Saipem SpA to Lead Consortium for QAFCO Fertilizer Project

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Researched by Industrial Info Resources (Sugar Land, Texas)--Qatar Fertilizers Company (QAFCO) (Mesaieed, Qatar), a subsidiary of Industries Qatar (Doha, Qatar), has awarded the $610 million engineering, procurement and construction (EPC) contract for the QAFCO-VI fertilizer plant to Saipem SpA (BIT:SPM) (Milan, Italy) and Hyundai Engineering and Construction Company (SEO:000720) (Hyundai ECC) (Seoul, South Korea). Saipem will lead the consortium. The scope of the contract also includes technology and process licensing, commissioning of the 3,850-ton-per-day granulated urea production facility, and construction of allied and associated infrastructure. QAFCO-VI will be located at the QAFCO complex in the Mesaieed industrial city, about 40 kilometers from Doha. The contract is expected to be executed in 35 months. Several domestic and international companies are also expected to be involved in this project as subcontractors.

Project officials have indicated that QAFCO decided to avoid the lengthy tendering process for the QAFCO-VI project and initiated discussions with Saipem. Presently, Saipem and Hyundai ECC are undertaking construction of the QAFCO-V project at the same location. QAFCO is expecting to save six months to one year's time on the tendering process and also reduce project costs to about $3 billion. QAFCO is working toward commencing operations of QAFCO-VI by the end of 2011. Feedstock for the plant will come from surplus ammonia from the QAFCO-V trains.

Ammonia, which contains 18% hydrogen and 82% nitrogen, is produced using natural gas as feedstock. Ammonia is the main feed for the production of urea. Urea, which consists of 46.6% nitrogen, is obtained from the reaction of carbon dioxide with ammonia. Urea is then converted into solid fertilizer products at the final stage in a granulation facility.

QAFCO-V, which is being constructed as a 75:25 joint venture between Industries Qatar and Yara International ASA (OSL:YAR) (Oslo, Norway), is expected to be completed in late 2010 or early 2011. The operations of QAFCO-V are expected to increase QAFCO's total urea and ammonia production to 4.3 million tons per year and 3.8 million tons per year, respectively. Work on the facility began last year. QAFCO-V will consist of two ammonia production trains, each with a capacity of 2,300 tons per year. The urea plant will have a production capacity of 2,850 tons per year. The products are expected to be exported to approximately 35 countries.

Presently, QAFCO operates four fertilizer plants in the Mesaieed industrial city with a combined production capacity of 3 million tons per year of urea and 2 million tons per year of ammonia. The operations of QAFCO-V and VI are expected to increase the production capability of urea to 5.6 million tons per year.

Industry experts have observed that the expansion plan comes at a time when fertilizer companies in the Middle East are facing a decline in profits. Recently, Saudi Arabian Fertilizer Company (SAFCO) (Riyadh, Saudi Arabia) announced a slump of 58.7% in third quarter results. The decline has been attributed to increasing regional fertilizer capacity, a slump in demand from the U.S. market, and falling global prices. Experts indicate that QAFCO's profitability will also be impacted.

Earlier this year, there was fear among global fertilizer producers that the price of urea could fall because of a global increase of production capacity. There were reports that Qatar and the United Arab Emirates were increasing capacity 1.3 million tons per year and 396,000 tons per year, respectively. Global production of urea was expected to increase 36.3 million tons, mainly from new production facilities in Venezuela, Iran, China and Russia. Through 2012, Iran, Russia and Venezuela are expected to account for a 22% increase in global urea production. But experts have indicated that there is no cause for alarm, as these countries are not expected to add new the new production capacities that were previously planned.

In August last year, global urea prices reached a record high of $790 per ton before slumping to $240 per ton in May and June 2009. Analysts have observed that about 7% of the total global urea production capacity is idle because of the lower prices. There is optimism that prices of urea will stabilize at $275 to $300 per ton for the rest of the year. Low-cost manufacturers such as SAFCO and QAFCO, which operate with locally available and inexpensive feedstock, are expected to benefit from healthier and higher margins.

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