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29 March 2024

Mena energy investment put at $4trn

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By Staff

Gulf hydrocarbon exporters and other oil producers in the Middle East and North Africa (MENA) need to pump nearly $four trillion until 2035 to expand their crude and gas output capacity but such investments could be blocked by rising costs and funding constraints, according to a prominent Arab analyst.

The capacity expansions will be prompted by a steady growth in energy demand, which will likely surge by around a third during that period, with nearly 60 per cent of the growth coming from China, India and the Middle East, said Ali Aissaoui, senior consultant at the Saudi-based Arab Petroleum Investment Corp (Apicorp), an affiliate of the 10-nation Organization of Arab Petroleum Exporting Countries (OAPEC).

In a study presented to an oil and finance conference in London this week, Aissaoui said the pattern of energy supply is undergoing major changes as oil, which continues to be driven by transport, grows at the slowest rate of less than 20 per cent to 2035. Nonetheless, it remains dominant in the global energy mix, he said.

In contrast, natural gas grows by more than 50 per cent to 2035, supported by developments in unconventional gas, he said in the study, sent to Emirates 24/7.

He said MENA is expected to supply the largest part of the growth in oil, much of which from Iraq, and a substantial amount of natural gas.

“Accordingly, MENA should contribute nearly $four trillion in energy investment to 2035, representing some 10 per cent of global requirements,” he said.

“Although this share is below potential, it is far from certain that the resultant level – an average annual investment of around $160 billion - will be forthcoming in the medium term due to the perception of deteriorating investment climate, unrelenting rising cost and major funding constraints.”

Turning to deteriorating investment climate, he noted that in the wake of the misnamed “Arab Spring”, Tunisia, Egypt and Bahrain have seen their sovereign ratings downgraded twice, while Libya’s rating was suspended altogether.
Except for Bahrain’s negative outlook, the GCC countries are expected to continue retaining their higher investment grades, he said.

“Unfortunately, others countries such as Iran, Algeria, Iraq, Syria, Yemen and Sudan (both north and south) are not rated.”

As for costs, Aissaoui, an Algerian, said that inflation has been the most important factor driving the increase in energy investment worldwide.

“In the context of MENA, we have established that the costs of energy projects have more than doubled during the last decade or so. Our focus has been on the main cost components of EPC contracts,” he said.

“In addition to the cost of input factors, these include contractors’ margins, project risk premiums and the cost of ‘excessive largeness’, as large-scale projects tend to incur significant delays and cost overruns……energy project costs would have certainly tripled during the last decade, if not for the dampening effect of the global financial crisis. The likelihood is for costs to continue rising.”

Aissaoui noted that funding is basically determined by the capital structure, which is expected to be 40 per cent debt and 60 per cent equity for MENA oil and gas value chains (both extended to include petrochemicals and the power sector).

With a dominant share in the downstream, debt is sourced externally, he said, adding that in face of a negligible contribution from the capital markets, it is typically provided through the syndicated loan market, which has collapsed in the wake of the Eurozone debt crisis, as most European banks have pulled out of the region.

In contrast, equity is a dominant part of the upstream as it is generally financed internally through retained earnings and state budget allocations, he said.

“Therefore, equity could only be secured if oil prices remain above producers’ fiscal break-even price, which we have estimated to be around $100 a barrel for OPEC on an output-weighted average basis,” he said.

“To sum up, uncertainties surrounding MENA investment climate and project costs are compounded by a marked deterioration of funding conditions. This is likely to further complicate the strategic decisions policy makers and project sponsors in the region make with respect to investment and financing.”