Project owners may be looking to new sources of funding as capital markets become more attractive sources of cash
As in many industries, the refining and petrochemicals sector often benefits from economies of scale and consolidation. It’s why there has been a growing emphasis on vertical integration between the refiners and the petrochemical producers in the region.
Because of this, the GCC’s downstream sector has enjoyed rapid expansion because of access to cheap feedstock from associated gas production.
Another factor which is more often overlooked however is the availability of capital from the regional and international banks which has also facilitated the large scale, vertically integrated projects.
But the scale and price tags associated with them capital projects is growing, and the region will soon need to reassess the way it secures funding.
With one of the highest projected population growth rates across the world, the region will need to continue investing in capital intensive projects.
With growing competition in North America and China, capacity expansion (alongside operational excellence) will become ever more important.
The demand for such costly projects goes beyond the downstream sector; a recent IHS report for example, projects that over $1 trillion worth of investments will be needed by 2030 to meet demand for gas and electricity in the Middle East and North Africa region, with approximately 50% of its economic growth coming from the GCC.
Developing the exploration and production, gas processing, power generation and delivery infrastructure will not be cheap.
“In the last six to seven years […] demand for large scale capital investments in the GCC has more than doubled, and we believe that it should increase by more than 60-70% in the next 6-7 years,” said Jonathan Robinson, regional head of banking MENA for HSBC, at the 9th Middle East Refining & Petrochemicals Conference and Exhibition in Bahrain last month.
“There’s a renewed drive to invest in the central public infrastructure projects which are the basic building blocks of a sustainable infrastructure,” he added.
Such capital projects include the refining and petrochemicals sector, but also the exploration and production sector, as well as the mining and metals industries.
As the region’s governments look to encourage and prolong the growth period following the Arab Spring and the global economic recession, demand for capital intensive projects can only be expected to grow.
Articles continues on next page …
According to a Gaurav Keswani, consultant at Contax Partners, 2014 is expected to see a 20% increase in project announcements from 2013 within the refining and petrochemicals sector alone, with at least $207 billion worth of projects to be announced in the remaining quarters.
“Recent political events in Egypt, geopolitical developments in Iran and emerging energy players are unlikely to change the need for investment in the Middle East and North Africa.
On the contrary, leaders in the region want to keep the oil and gas flowing, the lights on and their economies growing,” says Leila Benali, director of IHS Energy.
However, the dynamics within the supply of capital that can make this happen have changed dramatically, both on a regional and international level. This has raised the question of how future projects will be able to secure the necessary funding needed to sustain the high levels of growth.
It’s no secret that the global economic recession forced both the banks and the regulators to reassess their lending and financing practices. “The regulatory environment for us is changing, and it will make financing long term projects much more expensive and much more difficult for us to deploy,” said Robinson.
Currently, a majority of funding for projects in the GCC region comes from government sources in the form of wealth funds and equity.
In more developed markets however, funding is more evenly split between multiple sources, including banks, bond markets, equity, government agencies and export credit agencies.
While the GCC model has effectively provided the mega-projects with quick access to capital, it is unclear how deep the governments’ pockets really go and also how sustainable such a financing strategy might be.
In fact, it may be time for owners and entrepreneurs looking to secure finances for their projects to look elsewhere, in particular, the capital markets.
“If the traditional suppliers of capital have been government funding and or equity plus bank financing, then I would propose we need to look into the third pool of capital, the capital market,” explained Robinson. “This is the largest pool of liquidity in the world that is today relatively untapped in the region.”
Transitioning to the capital markets as a source of finance will not happen overnight.
“To tap into the capital markets, companies will need to be more organised. It is easier to go to the regional banks, they know the companies,” said Al Sherif Khaled Al-Ghalib, senior executive VP corporate banking sector at the National Commercial Bank in Saudi Arabia.
“For capital markets, you need to go through a process, you need to have ratings, you want to have quality investors, you need to go to the regulators, […] it’s a different process.”
In order to encourage companies to turn to capital markets will require a fundamental shift in the region’s approach to finance, and there are a few things that the industry must consider.
Project owners will need to determine which markets they can secure funding from; companies will have to release timely and accurate financials with well researched projections and rates of return. Ultimately they will have to ask whether they are ready to look to engage with capital markets for new sources of funding.
It may transpire that necessity breeds action, and it will not actually be until the industry needs to resort to capital markets that such a shift will take place.
“Infrastructure spend is increasing significantly, that’s putting pressure on capital, the traditional sources of liquidity in the region and the mix is not sustainable,” says Robinson.
“We need to think about how we can re-circulate capital and the project bond market, the bond market as a whole offers a great opportunity to re-circulate capital,” he concludes.
