A recent Bloomberg report on the UAE’s severely delayed ADCOP pipeline may have highlighted a risk arising from a trend in the GCC upstream sector to award complex projects to the lowest bidder.
The UAE’s flagship 400km Habshan-Fujairah ADCOP crude export pipeline runs from the ADCO fields onshore to the Fujairah export terminal nestling on the Gulf of Oman, traversing steep mountainous terrain along the way. The project comprises the pipeline, pumping stations, an oil terminal at Fujairah, offshore loading facilities and associated facilities.
The pipeline, which was scheduled for commissioning by the end of 2010, aims to save tankers time and money by removing the final leg of their journey around the Strait of Hormuz, and bypass a body of water Iran can threaten to blockade, a short trip for which tankers have extracted a risk premium. The pipeline is part of a plan to see Fujairah – once one of the UAE’s smallest and sleepiest emirates – compete with Singapore and Rotterdam as a global oil bunkering capital.
As it stands, the export of Abu Dhabi’s onshore oil remains subject to extremely high political risk. Almost all the Emirate’s onshore oil is loaded at the Jebel Dhanna port, while its offshore crude is loaded for export at Das Island.
The ADCOP project has been blighted by repeated delays, reported as early as October 2010. Bloomberg, citing two sources familiar with the project, reports that the pipeline is currently blighted by up to 270 construction errors discovered in an inspection last year, 50 of which have been deemed critical. IPIC announced that construction was completed in March 2011, whcih suggests that substantial subsequent remedial work has been required.
Abu Dhabi’s state news agency WAM reports that Mohammad Bin Dha’en Al Hameli, UAE Minister of Energy, says the pipeline “is almost complete but hopefully it will be operational within six months, by May or June.” The first cargo from Fujairah was scheduled for May.
“The project involves a lot of work as the pipeline has to be filled with crude and tested,” Hameli added.
In October, a bond prospectus issued by International Petroleum Investment Co (IPIC) – an Emirati state entity and owner of the pipeline – stated that the pipeline was to deliver its first oil to Fujairah in “early 2012.”
The contractor is China Petroleum Engineering & Construction (CPEC), a subsidiary of China’s state oil company, CNPC. The firm won the construction contract in 2008 from IPIC, after a competitive tendering process. The conceptual design of the pipeline was completed in 2006 and the construction related contracts were awarded in 2007. Construction of the pipeline started on March 19, 2008.
The pipeline had to undergo design changes halfway through the project, with a CPEC engineer telling Reuters in 2010 that “the technology is new, not used before.”
WorleyParsons carried out the project’s front EPC design and ILF Consulting Engineers, a German company, managed the construction by CPEC. The pipe supply contract – for 225,000 tonnes of coated steel pipe – was given to Sumitomo Corporation, Salzgitter Mannesmann International and Jindal Group in December 2007.
CPEC were not available for comment. ILF referred Oil & Gas Middle East to IPIC, who did not respond to a request for comment.
The delay of 18 months to a project originally slated to take 33 is thrown into relief by the progress made by Dolphin Energy’s Taweelah-Fujairah natural gas pipeline, which shares most of the difficult mountainous route of IPIC’s line, but was completed only eight weeks behind schedule.
Dolphin Energy contracted with Stroytransgaz, a Russian EPC firm and former Gazprom subsidiary, for the construction of the pipeline. Stroytransgaz is an experienced pipeline construction company, have recently built the Central Asia–China gas pipeline and the Arab Gas pipeline between Egypt, Israel and Jordan.
It is no secret that the Middle East contractor market is extremely cost competitive across projects of all sizes, with industry sources telling Oil & Gas Middle East on several occasions that the first question asked by operators and NOCs in the region is often “how much?”
Longer-established EPC firms have seen new entrants from Asian markets manage to undercut projects costs while delivering on time, with Samsung Engineering a notable example in Saudi. The combination of a western firm managing and designing a project with a Korean company constructing worked well for EPC giants such as Samsung and Daelim, who gained expertise sufficient to enter a slew of successful sole bids for multi-package awards from GCC national oil companies. In this instance, however, that model has plainly not worked well for IPIC.
The Fujairah route can accommodate all Abu Dhabi’s onshore oil exports. It’s absence in the (admittedly unlikely) event of a blockade of Hormuz could quickly cost the UAE hundreds of millions of dollars in lost revenue, and exacerbate what would in any event be a dramatic oil supply shock.
The inopportune delay to the Fujairah pipeline may give NOCs pause for future projects, especially those which either offer healthy margins or are of strategic importance. With oil prices averaging over $100 a barrel in 2011 and currently at $113, price hawkishness – embedded in the EPC scene after the oil spike and slump of 2008 – may have had its day.
More widely, GCC exporters – Bahrain, Qatar and Kuwait – and Iraq may now need to invest in pipelines to circumvent the Straight of Hormuz altogether. Picking the right pipeline contractor would be a globally-important decision. Paying bottom dirham may not be the best option.
