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.
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
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.
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