CAPEX - Q2 2018
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CAPEX Q2 2018

Improvement in crude oil prices have led to decent Q2 2018 project awards and multiple key announcements across a majority of the GCC countries in both the upstream and downstream sectors

 

In Q2 2018, oil prices witnessed yet another improvement with Brent Crude oil prices trading at around USD 75 per barrel – having reached highs of approximately USD 79 per barrel in the month of May. This c.11% improvement in oil price levels that Q2 2018 witnessed in comparison to the first quarter was triggered by factors including global economic growth, increase in demand for fuel as well as supply shortages – OPEC and non-OPEC production cuts, US’s re-imposition of sanctions on Iran and fall in production from crisis-hit Venezuela.

As oil prices fluctuated within a more comfortable band compared to that seen last year, project economics began to look more favorable, thus causing the GCC region to witness relatively healthy overall project capex spends and gradually see the award of larger projects. In Q2 2018, the region saw c.USD 7.8bn worth of spends – slightly lower to that seen in Q1 2018 (c.USD 9.9bn). While Q1 2018 witnessed higher project awards compared to that seen in Q2 2018, it only saw 3 projects that were c.USD 500mn or above. In Q2 2018, however, there were approximately 6 projects that were awarded worth c.USD 500mn or above supporting the fact that project owners are now slightly more comfortable in awarding larger projects as they begin to look more feasible.

A deeper analysis of project awards seen in Q2 2018 reveals that Saudi Arabia, Qatar and UAE accounted for the largest share of spends – c.47%, c.25% and c.15% respectively. While Saudi Arabia and UAE have typically been the largest spenders in any given quarter, Qatar, which usually sees the lowest or one of the lowest spends in any given quarter witnessed relatively high spends this past quarter. This was due to key awards including: Qatargas’s Barzan Replacement of Faulty Pipelines worth c.USD 1.3bn and North Field Gas Development: Offshore Jackets worth c.USD 500mn.

This steady level of spending that is currently being seen is expected to continue in H2 2018. While H1 2018 has so far seen c.USD 17.7bn worth of project awards, using our proprietary Tiering methodology (where Tier 1 projects have a 70% or greater probability of going ahead and Tier 2 projects have a 30% probability of being awarded), we believe that the market will likely see an additional c.USD 34bn worth of awards by the end of this year. This large addition stems from the fact that a majority of the mega projects planned for award this year are in advanced stages in their project life cycle and the timing for award is critical. A country split of projects categorized as Tier 1 for this year reveals that c.39% of the projects are anticipated to take place in Saudi Arabia while c.36% are expected to take place in UAE. A sector split reveals that the power and oil & gas production sectors will account for c.29% and c.27% of project awards respectively.

"Amid the slightly more optimistic market, it is interesting to see the various announcements made by a majority of the GCC countries this past quarter which is expected to lead to several developments over the next couple years"

 

Amid the slightly more optimistic market, it is interesting to see the various announcements made by a majority of the GCC countries this past quarter which is expected to lead to several developments over the next couple years. All announcements made have been in line with each country’s overall national strategy. Some of the key announcements include:

UAE: As part of UAE's 2030 National Strategy, one of the country's main aim has been to create more valuable products – this can be achieved by expanding petrochemical production, increasing refining capacity and expanding the range of products. As such, in Q2 2018, UAE announced a USD 45bn Downstream Investment Plan. While this announcement does not illustrate new capex spends from the date the announcement was made, but includes total capital expenditure outgoing over the nominated period, there are various initiatives in place that will be seen over the next few years. Some of these include: A) Expanding the Ruwais complex’s refining capacity by >65%, or 600,000 bpd by 2025 through the addition of a third new refinery; B) Develop one of the world’s largest mixed feed crackers, trebling production capacity from 4.5 mtpa in 2016 to 14.4 mtpa by 2025; C) Develop a new, large-scale, manufacturing ecosystem in Ruwais through the creation of new Petrochemical Derivatives and Conversion Parks.

Bahrain: The Kingdom announced the discovery of a shale oil and a deep gas resource in Khaleej Al Bahrain Basin in early April. The oil minister of Bahrain, Sheikh Mohammed Bin Khalifa Al-Khalifa, stated that independent appraisals carried out by oil consultants and an oilfield services company confirmed that there are significant quantities of oil present – with tight oil amounting to at least 80 billion barrels and deep gas reserves in the range of 10 - 20 trillion cubic feet.Earlier this month, the Crown Prince, Salman Bin Hamad Al Khalifa, stated that a number of wells are planned to be drilled as part of a research and evaluation phase (will include geological surveys to determine recoverable quantities of oil) that will start in October 2018 and expected to be complete in June 2019. He added, international companies will be selected to partner with Bahrain for the oil production phase in December 2019. Additionally, a month after the discovery, the Kingdom launched an Energy Fund which intends to raise up to USD 1bn. The fund, which will be open to investors regionally and internationally, will invest in energy projects in Bahrain across the downstream, mid-stream and upstream sectors.

Saudi Arabia: A key aim of the Kingdom has been to maintain production levels and this can be seen in the numerous upstream projects present in Aramco’s projects pipeline. Given that Saudi Aramco has numerous planned projects for its various offshore fields, it is now in the process of expanding its LTA member list. While it is understood that a group of 4 companies have submitted tenders for the aforesaid program, only 2 or 3 companies are expected to be added to the existing list.

Qatar: The country is currently focused on the development of its LNG Expansion project, execution of major projects for maintaining production of oil and implementation of various downstream initiatives. Qatar's planned expansion of the North Field is anticipated to supply gas as feedstock for the LNG Expansion project (which is expected to produce an additional 23 MTPA of LNG). Moreover, after the treatment of the gas, Qatar will likely produce 3,000 MTPD of ethane which has been allocated as the feedstock for a planned New Petrochemical Complex. This grassroots petrochemical plant will include an ethane cracker with a capacity of around 1.7 million tons per annum (MTPA) of ethylene and is expected to be operational by 2025. In addition to the progress made on the aforesaid projects, there have been talks on re-examining shelved projects such as QAPCO’s expansion project.

"we believe the market will likely fluctuate within similar levels and will not see drastic price changes"

 

With the energy market becoming more active again, OPEC and non-OPEC members convened on June 22nd to discuss the status of their production cut target as well as plans for the same. While this upward tick in Brent crude oil price was seen positively by oil companies such as ExxonMobil and Chevron, and several countries such as Saudi Arabia, concerns that prices rising too quickly could curb consumer demand prompted OPEC to now consider increasing supply instead. After a detailed discussion, the group agreed that it would add about 1 million barrels a day to global markets. As this increase is to be shared amongst all members, some of whom can’t raise output at all right now, this new addition in supply is expected to translate into a figure less than the expected 1 million barrels of new oil a day. While this increase in supply could cause prices to fall once again in the medium to long term – even though prices witnessed a c.2% increase shortly after the new OPEC deal was announced – we believe the market will likely fluctuate within similar levels and will not see drastic price changes.*

With the energy market witnessing improvements, the GCC region announcing new initiatives and project owners progressing with planned activities – aligned with their national strategies – over the next couple of years, get in touch with Contax Partners for holistic market intelligence & insights on various upcoming opportunities and strategies in order to take advantage of the current market. For more information, contact the VP of Business Advisory Services, Ann-Marie Carbery, at This email address is being protected from spambots. You need JavaScript enabled to view it. . *This prediction is based on the fact that no significant market changes will take place in the assumed period

-Shamlee Epari, Research Consultant
Contax Partners

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