Energy Investments in the Middle East Fall Due to Rising Costs and the Capital Markets Crisis
Walid Khadduri Al-Hayat - 07/10/07//
"Despite higher capital budgets, MENA energy investments appear to be losing momentum." This new and important conclusion has been reached by Apicorp, which was established by members of the Organization of Arab Petroleum Exporting Countries (OAPEC) in 1975 in Saudi Arabia, and appears in Apicorp's most recent monthly economic bulletin.
This conclusion is based on two important phenomena: the long-standing and growing rise in project costs, a rise that appears to have no end for the foreseeable future.
Problems have arisen recently in international money markets, whose international repercussions have appeared in greater relief of late, and reduced the flow of international investments to the Middle East. According to Apicorp, there are new indications of investment in the oil and gas, petrochemicals and electricity sectors in Middle Eastern states, over the medium term of 2008-2012, compared to the last four years.
This indicates the challenges that follow from this conclusion, such as the fact that the Middle East contains 67% of world oil reserves and 45% of its gas reserves. Moreover, countries in the region are ready to play a bigger role in closing the gap between rising international demand for oil and the slow pace of finding new energy sources in other countries of the world. In fact, over the last decade, the production of crude oil and condensate from the Middle East rose from 35% to 37% of world production, and from 12% to 17% of international natural gas production. Apicorp's research found that "if sustained, the demand for MENA petroleum, demand which has been more vigorous for natural gas, is likely to provide the region with the needed growth opportunities to realize its full potential."
It's natural for any slowness in developing additional productive capacity in the Middle East to have negative effects on the international level, due to the important role of the region's industry on the international scene.
The Apicorp bulletin affirms that the total value of planned or ongoing energy investments in the Middle East (the Arab countries and Iran) between 2008-2012 is estimated at $490 billion, or an increase of 24% from 2007-2011, and around 52% from 2006-2010, when it stood at $260 billion, and a rise of 17% from the 2005-2009 period, when the figure stood at $210 billion.
Apicorp's findings show that capital investments up to the 2006-2010 period were due to the rise in the number of energy projects. The results of the 2007-2011 surveys indicate that the number of projects has stabilized, meaning that the number of projects has not increased, despite the increase in the amount of capital. However, the research mentions its findings for 2008-2012, which are quite different from previous periods. For the first time, and despite the perceived increase in capital budgets, the number of projects throughout the region dropped by about 10%, with the exception of the UAE.
We can also observe that project planning is also moving toward bigger scope and scale. The bulletin also says that half of planned projects in the coming phase will take place in three countries, Saudi Arabia, Iran and Qatar, while Saudi Arabia will remain in the top ranking for regional energy investments ($105 billion). It appears that Iran has jumped from third place to second, due to the rise in inflation compared to GCC states. It confirms that more than half of oil investments in the Middle East are in GCC countries, which of course reflects the level of oil reserves in this particular region.
The reason for these rising costs, according to Apicorp, is the huge scale of new investments compared to previous ones, especially due to the rising costs of construction, equipment purchases and engineering services, as well as high and growing rates of contractor profits and the increase in political risk costs.
The bulletin says that 49% of energy investments for the coming period will be dedicated to building petrochemical refineries and factories, while 41% will go to gas projects (including securing gas for fertilizer factories). There is also an apparent change in the sources of financing for oil projects in the region; from 2008-2012, 50% will be generated by debt, with the other half coming from equity participation, compared to 47% and 53% for these categories, respectively, during the 2007-2011 period. However, Apicorp warns at the same time of the growing scale of debt in building these projects, which has reached $49 billion.
We should note that the overwhelming majority of this debt is for electricity, refining and petrochemical projects. The bulletin explains that with oil prices remaining high, and although the $49 billion in debts is a record figure (especially compared to the level of $39 billion assumed for 2006), the challenge today comes from the new direction in international money markets, the drop in available lending, and the lack of readiness by big financial institutions to supply easy loans as in the past, with the reason for this being the repercussions of the mortgage housing crisis in the United States.
*Dr. Walid Khadduri is an expert in energy affairs
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