states and the Middle Eastern hydrocarbons-producing and exporting countries is becoming noticeable in an increased rate of project-postponements and upward budget revisions. The rush to create new infrastructure, fueled by windfall profits from the rising global oil price, could lead to distortions in local economies as the supply chain of skills and applied technologies diminishes under the continuing pressures of global demand.

The cost of the Saudi Arabian Mining Company (known as Ma'aden) (51%) and Rio Tinto's (NYSE:RTP) (London) (49%) alumina and aluminum project rose from an estimated $7 billion in April 2007 to $7.53 billion, although some of this increase could be due to the finalization of project specifications and design capacities. The total project at Ras Al-Zour includes a 1,400- to 1,800-megawatt power plant and a smelter with an annual capacity of 720,000 tons. Bauxite for an alumina refinery will come from Az Zabirah in northern Saudi Arabia. In July, Ma'aden will float the Middle East's largest ever initial public offering, putting half the company's stock on the market for an expected return of $2.47 billion. The smelter is scheduled to begin operating in 2012.

Although no official reason has been given regarding the third delay in opening tender bids for the 200,000-barrels-per-day Jizan refinery project in southern Saudi Arabia, it is thought that escalating costs have stalled progress on this project and many other refinery projects worldwide.

Addressing the topic of cost escalations hitting energy projects worldwide, Michael Gambrell, Executive Vice President of Dow Chemical (NYSE:DOW) (Midland, Michigan), told Reuters that the petrochemical project to be built in Oman is now three to four years behind initial plans. Oman and Dow want to redesign the plant for better profit margins in the face of rising costs. Gambrell said that they had begun to revise the project when they found that it did not provide the financial returns and expectations required.

Qatar is planning to put a three-year freeze on steel and cement prices in an effort to curb rising inflation. The world's largest exporter of liquefied natural gas will extend a subsidy on diesel as strategic industrial resources and rents have been pegged at 2005 rates. These moves are aimed to provide a stable environment for contractors as import costs have risen with inflation of the local currency, which is pegged to the U.S. dollar.

The strain on building materials has been highlighted by the suspension of Egyptian cement exports to Bahrain. The Saudis have imposed new rules to combat international profiteering on the black market, done by selling price-controlled cement bought in Saudi Arabia into the black markets of other countries for huge profits. The move has rendered thousands of laborers in Bahrain idle, but still paid, and nearly all construction projects have stopped. Conservative estimates say their industry is losing over $10 million a day because of stoppages. Bahrain has been caught in the crossfire as the Saudis move to protect their own supplies of material as local shortfalls begin to show.

Large- and mega-projects in Saudi Arabia will require an estimated 52 million tons of cement over the next five years, and all developing Middle Eastern countries are facing major challenges involving the building of homes and the provision of urban services to their growing middle class populations.

Dubai-based consultants Contax Group report that energy and infrastructure capital expenditure on announced infrastructure projects for countries of the Gulf Cooperation Council (GCC) will reach $1.1 trillion between 2008 and 2010. This represents a 300% increase on the total forecast of 2007. Contax says that, with refining and petrochemicals comprising the major part of this investment, the GCC is viewed as "a land of rich pickings and opportunity." Contax warns, however, that the region is not without its challenges and creates a paradox for incumbent and new entrant players.

Lack of productivity on site, management of mega-project complexity and sliding project completion dates resulting in delayed mobilization and demobilization on site exacerbate the cost and resource problems. The Contax analysis shows a 20% decrease in the project realization rate from 2007 to 2008 over the previous year. This has resulted in a considerable spillover effect pushing up the 2008, 2009 and 2010 planned project capital expenditure forecasts.

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