Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop

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Qatar Petroleum and Royal Dutch Shell Plc ended plans to build a $6.5 billion petrochemical plant in the emirate, one of the biggest casualties of slumping oil prices so far as producers scrap projects to conserve cash.

The two companies, which formed a partnership for the al-Karaana project in 2011, said yesterday that they decided not to proceed with building the plant because it was “commercially unfeasible” in the current energy market.

The crash in crude oil from more than $100 a barrel in July to less than $50 today has forced producers to cut billions from capital budgets. As projects from the Arctic Ocean to the Middle East come under scrutiny, total industry spending is likely to fall 20 percent this year, according to analysts at Sanford C. Bernstein.

“Persistent low oil prices are pushing all the producers to focus on cutting costs and delaying investments,” said Tony Durrant, chief executive officer of London-based Premier Oil Plc. “Oil companies are re-evaluating their investment plans and most of the unapproved projects get delayed.”

Shell’s not the only major oil company to delay or scrap projects. In Norway, where the industry regulator said today it expects spending on exploration and development to drop 15 percent this year, Statoil ASA said last week it could delay a major offshore project for a third time.

Smaller producers are also pegging back investment.

Tullow Oil Plc, a London-based explorer active in Africa, said today it would trim its investment budget by a further $200 million in 2015 and plans to drill no offshore exploration wells this year. Premier Oil yesterday delayed a decision on developing an oil discovery in the Falkland Islands.

Investment Area

In the Middle East, governments such as Qatar’s, looking to diversify away from oil and gas production, have earmarked petrochemicals as an area for investment. Now, those plans are being rethought.

“The region is beginning to reduce its capital expenditure for petrochemical and hydrocarbon expansion, and that is expected given that oil prices have plunged,” Riyadh-based John Sfakianakis, Middle East director at Ashmore Group Plc, said in a phone interview.

Al-Karaana is the second petrochemical project in Qatar to be canceled in recent months due to unfavorable economics. Industries Qatar, the state-controlled petrochemical and steel producer, halted plans to build a $6 billion plant in September.

Scaling Down

Shell, which already operates a giant gas-to-liquids plant and a gas-export terminal in Qatar, rose as much as 2.6 percent and was trading up 0.4 percent at 2,015 pence by 11:56 a.m. in London trading. The stock is down 6.4 percent this year.

Qatar, a member of the Organization of Petroleum Exporting Countries and the world’s biggest exporter of liquefied natural gas, is seeking to diversify its economy away from oil and gas exports and is building factories to make petrochemicals, aluminum and steel.

Brent crude, a benchmark for more than half of the world’s oil, has tumbled 55 percent in the last 12 months to $47.51 a barrel in London today.

Some projects were in planning when oil was more than $100 a barrel and may have to be “scaled down” as a result of lower prices and a potential petrochemicals glut, Sfakianakis said. Saudi Arabia’s $19.3 billion Sadara Chemical Co. is among other petrochemical projects being built in the region.

“Qatar is right to take a view of how the supply side will look over the medium term,” he said. “Some of these projects will be reconsidered when oil prices rise and there is more excitement about the sector.”

Qatar Petroleum will study how to use ethane feedstock that was earmarked for al-Karaana in existing petrochemical plants operating in the country, QP said in a separate statement.

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