2009 saw the award of $95bn worth of energy and energy related projects in the GCC. This figure was c.53% higher than the level awarded in 2008, despite the economic downturn and was largely driven by the region’s strategic energy production targets to ensure a solid position for the future upturns in demand, relaxation in the contracting market and increased gas demand from the regions power and petrochemical sectors.
At the beginning of 2010, it was clear that the region had high spending hopes, with c.$230bn worth of projects planned for award in the year. Each taking nearly 25% share of this were the power and refining sectors with Oil and Gas Production spending following suit with c.17%.
However, as has been the trend for the past few years, there is always a considerable difference between the planned and actual spending. This is due to a number of reasons; projects are not considered to be essential in terms of a country’s strategic master plan, there is a heavy dependency on international project financing, lack of feedstock availability or due to the depressed demand and prices for certain products resulting in, the attractiveness of certain projects from a ROI perspective being less attractive.
On a quarterly basis, Contax Partners conducts an analysis all of the energy and energy related projects in the region to tier them in terms of their likelihood of progressing, thus allowing for the generation of a more realistic view of the project award landscape.
With the Tier 1 category representing a greater than 70% likelihood of proceeding in the current market, Tier 2 between 40 and 70% and Tier 3 less than 40%, the majority of planned 2010 projects at the beginning of the year fell into the Tier 1 category, 40%. Following closely was Tier 2 with 32%, thus giving a total of 72% of projects with a greater than 40% of proceeding within the year. Interestingly, on a quarterly basis, the forecast total spending levels across the tiers between Q1 and Q3 was relatively steady, between c.$46bn and c.$54bn.
However, in Q4, the expected spending levels increased to c.$88bn, representing c.38% of the total yearly amount, although it was expected that some of this planned spending would spill over into 2011. For the Tier 1 projects, specifically however, the scenario was slightly different, with over 60% of projects being awarded in the first half of the year.
Given these forecasts, it is interesting to note that as we near the end of Q1, fewer than 20% of the projects planned for award in Q1 have actually been awarded. The majority of these awards took place within the petrochemical and power sectors, c.30% and c.19% respectively, although the forecast at the beginning of the year was that the majority of spending would be found within the power, water and waste and oil and gas production sectors.
Coupled with the c.$185bn worth of projects still on the table and planned for award this year, the total planned expenditure for 2010 has decreased by c.16% from the levels forecast three months ago.
Nevertheless, looking forward to the remainder of the year, c.55% of the planned projects due for award is in Saudi Arabia, followed by the UAE which accounts for c.22%. From a sector perspective, the power sector continues to dominate the region’s spending plans with c.33%, followed by oil and gas production and petrochemicals, c.17% and c.15% respectively.
Looking again to develop a more realistic picture, Tier 1 projects account for over c.40% of the planned Capex expenditure, c.$75bn. With this in mind, it is expected that the final level of spending at the end of the year will be in line with or just below that of 2009 and once again considerably higher than that in 2007 and 2008.
Given this, under a realistic scenario where only Tier 1 and 2 projects go ahead, future projects will sustain the GCC energy workload at high levels. Looking briefly beyond 2010, should all of these Tier 1 and 2 projects go ahead as scheduled, the GCC is expected to witness another energy workload peak throughout 2011, which would be even higher than the stretched conditions of the construction boom during 2007 and 2008.
If this occurs, it would result in similarly severe challenges in project planning and execution. The question is: have we learnt from the past to ensure that we are properly prepared for this next cycle and have we developed robust mitigation strategies to ensure that we minimize the associated risks?
To further discuss how the Contax Business Advisory Team can help you understand the changing market dynamics, the full set of opportunities open to you and the best strategy/approach to ensure the opportunities are successfully secured, please contact Ann-Marie Carbery Antoun at AnnMarie.Carbery@contaxpartners.com
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