MEED Insight Blog

Is Qatar’s projects potential exaggerated?

There has been much understandable excitement and attention on the Qatar projects market since it won the right last December to host the 2022 FIFA World Cup.

In a region which badly needs a boost following the collapse of the Dubai real estate sector, the prospect of a $100bn-plus projects extravaganza has rightfully turned the attention of almost every contractor to the Qatari peninsula.

On the face of it, Qatar offers a once-in-a-generation opportunity as it races to have the right infrastructure in place for the event when 500,000 football fans from around the world converge on the state. A total of 12 stadiums will need to be either built or expanded and tens of thousands of new hotel rooms will be required to accommodate spectators, officials and players alike.

The directly associated football infrastructure is just the start of it. Doha is planning one of the most ambitious transport investment programmes ever undertaken to ensure a world-class rail and road system will be in place in time for the competition. This includes an estimated $35bn, seamlessly integrated, high-speed rail, metro and light rapid transport system and the planned Bahrain-Qatar causeway that will link the two nations for the first time. Ashghal is preparing a $20bn-plus roads programme that involves the complete modernisation and expansion of the existing roads and expressway network.

Transport, stadiums and hotels aside, there will be a host of projects in other sectors. As Qatar’s population grows, so too will demand for power, water and wastewater services, and a number of new power, desalination and sewage treatment plants are to be expected over the coming decade. Population and economic growth will similarly result in extra impetus of social infrastructure. Doha is prioritising education and healthcare development, with dozens of new schools, university faculties, clinics and hospitals planned or under development.

Real estate will also not be neglected. Although the demand/supply dynamics have reversed dramatically since the Dubai real estate crash, the government is determined to push ahead with its landmark real estate schemes such as Lusail and the various projects sponsored by Barwa. One of the expectations is that a construction boom will be self-fulfilling in that the thousands of professionals that will come to Qatar to work on other sectors will themselves create the additional demand that the real estate sector requires, much like that which occurred in Dubai prior to 2008.

On the industrial side, Qatar’s plentiful gas reserves should result in the second-phase of the Qatalum aluminium smelter and a new world-scale petrochemical complex being built over the next five years, while the emphasis on downstream value-added industries should likewise result in the development new moulding and extrusion complexes.

Just as enticing is the prospect of the government lifting its moratorium on further development of the North Field, the largest discovered non-associated gas reservoir on the planet. If this happens, we can expect some major offshore and onshore oil and gas activity that could match the projects heights last seen in the period 2002-2006 when Qatar was one of the major hydrocarbon project hubs.

All told, as is stands today there is theoretically easily more $100bn worth of projects to be developed in Qatar over the next decade. This of course does not include projects not yet announced or conceptualised that can only add to this figure.

It is in expectation of this that almost every major international and regional contractor has flocked to Qatar to ensure the right resources are in place for the inevitable projects boom. Given the slowdown in activity in Abu Dhabi and the difficulty in winning work in Saudi Arabia, it is no surprise that the state is now seen as the number one target among many firms active in the regional projects market today.

But does Qatar run the risk of not being able to live up to this expectation? At this stage, it is far from clear that it can as its projects market has not yet shown signs of taking off. In the first two quarters of 2011, the value of contracts awarded in Qatar was $6.9bn, more than $2bn or almost 30 per cent lower than the $9bn awarded in the same period in 2010, according to the MEED Projects database.

Although the amount of work will invariably have to increase in line with announced plans, it is unlikely to take the form of a sudden and immediate explosion in project activity that some people seem to be expecting.

Perhaps the best indication of when the market is expected to pick up was given by the government in April when it released an update on its national strategy. The update, which covered the period up to 2016, painted a rather different picture than the one most are hoping for. In it were two telling statements:

• “Based on current spending plans, public infrastructure spending will peak in 2012. This trajectory reflects existing plans for the launch of megaprojects,” and;
• “Though some World Cup related investment projects may be commissioned in the 2011-2015 period the likely impact is modest – a sizeable pipeline of projects is already in place.”

The government appears to be providing a cautionary message to the market; basically do not expect much soon.

The state’s position is supported by the fact that the World Cup Committee which is responsible for laying out and overseeing Qatar’s World Cup infrastructure plans has yet to announce its strategy and timeframes for project development. 

It should also be borne in mind that, with the exception of the hotels and stadium investments, nearly all projects planned today were on the drawing board prior to December last year. Winning the right to host the World Cup has not so far fundamentally altered the future project pipeline, although it may have an impact on speeding up the project implementation process.

Just as important is the increase in competition. Earlier this year on a normal road tender, Ashghal received a staggering 42 bids! Qatar’s potential is no big secret and almost every contractor out there is looking to get its foot in the door. This includes highly competitive Indian, Chinese and Southeast Asian firms. In an environment where the lowest price generally wins the day, winnable opportunities may be thin on the ground.

On the opposite end of the scale, there is the very real risk that the largest contracts will go to only a handful of firms as the authorities look to cut down on tendering times and pass on construction risk to others. There is a precedent on this with Qatar’s massive LNG programme which was effectively handled by just half a dozen main contractors.

We must not also forget the influence of the local contracting community. Already concerned by the large number of international contractors and vendors converging on the state, local firms have made it clear that expect a significant piece of the pie. These are concerns the government are unlikely to ignore.

Perhaps the best indicator of all for measuring the potential Qatar’s future projects market is the past. At its peak in 2006 at the height of the LNG programme, the value of contracts hit $30bn, while the annual average for the past three years is less than half that. Given the geographical, logistical, bureaucratic and technical challenges of its future projects programme, the logical assumption is that $30bn of projects a year is the maximum the state can handle, and even that is probably not sustainable for more than a 12-month period. To put that in perspective, that is much less than half than the UAE projects market at its peak in 2009, and almost half as large as the Saudi projects market today. And that is discounting the fact that there are more construction-related companies active in the region today than there were five years ago.

Qatar is undoubtedly going to be a more active projects hub than it has been over the last four years, but it may not provide the number of winnable opportunities that many are expecting, especially in the short term. Those coming expecting a quick reward are those likely to leave the most disappointed.

Should we keep faith in Kuwait's projects market?

Those that know me know that I have long been an enthusiastic supporter of the Kuwait projects market. Although this is a view not commonly shared among the regional contracting community, I have firmly believed that Kuwait had an almost unmatched potential for future project growth. After all, it had the two most important ingredients for success: a need and the financial means to meet that need.

So when the Central Tenders Committee (CTC) approved the Subiya Causeway budget in January, I was convinced that my faith in the market was finally about to reap rewards. For years, I had proclaimed the 34km-long project across Kuwait Bay as the essential piece in the projects puzzle. If it went ahead, then the state would have no option but to develop the Subiya peninsula or face the ignominy of having built a bridge to nowhere. The award of the $3bn-plus project would thus surely be the catalyst for the long-awaited and much-needed major projects boom.

There were other reasons for my optimism. The appointment of the energetic Sheikh Ahmad al-Fahad al-Ahmad al-Sabah to oversee the state’s $100bn, five-year development plan was further proof that the state was finally getting serious about its plans. While he undoubtedly has his critics, the former oil minister is known as one of the few politicians of action in a government that is painfully slow to make decisions.

But just as I began to say “I told you so”, it all began to unravel. Almost as soon as the CTC had approved the Hyundai Engineering & Construction-led bid, then the predictable political game began. MPs questioned the contractor’s credentials, while the State Audit Bureau – so often the death knell of major projects in Kuwait – was asked to investigate the bids. It was all starting to become depressingly similar, especially with the news in early June of the resignation of Sheikh Ahmad in advance of a scheduled parliamentary grilling.

So today it would seem we are no further along with the Subiya causeway than we were back in 2003 when the scheme was originally envisaged as a design-build project. Since then, the tendering strategy has been revised twice, the project redesigned, contractor prequalification started and then cancelled and then re-started, the alignment changed, more design work carried out, rejections made by Kuwait Municipality and the Environment Protection Agency and now finally by the National Assembly. In eight years, the only thing accomplished is a lot of expensive design work.

Now projects, especially such landmark ones, need to be implemented properly and the experience with the causeway would probably be acceptable if hadn’t been repeated so many times in Kuwait. Remember Project Kuwait, the much-vaunted plan to introduce international oil companies (IOCs) in Kuwait’s upstream sector? It took 15 years before the government gave up trying to convince parliament to accept it.

Then there is the on-going saga of the new refinery project at Al-Zour. Lump-sum engineering, procurement and construction (EPC) bids were first submitted way back in 2006 for the 600,000-b/d facility. But they were considered too expensive, so it was decided to tender the scheme on a cost-reimbursable basis. That was fine until MPs kicked up a fuss about the fact that bids did not go through the CTC. Today in 2011, the government is not even sure it wants the project in the first place!

I could list a whole number of other projects that have still to see the light of day; Failaka Island, first tendered by Dizart (remember them?), then the short-lived Mega Projects Agency, then the MPW and now by the Partnerships Technical Bureau (PTB). Then there is the Al-Zour North power plant. First tendered in 2005, it was cancelled when only one bid was received. Six years on and Kuwait still receives power cuts during the peak summer months while Al-Zour North is being tendered again, this time on an independent water and power project (IWPP) basis. The list of failed, abandoned or delayed projects goes on and on.

The question facing most business strategists today is whether to focus on Kuwait as a potential growth market over the coming years. There is unanimous agreement that Saudi Arabia and Qatar are the places to target, but with other nations such as Iraq, Algeria and Egypt also offering good prospects. For firms with limited resources, tough decisions have to be made on whether Kuwait really can provide them with a revenue opportunity.

There is no doubt that some firms have done well in Kuwait. UAE-based Drake & Scull has carved itself a successful niche as a capable MEP contractor in the state, while Egypt’s Arab Contractors has won close to $2bn worth of work over the last couple of years. But on the whole, most jobs in Kuwait remain restricted to local contractors, with opportunities for international players few and far between.

Data from MEED Projects shows that this is changing. Schemes such as the $3bn new university at Shadadiyah and the new airport terminal are open to international contractors as will the majority of PPP projects planned by the PTB. However, a brief look at the prequalification lists will not offer much solace to the traditional western contractor. Dominated by Turkish, Malaysian, and Chinese firms, being able to submit a competitive bid will be a significant challenge.

In our recent forecasts made in the Middle East Projects Forecast & Review 2011 report, we’ve projected Kuwait to be one of the major growth markets over the next two years, primarily due to a number of delayed projects such as the new refinery and clean fuels projects finally coming to fruition. 

But this growth forecast comes with a major caveat: that the various authorities and politicians can agree on the way forward. For a while, it seemed that they had, but with the Subiya Causeway stumbling, it appears that same age-old problems still prevail.  And while the projects market is still expected to grow, it may not be at the pace or breadth that many Western contractors may have hoped.

Given the seemingly terminal problems facing the Kuwaiti projects sector, is it now finally time to admit that the market is never likely to live up to its potential? There are many good things about the projects market such as transparent tender pricing, but frankly unless contract decision making becomes more centralised and decisive, and politics is kept out of the process, then I don’t think it will be possible to sustain my bullish position on the market for much longer.

What do you think? Do you believe the Kuwait projects market can offer long-term opportunities for your company, or do you think it will remain a second-tier projects destination?  I’d like to hear your thoughts in comments below.

Contracts worth $140bn to be awarded in the GCC in 2011, forecasts MEED Insight

Head of MEED Insight Ed James told the MEED Insight Middle East Projects Market Seminar 2011 in Dubai today that he forecasts that contracts for major projects worth $130bn to $140bn will be awarded in the GCC in 2011 and that the figure might rise to $150bn in 2012.

“We base our future forecasts on hard data only and use information in the MEED Projects data about thousands of projects that have been announced,” said James. “This has allowed us to come up with a comparatively solid forecast about the value of projects to be awarded in the next two years.

“We expect Saudi Arabia to be the largest market in the region with contracts worth almost $60bn awarded this year as a whole,” James said. “About $40bn will come from the UAE. For 2012, there will be significant growth in Saudi Arabia and some shrinkage in the UAE. The value of projects likely to be awarded in 2012 is extremely hard to forecast.”

However, he warned that the price of oil would have a major say in future project spend. “If the oil price drops below $60 a barrel, then it is our view that all bets are off because Middle East oil-exporting nations will simply not be able to finance their project plans,” said James.

“Historic trends show that there is a correlation between the value of GCC project spending and the oil price. But this connection is not that strong: oil prices fell in 2009 but Middle East project spending went up.”

Other factors are also driving the projects market, James said, including population growth, changes in government policy to emphasise domestic investment and special factors, such as plans to support the 2022 Qatar World Cup finals.

“There is even more uncertainty attached to any forecasts we make about the Middle East and North Africa region excluding the GCC,” James said. “There are almost $300bn-worth of major projects announced and not yet awarded in Iraq, but there are question marks about whether and when they will be implemented.”

James said that MEED Insight forecasts that the value of major projects awarded in 2011 in the Middle East and North Africa excluding the GCC will be $65bn-$70bn. He said that this figure could rise to about $85bn, but that would depend upon benign political developments in Egypt and Iraq.

Middle East focuses on $500bn of transport projects

MEED Editorial Director Richard Thompson told the MEED Insight Middle East Projects Market Seminar 2011 in Dubai today that transport and infrastructure will be one of the largest future sources of new construction business in the Middle East.

”We estimate there are about $500bn-worth of projects planned or under way in the Middle East and North Africa,” Thompson said.  “This does not include the large number of roads and transportation projects within real estate schemes.

“The underlying driver is about creating jobs and diversifying the region’s economy,” Thompson said. “The GCC is perfectly located between Europe, Africa and West Africa. We have seen Dubai exploit the region’s location to develop new sources of income and employment.”

The rail sector makes up the bulk of the major transport projects that are under way or planned in the Middle East.

“They amount to more than $60bn in Iran. Saudi Arabia’s railway plans are the second largest in the region and involve capital spending of more than $40bn, followed by Qatar with a plan worth more than $35bn,” Thompson said. The UAE’s Union Railways plan calls for investment of more than $15bn.

MEED estimates that there are almost $100bn-worth of major road projects under way or planned in the Middle East. A similar figure is attached to the region’s major port projects under way or planned. Middle East airport projects worth more than $80bn have been announced or are under construction.

Kuwait to tender $30bn of energy projects

More than $30bn worth of major oil, gas and petrochemical projects could be put out to tender in Kuwait in 2011-13, MEED Insight Research Director Angus Hindley told the MEED Insight Middle East Projects Market Seminar 2011 Seminar in Dubai today.

“The fourth refinery and the clean fuels projects are by far the most important projects that are due to be put out tender,” Hindley said.

The timing of bidding for these projects, however, is not yet clear.

Private sector takes leading role GCC in power generation

Some 37,000MW of capacity has been completed or is under construction by private developers in the GCC, MEED Insight Research Editor Angus Hindley told delegates attending the MEED Middle East Projects Market Seminar 2011 in Dubai today.

“Abu Dhabi has 13,333MW of private power completed or under construction. But something like 40 per cent of future power capacity will come from the private sector in Saudi Arabia.” Hindley said

Saudi Arabia has 9,358MW of private power completed or under construction and both Dubai and Kuwait are now considering the possibility of building private power plants.

“GDF Suez had more than 5,500 MW of equity capacity in the GCC. It is by far the largest in the region and it’s going to get bigger in the region following the agreement at the start of this year for the company to merge with International Power,” Hindley said.

“We have seen a number of aggressive Asian companies coming into the GCC private power market such as Kepco of Korea and Sumitomo of Japan. Acwa Power of Saudi Arabia has also emerged as a major developer in the kingdom,” he added.

“Fichtner is the leading international power consultant working in the GCC,” Hindley said. “The region says it wants more competition in this sector.”

The largest EPC contractor working on power projects in the GCC is Arabian Bemco of Saudi Arabia, where it is building more than 6,500MW of capacity. “It has taken on a number of very large contracts for the Saudi Electricity Company,” Hindley said. “Sepco 3 of China is now working on three power projects in the GCC: two in Saudi Arabia and one in Oman. The South Koreans have been active in the market. Daewoo is now in the market and GS has entered the GCC.”

Soaring demand strains Middle East electricity output

The Middle East will need to invest up to $140bn in new power generation, distribution and transmission capabilities this decade to cope with soaring electricity demands.

Average peak demand in the Middle East is growing at a rate of 8 per cent annually, although in Abu Dhabi and Qatar, peak power demand is rising by 10-15 per cent a year. MEED Insight Research Editor Angus Hindley estimates that by 2019, capacity requirements in the GCC alone will be 170,000MW, requiring huge levels of investment.

Speaking at the MEED Middle East Projects Market Seminar 2011 in Dubai, Hindley told delegates: “On present trends and taking into account recent public spending announcements, the required total GCC power capacity will have to rise to more than 170,000MW by 2019, from about 95,000MW at the end of 2010.  

“Saudi Arabia will account for about 80,000MW of this. But there will have to be big increases in Kuwait, Abu Dhabi and Oman. This does not however take into account the need to decommission and replace existing capacity.”

Hindley estimated that the new capacity required in the GCC by 2020 will involve investment of $66bn to $70bn. “At least the same amount will be needed for investment in transmission and distribution.”

Saudi Arabia is the largest electricity generation market in the region, with 50,000MW of capacity, followed by Egypt, with about 25,000MW. In 2010, power demand grew by 10 per cent in Saudi Arabia, due to a combination of economic and population growth and the very hot summer. Current power reserve margins vary across the region, Hindley said, with Abu Dhabi, Dubai and Qatar having healthy reserve margins, while in Kuwait it is very low at 3 per cent.

Feedstock is probably the biggest issue facing the Middle East power sector, said Hindley. “Gas is the feedstock of choice if generators could get it. The overwhelming majority of Kuwait’s power feedstock is in the form of liquids. Almost 70 per cent of feedstock in Saudi Arabia is liquids. About 800,000 barrels a day of liquids are used in the kingdom’s power stations.”

For this reason, Saudi Arabia is considering the possibility of building up to 30,000MW of nuclear power capacity, allowing it to reduce the quantity of oil used each day to generate power.

“There are LNG terminals in Dubai and Kuwait and one is to be built in Bahrain,” said Hindley. “But so far, gas feedstock imports into the region have been modest. LNG is seen as a back-up for emergencies.”

The GCC has about 95,000MW of installed generation capacity, with some 11,000MW of new capacity being commissioned in 2010, Hindley said. “Qatar has sufficient capacity to make it possible to import electricity through the regional GCC grid,” he said.

“Saudi Arabia had an unprecedented amount of new awards in the power sector in 2010,” Hindley said. “Some 11,000 MW of generation capacity was awarded last year. This compares with contracts for about 3,400 MW of capacity in 2009.” He said awards in other parts of the region were comparatively modest.

Long delays continue to dog GCC project tenders

Long delays are continuing to affect GCC project tenders, with companies often not hearing news on their bids for months on end, MEED News Editor Colin Foreman told the MEED Insight Middle East Projects Market Seminar 2011 in Dubai today.

“I call GCC markets the black hole markets,” Foreman said. “This is because people are submitting bids for projects and hearing nothing about them for months and months. It is as if their tenders have disappeared into a black hole.”

Foreman said there were a number of factors affecting decision-making, including regional developments, bureaucracy and the fact that some of the GCC’s biggest projects are not immediately required.

Desalination investment to be $12.5bn between 2011 and 2020

MEED Insight Research Editor Angus Hindley today told delegates at the MEED Middle East Projects Market Seminar 2011 in Dubai that the GCC will need to build about 2.2 billion gallons a day (g/d) of additional water desalination capacity by 2020 to meet soaring demand.

“This will cost about $12.5bn in total, but you will have to remember that most of this will be built with electricity generation capacity,” Hindley said. Average annual peak demand for desalinated water is rising by about 6 per cent, he added.

MENA projects hit $80bn in 2010

The value of contracts awarded in the Middle East & North Africa (Mena) region - excluding the GCC - rose to more than $80bn in 2010, up from approximately $70bn in 2009, Head of MEED Insight Ed James said today.

Speaking at the MEED Insight briefing in Dubai, James told delegates: “We have seen a massive increase in the value of new projects awarded in Iraq. The value of contracts awarded last year rose to $25bn. This figure for Iraq, provided the politics allows it, can only keep going up.”

He said contracts awarded in both Algeria and Iran fell sharply, while Egypt saw growth in 2010 that is likely to be reversed in 2011, due to the Arab uprisings.

Gap growing between oil and non-oil exporters

MEED Editorial Director Richard Thompson told the MEED Insight briefing in Dubai this morning that the gap between the economic performance of oil-exporting and non-oil exporting Middle East countries will grow in 2011.

“GCC states are forecast to enjoy higher real growth in 2011, despite political events in the region,” Thompson said. “Growth in oil-importing Middle East countries, in contrast, will decline.”

The GCC is forecast to be the world’s fastest growing region in 2011 and is expected to double in size by 2020 to $2 trillion, Thompson said. Additional public spending announced in 2011, he added, amounts to 16.7 per cent of Saudi Arabia’s GDP. All GCC governments have announced government expenditure increases following uprisings in Arab countries since the start of 2011.