CAPEX - Q4 2014
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CAPEX Q4 2014

Low oil prices lowers expectations for 2015

With high hopes for energy project spends, 2014 has demonstrated a56% improvement in project awards since 2013, ending the year with c.USD67bn as compared with c.USD 43bn in 2013. At year-end2013,c.USD 172bn worth of mega projects valued at USD1bn and over were planned for award in 2014, however, only 18% (c.USD31bn) of these projects went ahead in 2014. The remaining c.USD141 worth of projects were either delayed or cancelled (Figure 1). 

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Among the delayed projects are several super mega projects valued at USD 3bn and over that have also seen delays in 2014 (Figure 1 Table). The vast majority of these projects are greenfield developments with the exception of three projects:  Saudi Arabia’s Arabian Heavy Crude Program in Manifa, Qatar’s IddeShargi North Dome Expansion and KAHRAMAA/Qatar Electricity and Water Company IWPP Expansion in RasLaffan. While several of these super mega projects/ packages are in their late stages for award, almost all will be pushed to 2015 or later taking into account the continuous decline in oil prices. We can expect the projects in the early stages of development to be sent back to the drawing board or even shelved,while projects in EPC bid, EPC PQ and FEED stages to face some delays due to retendering of bids.

"Saudi Arabia and Kuwait contributes 64% realization rate of total GCC awards in 2014"

Year 2014 had a total of 440 projects planned for award however, there was only a 27% realization rate (i.e. the value of projects that went ahead compared to the value of projects announced). This is a slight improvement from last year’s 23% realization rate, however, much lower than the historical (last 10 year) average of 33%.Saudi Arabia and Kuwait are the highest contributors to this year’s overall realization rate, representing 64% of total GCC awards in 2014. Even individually, the two countries showed strong realization rates of c.31% and c.29% respectively, however the UAE superseded both countries with an internal realization rate of 38%. As historically seen, Saudi Arabia remained the largest projects market representing 39% of total project spends in the GCC with almost half of the country’s spend targeting the power sector. Saudi Aramco’s Jizan refinery IGCC power plant package (c.USD 2.5bn) is one of the main beneficiaries of the country’s high spending in the power sector this year. Kuwait represents 25% of total project spends in 2014 with the refining sector contributing to the highest share of the country’s spending. The UAE follows Saudi Arabia and Kuwait as the third largest capex spender with upstream oil and gas production representing the highest portion of the country’s spending this year (at 51%).

Taking a look at the projects awards in 2014, a hefty 68% of these projects took place in the first half of the year with the award of several previously delayed packages. The formerly delayed KNPC’s Clean Fuels Refinery Project started 2014 off on a high note awarding three mega packages with a combined Capex value ofc.USD11bn.  Other major projects awarded in the first quarter include BP Global awarding the Khazzan and Makarem tight gas field project valued at c.USD 1.2bn in Oman, and Maaden/ Mosaic/ Sabic JV awarding Saudi Arabia’s second phase of Waad Al Shamal phosphate development project (valued at c.USD 1 bn). The second quarter witnessed several of Saudi Aramco’s Jizan IGCC packages, also formerly delayed, contributing c.USD7.2bn.  In addition  ADCO’s North East Bab Field Development (phase 3 of Rumaitha andShanayel Field) valued at c.USD 1.5bn  and Mitsubishi Corporation and Saudi Basic Industries Corporation’s (SABIC) awarding Jubail Methyl Methacrylate andPolymethylmethacrylate Plants valued at USD 1.2bn were also awarded.

The second half of 2014 witnessed a slowdown in the pace of project awards, with 14% of projects realized in the third quarter and a slightly improved 17% in the fourth quarter. Part of this slowdown can be justified with a number of reasons, starting with the occurrence of Ramadan season in Q3 which generally tends to slow down the pace of projects in the region. Furthermore, delays in gas finds also contributed to postponements in several downstream projects, especially within the power sector, where a majority of the plants are gas fired. As a result, many of the planned awards for packages related to gas fired power plants have seen considerable delays. The continuous drops in oil prices since June 2014 reaching USD 62 a barrel on December 22, 2014 down from its previous level at USD 115 in June is also an important factor contributing to the slower second half of 2014. However, in spite of the project delays, the third quarter saw the award of Kuwait Oil Company’s Crude oil gathering center 29, 30 and 31 valued at c.USD 2.3bn and Abu Dhabi Marine Operating Company’s second phase of the Nasr filed development valued at c.USD 1.9bn.The final quarter saw the award ADCO’s phase 3 of Al Dabbiya field in North East Bab valued at c.USD 2.3bn, Emirates Aluminium International’sTaweelah Alumina Refinery valued at c.USD2bn and Saudi Aramco’sKhurais Increment Program package valued at c.USD 1.5bn.

In view of the recent developments with the continuous decline in oil prices, the Capex forecast for  2015 now paints a different picture. Under regular conditions, the 2015 forecast would apply the historical 33% average realization rate to the c.USD 188bn worth of projects announcements for the upcoming year bringing the total value of forecasted awards to c.USD62bn. The first two quarters would have seen the bulk of project awards estimated at c.USD32 bn. While the second half would have seen a 35% drop in awards with a Capex of c.US D24bn. However, given the direct correlation between the dropping oil prices and oil and gas activities, Contax Partners believes that 2015 is likely to see delays in several of the forecasted awards (even those in the EPC Bid and EPC PQ stages), similar to the case in 2009.

"Contax Partners believes that 2015 is likely to see delays in several of the forecasted awards (even those in the EPC Bid and EPC PQ stages), similar to the case in 2009."

Looking back at 2009 when oil prices dropped from their 2008 peak at USD 147 a barrel to USD 45, most project activity had stalled and many oil companies and their suppliers scaled back in their operations. We are likely to witness a similar trend in 2015. In fact, using Contax Partners’ 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), Contax Partners forecasts that only 50% of tier 1 awards and 20% of tier 2 awards are likely go ahead in 2015. This would bring the total expected project awards of tier 1 and tier 2 projects to c.USD58 bn.


On a sector level, Contax Partners' tiering methodology shows that the upstream Oil and Gas Production sector will represent the largest share (22%) of tier 1 projects forecasted for 2015 (see figure 2) with the award of some key mega projects in UAE, Kuwait and Oman.The Refining and Power sectors will continue to be an area of further investment with countries such as Kuwait and Saudi Arabia taking the lead. Kuwait is forecasted to be the main contributor in the Refining sector with c.USD 6bn worth of planned awards. The Power sector comes in second with Qatar representing majority share of tier 1 projects forecasted in the sector while Saudi Arabia account for the largest share of tier 1 and tier 2 projects combined. As for tier 2 awards, the Power sector makes up the largest share of tier 2 projects with c.USD4bn, 88% of which is forecasted to be from Saudi Arabia. The Oil and Gas Production and Metal sector follow the Power sector with the UAE making up 39% of the Oil and Gas Production sector and Qatar making up 57% of planned Capex in the Metal sector.

With the above forecasts in mind, the sector likely to take a hard hit if the oil prices continue to decline is the petrochemical sector, whereby many projects may undergo re-evaluations particularly in terms of pricing, for a number of reasons. The first reason is the shrinking oil and gas prices impacting the competitiveness of petrochemical products, thereby dragging their prices down and reducing the sectors profitability. The second reason is the shale oil boom in the US and North America coupled by the low costing coal-based polyethylene products in China, both of which may impact the competitiveness of the GCC region’s petrochemical products and their profitability as well. The 2008-2009 oil slump saw a similar impact in petrochemical products with the drop of demand and profit margins in 2009. During this time,Saudi Arabia’s SABIC for example, reported a quarterly loss USD 259.3 million. 

Contax Partners’ initial forecast had high expectations for the first quarter of 2015 however, with the oil plunge comes a significant shift in Capex outlook for the upcoming year. 2015’s forecast has gone from optimistic with potentially high project spends to a year most likely subdueddue toproject delays, internal reassessments and multiple retendering.

-Lina Juma, Research Consultant
Contax Partners

 

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