Gulf oil heavyweights and other Arab crude producers have slashed planned oil investment for the next five years by a staggering $200 billion (Dh734bn) because of the global financial crisis, an official report said yesterday.
From around $650bn during 2009-2013, the projected investments were reduced to around $520bn by the end of 2008 and are now estimated at only $450bn, the Arab Petroleum Investment Corporation (Apicorp) said.
As they control most of the crude and gas resources in the region, the Gulf Co-operation Council (GCC) nations accounted for the bulk of the shelved projects, mainly the UAE, Saudi Arabia and Qatar, said Apicorp, an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).
In a study sent to Emirates Business, the Dammam-based Apicorp, said the postponement of the projects was a result of the global economic crisis and the ensuing credit tightness and the collapse in crud prices.
"Against a backdrop of collapsing global growth, scarce and high-cost credits and depressed oil prices, our 2009-2013 review of energy investments in the Arab World points to a significant capping of their potential," said the study, prepared by Apicorp's Economics and Research director Ali Aissaoui.
"This stems from the shelving or postponement, beyond the five-year review period, of a substantial number of initially planned projects, mostly downstream the oil and gas supply chains. As a result, actual capital requirements are projected at $450bn, falling short by at least 19 per cent of potential."
It said around 69 per cent of these investments are located in the six-nation GCC and over half of them are shouldered by the UAE, Saudi Arabia, and Qatar.
"In addition to the deteriorating economic and credit environment highlighted above, the GCC area faces specific challenges since nearly all Gulf countries have experienced to one degree or another gas supply shortfalls," it said.
"As a result, the availability of high-quality and low-cost feedstock adds further uncertainty to the investment outlook."
On the sector level, the oil supply chain (including the oil-based integrated refinery-petrochemical link) accounts for the biggest share of 47 per cent of the expected $450bn actual capital investment requirements, the report showed. The gas supply chain (including the gas-based petrochemical and fertiliSer links) accounts for 36 per cent. The remaining 17 per cent of requirements are those of the oil or gas-fuelled power generation sector.
"The associated capital structure is more complex to determine, particularly in a context of an unprecedented credit crisis. The industry would normally prefer retaining enough earnings to fund upstream and midstream activities," it said.
"By contrast, it tends to rely more on debt for downstream activities. Most recent trends have continued to point to an average equity-debt ratio of 30:70 in the oil-based refining petrochemical sectors. In the gas-based downstream sector, the ratio is set at 40:60 to factor in higher feedstock risks. Finally, in the power sector, the ratio is put back at 30:70 to reflect expected reduced leverage in the IPP-IWPP sector… under these conservative assumptions, the resulting capital structure for the period 2009-2013 is likely to be 57 per cent equity and 43 per cent long-term debt," the study added.
It expected the trend towards more equity-weighted structure to be more pronounced in the future because of the credit shortage.
But it noted that, whatever the structure, funding both equity and debt is expected to be extremely challenging in the near future.
"On the one hand, low oil prices will hamper project sponsors' capacity to fund the upstream and associated midstream through retained earnings… on the other hand, funding prospects for the still highly leveraged downstream will be uncertain. The annual volume of debt of $39bn, resulting from the above actual requirements and the corresponding capital structure, is comparable to the all-time record achieved in the loan market at its peak in 2006."
According to Apicorp, which advises on Arab oil investment strategies, those amounts would hardly be met should current credit market conditions persist.
"The economic crisis has broadened and spread to gradually engulf the Arab-Mena world. Current trends in the credit market and oil market have combined to heighten risks, mostly relating to the availability and cost of funding. As a result, not only may the economic outlook deteriorate substantially, but the energy investment potential is likely to be capped further."
Apicorp gave no breakdown for shelved projects but in its previous study, it showed Saudi Arabia, the largest investor during that period, could shelve nearly 13 per cent of its projects. As its investments were estimated at $163bn, the value of the delayed projects was put at around $21bn.
The UAE is estimated to need more than $60bn but nearly $55bn would be actually invested.
How to deal with the crisis?
The report presented the following three policy recommendations to face such challenges:
- First Arab governments should make up for shrinking foreign capital inflows by reallocating internally the net assets invested offshore by their sovereign wealth funds.
- Secondly, in providing liquidity and supporting the recapitalisation of pan-Arab financing institutions, they should target those contributing to the development of the petroleum industry, which remains a powerful economic lever, as well as those focusing on job creation
- Thirdly, in reviewing their investment strategies, public and private project sponsors should exclude from any “option to wait” economically viable infrastructure energy projects.