Qatar Petroleum and Shell pull out of $6.4bn Al Karaana project as oil price slides

The state-run energy firm Qatar Petroleum (QP) and Royal Dutch Shell have pulled the plug on the US$6.4 billion Al Karaana petrochemicals project in the Gulf state because of high costs and slumping oil prices, the companies said.

The cancellation comes even as the consultancy PwC said in a report that regional oil and gas companies expect to continue to spend on projects this year, despite the slump.

More than three-quarters of respondents surveyed in 2014 expect spending to rise over the next 12 months and 40 per cent expect spending to increase by more than 25 per cent, the survey showed.

“Irrespective of the recent decline in oil prices, there is cause for optimism in the regional oil and gas industry. However, it also brings to sharp focus some issues that need to be addressed as a matter of urgency if the sector wants to deliver on its ambitions,” Paul Navratil, PwC’s leader of energy, utilities and mining in the Middle East said in the statement.

“If oil prices remain as they are, or drop further, then the need for efficiency of capital will be even more important.”

Al Karaana is the second project to be scrapped by QP recently; in September it halted work on the $6bn Al Sejeel petrochemicals project.

Brent oil price is hovering around $46 per barrel, a 60 per cent drop from last year’s record $115 reached in June owing to an oil supply glut spurred by the US shale oil boom, weaker demand in Asia and Europe and a strong dollar. The oil price rout has as a result dragged down the price of petrochemicals.

“The decision came after a careful and thorough evaluation of commercial quotations from EPC [engineering, procurement and construction] bidders, which showed high capital costs rendering it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” QP and Shell said in a joint statement.

The project, in which QP had an 80 per cent stake, was to come up in the Ras Laffan Industrial City, north of Qatar by 2018. It was designed to produce an array of products, including mono-ethylene glycol, linear alpha olefins and Oxo alcohols. The two firms had signed heads of agreement for the project in 2011.

Shell, though, remains a major investor in Qatar, with a stake in the liquefied natural gas project Qatargas 4 and the Pearl gas-to-liquids joint venture, the world’s largest plant to turn gas into cleaner-burning fuels.

The Al Sejeel petrochemical project, a joint venture between QP and Qatar Petrochemical Company (Qapco), was due also for completion in 2018 and was designed to produce 2.2 million tonnes per annum of polymers, which are used to make plastic products.

Shell and Saudi Basic Industries Corporation (Sabic) also cancelled in October the expansion of Saudi Arabia Petrochemical Co (Sadaf), a 50-50 joint venture in Saudi Arabia, saying the studies’ result was “not encouraging”.

But other petrochemical projects are going ahead.

Sabic, one of the world’s biggest petrochemical companies, plans to launch this year the $3.4bn Al Jubail Petrochemical Company (Kemya), a joint venture between Sabic and the US energy company ExxonMobil. Also in the works is Saudi Arabian Fertilizer Company’s (Safco) $533 million expansion, known as Safco V.

Kemya will produce 400,000 tonnes a year of synthetic rubber products, which are mainly used for automotive products, and Safco V will produce 1.1 million tonnes a year of urea.

Sadara Chemical, a $19.3bn joint venture between Saudi Aramco and Dow Chemical of the US, is more than 80 per cent complete and is expected to start production in the second half of this year. It is anticipated to reach full capacity in 2016.

The Sadara project, which will produce 3 million tonnes of petrochemicals a year, is the world’s largest petrochemicals facility to be built in a single phase. It is also the first in the Middle East to use refinery liquids, such as naphtha, as feedstock.

Saudi Refining and Petrochemical (PetroRabigh), a joint venture between Saudi Aramco and Japan’s Sumitomo Chemical, will start production in December from the $8.5bn plant expansion known as PetroRabigh II.

It is expected to reach full capacity in the first quarter of 2016.

Abu Dhabi-based Borouge, a joint venture between the state-run energy firm Abu Dhabi National Oil Company and Austria’s petrochemical company Borealis, are on track to reach a petrochemicals production capacity of 4.5 million tonnes a year by next year from the current 2 million tonnes a year.

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