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28 March 2024

Oil prices boost Mena energy funding to $615bn

UAE ranks second in actual investment and third in projected capital. (EPA)

Published
By Nadim Kawach

Strong oil prices have boosted the projected energy investment in the Middle East and North Africa (Mena) by nearly $65 billion to around $615 billion over the next five years, an official Arab study showed Saturday.

The bulk of the capital is expected to be pumped by five regional nations, namely Saudi Arabia, UAE, Qatar, Iran and Algeria, said the study by the Dammam-based Arab Petroleum Investment Corporation (Apicorp).

The study, sent to Emirates 24|7, said the improvement in crude prices that followed a steep fall in the aftermath of the 2008 global fiscal distress is encouraging regional crude producers to bring shelved projects back on stream and set up new hydrocarbon ventures, mainly crude oil.

But gas projects are still facing challenges following the US shale gas revolution, which has depressed gas prices, the study said.

“The context of this review for 2011-2015 is that of a global demand for energy gradually recovering and of crude oil prices stabilising within an adjusted anchor price range of $70-90 a barrel,” said Apicorp, an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).

This has encouraged investors to bring back in line some of the oil-based projects they had previously shelved or postponed and to slate for development new ones. In the gas sector, however, export projects face a more challenging market in the wake of the US shale gas revolution.”

The report showed growth in MENA energy capital investments is expected to recover from the post-crisis contraction, when most regional hydrocarbon producers were forced to put key projects on hold due to low crude prices, lack of funding, high costs and uncertainty in demand for oil.

“Indeed, current review for the period 2011-2015 points to a higher potential investment of $615 billion, compared to $550 billion in the last review,” said the study, authored by Apicorp senior consultant Ali Aissaoui.

“Furthermore, the total amount of investments shelved or postponed has dropped to 22 per cent of potential, compared to 30 per cent in the last review. As a result, actual capital requirements should amount to $478 billion for the period 2011-2015, compared to $385 billion in the last review.”

A breakdown showed around two-thirds of the energy capital investment potential continues to be located in Saudi Arabia, Iran, the UAE, Qatar and Algeria. In the present review the UAE has taken over Qatar as the third biggest

potential energy investor in the region, according to Apicorp.

Furthermore, in terms of actual capital requirements, the UAE ranks second to

Saudi Arabia, while Iran is relegated to the fourth place, it said.

It estimated potential capital investment in Saudi Arabia at around $130 billion.  “With Saudi Aramco and SABIC reaffirming their commitment to implement their investment programs, shelved or postponed projects are expected to decline to six per cent of potential, compared to 21 per cent in the previous review.”

In the UAE, revised potential investment totals $74 billion with projects made

redundant amounting to 20 per cent, the study showed.

“Iran’s potential investments amount to some $85 billion. In this country, poor investment climate has been aggravated by tighter international sanctions targeting the energy sector. As a result, the ratio of shelved or postponed projects has increased to 45 per cent of potential,” it said.

It put potential capital investment in Qatar at $70 billion, adding that it expects the moratorium on further development of the North Field gas reserves (beyond the Pearl and Barzan projects) will not be lifted during the review period.

“Accordingly, shelved and postponed projects, though much less than the 36 per cent found in the last review, remain relatively high at 32 per cent of potential.”

In Algeria, the study said the state-run Sonatrach is anticipated to recover quickly from its recent paralysis and resume normal investment activities.

“Hence, potential investment has been revised upward to around $57 billion, while postponed projects are expected to drop to about19 per cent of potential, compared to 31 per cent in the last review,” it said.

Sector wise, the study showed the oil supply chain accounts for nearly 41 per cent of the actual capital requirements of $478 billion.

It said the investments would be needed to develop new production and transportation capacity, sustain current production through enhanced oil recovery (EOR) programs, and finalize the expansion program of the refining and

Oil-based refining/petrochemical sectors.

The gas supply chain accounts for 35 per cent, it said, adding that the amount would be needed to develop new production and transportation capacity for both natural gas and the associated NGLs, expand capacity to meet domestic requirements and finalize ongoing export based projects, including gas based petrochemicals and fertilizers.

Capital requirements in the oil, gas and nuclear fuelled power generation sector represent the remaining 24 per cent.

Turning to funding, Apicorp said cost uncertainties and feedstock availability are compounded by a marked shift in projects’ capital structure.

It noted that in a context of a still tight credit environment, this is likely to complicate further corporate financing policies.

“We continue indeed to witness a trend towards a more equity oriented capital structure. Based on most recent deals, the average equity-debt ratio in the oil-based refining/petrochemical sectors has been 35:65,” it said.

“The ratio in the gas-based downstream sector has been 40:60 to factor in higher risks of feedstock availability. In the power sector, the ratio has been reset to 30:70 to reflect lower leverage in independent power/water projects. On this basis, the resulting weighted average capital structure for the whole oil and gas supply chain is likely to be 57 per cent equity and 43 per cent debt.”

The study showed that 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 a prolonged period of low oil prices below $70 will affect project sponsors’ ability to self-finance upstream investments. On the other hand, funding prospects for the still highly leveraged downstream will be even more daunting.”

Apicorp noted that the annual volume of debt of $41 billion for the next five years, which results from the actual capital requirements found in the current review and the likely capital structure, remains comparable to the all-time annual record of $39 billion achieved in the loan market prior to the credit crisis.

It said such amounts of debt can hardly be raised at present owing to lesser credit availability, higher costs of borrowing and tighter lending conditions.

“Notwithstanding an uncertain global economic climate, growth of energy investment in MENA region is expected to resume, mostly driven by the power generation sector. In this context project sponsors face many of the same challenges: cost uncertainties, feedstock availability and funding accessibility, with the latter remaining the most critical,” it said.

“Due to global economic conditions, public resources have been inadequate and private investment has somewhat retreated. As a result, MENA governments face a difficult balancing act…. they must step up to fill the current funding gap, but they must also provide the assurances critical to regaining private investment momentum.”