SEOUL • South Korean refiner S-Oil Corporation yesterday put an indefinite hold on its $4bn plans to build a major new refinery, the latest energy project to fall victim to tight contractor markets and soaring costs.
S-Oil, the country’s third-largest refiner and one-third owned by state oil firm Saudi Aramco, announced plans last April to build a sophisticated new 480,000 barrels per day (bpd) refinery by 2010, one of a host of similar projects worldwide to address the current shortage of fuel production capacity.
But some of those projects have already slipped or risk being cancelled after construction costs surged as much as threefold, even as some analysts said the rush to build new plants risked undermining profit margins at the end of this decade.
“The current construction market is too overheated for us to start construction and this is causing the delay,” company spokesman Lee Dong-hoon said.
S-Oil could not say when construction would start and emphasised that the project was delayed, not cancelled. But analysts said it may be forced to wait years before seeing any relief in costs.
As much as 3.8 million bpd of refining capacity that had been planned in Asia and the Middle East may now not be built due to higher costs, Fereidun Fesharaki, Chairman and CEO of consultancy Facts Global Energy, said in May.
He had already included S-Oil’s project on that list, saying that costs could have risen to double-digit levels.
Kuwait had to retender for investors in its planned 615,000 bpd refinery this year after costs doubled to an estimated $12bn.
“S-Oil would have to pay billions of dollars more if it tries to follow the plan now,” said Hwang Kyu-won, analyst at Tong Yang Investment Bank.
“It will not cancel the project but overheated market conditions are likely to last for at least three years.”
S-Oil’s 3.6 trillion won ($3.87bn) investment plan included building two crude distillation units (CDU) with total capacity of 480,000 bpd, a 75,000-bpd hydrocracker and a 75,000-bpd residual fluid catalytic cracking (RFCC) unit.
The project would boost S-Oil’s refining capacity by 83 percent to make it South Korea’s second-largest refiner after SK Corp.
S-Oil is 35 per cent-owned by Saudi Arabia’s state oil firm Saudi Aramco, which has been looking to invest in refineries in Asia to guarantee buyers for its crude and to tap the region’s growing fuel demand, and has also touted its investments as proving its efforts to help consumer nations get enough fuel.
Refinery project cancellations have accelerated in recent months as escalating costs, a shortage of engineers and uncertainty about returns raise doubts over the future profitability of new units making key transport fuels.
