After Brent oil prices sank to new lows of less than USD 30/bbl at the beginning of this year, the GCC energy market witnessed a further slowdown in project activity from already low levels of activity that has been witnessed in the past two years. While the first half of 2016 saw relatively lower project spends (c.USD 20.6bn) than that seen in H1 of 2014 (c.USD 46.5bn) and H1 of 2015 (c.USD 32.8bn), a look at the project awards in each quarter of this year reveals that Q2 2016 (c.USD 7.5bn) witnessed a c.42% fall in project awards compared with Q1 2016 – which was already considered one of the weakest quarter in terms of project activity.
As this quarter witnessed remarkably low project spends, the worst seen in the past 5 years, a comparison of the Q2 project awards for the past several years was also carried out. Data confirms, however, that low spends for this quarter were due to market instability rather than seasonality. The following figure (Figure 1) illustrates the aforementioned trends in project awards seen over the past two years.
Further examination of Q2 2016 spends reveals that this was not due to a poor pipeline either, as Q2 2016 initially had c.USD 30bn worth of projects planned for award. A deeper analysis of the data depicts that all projects above c.USD 500mn that were due for award this quarter, faced delays, and were postponed for award to H2 2016, except for two projects – ALBA’s Aluminium Plant Expansion Phase 6 - Smelter worth c.USD 2.5bn and Aramco’s Arabiyah-Hasbah Development: Hasbah Sour Gas Field Expansion worth c.USD 1.7bn.
Lack of Funding: Large spenders in the region experienced a slowdown in project activity due to issues related to financing, as governments focus on reducing their fiscal deficits. Data by Bloomberg reveals that energy producers in the GCC more than doubled their borrowings this quarter with Saudi Arabia leading the way as the largest borrower. Saudi energy companies have borrowed c.USD 23.1bn in the past 18 months, almost as much as the c.USD 23.4bn they borrowed over the past eight years. These numbers include credits given to companies involved in oil exploration, production, refining and natural gas services & processing.
Major Restructuring in the Oil & Gas Space: Countries such as Saudi Arabia and UAE have undergone major re-structuring within the key decision making hierarchy. While Saudi Arabia saw the replacement of its energy minister to Khalid al-Falih, who is planning to focus on diversifying the country’s energy portfolio, UAE saw its national oil company, ADNOC, go through a major reshuffle this quarter in an effort to drive efficiency, performance and profitability of the business. With major re-structuring taking place in the industry, projects are now experiencing further delays as new department heads are re-evaluating the viability and the necessity of several projects.
Current Workload & Lack of Resources: Kuwait, another large spender in the region, witnessed a fall in project awards due to the fact that the country is currently executing several mega-projects already and does not have additional capacity to take on more mega projects.
While a majority of the GCC countries are facing a slowdown in project activity, Bahrain on the other hand, has witnessed its strongest quarter in terms of project spends in the past decade. This was due to the award of ALBA’s Aluminium Plant Expansion Phase 6 - Smelter. Moreover, the country’s future pipeline continues to look strong as it expects to witness further large spends due to its upcoming Sitra Refinery Modernization Program by BAPCO worth c.USD 4.5bn, GPIC’s Ammonia/Urea Plant Expansion worth c.USD 1.5bn and ALBA’s Aluminium Plant Expansion Phase 6 - Power Plant 5 worth c.USD 750mn.
"H2 2016, however, is expected to be dominated by the downstream sector (c.USD 18.8bn) with refining and gas processing accounting for the largest share (c.50% and c.19% respectively within the downstream sector). "
A sector analysis of the first half of this year depicts that H1 2016 witnessed very low downstream activity (c.USD 5bn) and was largely dominated by the power, oil & gas production and pipeline sector; these sectors saw c.21%, c.20% and c.18% of awards respectively. H2 2016, however, is expected to be dominated by the downstream sector (c.USD 18.8bn) with refining and gas processing accounting for the largest share (c.50% and c.19% respectively within the downstream sector). While the downstream sector is expected to witness major awards in the second half of the year, H2 2016 anticipates the largest number of awards to take place in the water & waste and power sector (c.29% and c.25% of total planned for award).
In order to understand the contractor landscape, a deeper analysis of the projects awarded in the first half of this year was carried out. This revealed the dominance of the Asian contractors (such as SEPCO III and HDEC) that won four out of the six projects which were above the c.USD 750mn threshold, when compared to only two projects won by the Western contractors (i.e. Bechtel and SNC Lavalin). An assessment of the future projects and the contractors bidding for these projects illustrates that a similar trend will be seen in the latter half of the year with Asian contractors, in particular, Koreans, dominating the contractor landscape. Korean contractors such as Samsung E&C, GS Engineering and Hyundai (HDEC & HEC) are bidding on many projects, and thus, have a higher likelihood of winning more projects than their Western competitors such as Tecnicas Reunidas, Petrofac, Saipem and CB&I.
Looking at the future projects for the remainder of the year, we see that the GCC market has c.USD 66.2bn worth of projects planned – with Q3 2016 expecting to see the award of c.57% of planned projects. A country-wise analysis for this year reveals that Kuwait, Saudi Arabia and UAE will account for c.26%, c.25% and c.19% of total planned projects. However, 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 only USD c.USD 28.6bn worth of additional projects have a realistic chance of being awarded this year. Thus, total capex spends of c.USD 49.3bn is anticipated for 2016. Several key upcoming mega-projects for this year include: DRPIC’s Duqm Refinery, Saudi Aramco’s Ras Tanura Refinery Clean Fuels and Aromatics Project, ENOC’s Jebel Ali Refinery Expansion and KOC’s Jurassic Non Associated: Phase 2: East & West Raudhatain Field Development.