Refineries Pose Upside Risk To Forecast, But Risks Weigh Heavy


After Algeria's oil minister Youcef Yousfi announced the North African country was to increase its downstream capacity in April through the construction of six new refineries, Daewoo Engineering & Construction Co Ltd has won a US$647.2mn order to build petroleum treatment facilities from Sonatrach First Calgary Petroleums LP, consisting of Algerian government-owned oil company Sonatrach, and the Italian oil company Eni's affiliate First Calgary Petroleums.

For the next 34 months, with completion expected in 2016, Daewoo E&C will develop through an Engineering, Procurement and Construction (EPC) contract, a central oil processing unit and additional facilities which can manage 32,000 barrels per day (b/d) in the Berkine region, southeast Algeria. The facility will connect to 36 oil wells in the field located in Berkin Basin's block 405b. The project will see the creation of a network for crude collection, a separation and oil desalting unit, a gas re-injection station and a second station for injecting water.

Daewoo has recently seen an uptick in construction awards for projects in the Middle East and within the energy and utilities and industrial construction sectors. The South Korean builder has recently won US$709mn service contract to develop Iraq's largest gas field in the western province of Anbar. Similarly, the company also won a US$521.49mn order from Japan's JGC Corp to build naphtha treatment and other facilities for a refinery in Jazan, Saudi Arabia.

Looking toward future opportunities, with numerous Middle Eastern countries developing their nuclear power capacity, as part of a South Korean consortium with Korean Atomic Energy Research Institute, Daewoo secured permission to build Jordan's first nuclear reactor. We expect further EPC wins for Daewoo and other Asian heavy engineering firms across the Middle East over the coming years, in light of attempts by governments to move up the export value chain of the oil and gas industries by refining products domestically and selling higher value refined products abroad after meeting local demand.

Refinery Investments To Increase Capacity
Refining Capacity (000b/d) and Growth (% Change Year-on-year)

Whilst this project is a good step towards realising the Algerian government's goal to increase its refining capacity to 60mn tonnes per year, compared with the current capacity of 30mn, we highlight that there are numerous risks currently plaguing Algeria's oil and gas industry which may see other large refinery investments stall or even be cancelled. The security situation in Algeria after the January 2013 terrorist attack on the In Amenas gas plant, which killed 40 local and foreign workers, continues to put off investors. BP chief executive Bob Dudley revealed that as a result of the attack, previously scheduled projects would not come online in 2014 and would be dependent on the security situation ( see 'BP Delay Highlights Regional Security Challenges', 30 October).

Realised Refineries Would Provide Upside
Construction Industry Value (US$bn) and Real Growth (% Change Year-on-year)

Although we have previously highlighted that the Algerian construction market is opening up and could offer new opportunities for foreign firms in the housing and infrastructure sectors, the oil and gas sector will continue be a key component of our forecasts ( see 'Open Doors For Construction Market: Opportunities And Risks', 23 July). As such, the potential threat to investments in the oil and gas sector poses a downside risk to those forecasts, which currently stand at an average 4.9% real growth between 2014 and 2018 and then 6.8% from 2018 to the end of our forecast period in 2023.

That said, should the six planned refineries move forward as the Berkine facility appears to be doing so, then our construction outlook would improve. Whilst the security risks weigh heavily, a new tax regime should help spur investment in the oil and gas sector. Despite having increased complexity and unpredictability, BMI's Oil and Gas team believe the new tax system reform offers a slight improvement in the investment environment for international oil companies (IOCs) compared to the previous regime. As such, should the security situation improve, we expect investment to be forthcoming.

This article is tagged to:
Sector: Infrastructure
Geography: Algeria