Project costs up by around 25% after a slight decline
Arab hydrocarbon producers will have to borrow between $37 billion and $46 billion a year to fund energy projects in the next five years despite credit tightness, according to an official report.
But the tight credit markets are expected to push them to rely more on equity to finance such projects, which the report said have increased in value because of higher costs and larger scales.
In its latest review for 2011-2015, the Arab Petroleum Investment Corporation (Apicorp) said it expected the cost of an average energy project, which has risen almost three times between 2003 and 2008, to increase again after having slightly dropped in the last review.
The 25 per cent upward trend underpinning the current review may be explained by two factors, the Dammam-based group said.
The first is that project sponsors will be focusing on important projects, which mostly entail higher costs. The second factor is related to anticipated cost inflation, which is still tentative.
The report said that in order to cope with unrelentingly rising costs, the major Arab project sponsors have sought to increase the scope and/or scale of their projects in order to lower unit costs and maintain an adequate return on invested capital.
But it noted that that anecdotal evidence suggests that the economies of scope and scale of some large projects in the region have been offset by the diseconomies of the resulting complexities.
"Cost uncertainties and feedstock availability are compounded by a marked shift in projects' capital structure. In a context of a continuing tight credit environment, we have witnessed a trend towards a more equity-weighted capital structure," said Apicorp, an affiliate of the 10-nation Organization of Arab Petroleum Exporting Countries.
"Based on most recent deals, the average equity-debt ratio in the oil-based refining/petrochemical sectors has been 35:65. The ratio in the gas-based downstream sector has been 40:60 to factor in higher feedstock risks. In the power sector, the ratio has been reset to 30:70 to reflect lower leverage in
independent power/water projects."
It said on that basis, the resulting average capital structure for the whole oil and gas supply chain is likely to be 57 per cent equity and 43 per cent debt for the period 2011-2015.
This compares with the equity-debt ratios of 54:46 found in the 2009-2013 review and 50:50 in the 2008-2012 review.
"This trend poses new challenges for achieving the needed amount and mix of equity and debt . On the one hand, we have estimated that any prolonged period of low oil prices below $70/bbl will affect project sponsors' ability to self-finance upstream investments," the report said.
"On the other hand, funding prospects for the still highly leveraged downstream will be even more daunting....the annual debt would be in the range of $37 billion to $46 billion for the next five years."
It said the lower bound of debt results from the actual capital requirements found in the current review and the likely capital structure highlighted above.
The higher bound corresponds to the potential requirement and the speed at which remaining redundant projects will be brought back when the business climate fully improves.
"The lower bound compares to the all-time annual record of $38 billion achieved in the loan market prior to the credit crisis.
Nowadays, such amounts of debt can hardly be raised owing to lesser credit availability, higher costs of borrowing and tighter lending conditions," Apicorp said.
"And this is despite the move by some Arab public investment funds to tap governments' net savings and step up their lending and involvement in the local debt market."
According to the study, the latest unrest in the Arab region could complicate project funding after the rating of some countries, including Egypt and Tunisia, were downgraded.
"While others might be placed on a negative credit outlook, we expect a fewer number of countries in the GCC area to retain their higher investment grades and, as result, to be able to continue accessing funds at lower cost and better terms."
"Access to funding will be most testing in countries affected by the turmoil. While the predicament they face could turn for the better, the likelihood is that of a deteriorating investment climate that could deter both domestic and foreign capital for some time," it said.
"Meanwhile, faced with more pressing social demands, governments will hardly be capable of funding the resulting shortfalls."
© Emirates 24|7 2011
