CAPEX - Q4 2016
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CAPEX Q4 2016

While 2016 was a disappointing year, market optimism from 2017 hinges on OPEC cuts

 

While Contax Partners had anticipated that 2016 would result in a disappointing year, year-end data reveals that this year has in fact seen the lowest energy spends in the past decade. This year saw a total of c.USD 35.4bn worth of spends as compared to an average capex spend of c.USD 67.6bn seen in the last 5years. Similar to spends seen in Q3 2016, this quarter witnessed only a mere c.USD 7.5bn. Analysis of the data illustrates that Saudi Arabia accounted for c. 73% of the projects awarded this quarter. This is due to the award of Saudi Aramco’s mega-projects such as Ras Tanura Refinery Clean Fuels and Aromatics Project worth c.UDS 1.8bn and Uthmaniyah Gas Treatment Units worth c.USD 727mn. All other countries in the GCC, however, witnessed extremely weak project activity – less than c.USD 1bn worth of spends each – a phenomenon not seen in the recent times.

"This year saw a total of c.USD 35.4bn worth of spends as compared to an average capex spend of c.USD 67.6bn seen in the last 5years"

These weak spends can be attributed to the continuous skepticism about crude price trends felt in the market which resulted in project owners deciding not to rush the award of large projects, but instead, focus on reducing spends and improving efficiency. Consequently, multiple projects have either been shelved or have been pushed for award in 2017.

2017 currently has c.USD 119.3bn worth of projects planned for the year and is also expected to experience weak project activity, similar to what was seen in 2016. Data reveals that the realization rate for projects in the region has typically been around 30% – except for the anomaly seen in 2015 where several mega-projects by KNPC were awarded. While this c.30% realization rate is projected to continue next year, 2017 could potentially witness even lower spends due to a poor projects pipeline. Analysis of data over the last four years illustrates that planned expenditure for projects has been declining every year – since 2014 – and this trend has continued as 2017 is expected to see a c.13% fall in planned expenditure compared to that seen in 2016. Figure 1 demonstrates the decrease in planned expenditure for oil & gas projects over the past four years.

Planned O&G Expenditure

 

This decline in planned projects can be attributed to several common factors:
Wait and Watch attitude by project owners: With constant changes in the market, project owners in the region have developed a ‘wait and watch’ attitude where projects are evaluated more thoroughly and decisions to award projects are delayed as they are dependent on predictions of the energy market. After an announcement was made that OPEC and non-OPEC members have agreed to cut production by approximately 1.8mn b/d, oil prices saw an improvement. However, with countries such as Nigeria and Libya being exempt from production cuts, rising concerns over compliance to promised cuts, and non-OPEC members adopting a gradual production cut approach, project owners remain cautious and are awaiting a better market scenario in order to award projects

IOCs exiting the region: With IOCs exiting the region during this difficult period, NOCs have begun facing capital constraints and have thus downsized their plans to award projects. Furthermore, regional NOCs rely on the expertise and technological know-how of IOCs in order to execute, sustain and enhance production from their fields. However, with IOCs leaving the region, NOCs will likely find it difficult to operate with the same efficiency – thereby reducing the total amount of planned projects. Examples of IOCs leaving the region include: Shell withdrawing from ADNOC’s Bab sour gas project; Mubadala Petroleum together with its partner Occidental, agreeing to exit Tatweer Petroleum, the operating company that has managed Bahraini field operations since 2009

Diversification from O&G: As the energy market remains unsteady, countries do not want to rely heavily on oil & gas activity and have thus modified national strategies to incorporate a greater diversification from oil & gas activity. This was seen in 2016 as large spenders such as UAE, Oman and Saudi Arabia budgeted a significant c.49.1%, c.38.8% and c. 38.6% of their 2016 expenditure respectively towards the social sector (comprises of healthcare, education and social services). This non-reliance on the oil & gas market has also contributed to the fall in planned projects

In addition to these common factors, countries in the region are facing individual challenges that are deterring them from awarding projects. Table 1 below illustrates the various country-specific challenges that are currently being faced as well as prospects for the oil & gas sector in 2017.

 

Country Specific Challenges & Prospects for 2017

 

Although the aforementioned factors have led to a further decline in planned projects for 2017 – compared to previous years – 2017 is expected to witness the award of several key projects. Some of these include: Bapco’s Sitra Refinery Modernization Project, SEC’s Madinah Taibah Integrated Solar Combined Cycle (ISCC) Power Plant, DRPIC’s Duqm Refinery & Petrochemical complex and ADCO’s Bab Integrated Facilities Field Expansion. Of the c.USD 119.3bn worth of projects planned for next year, Contax Partners forecasts (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) that approximately USD 34.6bn will go ahead. A sector-wise analysis depicts that the water & waste, power and oil & gas production sectors will account for c.25%, c.25% and c.18% of planned projects respectively while a country-wise analysis reveals that most projects will take place in Saudi Arabia, Oman and UAE.

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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