• Abu Dhabi took advantage of low costs to spend during last recession
  • Uncertainty of oil prices could see contract awards delayed in 2015
  • Contractors say project costs have not lowered with crude prices

The effect of the global crude price on new oil and gas projects in the Middle East has been widely discussed in the region since the market started to fall in the summer of 2014.

Contractors fear that falling oil revenues will lead to governments in the GCC tightening their purse strings – holding out on large spending commitments until some element of certainty returns to the oil markets.

A look into historical contract awards in Abu Dhabi, however, suggests that low crude prices have not had a negative impact on spending.

The pattern of spending in the region’s second-biggest oil and gas projects market appears to have been counter-cyclical to the price of crude.

Brent crude prices were at record highs in 2008, peaking at more than $140 a barrel, while spending on UAE oil and gas projects hit an annual low of just over $1bn.

When the price crashed towards the end of 2008 and only slowly recovered in 2009, the UAE awarded a record $28.7bn on engineering, procurement and construction (EPC) contracts on oil and gas schemes, according to regional projects tracker MEED Projects.

At the time, oil analysts suggested Abu Dhabi National Oil Company (Adnoc) was taking advantage of lower project costs during the global recession. The state-owned oil producer was seen to be investing at the bottom of the market so that new production comes on stream as demand rises.

Projects awarded during the 2009/10 period include the $11bn Shah sour gas development, the $10bn Ruwais refinery expansion and the $11bn Integrated Gas Development, as well as the major Borouge 3 petrochemicals complex expansion.

Abu Dhabi’s oil and gas projects market then saw two quiet years in 2011 and 2012 as the crude price stabilised at $100-plus prices, but spending recovered someone in 2013 and 2014 driven by awards on major offshore oil field developments.

With global crude prices plummeting in the second half of 2014 and unlikely to return towards $100-a-barrel any time soon, the big question is whether Abu Dhabi will continue its trend of counter-cyclical spending.

There are two important differences between the oil price collapse in late 2008-09 and the current downcycle.

The former was caused by the global economic downturn weakening demand and there was a clear expectation that the price would pick up when major economies returned to growth. The current trough in prices is much more uncertain and few are forecasting a return to the $100-plus prices the oil industry enjoyed for the previous four years. Lower oil prices could be here to stay for the coming years.

The second difference, according to contractors, is that the costs of delivering projects have not decreased significantly since the summer of 2014. Contractors for a major energy project in the UAE have been asked to take into account market conditions in the bid price, with the client looking for lower offers.

“Crude prices are already climbing, so what if it goes over $120 a barrel in the period I am executing the job? Where do I go then to ask for compensation?” one UAE-based contractor tells MEED.

“The inputs to a project’s cost are manpower, machine and materials, but these costs have not dropped. Manpower is the same, if not more. I think [the call for lower EPC bids] is a directive from the top, and it was sent down irrespective of how it would affect projects,” the contractor adds.

Another contractor said he expects several major oil and gas projects in the UAE to have bid deadlines and tenders pushed back until some stability returns to the crude market.

Although there appears little chance of counter-cyclical boom in spending in 2015, there are several major projects that are scheduled to be awarded. The big upstream prize this year is the estimated $2bn Bab Integrated Facilities, while two major projects in Fujairah – the new refinery and liquefied natural gas (LNG) terminal – are also due to be awarded.

Abu Dhabi prepares for the upturn in 2009

MEED, 18 June 2009: By pushing ahead with its development plans, the emirate is also becoming the hottest market in the Gulf for contractors, with some engineering executives going as far as to warn that there may not be sufficient manpower in the country to keep up with the volume of work that Abu Dhabi has to offer.

“Where in the first quarter nothing was happening, now they are coming out with so many tenders that it is hard to keep up,” says the Middle East business development manager of one major international oil and gas contractor. “Abu Dhabi is definitely the place to be.”

The logic behind the number of projects now being implemented is “pretty simple”, says Craig MacMahon, analyst at UK oil and gas consultant Wood MacKenzie.

Overall costs on major developments are far lower than at the peak of the boom in 2008, and with long-term forecasts for oil demand and prices becoming more positive, investing at the bottom of the market so that new production can come on stream as demand rises makes sense. “If you have the cash and you have a bullish view on how quickly the world is going to come out of this recession, this is about the best time to invest,” says MacMahon. Read more.

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