Financial crisis hampers Middle East energy projects

Energy projects in Gulf oil producers have become the latest victim of the festering global financial crisis as it is depriving them from funding and discouraging full capacity expansions, according to officials and experts. Besides worsening fund shortages, the crisis has already sharply depressed oil prices and is set to smother global demand which is seen by key crude producers as vital for full-blown capacity expansion programmes. Over the past few weeks, crude prices have tumbled by at least 50 per cent and they could continue their slide in the absence of strong demand growth, sharply pushing down the main source of income for Gulf oil heavyweights. Such problems have been complicated by a surge in the value of energy projects in the region because of soaring construction costs as well as other factors. « One year after its gravity became apparent, the US mortgage induced credit crisis has moved into a protracted and more severe phase. The crisis now has the potential to slow global economic growth and, as a result, depress oil markets and prices, » said the Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries. « Even in taking a longer-term view to investment, constrained capital (for both debt and equity) would combine with continuing escalating costs and inadequate feedstock availability to cap further the upside potential of the energy investment outlook. Against this backdrop, the 2009-2013 review has revealed a higher potential for energy capital investment requirements in the region, now estimated at $650 billion (Dh2,388bn) , » Apicorp said in a study, sent to Emirates Business yesterday. « However, despite efforts by project sponsors to push ahead with implementation of initial development plans, many projects appear to have been postponed beyond the five-year horizon or have simply been shelved. As a result, the projects actually in progress amount to $520bn or 80 per cent. To be sure, the ongoing credit crisis has dented the investment outlook. » Apicorp’s figures showed investment requirements in the oil supply chain in the Middle East and North Africa (Mena) region are estimated at about $243bn, including nearly $153bn in the downstream sector. Gas investments during the 2009-2013 review period were forecast at around $165bn, while the rest would be pumped into power generation projects. « There is no doubt the outlook for energy projects in the Middle East is now dim because it has become very difficult to get funding while a sustained decline in oil prices will sharply depress the hard currency income of producers, » said Ali Alak, economics professor at Saudi King Fahd Petroleum and Minerals University. « But the main reason that could choke the pace of such projects, specially oil, is a the slackening demand as a result of the crisis. Oil producers have made clear they need demand security to push ahead with capacity expansion projects. In such circumstances, I don’t think they see much security. » Nearly half the potential energy capital investment requirements continue to be located in three countries namely Saudi Arabia, Iran and Qatar. Regarding funding, the study noted while capital requirements are relatively easy to assess, the associated capital structure, which reflects corporate financing policy decisions, is more complex, particularly in a context of a major international credit crisis. « Until able to evaluate the full impact of the crisis, we have continued to use the current industry standard, which is to first tap retained earnings (internal equity) to fund highly risky but highly profitable upstream and associated midstream activities. By contrast, the industry tends to rely more on debt and external equity for less risky downstream activities, particularly when funded under project finance structures, » Apicorp said. It said recent trends have continued to point to an average equity-debt ratio of 30:70 in the oil-based refining/petrochemical sectors. In the gas-based downstream sector, the ratio is put at 40:60 to factor in higher feedstock risks. Finally, in the power sector, the ratio is put at 25:75 to reflect the still highly-leveraged IPPs and IWPPs. Under these conservative assumptions, the resulting capital structure for the period 2009-2013 is likely to be 54 per cent equity and 46 per cent long-term debt, the study said, adding this compares with the equity-debt ratios of 50:50 found in the 2008-2012 review and 47:53 in the 2007-2011 review. « The annual volume of debt of $48bn, which results from actual capital requirements and the above structure, exceeds by 23 per cent the all-time record of $39bn achieved in the loan market at its peak in 2006. These amounts would hardly be met should current credit-market conditions persist. Not only has the cost of borrowing gone up as a result of an upward repricing of risks, but credit standards have been tightened. » The study said in this context, project sponsors’ credit ratings, which measure their ability to service debt, will be closely monitored, as well as the sovereign ceilings that bind them. « Our annual review of Mena energy investments for the period 2009-2013 has found a potentially higher capital requirements. The upside, however, is likely to be capped as a result of postponement (beyond the five-year review period) or the shelving of a substantial number of initially planned projects, mostly in the petrochemical sector. Obviously, constraining factors continue to be soaring project costs and the inadequate feedstock availability, » it said. However, funding uncertainties stemming from the credit crisis are adding to the challenges ahead. » By Nadim Kawach on Sunday