CAPEX - Q3 2018
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CAPEX Q3 2018

Although several key projects have reached the final stages of award, at an overall level, Q3 2018 was another quarter of low spends as many projects are still awaiting final negotiations or official announcements. Given the expectation of continued stability in the energy market, next quarter is anticipated to witness healthier project spends in the GCC as many of the delayed projects of Q3 are expected to get awarded by year end

 

While oil prices have continued to fluctuate in the past quarter, it has remained within a comfortable band of between USD 72 and USD 82 per barrel. This band is similar to that seen in the previous quarter where Brent Crude oil prices were trading at around USD 75 per barrel and had reached highs of approximately USD 79 per barrel. The small c.4% rise from previous highs of USD 79 to current highs of USD 82 per barrel are likely due to OPEC+ members ending with no formal agreement on any additional supply boost during their meeting which took place in Algiers earlier this month. In addition to OPEC+ members signaling there will not be an immediate boost in output, buyers of Iranian oil remain wary of penalties from sanctions – due to take effect from November 2018 – and have thus significantly reduced oil exports from Iran. This anticipated disruption of global oil supply and expected increase in demand have pushed oil prices to its highest level since the crash in 2014.

As crude oil prices have been relatively stable in Q3 2018, energy projects within the GCC region have continued to progress within their project life-cycles. Although projects advanced to the next stage, the GCC region did not witness significant awards this quarter as several major project awards are still awaiting final negotiations or official announcements. Another reason for low spends in Q3 2018 was the slower decision-making process witnessed in countries like UAE where integration and restructuring of main O&G entities are still being administratively formalized. The shake up of many of these NOC’s has left a void in some key decision-making roles where new appointees are cautious of making key decisions.

In Q3 2018, the GCC region only saw c.USD 6.7bn worth of project awards in the energy sector which is a c.19% decline in spends from the c.USD 8.2bn seen the previous quarter. While the c.19% drop may reflect a poor quarter, a deeper look reveals that many of the projects are in final negotiations and may be awarded in the upcoming weeks. An analysis of project awards seen in the past quarter reveals that UAE and Saudi Arabia – which are typically the largest spenders in the region – accounted for the largest share of spends – c.54% and c.33% respectively. While UAE saw a majority of its spends across the gas processing, power and oil & gas production sectors, Saudi Arabia witnessed most of its spends in the pipeline sector. Some of the key project awards which took place in the aforesaid countries include: ADGAS's IGD Expansion: Phase 2 package worth c.USD 860mn, Borouge's Polypropylene 5 Project worth c.USD 500mn and Aramco's Haradh Gas Compression Plants Pipeline Packages worth a combined c.USD 1.3bn.

A deeper examination of several of the typical GCC energy spenders led us to identify key themes that were present in these countries which contributed to the low spends seen this quarter.

"With both contractors and project owners taking a longer time during the bidding process, major projects witnessed significant delays, thus further pushing project award timelines"

UAE Key Theme: Long ICV Evaluation Process

  • Of the c.USD 6.3bn Tier 1 projects that were planned for award in Q3 2018, the UAE witnessed only c.USD 3.6bn worth of spends. An analysis of the projects awarded in UAE reveal that there was a greater focus on awards within the upstream sector where most projects were smaller in value, thus resulting in overall spends in the UAE to be relatively low. While the award of smaller-valued projects played a role in overall low spends within UAE, delays in project awards due to ICV was the main reason for low spends. As UAE placed significant importance on ICV scores this year, contractors took longer in developing a strong bid that incorporated high ICV scores given that companies with the highest ICV score would have the opportunity to meet the lowest commercial bid. Furthermore, project owners were spending more time in auditing contractor’s ICV scores – to ensure data is accurate – and in negotiating with contractors. This has occurred for several key projects including ADNOC Onshore’s Bu Hasa Integrated Field Development (delayed with expected award date now in Q4 2018), ADGAS IGD Expansion: Phase 2 package and Borouge Polypropylene 5 (both had been delayed but have now been awarded). With both contractors and project owners taking a longer time during the bidding process, major projects witnessed significant delays, thus further pushing project award timelines. Additionally, with ADNOC revisiting the ICV process during this quarter and making several crucial changes which will come into effect from this November, upcoming projects could likely see further delays

Saudi Arabia Key Theme: Slower Decisions Due to Other Priorities

  • The main reason for weak spends seen in Saudi Arabia this quarter was due to key decision makers being focused on other priorities such as Aramco’s IPO and its plan on buying a controlling stake in petrochemical company: Sabic – the world’s fourth-largest petrochemicals firm with a market capitalization of approx. USD 103bn – instead of project awards. With numerous decision makers now focused on the strategic Sabic deal, this theme will likely continue next quarter and impact the award of several other planned mega-projects till a final decision is made
  • In addition to delays in multiple high-valued projects such as Maaden’s Ammonia Plant in Ras Al Khair (c.USD 1bn), Maaden’s Mansourah-Massarah Gold Mine Project (c.USD 600mn) and Repdo’s Round I: Phase 2: 400MW Wind Power Plant at Dumat Al-Janda (c.USD 500mn) which are still under bid evaluation phase and are now expected to witness their award next quarter, Saudi Arabia also saw the cancellation of its largest planned project that was expected to be awarded this quarter – SEC’s Jeddah South Power Plant Phase 2 (c.USD 1.5bn). The postponement and cancellation of these mega-projects also contributed to the weak spends seen in the Kingdom

Kuwait Key Themes: Focus on Execution & Political Changes

  • Kuwait witnessed significantly low spends of only c.USD 25mn this quarter. One of the main reasons that the country saw insignificant spends was because Kuwait continued to focus on the execution of its current mega-projects and did not have many planned projects in advanced stages of their life cycle
  • Moreover, with the country expecting to go through a cabinet reshuffle before the end of this year, with Oil Minister Bakheet Al-Rasheedi and Social Affairs Minister & State Minister for Economic Affairs Hind Al-Sabeeh anticipated to leave their post during the reshuffle, there have been no firm decisions that have been made in progressing with key planned mega energy projects. Some of these upcoming mega-projects (> c.USD 1bn) in Kuwait include KIPIC's Al Zour Petrochemical Complex and KAPP’s Al Zour North IWPP: Phase 2 & 3 and Nuwaiseeb - Power & Water Desalination Plant: Phase I

Figure 1: Representation of Q4 2018 future project Capex in the GCC region

Gulf countries project spendings 2016

 

Despite the slow pace of activity seen in project awards this year, Q4 2018 is anticipated to see slightly healthier awards than that seen over the past two quarters. Next quarter, the GCC region has approximately USD 27.7bn (Figure 1) worth of projects planned, of which, approximately c.USD 15bn is expected to be awarded based on 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). Although the identified themes which caused low spends this quarter are expected to roll forward, the high value of planned projects expected to be awarded in Q4 2018 stems from the numerous project postponements from Q3 2018 and the fact that these projects are in their advanced stages. Data reveals that of the total projects planned for award next quarter, a majority is expected to take place in the water & waste, power and oil & gas production sectors. Furthermore, most of these awards are anticipated to take place in Saudi Arabia, UAE and Oman.

With the energy market looking relatively stable and with numerous mega-projects expected to be awarded 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. .

 

-Shamlee Epari, Research Consultant
Contax Partners

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