CAPEX - Q1 2015
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CAPEX Q1 2015

Despite the slow progression of projects, 2015 is still expecting to see the award of multiple Mega Tier 1 projects

The decline in oil prices which took place in mid-2014 has affected the feasibility of multiple mega projects due for award in 2015.Thus, with uncertainty in the market, 2015 is expected to see fewer project awards compared to those seen in a typical year. Although projects are expected to progress slowly, the market has historically seen healthy project awards in the first quarter of a given year. This results in an annual average realization rate of c.33%; a similar trend is seen this year. Q1 2015 started off well and has already seen c.USD 17bn worth of projects awarded. Of these, c.USD 5.4bn took place in the oil & gas production sector, followed by c.USD 5.2bn worth of projects which took place in the waste & water sector. The largest awards of Q1 2015 included: KOC’S Ratqa Lower Fars Heavy Oil Handling Facilities worth c.USD 4bn and KAHRAMAA’s Facility D worth c.USD 2.4bn.

While Q1 2015 witnessed a c.48% increase in project awards compared to the previous quarter, the quarter also saw multiple cancellations and project postponements. With the current market experiencing high costs of execution and a peak in market workload, project owners are scrutinizing the timing and feasibility of their upcoming mega projects.

"Q1 2015 witnessed a c.48% increase in project awards compared to the previous quarter"

Earlier this year, Aramco’s c.USD 2bn Ras Tanura Refinery Modernization Project, was put on hold after being delayed several times. While the market is hopeful to see the revival of this project in late 2015 or early 2016, it is likely that Aramco will maintain its focus on upstream oil and gas projects this year and emphasize on more mega downstream projects focused on value added products in the coming years. The conscious shift in strategy is in line with Saudi Aramco looking to enhance its position as a leader in innovation. As part of this effort, Saudi Aramco and other major downstream players such as SABIC, PetroRabigh, Sadara, Sipchem & Tasnee have set up research and innovation centers to supply the market with better quality products while continuing their focus on enhancing margins.

Similarly, in Kuwait, KNPC‘s Al Zour Refinery (ZOR) worth c.USD 14bn has caused concerns as the bids have significantly exceeded the estimated budgets. While bids are under evaluation, KNPC is simultaneously considering the possibility of integrating a petrochemical facility along with this refinery. Feasibility studies for this plan are currently underway and the results will determine how KNPC will progress with ZOR. Likewise, Qatar will see a significant decline in project spends as two of the country’s major petrochemical complexes this year were stalled. With the Sejeel Petrochemical complex put on hold in September last year and the Al Karaana Petrochemical complex cancelled early this year, the country will see a reduction of USD 12bn worth of projects from 2015. Furthermore, Qatar witnessed c.USD 5.2bn worth of project postponements this quarter with a majority of these projects taking place in the water and waste sector and the oil and gas production sector.

 "GCC energy market still appears optimistic with c.USD 123bn worth of projects planned for award"

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Despite the market experiencing several challenges, the GCC energy market still appears optimistic with c.USD 123bn worth of projects planned for award. 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), we expect 2015 to be more conservative in project spends and therefore forecast c.50% of Tier 1 projects and c.20% of Tier 2 projects (In figure) to be realized.

A majority of the Tier 1 projects which are expected to be awarded by the end of 2015 will take place in Kuwait, which accounts for c.35% spends and will be followed by Saudi Arabia which accounts for c.19% of total planned spends. Furthermore, of the Tier 1 projects, the refining and oil and gas production sectors will account for a majority of spends; c.26% and c.23% respectively. This is followed by the power sector which accounts for c.13% spends. Keeping these spend forecasts in mind, we expect 2015 to see c.USD 49.3bn in spends – a c.27% drop from 2014. As the GCC energy market continues to have many Tier 1 mega projects still due for award this year.

 

-Shamlee Epari, Research Analyst
Contax Partners

 

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