GCC opts for equity to fund downstream projects

Gulf hydrocarbon producers are expected to maintain a policy of having foreign partners to fund costly refining and other downstream projects while relying on their own oil export revenue to finance upstream business, according to an official report.

But oil companies in the region could still face major challenges in securing finance for energy expansion ventures because of the deteriorating funding conditions worldwide following the 2008 global fiscal turmoil, said the report by the Saudi-based Arab Petroleum Investment Corp (Apicorp), a subsidiary of the 10-nation OAPEC.

“Uncertainties surrounding project costs and feedstock supplies are compounded by a sudden deterioration of funding conditions, which is likely to complicate further the strategic decisions energy corporations in the region make with respect to investment and financing,” said the study, authored by Apicorp’s senior economist Ali Aissaoui.

“To be sure, the upstream and midstream sectors in the GCC and other MENA countries should continue to rely on internal financing, either from state budget allocations or from corporate retained earnings. In contrast, transactions in the downstream sector are likely to continue to be structured with higher equity content.”

It said that in a context of widespread deleveraging, the downstream, which normally exhibits a ratio of 70 per cent debt and 30 per cent equity has exhibited higher equity levels. In the oil-based refining-petrochemical link, the ratio has been 65:35.

The ratio in the gas based downstream link has been 60:40 to factor in higher risks of feedstock availability, according to the report.

In the power sector, the ratio has been reset to 70:30 to reflect much less leveraged IPPs and IWPPs, it said, adding that as a result, the weighted average capital structure for the oil and gas supply chains is found to be 43:57.

“This structure of capital is comparable to the world’s average of nearly 40:60 for all groups of firms, as supported by empirical analysis of the World Bank,” it said.

“Internal or self‐financing of the 57% funds required will be a function of how much growth capital MENA energy corporations generate from their own income, which depends for most of them on international oil prices and their dividend policies.”

Aissaoui said that the upstream and midstream links of the oil and gas supply chain are likely to continue to be financed through retained earnings by the national oil companies (NOCs) and their partners the international oil companies (IOCs).

In addition, as long as the value of OPEC basket of crudes remains above Apicorp’s revised fiscal break‐even price of about $90, NOCs can expect to complement funding from government budgets, he added.

“The remaining 43 per cent of the funds required may be sourced from the equity capital market (external equity), the debt market (bonds or sukuk) and banks (loans). Whenever possible, MENA energy corporations and their local and international partners would consider using the full range of such financing instruments.”

The report showed that of the total capital requirements in MENA region for the period 2012-2016, the oil value chain accounts for 42 per cent, the gas value chain for 34 per cent and the remaining 24 per cent represents oil and gas fuelled power generation.

In a recent study, Apicorp estimated energy investment in MENA countries at around $740 billion for the next five years.

It showed the UAE, the second largest Arab economy, could pump $107 billion into such projects while Saudi Arabia’s investments were put at $165 billion.

The report showed energy investment requirements in MENA are picking up after a period of stagnation in the past few years mainly because of the 2008 crisis.

“Within this framework, MENA energy capital investment is expected to add up to $740bn for the five‐year period 2013‐17. Compared to past assessments, which have been uniformly and consistently revised to reflect the full scale and scope of the power sector, investment appears overall on the rise again, driven mainly by costs and a catch‐up effect,” the report said.

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