Ras Tanura Petrochemical Complex Expected To Cost $23-26Bn

Despite the fall in engineering, procurement and construction (EPC) prices over the last year, the cost of implementing the Ras Tanura integrated refinery and petrochemicals complex was estimated at around $23-26bn when the joint venture partners met in London last week, MEES understands. This helps to illustrate the sheer size of undertaking, sponsored by Saudi Aramco and US company Dow Chemical, which is more aptly described as a petrochemical industrial city. The projects scale was behind the decision earlier this year to bring in more contractors Foster Wheeler and Jacobs Engineering to lighten the burden on US firm KBR, which was initially exclusively awarded the front end engineering and design (FEED) contract (MEES, 26 January).

Producing 300 different petrochemicals, plastics and other downstream products from 35 process units, Ras Tanura appears to have seen little change in its price tag, while sponsors of other projects have managed to slice into their outlay. The Saudi Aramco/Total Jubail 400,000 b/d export refinery managed to keep its EPC costs under $10bn, the Takreer Ruwais refinery in Abu Dhabi has also managed to cut costs, and Kuwaiti authorities are expecting to knock 20% off the original forecast for setting up their fourth export refinery at Ras al-Zour.

For Ras Tanura, however, the amount that the joint venture partners will finance themselves is in flux, as discussions continue over whether to outsource parts of the project, which could include power, water and steam facilities, industrial gases, the polyvinyl chloride unit, and security systems. At the Saudi Aramco/Sumitomo $9.8bn PETRORabigh petrochemicals operation the power is being provided by third parties (ACWA and Marubeni). For Ras Tanura outsourcing proposals have been received from a number of companies and these are currently being analyzed, MEESunderstands.

While the gearing (debt to equity ratio) has not yet been determined for the project financing, sufficient funding sources have been identified to allow the mega-complex to proceed without the need for phasing it in, MEESunderstands. When the project was first mooted, some experts had anticipated that it would have to be constructed and financed in segments, but banks, export credit agencies (ECAs), capital markets and institutional lenders in the Kingdom should be able to provide sufficient debt for what will be the single biggest project anywhere. The project is a strategically important component of Riyadhs drive to reinforce industrialization, and at the London meeting the partners continued to thrash out all details of the agreements necessary to push ahead. However, with a project of this size, the lead times are long and the sponsors (advised by Royal Bank of Scotland and Riyad Bank) are not expected to seek financing until 2011.

Before Ras Tanura, the Saudi Aramco/ConocoPhillips 400,000 b/d joint venture export refinery will seek financing. Sponsors are hoping to replicate the Jubail projects success in cutting EPC costs, and once these contracts are awarded, they will approach potential lenders. Sponsors (advised by Citi and Riyad Bank) are expecting this to occur next year, some six months after Jubails financing. Jubail, which is sponsored by Saudi Aramco and Total (with Calyon and Saudi Fransi acting as financial advisers) has received a good response to its funding request, with around 30 international, regional and local banks seeking to participate (MEES, 5 October).

There is potential oversubscription, particularly from Saudi banks, which are keen to lend to premium sponsors like Saudi Aramco and Total, after problems surfaced with the privately owned Saad and Algosaibi groups in the Kingdom (MEES, 21 September). Some media reports have suggested that the losses of a few international banks in the Saad/Algosaibi saga has reduced their appetite for financings in the Kingdom, but this notion was dismissed by most bankers, who suggest, that on the contrary, the project is benefiting from a flight to quality. Not going into Jubail for this reason is like saying youre not investing in US treasury bonds because of Bernie Madoff, commented one bemused banker.

Terms on Jubail, which is seeking $8bn in debt, are still being thrashed out between the banks and sponsors and final margins (the premiums that banks make on deals) have not yet been agreed. Some lenders have requested changes in the Jubail term sheet, and these details are also being worked on by the parties involved, in the typical discussions that accompany such deals. The local players have been keen to provide funding in Saudi riyals, which has the potential to hike the export projects foreign exchange exposure. The riyal remains pegged to the dollar, and the Saudi Arabian Monetary Agency (SAMA) central bank governor Muhammad al-Jasir continues to issue statements supporting the peg, so the risks are not prohibitive, although it is difficult to secure coverage in the riyals thin forward markets.

The big news right now is to see what shakes out, in terms of margin, on the Jubail refinery, and it has not yet shaken, said one banker. All eyes are on Jubail, not just because, as one of the few mega-financings this year, it will provide an indication of where pricing is settling in the wake of the crisis, but also because it will provide a benchmark for debt on Yanbu' and Ras Tanura. However, shifting bank market conditions will continue to play their part in determining appetite for any deal.

Copyright MEES 2009.