Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B) and Qatar Petroleum have scrapped a 3-year-old plan to build a petrochemical plant in Qatar because the plunging price of oil has rendered the project unprofitable.
Since 2011, the two companies had planned to operate the al-Karaana facility at Ras Laffan in northeastern Qatar, with state-owned Qatar Petroleum holding an 80 percent share and Shell a stake of 20 percent. But the two companies said in a statement on Jan. 14 that they abandoned the project after studying estimates from engineering and construction firms bidding for work.
Shell and Qatar Petroleum said the cost of the complex "has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry." Crude oil prices have dropped by more than 50 percent since June 2014.
The al-Karaana petrochemical project is the second in Qatar to be canceled in recent months because of the drop in oil prices. Industries Qatar, the government-controlled petrochemical and steel producer, abandoned plans to build a plant in September. It would have cost $6 billion.
Shell has been under pressure to increase revenues since 2014, when it issued a warning on profits, the first in the history of the Anglo-Dutch energy company. Even before the price of oil began to drop in June, Shell's new CEO, Ben van Beurden, had begun a campaign to cut spending, and by the end of September announced that the company had saved $14 billion.
Meantime, the company had been telling investors that it expects increased production to give them $30 billion in profits from 2014 and 2015. But in October 2014 Shell warned that it was preparing for a sustained drop in prices and needed to take further action to maintain optimum profitability.
Had it come into being, the al-Karaana project would have produced 2 million metric tons a year of petrochemicals, most of them from a plant producing monoethylene glycol for synthetic fabrics and making plastic bottles. It would have been the largest monoethylene glycol facility in the world.
Shell and Qatar Petroleum also are partners in other projects, including Pearl GTL plant, also at the Ras Laffan industrial city on Qatar's Persian Gulf coast, an integrated facility that converts gases to liquids and the largest such plant in the world. That project has not yet been affected by the drop in the global price of oil.
As for the al-Karaana facility, it seemed to have been plagued by delays even before oil prices began dropping in June. Shell and Qatar Petroleum were to have sent banks requests for financing assistance by the end of March 2014, but never issued the letters. This implies that these and other companies were aware of impending changes in demand for energy and were prepared to abandon costly projects.
Similarly, Reuters reports that for the same reason Saudi Aramco, the Saudi Arabian oil giant, had delayed plans to spend $2 billion on a clean-fuels plant at its largest oil refinery in Ras Tanura, on the Persian Gulf coast not far from Qatar.
Nevertheless, several other expensive projects in the region are still in the works, including a joint venture of Aramco and Dow Chemical to build a petrochemical complex costing $20 billion.
By Andy Tully of Oilprice.com. Oilprice has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.