The biggest risk to the energy investment outlook in the Arab World is escalating costs, according to the Arab Petroleum Investments Corporation (Apicorp).
A substantial number of previously planned projects, whose viability was weakened by unrelenting price hikes, have already had to be shelved, Apicorp found in a new report.
Last year, ExxonMobil and Qatar Petroleum (QP) abandoned plans to build what was going to be the world’s largest gas-to-liquids (GTL) plant because of spiralling costs. Their Palm GTL project in Qatar was originally projected at $7 billion (Dh25.6bn). But the price tag had since risen to as much as an estimated $15bn.
Like the Palm project, Shell’s Pearl GTL initiative in Qatar has experienced significant cost escalation. Originally estimated at $4bn, industry sources believe the Pearl facility is now costing Shell around $18bn to build.
Apicorp’s most recent review of energy investments in the Arab World showed the cumulative energy capital has now reached $420bn. This represents a 22 per cent increase over its previous projections of $345bn for the period 2007 to 2011. The funding of these investments will weigh heavily in the overall capital demand and supply of the region, it said.
Apicorp estimated this level of investment is equivalent to about 6.3 per cent of Arab countries’ GDP and 21 per cent of Arab gross domestic investment over the projected period. Past reviews from 2006 to 2010 had shown rising capital investment was mostly matched with an increase in the number of projects. And the 2007 to 2011 review established the number of projects had levelled off.
However, in the present review, the number of projects has for the first time declined by almost 10 per cent across the whole region, except for the UAE, in each individual Arab country. In both reviews, the project costs have increased tremendously.
The factors most responsible for the escalation of project costs are notable changes in scope or the scale of key projects and, above all, continued soaring EPC (engineering, procurement and construction) costs.
Reflecting the distribution of petroleum resources, a little more than half of the planned energy investments in the Arab World are located in three countries – namely Saudi Arabia, Qatar and the UAE.
Saudi Arabia has continued to top the energy investment ranking with a $105bn mark.
Despite slowing momentum, Qatar has maintained its second ranking with $65bn. The most notable change in the country ranking, however, is the UAE taking over Algeria’s traditional third position.
Of the expected $420bn total energy capital investment in the Arab World, the oil supply chain including the oil-based integrated refinery-petrochemical link accounts for 43 per cent; the gas supply chain including the gas-based petrochemical and fertiliser links for 44 per cent and the oil- or-gas-fuelled power generation sector for the remaining 13 per cent.
The report by Apicorp reveals a much higher increase in the downstream sector, most dramatically in the oil-based refining and petrochemical sector.
However, the Oapec (Organisation of Arab Petroleum Exporting Countries) affiliate reiterated this investment outlook could be affected by EPC costs.
In Kuwait, the Al Zour oil refinery – projected to be the biggest downstream facility in the Middle East by 2010 – will take a one-year delay from its proposed completion. The project, with a projected capacity of 615,000 barrels per day, bid up to $15bn in estimated construction costs, more than half of the original cost estimate.
In Oman, the $10bn, 300,000 bpd refinery being proposed by the government at Duqm could now be scaled back to half that size, as concerns grow over the feasibility of the project in its current form.
“In view of the uncertainty regarding refining margins, the refinery link of the oil supply chain would be affected most,” Apicorp said. “In addition, the availability of low-cost and high-quality feedstock adds a further element of uncertainty for the ethane-based chemical industry,” it added.
Apicorp said the resulting capital structure for the period 2008 to 2012 is likely to be 50 per cent equity and 50 per cent debt, compared with the equity-debt ratio of 47:53 found in the 2007 to 2011 survey.
Despite a lower debt ratio, however, the volume of debt of some $42bn per year is still “considerable”, it added.
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.
By contrast, funding prospects for the highly leveraged downstream are “uncertain”, Apicorp said.