CAPEX - Q4 2015
  • Register

CAPEX Q4 2015

With oil prices sinking to new lows of USD 30/bbl and GCC countries implementing new reforms, project owners in the region are expected to face another challenging year

Oil prices hit their lowest level, similar to those seen in 2003, as it sank below USD 30 per barrel this year. While this has caused rising concerns among all countries in the GCC, which have begun to rethink their strategies for the upcoming years, project awards witnessed last year depict otherwise as 2015 witnessed c.USD 75.6bn worth of project spends. While a majority of the project awards in 2015 took place in the third quarter of the year, Q4 2015 witnessed the award of several mega-projects in Oman, Saudi Arabia and U.A.E. It should be noted that while 2015 concluded with higher project awards compared to those seen in 2014, a majority of these were either spillover projects that were initially scheduled for execution during the previous year or were projects that were most critical for the country. An example of these critical projects that were heavily delayed include: ORPIC’s Liwa Steam Cracker & Polyethylene Plant Project and DEWA’s Hassyan Coal Fired Power Plant amongst others. As oil prices have plummeted even further since December 2015, the energy outlook in the GCC region for 2016 is expected to be quite challenging.

"2016 budget estimates are now based on oil prices ranging between USD 30 to USD 40 per barrel"

With a c.70% drop in oil prices since mid-2014, GCC countries have had to make significant adjustments to their 2016 budgets. While 2015 budget estimates within the GCC were previously made based on predictions that oil prices would range between USD 60 to USD 75 per barrel, due to further depreciation in oil prices, 2016 budget estimates are now based on oil prices ranging between USD 30 to USD 40 per barrel. This new reality has resulted in many GCC countries reducing their budgeted expenditure for the year due to mounting budget deficits. These budgets indicate that the governments have a specific mandate for certain strategic sectors and as such, planned expenditure would be in line with these specific mandates.

  • Saudi Arabia: As per its 2016 budget, Saudi Arabia has predicted a deficit of USD 87bn, as compared to a deficit of USD 98bn in 2015. Although Saudi’s Finance Ministry had asked government departments to freeze any new project announcements in Q4 2015 until further notice, the country has decided to put a greater focus on its upstream activities. Amongst the key projects of focus this year, Saudi Aramco’s Arabiyah-Hasbah Development: Sour Gas Field Expansion and Shale Gas Development: System B are planned for award later this year.
  • U.A.E.: As the country experienced a c.1.5% budget deficit last year, it has planned for a zero deficit budget in 2016. Based on the budget released for 2016, the sectors of focus for the U.A.E. will be healthcare, social development, infrastructure and oil & gas. While oil & gas is considered important, U.A.E. announced its interest in developing an economy beyond oil and as such, no major oil & gas awards are expected.
  • Qatar: Facing its first budgetary deficit in over 15 years, the government has approved a c.USD 13bn budget deficit for 2016. In order to reduce its deficit, Qatar has decided to enhance its efficiency by reducing its operating costs of various government departments, slashing expenditures (the government has reduced its spending from QR 226bn in 2015 to QR 202bn in 2016) and focusing on key infrastructure related projects (such as rail, metro and healthcare related projects).
  • Bahrain: As the country is highly dependent on the oil & gas market, it is one of the most vulnerable to the drop in oil prices. While the country saw a budgetary deficit of approximately 15% in 2015, this is likely to rise in 2016 given the expected award of BAPCO’s Sitra Refinery Modernization. This project is considered critical to the growth of Bahrain’s economy.
  • Oman: The country has developed a budget deficit of c.USD 8.5bn for 2016. While social initiatives will be the focus of spending in the upcoming year, the O&G sector will continue to receive allocations given that the sector constitutes c.72% of the government’s revenues. The country is currently focused on the downstream sector and is planning to award several packages of the Duqm Refinery & Petrochemical Complex later this year.
  • Kuwait: Despite having one of the largest federal reserves within the GCC, the country is experiencing a c.USD 27bn budget deficit. Given the lack of energy investments in the last decade and its loss in production from the Khafji oil field, Kuwait is expected to award several key O&G projects in 2016. These projects are likely to be in the oil & gas production sector (KOC’s Jurassic Non Associated Oil & Gas Reserves Expansion: Phase 2) and the LNG sector (KNPC’s LNG Regasification & Import Terminal)

In order to fund the various projects critical to each country and in an attempt to rectify the large budget deficits for the year, all GCC countries have begun to slash energy subsidies. While this will reduce some of the pressure faced by these countries, the removal of subsidies will result in higher costs for the industrial sector, thus increasing the cost of raw materials. As this would cause project economics to become less attractive, it is likely that the GCC will see further delays and cancellations of projects.

In addition to the fiscal concerns that the GCC countries are facing in this era of low oil prices, the recent removal of sanctions from Iran will become an additional cause for concern. Hours after sanctions on Iran were lifted, the deputy oil minister of Iran, Amir Hossein Zamaninia, announced that Iran was ready to increase its crude oil exports by 500,000 barrels per day. The entry of new Iranian crude supply into an already oversupplied oil market is expected to further weaken the oil prices and increase the pressure faced by all countries in the GCC.

"Countries are evaluating their strategies for the year and prioritizing only some of the planned oil & gas projects in the region"

As such, countries are evaluating their strategies for the year and prioritizing only some of the planned oil & gas projects in the region. With the future of oil & gas in question, countries are taking grave measures to ensure their survival. Recent news has illustrated this as Saudi Arabia is currently considering to list the state-owned energy giant Saudi Aramco, a measure that was unprecedented. Aramco announced that it has been evaluating various options to allow public participation in its equity by listing a percentage of the company’s shares in the capital markets and/or by listing a bundle of its downstream subsidiaries.

With plummeting oil prices, rising budget deficits, and increasing supply of crude in the market, 2016 is expected to be another challenging year. While 2016 has over a USD 100bn worth of projects planned for the year, Contax Partners believes that only approximately USD 45bn worth of projects will go ahead, a c.40% drop from project awards seen in 2015. As global analysts predict oil prices are likely to remain in the USD 25 – USD 40 per barrel range in the medium-term, project owners are likely to selectively award projects based on their significance and necessity to the country.

As the GCC energy market continues to face challenges,Contax Partners can support project owners, contractors and suppliers understand market conditions, maximize the opportunities that are present in the region and guide them on the underlying risks related to execution. Through its dedicated research team and detailed Tiering methodologies, Contax Partners can help companies evaluate which projects are likely to go ahead.

 

-Shamlee Epari, Research Analyst
Contax Partners

 

Download Brochure

 

LET US HELP YOU SUCCEED IN THE ENERGY MARKET!

 

Contax Partners assists project owners, contractors and suppliers to maximize opportunities associated with these projects, guide them on the underlying risks related to execution and the effects of increasing project workload. 

Request for more information
OUR LOCATIONS

Bahrain

Office 241, 19th Floor

Platinum Tower- Seef

 P.O. Box 31005, Manama

Bahrain

Tel: +973 (1) 7224456

Fax: +973 (1) 7212204

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.  

Dubai

Office 3106, Jumeirah Business Centre 3

Cluster Y, Jumeirah Lakes Towers

P.O. Box 643554, Dubai

United Arab Emirates

Tel: +971 (4) 3695520

Fax: +971 (4) 3695521

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

Abu Dhabi

Office No. 5/Unit-3A, 2nd Floor

Sh. Saeed Al Nahyan Building,

Al Falah Street, Location No. C-48-E18_02

P.O. Box 2503, Abu Dhabi

United Arab Emirates

Tel: +971 (2) 6222966

Fax: +971 (2) 6222977

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

Since our establishment in 1985, Contax Partners has been the advisor of choice for companies operating within the constantly evolving Middle East and Africa energy sector. Having operated in the energy market for over 30 years, we have a track record of empowering our clients to win business. Contax Partners is well placed to understand the challenges, and what impact these can have on your growth plans for the Middle East and Africa. 

UAE Oil and Gas Consulting Firm Company Download Brochure