With the price of oil having dropped by more than two-thirds from a record of $147 a barrel in July to below $50 a barrel in November, the Middle East’s energy-dependent countries face a nervous period of consolidation as their projected revenues plummet.

In a startling turnaround caused by the fallout from the global credit crunch, oil companies around the region are recalculating their break-even oil price levels, while a slew of planned projects face increased uncertainty. Until the July peak, oil prices had been climbing continuously since the start of 2003, when they stood at about $29 a barrel.

The situation is a dramatic change for Gulf governments, which over the past 12 months have embarked on some of their biggest spending plans to date. When oil prices reached the $100-a-barrel mark for the first time in early January, many national oil companies took it as their cue to embark on ambitious upstream and downstream plans that were previously considered too expensive.

Abu Dhabi launched a $10bn programme to exploit its substantial sour gas reserves, which comprise nearly half the UAE’s overall gas reserve base, while the world’s largest oil company, Saudi Aramco, made a new push to explore its ample but costly heavy oil, tar sand and bitumen deposits.

In North Africa, Algeria started to target tight gas developments with the help of oil majors, while Jordan is proceeding with plans to develop its vast oil shale reserves.

Across the region, a raft of refineries and petrochemical facilities to process the crude into a range of other products took shape, despite costs in some cases doubling from just a few years previously. Saudi Arabia took the lead through the development of its twin export refineries at Jubail and Yanbu.

However, smaller operators are losing their nerve as rising engineering, procurement and construction (EPC) costs begin to bite. The US’ ConocoPhillips has ended its involvement in the UAE’s Fujairah refinery, while in Oman, the $10bn, 300,000-barrel-a-day (b/d) refinery being proposed by the government at Duqm is also expected to be scaled back.

Kuwait’s Al-Zour refinery, plagued by spiralling costs in 2007, has run into trouble after parliamentary critics complained that refinery deals were not tendered through the Central Tenders Committee, which evaluates and approves most public sector contracts in the country.

Iran and Iraq, both of which are looking to improve on years of underinvestment in their hydrocarbons sectors, have made only piecemeal progress despite record oil prices for much of the year.

Baghdad failed to pass its crucial hydrocarbons law and scrapped short-term service deals aimed at enabling oil majors to make short-term increases in production capacity. It did, however, launch the country’s first post-war licensing round, for eight existing oil and gas fields, with strong investment interest from both oil majors and national oil companies.

Although buoyed by strong oil receipts, Iran has struggled to entice oil majors to invest while US and UN sanctions remain in place.

One notable exception is the republic’s deal with Brazil’s Petrobras to develop deep-water hydrocarbons in the Caspian Sea. The agreement is the country’s first production-sharing deal, marking a radical change for Tehran, which has favoured using buy-back contracts for more than 20 years.

Algeria and Egypt, which attracted record levels of investment in 2007, have taken a harder line in the terms they offer to oil companies because of political concerns about giving away their hydrocarbons resources too cheaply. Cairo has imposed a 20 per cent tax on energy-intensive companies operating in its free zones, while Algiers has introduced a policy of taking a majority stake in any project involving foreign capital.

Analysts argue that while the sharp dive in oil prices will cause concern around the region, many countries have been more savvy when investing their windfall oil dollars than during previous energy booms. “The outlook has changed for a lot of countries and there will be some refocusing,” says Samuel Ciszuk, Middle East analyst at US consultant Global Insight. “But countries have been smarter this time around with their money and investment plans.”

US investment bank Merrill Lynch estimates that GCC countries have saved about 70 per cent of their oil revenues over the past five years. However, Ciszuk warns that Iran may prove the exception after over-exposing itself to new investment and exploration plans.

“There are suggestions Iran may need an oil price in the mid $90s a barrel to be able to carry out the projects it has announced, and that could prove a problem,” he says.

The one upside of the turbulent financial conditions is a moderate fall in EPC costs following a period of overheating over the past few years. However, if oil prices remain low, fewer projects are likely to be approved, according to Ciszuk. “We do not see the current slate of projects being cancelled but some of them may be put on hold,” he says.

However, analysts argue that while project activity is slowing, government-backed projects are unlikely to be significantly affected by the falling oil price.

Key facts:

  • Investment made by Abu Dhabi to exploit sour gas reserves: $10bn

  • Proporation of oil revenues GCC states have saved in five years: 70 per cent

  • Oil prices Iran needs for planned infrastructure projects: $90 a barrel