CAPEX - Q1 2017
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CAPEX Q1 2017

Despite a resurgence in U.S. shale, broad adherence to OPEC cut commitments has resulted in a relatively stable oil price. With several mega projects due for award in the near future, the remainder of the year is anticipated to witness decent project activity, slightly healthier than 2016

 

After oil prices dwindled to the lowest levels seen in the past decade due to global oversupply, OPEC countries developed resolutions in order to address this issue and thus, agreed to production cuts late last year. Due to OPEC broadly meeting its commitments to production cuts, oil prices have witnessed an improvement over the past quarter with oil prices reaching highs of over $55 per barrel. Recent data reveals, however, that with steadier prices, U.S. oil drillers have boosted rig counts at an unprecedented pace, increased oil production and witnessed a rise in inventories which has weighed on the production reductions made by OPEC members and its allies. While this has resulted in a correction in oil prices once again, officials from OPEC and select non-OPEC members have met this month, to review the impact of production cuts, ensure conformity and discuss possible extensions of these production curbs, thereby taking steps for an upward movement in price.

Although there are emerging concerns with regards to the growth in U.S. shale oil, with oil prices relatively stable after production cut efforts, the market has witnessed a gradual improvement in project activity. This quarter, the GCC witnessed c.USD 10.2bn worth of spends – although low, the spends are c.28% higher when compared to project spends seen in Q4 2016 and c.61% higher when compared to project spends seen in Q3 2016.

"This quarter, the GCC witnessed c.USD 10.2bn worth of spends – although low, the spends are c.28% higher when compared to project spends seen in Q4 2016 "

A deeper analysis of the project awards this quarter reveals that most awards took place in the oil & gas production, power and refining sectors. Furthermore, data reveals that while these sectors witnessed the highest spends this quarter, this was primarily due to the award of one mega-project in each sector – KOC’s Burgan Gathering Center 32 (c.USD 1.3bn), Kahramaa’s Qatar Transmission Phase 13: Substations (c.USD 1.6bn) and Takreer’s Refinery West (RRW) Restoration (c.USD 950mn) respectively. A country-wise analysis illustrates that, unlike the previous quarter, which saw only Saudi Arabia significantly contributing to project spends (c.73%), this quarter saw Kuwait, U.A.E. and Oman contributing similarly to overall GCC project spends (c. 27%, c.21% and c.21% respectively).

While the year commenced with reasonable project activity, the market is expected to witness modest growth over the next few quarters. This is due to the fact that a majority of the planned mega-projects across the GCC (greater than c.USD 1bn), are in advanced stages – bids will either be submitted shortly or have been submitted and are under evaluation by project owners. As project owners are being cautious under the current market situation, thorough review of scopes is carried out along with heavy negotiations for budget reductions. While this may result in a longer bidding processes, project awards are still expected to take place. Table 1 summarizes the status of key mega-projects planned for award over the next few quarters.

2017 Mega Projects

 

While the above provides a summary of key upcoming mega-projects, a Tiering analysis (illustrated in Figure 1) portrays the project landscape for the remainder of this year. The GCC energy market has c.USD 95.2bn worth of projects planned for award for the rest of this year. While a sector-wise assessment reveals that the power, oil & gas production and refining sectors account for c.23%, c.17% and c.15% respectively of the projects planned, a country-wise analysis depicts that most projects will take place in Saudi Arabia, U.A.E. and Kuwait (c.36%, c.22% and c.17% respectively ). 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 of the total planned projects for this year, only c.USD 35.2bn worth of additional projects have a realistic chance of taking place.

2017 Tiering Chart CXP

 

Although the Tiering analysis provides an insight on where a majority of the planned projects will take place, a broader evaluation of the GCC region’s plans depict a growing interest in developing gas fields – due to the increase in demand and the lack of gas present. U.A.E. has shown that it is majorly focusing on developing gas fields which will lead to more brownfield activities, EOR activities and gas processing projects in the coming years. This is seen in the progress of the Hail & Ghasha field for which the FEED and PMC bidding will begin soon. Similarly, Saudi Arabia has placed importance on this sector - with investments placed in numerous Long Term Agreement projects as well as the progress seen with the Hawiyah Gas Plant Expansion & Haradh Gas Compression program. Moreover, Oman is also focusing on gas development via its Khazzan Field and Ghazeer field (newly extended area within Block 61) and is expecting to have a combined production of approximately 1.5 billion cf/d, increasing Oman’s gas production by a total of 40%.

Additionally, the region is looking favorably towards investing in alternative energies. In Saudi Arabia, the energy ministry created a new division - The Renewable Energy Project Develop Office (Repdo) - to drive the Kingdom’s renewable energy plan. The first phase of the energy plan will involve projects developed in the northwest of the country – 300MW of solar in Sakaka and 400MW of wind in Midyan. In U.A.E., while there were plans to develop the Sweihan IPP (PV) which was projected to have a capacity of 350MW, this was increased to a new capacity of 1,177MW. Furthermore, Kuwait has large plans of developing Phase 2, 3 & 4 of its Shagaya Renewable Energy Complex.

As 2017 presents opportunities in a difficult market place, 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 and which projects are likely to suffer delays. For more information on how to consolidate your position and take advantage of a challenging energy market, contact the Director 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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