Soaring costs drive energy investments

The UAE is set to be the largest investor after Saudi Arabia and Qatar, with a forecast $50bn in oil, gas and power generation from 2008 to 2012, the Arab Petroleum Investment Corporation (Apicorp) said in a study sent to Emirates Business.

About 43 per cent of the total capital would be channelled into the crude oil sector, while gas is projected to receive 44 per cent and the rest would be channelled into power generation, said the Saudi-based Apicorp, an affiliate of the Organisation of Arab Petroleum Exporting Countries, which groups the UAE and nine other Arab oil producers.

The 2008-2012 investments are 22 per cent higher than the capital forecast for the previous five-year period of $345bn and more than double the $175bn forecast for 2006-2009.

The 2008-2012 investment requirements recorded a rise despite a 10 per cent decline in the expected projects in the region for the first time over the past five years.

“Past reviews up to that of 2006-2010 had shown that rising capital investment was mostly matched with an increase in the number of projects. The 2007-2011 review established that the number of project had levelled off.

“In the present review, the number of projects has for the first time declined by 10 per cent across the whole region and, except for the UAE,” Apicorp said.

“In both past reviews, project costs have increased tremendously… the factors most responsible for the escalation of project costs are notable changes in scope or scale of key projects and, above all, continued soaring EPC costs… Admittedly, the latter have been caused by rising prices of factor inputs, higher contractors’ margins and the systematic pricing of project risks.”

Apicorp, which advises on energy investment in member states, said more than half the forecast investments in its latest review are located in three Gulf countries – Saudi Arabia, Qatar and the UAE. It put investment at $105bn in Saudi Arabia and $65bn in Qatar.

“The most notable change in the country ranking, however, is the UAE taking over Algeria’s traditional third position,” the report said.

While strong oil prices would provide the needed funding for most regional states, Apicorp said some projects could require borrowing.

“Assuming oil and gas export prices remain strong, retained earnings are expected to provide project sponsors with enough funds to self-finance the upstream and associated midstream,” Apicorp said.

“By contrast, funding prospects for the highly leveraged downstream are uncertain. Not only does the required annual volume of debt of $42bn exceeds by 20 per cent the all-time record of $35bn achieved in the loan market in 2006, but current trends in global credit conditions and the consequent re-pricing of risk are likely to translate into tighter lending standards and higher borrowing costs.

“To be sure, with growing risk aversion among investors, the appetite for debt issued in the region is expected to be subdued,” it said.