Arab energy sector needs $1.5trn in investments |
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Arab states need to pump a staggering $1.5 trillion (Dh5.5trn) into projects over a period of 25 years to expand their hydrocarbon sector and build additional power capacity to meet a rapid growth in demand, according to an official report.
More than $1trn will be needed to be invested in the oil and gas sector alone while around $458 billion could be spent on electricity projects, said the report, published in the Arab Oil and Co-operation quarterly magazine of the 10-nation Organisation of Arab Petroleum Exporting Countries (OAPEC)Organisation of Arab Petroleum Exporting Countries (OAPEC)
.Four Gulf Co-operation Council states - the UAE, Saudi Arabia, Qatar, and Kuwait - will account for nearly half of the total investments, which cover oil and gas upstream, midstream and downstream projects.
The projects include oil production and exploration, capacity expansion, refining, petrochemicals, gas exploration, production and liquefaction, associated industries, as well as electricity projects covering capacity expansions, transport and distribution, according to the 100-page Arabic language study.
A breakdown showed oil investments were estimated at $614bn, including around $484bn in exploration and production, $110bn in refining, and $20bn in gas to liquids (GTL) projects.
Investments in the gas industry were put at $426bn, involving nearly $269bn in exploration and production, and about $168bn in LNG and other industries associated with gas. In electricity, the investments are expected to include $203bn in power generation, $79bn in transport and $176bn in distribution networks. The report showed Saudi Arabia, the world's dominant oil power, would be the largest investor as it is projected to pump in around $332b. Its investments cover around $174bn in the crude oil industry, $48bn in gas and about $110bn in electricity.
Ambitious programme
Nearly $141bn of the oil investments would be pumped into exploration and production as the Kingdom is pushing ahead with an ambitious programme to lift its output capacity to 12.5 million barrels per day by the end of 2009 and above that level beyond that date.
Qatar, which controls the world's third largest gas resources, is forecast as the second largest Arab energy investor, with total projects worth around $155bn.
They include $50bn in the oil sector and $99bn in the gas industry although the tiny Gulf nation has already pumped in more than $50bn during 1990s and early 2000s to develop its mammoth North Field, the world's largest single reservoir of natural gas, estimated at over 900 trillion cubic metres.
The study predicted the UAE's energy investments at around $115bn during 2004-2030, covering nearly $46bn worth of oil projects and $34bn in gas ventures. The rest would be invested in electricity.
Investments in Kuwait were estimated at around $86bn, including nearly $59bn in oil, $8bn in gas and $19bn in power projects.
In conflict-battered Iraq, energy spending was put at around $96bn, including nearly $59bn in the oil sector, $11bn in gas and $26bn in electricity.
Outside the Gulf, Algeria emerged as the largest Arab investor, with an estimated $114 billion. They include around $38bn in the oil industry and $59bn in gas as the North African country has been locked in a massive gas development programme given its huge reserves, the world's sixth largest at more than five trillion cubic metres. The investments also include around $17bn in electricity.
According to the study, total Arab energy investments estimated at around $420bn over the next five years, far higher than the estimates for projects in the previous five-year periods. The report attributed the surge to soaring costs and the implementation of some larger projects in oil and gas sectors.
During the 2008-2012 period, the UAE is expected to be largest investor after Saudi Arabia and Qatar, with a forecast $50bn, the report showed.
Wealth distribution
About 43 per cent of the total capital would be channelled into the crude oil sector, while gas is projected to receive 44 per cent and the rest would be channelled into power generation, said the study, citing OAPECOAPEC
estimates and figures by its affiliate, the Arab Petroleum Investment Corporation (Apicorp)Arab Petroleum Investment Corporation (Apicorp).The 2008-2012 investments are 22 per cent higher than the capital forecast for the previous five-year period of $345bn and more than double the $175bn forecast for 2006-2009. The 2008-2012 investment requirements recorded a sharp rise despite a 10 per cent decline in the expected projects in the region.
"Past reviews up to that of 2006-2010 have shown that rising capital investment was mostly matched with an increase in the number of projects. The 2007-2011 review established that the number of project had levelled off. In the present review, the number of projects has for the first time declined by 10 per cent across the whole region and, except for the UAE," the study said.
"In both last reviews, project costs have increased tremendously... the factors most responsible for the escalation of project costs are notable changes in scope or scale of key projects and, above all, continued soaring EPC costs... Admittedly, the latter have been caused by rising prices of factor inputs, higher contractors' margins and the systematic pricing of project risks."
According to Apicorp, which advises on energy investment in OAPECOAPEC
members, more than half the forecast investments in the 2008-2012 review are located in three Gulf countries - Saudi Arabia, Qatar and the UAE. It put investment at $105bn in Saudi Arabia and $65bn in Qatar. "The most notable change in the country ranking, however, is the UAE taking over Algeria's traditional third position," the report said. While strong oil prices would provide the needed funding for most regional states, Apicorp said some projects could require borrowing. "Assuming oil and gas export prices remain strong, retained earnings are expected to provide project sponsors with enough funds to self-finance the upstream and associated midstream," Apicorp said.
"By contrast, funding prospects for the highly leveraged downstream are uncertain. Not only does the required annual volume of debt of $42bn exceeds by 20 per cent the all-time record of $35bn achieved in the loan market in 2006, but current trends in global credit conditions and the consequent re-pricing of risk are likely to translate into tighter lending standards and higher borrowing costs. To be sure, with growing risk aversion among investors, the appetite for debt issued in the region is expected to be subdued."
It said global market turmoil has also reduced the funding capability of international banks and this could affect the economy and project activity in the region. It said such developments have forced Gulf oil producers and other Arab countries to seek funding for their mega projects from partners on equity sharing basis.
"Although the overall capital structure has slightly shifted to equity, securing the appropriate amount and mix of debt will be considerably more challenging," it said.
Surge in loans
Despite that shift, loans sought for projects in the Arab region surged by nearly 25 per cent to around $49bn in 2007. "With growing risk aversion, the appetite for debt issued in the region may be subdued... the market for project finance is in severe dislocation... local banks tend to concentrate on local currency denominated tranches while regional banks lending capacity has overall been reduced by current financial turmoil.
"International banks are credit constrained and confidence in syndication is low... only a few Islamic financing institutions are active in long tenor project finance lending... quality projects still find financing but on terms and conditions, including pricing, not as borrower-friendly as prior to Summer 2007."
The study did not elaborate on the region's oil capacity expansions but according to Western estimates, such projects in the six-nation GCC would add nearly 10 million barrels per day to the existing output capacity.
Main contributors
Saudi Arabia will account for more than half the capacity increase while the UAE will add nearly 1.9 million bpd and Kuwait one million bpd, according to Proleads, a research centre based in Dubai and other areas.
"A massive $300bn investment in boosting oil production is under way which could see the Gulf deliver a staggering 10 million barrels of crude a day in added capacity by 2015 - more than half from Saudi Arabia alone," it said. Citing global estimates, it said the world's total oil production capacity is expected to increase from around 87 million bpd currently to nearly 108 million bpd by 2015.
"Our analysis shows that if all current projects across the region meet their projected targets, it would mean that by 2015 the GCC countries will be supplying more than half that future added oil capacity," Proleads said.
By Nadim Kawach
© Emirates Business 24/7 2008
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