Business | Oil & Gas
Major Gulf projects to be speeded up
Gulf Arab oil producers could speed up some key expansion projects despite the global economic downturn, as states sitting on windfall oil revenues take advantage of cheaper input costs and stronger currencies.
- Reuters
- Published: 23:22 November 6, 2008
Kuwait: Gulf Arab oil producers could speed up some key expansion projects despite the global economic downturn, as states sitting on windfall oil revenues take advantage of cheaper input costs and stronger currencies.
Since the global credit crisis escalated last month, investors have expected Saudi Arabia and its five Gulf neighbours to slow the pace of expansion to offset a rapid fall in oil prices and position themselves for a global recession.
While Gulf project cancellations are inevitable, strategic spending, including on roads and power plants, may actually gain momentum as building material costs tumble, top executives told the Reuters Middle East Investment Summit this week.
"We're not at the centre of the earthquake," said Naser Al Merri, managing director of Noor Financial Investment. "Our markets have overreacted. We still haven't seen the oil money go into the system... We are going to see the oil money in the Gulf countries starting from early next year."
There are more than $2 trillion worth of expansion projects under construction in the world's biggest oil-exporting region, where economies have been booming as oil prices surged.
Gulf states have invested fortunes into projects designed to reduce their reliance on oil revenues, dedicating funds to build their energy, infrastructure, real estate and industry sectors.
Many of those projects were facing difficulties this year on rising costs of building materials, such as steel and cement.
The price of both has collapsed in the last two months as the global financial crisis slashed end-user demand. Saudi Basic Industries Corp, for one, cut reinforcing bar prices three times since September on signs of slower demand.
Stronger currencies
"It's better to build a project now because you can build them cheaper," said Abdul Majid Al Shatti, chairman of Commercial Bank of Kuwait, Kuwait's third-largest lender.
"We [Kuwait] have a lot of projects, and now that the inflationary pressure has eased, we can use the fiscal policies in terms of more projects to boost the economy."
Gulf state and private investors with cash positions have also benefitted from the dollar's recent rebound against the euro and Asian currencies since most Gulf states maintain currency pegs to the greenback, executives added.
Still, tight credit conditions would force Gulf investors to be more choosy about which projects they will proceed with, especially as oil prices have tumbled by more than half since hitting record levels near $150 a barrel in July.
With global fuel demand expected to slow next year, Gulf governments have little choice than to boost public spending at a slower pace to keep their budgets balanced.
"I think where you've got projects that are consumer related and they are still really on the drawing board, that is where they may be delayed or cancelled and that may not be a bad thing," said Richard Webster, head of investment at Burgan Bank.
Growth in the non-oil private sector, the major driver of regional growth, is also set to suffer as recessions abroad hit demand for exports and tight credit conditions increase the costs and reduce the availability of funding.
But many regional private companies have free cash they are ready and willing to invest once market conditions stabilise.
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