QATAR - Project Costs UP.

A big rise in engineering, procurement and construction (EPC) costs, caused by spiralling steel and other raw material prices and under-capacity in the construction sector, has forced Qatar to put the brakes on three of its GTL projects. Speaking at CWC's 5th Annual World GTL Summit in London on May 18, QP Director of Downstream Ventures 'Ali al-Sidiqy said Qatar had made a strategic decision to slow down the review process for the three projects based on rising EPC costs in Qatar and the Gulf, and on the need to properly evaluate the impact on gas reservoirs of Qatar's accelerated gas development plan, which will see production of 24,000 MCF/d for all gas-related projects by 2010, instead of the originally forecast 2020.

The scaling back of projects was first signalled on April 26 by Minister Attiyah - who is also Qatar's second deputy prime minister and chairman of QP. Attiyah said QP wanted to ensure high output levels for as long as possible, adding: "The concern is how to keep the 25,000 MCF/d level for 100 years".

A jump in EPC demand had seen the cost of construction rising 40-60% from mid-2003 to end-2004, with Dubai experiencing price hikes of up to 80% for some key construction commodities such as cement and steel. The global hike in steel prices driven by rising demand from China had added to the pressure.

For contractors locked into fixed prices on long-term projects, the consequences have been disastrous. They have faced shortages of supply and a rapid rise in prices, which ate into their profit margins. Now many contractors in the region say it is not possible to make a profit in such conditions. In the first half of 2005, the picture has shifted somewhat.

MEED on May 13 reported a survey done by the UK cost consultant Davis Langdon as showing that the rate of cost increases in Dubai had slowed considerably since December. It quoted Steven Coates, Davis Langdon's Gulf director, as saying: "Generally materials have remained level over the past six months. However, we expect a surge in prices in the next six months. Particularly in Dubai is where contractors are expecting labour and materials prices to surge about 30 per cent because of the sheer quantity of work".

Problem facing contractors are no longer a matter of materials. The region faces a major shortage of skills. Coates said: "Dubai is one big building site, there are 160 towers planned for Doha, Bahrain is...busy with big schemes such as it has never seen before and Cairo has big projects in the pipeline. All of these structures are concrete, which means there is massive demand for aggregate, sand and cement. But there are not shortages of concrete. The problem is shortage of staff".

Worst hit is Qatar, where a sudden surge of activity in the first half of 2005 has pushed Doha ahead of Dubai as the region's hottest construction spot in terms of construction cost. By May construction costs in Qatar had 35% since December. While prices have risen in other markets, Qatar is also the only country to have seen universal inflation across all of its construction costs, from the price of cement through to professional salaries. Coates said: "The thing that stands out in the region is what is happening in Qatar. The fact that Doha is sitting on 900 years of gas reserves, has triggered a sudden construction boom that is pushing up prices. Qatar is unique in the region. Concrete providers in Qatar charge more...because there is no competition in the country. It is due to a combination of state-owned monopolies controlling production and restrictions on imports. But, this does not need to be the case. Qatar needs legislative change to let more into the market. If Doha opens up the market, not only will prices come down but it will attract better quality. The quality here could be higher. There is a phenomenal boom in Qatar, and in order to maintain it they need more competitors to provide the capacity".

Acute shortages of skills and a rising cost of accommodation had by May caused the cost of professional staff climb 20-35% in Doha. The monthly salary of a locally hired project manager had risen 35% since December to about $6,600 a month compared with about $4,900 a month at Christmas. In the same period expatriate salaries for project managers had risen 20% to about $9,900 a month. The costs of engineers, both locally-hired and expatriate, had also risen sharply. Coates said: "There is a lack of quality in the Middle East so anyone of any quality can effectively name their price so salaries are rising. Contractors can need to follow the market rate if they are not to lose the quality". Another factor is Doha's escalating property market. Housing prices had jumped 30% in six months. Rental prices had shot up.

Ready-mixed concrete had risen 43% since the December in Saudi Arabia and 19% in the UAE, although rebar prices had fallen in both places. In Beirut where private real estate continued to surge despite Lebanon's political turmoil prices had risen sharply. In Egypt - trying to kick-start growth after years of stagnation - materials costs had risen in a big way. The most consistent rises across the region were in the cost of project managers, reflecting the importance of delivering projects on time and budget.

Qatar's budget for 2005-06 from April bases its income on an average crude oil price of $27/b, up from $19/b for fiscal 2004-05, and puts spending at $10,388m - up 33% from 2004-05. It will have a surplus of more than $2,000m.

In mid-February, the second major IPO in an energy venture - Qatar Gas Transport Co. (Nakilat) - closed nine times over-subscribed. The private sector is being encouraged to step up its presence in the industries through the establishment of small and medium-sized enterprises (SMEs) to support the energy sector. As part of the private sector industrial drive, a new free zone law is awaited after approval of its draft earlier this year. Whenever top officials are questioned about Doha's ability to deliver on its extensive programme, they point to the LNG experience and its huge challenges since the early 1990s.