Deflation a factor in delay of energy projects
November 16th, 2008From Zawya, a source for news from the Middle East:
“The global financial crisis is poised to cut a swathe through projects throughout the Gulf. Plunging costs for raw materials and the expectation of further slides are prompting Gulf project sponsors with an eye to making major savings to reschedule bidding dates on lump sum turnkey (LSTK) projects. Even state-owned Saudi Aramco, with its strong track record on delivery times, has postponed bid dates on at least two of its flagship downstream projects.
We have previously reported on the impact that the financial crisis is having on energy investment, including oil, and argued that the financial crisis will likely be found to have precipitated peak oil.
But now there’s an additional reason for postponing projects: deflation. The costs of the projects are expected to be substantially less a year from now than today, so projects are being postponed awaiting the expected fall in costs.
Of course, the “extremely bad short-to-medium term prospects for petrochemicals globally” is also a consideration. The article also cites “delays . . . aimed at giving developers more time to put together financing given the difficulties in the banking sector.” But the fall in contractor and materials prices is a new wrinkle.