Saudi Arabia to invest $318b in energy sector

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JEDDAH - The Kingdom of Saudi Arabia is forecast to invest around $318 billion in energy over the next few years as massive infrastructural developments are in full swing brought about by economic reforms and huge oil revenues amid high crude prices in the global markets.

A recent study by Kuwait Financial Centre (Markaz) forwarded to the Saudi Gazette on Monday said a breakdown of the figure shows that allocation to petrochemical projects totals $90 billion, the same amount is assigned to power generation, $88 billion is earmarked for water desalination plant projects and $50 billion is appropriated for natural gas-related projects.

Markaz said to achieve this target, the authorities would have to present several joint projects to the private sector, local and foreign, in order to increase power generation capacity.

"The petrochemicals sector is driven by either proximity-to-market or large-scale projects, which take advantage of low-cost, secure oil and gas supplies.

These factors, in turn, have, made the Kingdom one of the world's strategic hubs for petrochemicals.

These competitive advantages are now likely to be joined by a number of highly integrated refining and petrochemical investments, which will develop and strengthen the industry," the study said.

It added though that "capacities after 2008 based on current planned projects, may not be met due to the restriction on inputs supply unless the gas production capacity is substantially increased."

Moreover, the fiscal surpluses are projected to decline from 12.4 percent of GDP in 2007 to 6.9 percent of GDP in 2012 as spending continues to increase rapidly.

Currently, 50 percent of the domestic demand for potable water is met with desalinated water. Given the demand, there is a clear need for additional generation/desalination, transmission and distribution capacity and improving investment and regulatory environment for private investors, Markaz noted.

It said the new power and water projects being developed are expected to come on stream by 2009.

Electric generation capacity is set to more than double to 60 gigawatts (GW) at a cost of an estimated $120 billion.

In addition, the expanding population, coupled with increasing incomes, will continue to feed demand for infrastructure and utility services, particularly energy, water, transportation and other infrastructure services, housing, health and education, it further said.

Markaz pointed out in the study that demand for food and beverages (F&B), telecommunications, especially mobile telephony and internet services "should remain robust, giving rise to investment opportunities in these sectors."

As one of the region's largest consumer markets, the study said the Kingdom's rapidly growing population will remain highly dependent on imports of food and beverages. "Total consumer expenditure on food, beverages and tobacco is increasing, and reached an estimated $24.4 billion in 2007 (the equivalent of 24 percent of household spending) and is estimated to increase to $35.6 billion in 2010," Markaz said.

Furthermore, investment in retail trade is expected to grow after the sector has been opened to foreign direct investment in May 2007, it added.

Markaz also said indirect FDI in Saudi Arabia's stock exchange through swap agreements is a step toward opening the market to direct foreign investment in the Tadawul.

Investors in the swap contract will receive the economic benefits of owning the stock, such as dividends and stock splits, but will not hold voting rights.

Earlier, foreign ownership was allowed only through investment funds. Due to the market's upside potential, large pipeline of mega-projects and increasing public sector expenditure has been planned.

The study moreover noted that the Saudi banking and insurance sectors have been active in both cross-border and cross-sector acquisitions and expansions, highlighting some of the key transactions that occurred, among them, were UAE-based Al Khazna Insurance CompanyAl Khazna Insurance Company acquiring a 15 percent stake in Saudi Arabia's Sanad for Co-operative Insurance and Reinsurance, with the transaction involving 3.0 million shares with a value of $25.8 million; Crédit Agricole Asset Management (CAAM) entered into a JV with Banque Saudi Fransi (BSF) and formed CAAM Saudi FransiCAAM Saudi Fransi, in which 60 percent is held by BSF and 40 percent by CAAM; and STC's acquisition of 25 percent of Malaysia-based Maxis Group in September 2007 for $3.04 billion.

The deal also included a 51 percent stake in Maxis' Indonesian subsidiary PT Natrindo Telepon Seluler, which has a license to operate a third generation mobile network.

STC also acquired a 26 percent stake in Kuwait's third mobile network operator, with a value of $900 million for the license. It is expected that STC will continue to grow through M&A deals in the future as well, Markaz said.

It added that M&A transactions have primarily occurred in the industrial/manufacturing, services, F&B, services, oil & gas, real estate/construction, and investment services sectors.

By Querubin J. Minas

© The Saudi Gazette 2008