The value of energy and industrial investments in the UAE has dropped by 17 per cent in the first seven months of this year due to continuous liquidity problem and investors' low-risk appetite.
Emirates Business' analysis of data from ProLeads reveals that the value of projects plummeted from $213 billion (Dh781.7bn) for 245 projects in January to $175bn for 193 projects in July.
The 19 industrial projects, which mostly involve district cooling, are now down to nine, pushing the value to $4bn from $5bn.
Oil and petrochemical projects were down 12 and nine per cent respectively, while power and water saw bigger drop of 43 to 25 per cent respectively.
Oil projects, which were valued at $50bn are now $44bn, while petrochemical projects that were valued at $33bn are down at $30bn. Gas was the only sector that saw an increase, which was primarily due to Abu Dhabi's gas expansion programme.
Although part of the drop in value is due to the completion of some projects, it has been noticed that a huge chunk of projects under study, planned and in the bidding phase have been shelved.
ProLeads data is similar to Apicorp's estimates, which said that 17 per cent of investments in the energy and related industries have been shelved due to the economic crisis.
It said potential capital investment for the seven-emirate federation's energy projects (oil, gas and petrochemical) fell from $51bn to about $43bn.
Cost uncertainties have been compounded by a marked shift in projects' capital structure. In a context of severe credit and oil market crises, this shift has exacerbated the dilemma facing corporate financing policies.
Apicorp said the trend is now towards a more equity-oriented capital structure, and with investors – whether corporates or government – still risk-aversed pursuing capital intensive projects would have to take time.
The industry normally uses retained earnings [internal equity] to fund high risk, high return upstream and associated midstream activities. In contrast, it tends predominantly to use debt and external equity for low risk, low return downstream activities.
Based on most recent deals, the ratio has moved more into the equity side.
Industrial
Frost and Sullivan cites district cooling as the most viable cooling solution in the Middle East, where air-conditioning requirements consume 70 per cent of the power during peak electricity demand.
Industry analysts said the region's district cooling market, which earned revenues of $580 million in 2008, will reach $2bn in 2013 at a compound annual growth rate of 28 per cent. Despite these forecasts, district cooling projects in the UAE have cooled off due to lack of financing source. The value of projects dropped by 30 per cent from $5bn to $3.5bn, while the number of projects has halved from 19 to nine.
This happened despite the fact that the National Central Cooling Company (Tabreed), for one, has rescheduled more than 25 per cent of its future district cooling plants.
The crisis has not only affected the firms' expansion plans, it has also caused Standard & Poor's to lower its long-term corporate credit to BB- from BB last week. At the same time, the rating was placed on CreditWatch with negative implications.
The debt rating on the senior secured sukuk certificates due 2011 issued by Tabreed 06 Financing was also lowered to BB- from BB, and the debt rating on the subordinated convertible sukuk certificates due 2011 issued by Tabreed 08 Financing Corp was lowered to B- from B.
The lower ratings, said S&P, was due to the company's underperformance in the year to date compared with the guidance as set out in its December 2008 business plan. In addition, the company faces a high ongoing exposure to refinancing risk through the rollover of various short-term banking facilities.
"While this rollover has been successfully undertaken in the year to date, the refinancing risk does leave Tabreed vulnerable to a further stress on its already weak liquidity position," said Karim Nassif, S&P's credit analyst. It is also because of the liquidity squeeze that every refinancing deal is being hailed, even if it is just a short-term loan that provides interim financing.
Palm District Cooling, a subsidiary of Istithmar-owned Palm Utilities, would have breathed a sigh of relief when it was able to raise a $141m bridge financing facility.
The financing is part of a wider financing strategy that will include accessing the syndicated loan and capital markets in the future.
While district cooling companies struggle with their cash flow, they will also have to deal with the issue of using "alternative" water later, where a switch to another system/technology means additional capital expenditure.
Oil
While oil projects are deemed strategic and therefore should be looked into as long-term investments, the drop in demand has forced national oil companies to halt some of their exploration and development projects.
Upstream projects have become costlier as oil companies look for more oil in harsh environment although doing so requires more expensive technology.
The drop in oil prices has become a concern that profitability would not be desirable considering the increased cost of lifting.
The price of oil today is nonetheless significantly higher than the last quarter of last year where the oil industry was shocked to see a 70 per cent drop in price from the peak of $147 in July 2008.
A number of investment banks such as Egypt-based EFG Hermes are looking at higher oil prices. EFG Hermes has recently increased its oil price forecasts for Brent Crude to $60 per barrel for 2009 and $70 per barrel for 2010. It said the UAE is expected to realise fiscal surpluses when the oil price averages at $50 per barrel.
"With the upward momentum in the oil prices and the increased market optimism, an increase in our oil price forecasts was necessary. We continue to highlight, however, that considerable risk remains to the oil price outlook," it said.
"We believe that the strengthening in oil prices have so far been driven by improved market perception regarding the global economy, rather than a material change in the fundamentals of the global economy or oil market, it added.
Although the outlook is beginning to become better, the value of oil projects still dropped by 12 per cent from $50bn in January to $44bn in July. Analysts said surplus oil, which remains stored in vessels, shows that there are still more unused supply and any further output will only go to stock.
Petrochemical
Petrochemical projects in the UAE remain healthy with only a single digit drop of value.
The UAE has 13 projects worth $30bn, most of which are located in the capital Abu Dhabi – which remains flush with liquidity.
Although financing has not been easy, lenders are still interested in projects that have state sponsors behind them. Among the projects moving forward is the plan for a $20bn chemical industrial city in Abu Dhabi, which will be managed by Abu Dhabi National Chemicals (ChemaWEyaat) and Borealis. ChemaWEyaat is a joint venture between the Abu Dhabi Investment Council, International Petroleum Investment (Ipic), also of Abu Dhabi, and Abu Dhabi National Oil (Adnoc). Borealis is a joint venture between Ipic and Austrian oil and gas company OMV.
Borouj Petrochemicals, meanwhile, is expecting to start the production of 2.5 million tonnes of polyethylene olefins by the fourth quarter of 2013.
Abdulaziz Al Hajri, CEO, Borouj, said the operation will ensure that Borouj Two take advantage of the additional quantity of feedstock available after the expansion of Adnoc in the area of gas refinery in Ruwais.
Borouge, a manufacturer of polyoleofins, was founded in 1998 and is a joint venture between Adnoc and Austria's Borealis.
It has two complementary ventures: One based in Abu Dhabi and another in Singapore. Borouge is a leading supplier of environmentally superior polyolefin plastics - polyethylene and polypropylene. The company recently awarded a series of contracts, worth more than $1bn, for construction and design deals at its Ruwais site.
The contracts are part of the third-phase expansion of Borouge's petrochemicals production at Ruwais. The Borouge Three expansion will result in the company increasing output to 4.5 million tonnes a year by 2013.
Power
According to Business Monitor International, the UAE needs more than $10bn to meet soaring power demand as the country will account for 5.77 per cent of regional power generation by 2011.
In response to escalating demands, the UAE Government has announced plans to expand its 10-gigawatt production capacity by more than 50 per cent by 2017.
The government is undertaking necessary actions to provide adequate supply of electricity, especially in rapidly growing emirates such as Dubai, which has recorded a 14 per cent increase per year.
The crisis has, however, meant lesser demand, and this lesser reasons to push through aggressive expansion plans in the power infrastructure sector.
Proleads data shows value of power projects dropped by 43 per cent from $77bn in January to $44bn in July, with projects going down from 64 to 47.
In Dubai, Dewa had to postpone the bidding of the $8.6bn Hassyan Power Generation and Desalination Plant, which was extended to September.
The first tender will be closed on September 8, and the winner will be announced on January 6. The second tender will be closed on September 13 and the winner will be announced on January 12.
Besides this, all of Dewa's projects are on going as planned, said Dewa CEO and Managing Director Saeed Mohammed Al Tayer.
Abu Dhabi, on the other hand, is going ahead with expansion plans in full steam.
The UAE capital, which is less affected in terms of the property sector, will be inviting international companies to bid for its ninth independent water and power project (IWPP), the Taweelah C project, by year-end at the latest.
According to Abdulla Saif Al Nuami, the director of privatisation at the Abu Dhabi Water and Electricity Authority (Adwea), the request for proposals will be issued soon after the refinancing for its eighth IWPP Shuweihat Two is closed. The Taweelah C project will have capacity of about 1,500 MW of power and 100 million gallons a day of water. Abu Dhabi expects power demand to more than triple by 2020.
In the short term, power demand growth in Abu Dhabi was expected at about 17 per cent to 20 per cent a year.
Elsewhere in the UAE, the problem of power shortage is looming. And although financing for infrastructure could be availed, the solution for the shortage of gas – the main source of electricity – is still uncertain.
The UAE is looking at getting more gas from Qatar, which is constrained to sell more due to its gas moratorium; or getting it from Iran, which for years have been delaying the delivery of the much-awaited supply.
"The shortage of electricity is there for sure. Most of the new buildings are there but there is no electricity. There is electricity but if you need more, then it'll be difficult," said Ashraf Helmy, General Manager and Area Development Manager, Miramar Al Aqah Beach Resort, Fujairah. Most of the new business establishments in the Northern Emirates are running on generators.
"Using the generator is our last option but the generator is not a permanent solution, it is temporary," said Helmy.
Gas
It is for this reason – the shortage of gas – that this is the only sector which records growth. The value of projects rose by 29 per cent from $33bn in January to $43bn in July.
Currently, the UAE is facing a severe gas supply shortage and despite a steady rise in domestic gas output, the shortage has widened over the past few years because of a surge in domestic consumption, prompting some power plants to use costlier diesel fuel.
"The UAE faces a severe shortage of gas and the effects of the coming crisis are already being felt," Hamed Al Marzouqi, acting head of the market research at Abu Dhabi Gas Liquefaction Company, told a recent gas conference in Abu Dhabi.
"The UAE's gas demand has increased tremendously and is expected to increase further on the back of massive economic expansion... ensuring adequate gas supply to meet the massive growth in demand will emerge as a challenging issue especially for power generation." said Marzouqi. The supply-demand gap during the last summer widened, forcing the UAE power stations to burn "expensive diesel".
"Availability of gas for power plans will be an important issue for the next few years... gas re-injection in to the oilfields has also become an important issue for the UAE," he said at the four-day conference.
Khaled Al Awadi, Gas Operations Manager at the state-owned Emirates General Petroleum Corporation (Emarat), put the country's current gas consumption at about 5.5 billion cubic feet per day and demand growth at nearly 13 per cent, one of the highest growth rates in the world.
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