Business | Oil & Gas
Energy expansion costs soar in Gulf region
Tightening credit conditions in the world's top oil exporting region are raising the cost of expanding energy capacity and adding to delays but are unlikely to derail strategic projects.
- Agencies
- Published: 23:32 September 26, 2008
Dubai: Tightening credit conditions in the world's top oil exporting region are raising the cost of expanding energy capacity and adding to delays but are unlikely to derail strategic projects.
Interbank lending rates have risen across the Gulf Arab region as global financial turmoil has left banks struggling to finance expansion of infrastructure, real estate and industry.
Record oil export revenues have financed the Gulf's economic boom, bolstered central bank reserves, fed budget surpluses and left governments in a strong position to absorb the impact of the credit crunch. But there is a limit to how much central banks can do, analysts said.
"Even though governments are carrying huge surpluses, they can't afford to finance everything," said Raja Kiwan, Dubai-based analyst at PFC Energy.
Key projects
"A lot of big energy projects are well on their way to completion and funding is secured, but some of the less strategic projects still in the pipeline or those involving the private sector may be more vulnerable."
Most Gulf energy projects are being undertaken by state-owned companies and are seen by governments as strategic. Even with higher lending prices, those plans will proceed, analysts said.
"For the key projects, people will be willing to pay more," said analyst Monica Malek, regional economist of EFG-Hermes. "Higher funding costs could contribute to the greater focus on the key projects."
Saudi state oil giant Aramco plans investments of $129 billion (Dh474.07 billion) over the next five years to increase both domestic and international capacity across the energy sector.
Projects to boost Saudi crude output capacity to 12.5 million barrels per day by the end of next year from just over 11.3 million bpd were nearing completion and long-since financed, analysts and industry sources said.
Aramco typically only uses project finance for around 20-30 per cent of funding for projects it undertakes alone, limiting exposure to tighter credit conditions, financiers said. The rest is funded through cash flow. Across the region, joint state and private ventures in refining, petrochemical and power still looking for finance may be delayed and see costs rise as they wait for credit conditions to ease.
That will exacerbate the global trend in the energy industry for late starts and budget busting due to a lack of skilled labour and rising costs of raw materials.
Estimates double
"Some projects are being postponed, and economics are being distorted by rising costs," said one banker involved in Gulf project finance, speaking on condition of anonymity.
"Right now, even Aramco or Qatar Petroleum don't dare to come to market. Why would they, if they have to pay 150 to 200 basis points or more above what they would pay otherwise?"
Big projects that could look for financing toward the end of the year include joint ventures refineries in Saudi Arabia between Aramco and France's Total and Aramco and Conoco-Phillips, one banker said. If credit conditions fail to improve, the companies may choose to wait, he added.
Those projects have already seen cost estimates double to around $12 billion from initial estimates around $6 billion.
Aramco and US Dow Chemicals were likely to look for finance toward the end of next year for their giant petrochemical complex at Ras Tanura.
That project was last estimated to cost $22 billion, and Dow's share will mark the largest single foreign investment in Saudi Arabia's energy sector.
Projects that had already seen rising costs eat into potential profit margins will face further pressure, bankers said.
Oman's planned new petrochemical plant with Dow Chemicals is being redesigned in the face of rising costs and is already three or four years behind schedule.
Abu Dhabi's International Petroleum Investment Co (IPIC) earlier this year slashed the capacity of a planned new refinery in the UAE and revised configuration plans to cut costs.
The Gulf's power generation industry, where the private sector plays a bigger role than in oil and gas, may see the pace of expansion threatened, a Doha-based banker said.
"I am especially concerned with the power sector, which can't be delayed because of the economic growth and the infrastructure population growth needs," he said.
Power demand in the region is growing at an annual rate of around 8 per cent per year as populations and economies grow, and governments are struggling to keep up.
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