Mena faces obstacles in funding oil projects

Hydrocarbon producers in the Middle East and North Africa (Mena) are facing obstacles in funding development of their energy sector as many of them are pushing ahead with expansion plans to meet growing domestic and foreign demand, according to an official Arab study.

As a result, most of them could be forced to rely more on own resources and this will result in widening the equity-debt ratio in the funding structure, the Saudi-based Arab Petroleum Investment Corporation (Apicorp) said.

Apicorp, an affiliate of the Organization of Arab Petroleum Exporting Countries (Oapec), said hither costs had boosted the investment requirements for oil, gas and power projects in the Gulf and other MENA nations to nearly $525 billion during 2012-2016 from less than $500 billion in the previous five years.

“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, sent to 'Emirates24|7'.

“In a context of widespread deleveraging, transactions have continued to be structured with higher equity content. To be sure, the upstream and downstream have not much choice but to rely on internal financing, either from state budget allocations or from corporate retained earnings.”

The study noted that the downstream sector, which normally exhibits a ratio of 30 per cent equity and 70 per cent debt (30:70), has needed higher equity levels.  In the oil based refining/petrochemical link the equity-debt ratio has been 35:65.

The ratio in the gas based downstream link 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 much less leveraged IPPs and IWPPs.

“As a result, the weighted average capital structure for the oil and gas supply chains is found to be 57:43,” the study said.

“Although essentially unchanged from the previous review, this structure confirms the trend towards more equity, when set against the equity-debt ratios of 50:50 found in the 2008-12 review and 54:46 found in 2009-13..….this adjustment in the capital structure does not, however, lessen the challenge of achieving the needed amount and mix of equity and debt.”

Apicorp said it believes that any prolonged period of low value of OPEC Basket crudes below $90 a barrel will affect internal financing for the upstream sector. On the other hand, funding prospects for the still highly leveraged downstream are now unsure, the report added.

“The corresponding annual volume of debt of $45 billion, which result from the capital requirements found in the current review and the likely capital structure highlighted above, is of the same order as the record of $44 billion achieved in the loan market in 2010,” it said.

“Raising such amounts of debt in a context of a collapsing loan market and persistently high cost of borrowing will be hardly possible….the  resulting shortfall could be even larger if Mena public investment funds, which have stepped up their involvement in the local loan market, are denied support by governments now confronted with more competing social demands for public funds.”

The report showed loans for energy projects in MENA have sharply risen over the past decade, leaping from $3bn in 2000 to nearly $25bn in 2005.

They soared to around $40bn in 2008 before plummeting to about $18bn in 2009 because of the global fiscal distress. But they shot up to nearly $45bn in 2010 and are projected to dive again to around $15bn in 2011.

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