GCC market poised for rebound

04 February 2013

The award of major schemes in Qatar and Kuwait is expected to boost the GCC projects market in the coming year, following a lacklustre performance by Saudi Arabia in 2012

Despite a disappointing year in 2012 due to a lack of awards in Saudi Arabia, the GCC projects market looks set to pick up next year as crucial projects in Qatar and Kuwait move forwards.

Two years ago, the projects market performed resiliently. Governments acted quickly in response to widespread regional unrest to demonstrate that they were receptive to the needs of young and rapidly growing populations. The total value of contracts awarded in 2011 was $127bn.

The sheer scale of the budget commitment to social infrastructure investment, as well as public sector pay rises and food subsidies, meant the outlook for projects in 2012 was positive. MEED’s research division, MEED Insight, predicted that $140-150bn-worth of contracts would be awarded in 2012, largely contingent on the momentum of contract awards continuing in Saudi Arabia.

Falling short

That forecast will not be met, however. According to regional projects tracker MEED Projects, by mid-November just $93bn-worth of contracts had been awarded, suggesting a more probable total for 2012 of $110bn, the lowest value since 2007 and the second lowest total in seven years.

Awards in most GCC markets, notably the UAE, over the first nine months of 2012 were equivalent to the same period in 2011, and there are some signs that Dubai is staging a modest recovery. The depressed state of the region’s projects market is almost entirely due to a disappointing lack of awards in Saudi Arabia.

The total value of contract awards in the kingdom was $32bn in the first nine months of 2012, compared with $55bn over the equivalent period in 2011 and about the same in the first nine months of 2010. While Saudi Arabia remains the dominant projects market in the GCC, its share of the region’s total contract awards has fallen to well below 50 per cent.

Led by Abu Dhabi, the UAE could see $30bn-worth of projects awarded in 2013, up from a probable $25bn in 2012

From 2006 onwards, Saudi Arabia awarded a higher proportion of large-scale projects – worth more than $1bn – than any other GCC market. It was only in 2009, when a significant number of smaller construction projects were cancelled across the region, that the share of the total number of awards for large projects was higher in the rest of the GCC than in Saudi Arabia. The picture is dramatically different as 2012 draws to a close. Large-scale projects make up just 6 per cent of the total number of contracts in the kingdom, as opposed to 18 per cent in the previous two years.

This drop is partly explained by the lack of activity in the oil, gas and petrochemicals sectors. Infrastructure, too, was expected to boost the number of large-scale projects awarded in 2012. But a combination of institutional decision-making problems and the inability of the economy to support the proposed spending plans has resulted in no infrastructure awards, with the exception of a handful of roads projects.

Awards in 2013 in Qatar could be back at the levels enjoyed during the liquefied natural gas investment boom

Large projects including the $67bn Saudi housing programme, the $38bn-worth of rail plans and power generation schemes such as the King Abdullah City for Atomic and Renewable Energy proposed $155bn nuclear programme are essential if the kingdom is to meet its commitment to invest in social infrastructure. Nearly $60bn-worth of industrial and downstream petrochemicals projects, which are critical for economic diversification and job creation, are scheduled to be awarded over the next five years. Virtually all of this $320bn investment will come from government departments or government-owned entities.

UAE recovery

In 2011, the UAE recorded its worst year for project awards since 2004 due to a combination of inertia in Dubai during the protracted aftermath of the real estate crash of 2008 and a sudden cessation of spending in Abu Dhabi in the second half of the year.

In 2012, nearly 40 major new building contracts worth in excess of $4bn were awarded in Dubai, more than in any year since 2008. The rebound in Abu Dhabi was not quite as marked, but the award of the long-awaited midfield terminal complex at Abu Dhabi International airport signalled the intention to start spending again.

Further grounds for optimism were provided by the announcement that flagship projects such as Saadiyat Island’s Louvre

Abu Dhabi were back on track. Discussions about the Abu Dhabi Metro have also been rekindled and further Etihad Rail packages have been awarded.

Led by Abu Dhabi, the UAE could see $30bn-worth of projects awarded in 2013, up from a probable $25bn in 2012.

Much of the optimism unleashed by Qatar’s winning bid for the Fifa 2022 football World Cup has given way to sober reality. Delays in awarding contracts on the Doha metro have had an impact on the country’s project volumes in 2012. The year was expected to deliver more than 100 contracts, with a total value in excess of $25bn, but the number of awards will drop to below 80 and the top-end expectation for the year is no better than 2011’s $14.5bn.

The schedules for the completion of major pieces of infrastructure ahead of 2022 are getting ever shorter. Qatar remains committed both to Fifa 2022 and to the Qatar National Vision 2030, published in 2008. Contracts for projects such as the Doha metro, the national railway and the expressways programme, all cornerstones of Qatar’s ambition, must be awarded in 2013.

This imperative alone means awards in 2013 in Qatar could return to the levels enjoyed during the liquefied natural gas investment boom of 2004-07. MEED Projects’ least aggressive estimate, based on projects that are currently at an advanced bidding stage, is that $25bn-worth of contracts will be awarded in Qatar next year. Transport, in particular road and rail schemes, will account for nearly two thirds ($17bn) of these.

Oil exports

The Paris-based International Energy Agency (IEA) grabbed headlines in November 2012 by stating in its World Energy Outlook report that the US would displace Saudi Arabia as the largest oil producer in the world by 2020.

The report estimates that US output will reach 11.1 million barrels a day by 2020, as a result of its ramp up of tight oil exploitation. This, combined with a reduction in domestic demand, would lead to the US becoming an oil exporter.

The danger for the GCC is that a softening of US demand for oil due to reduced domestic consumption and increasing use of renewables could trigger a downward trend in the oil price over the next eight years. The oil exporters of the GCC, critically the UAE and Saudi Arabia, have a relatively short timeframe in which to exploit the high budget surpluses that have come from oil prices in excess of $90 a barrel since 2010.

If the IEA is right, the window of opportunity for the recycling of petrodollars into social infrastructure and economic diversification projects could close after 2020.

This brings the next few years into sharper focus. More than $700bn-worth of known projects are scheduled for award before 2017. Well over half ($363bn) are in infrastructure, industrial, downstream and power projects, all of which are sectors critical to government plans for social development and economic diversification.

The modest total for 2012 ($110bn) suggests delays to the award of projects and not a downward trend in the potential of the projects market. The volume of projects due for award in 2012, but put on hold or cancelled (190 projects), is no higher than in 2011 (204 projects) and significantly below 2010 levels (294 projects).

Optimistic outlook

Much of what would have been awarded in 2012 will be pushed into 2013. Assuming only a modest rebound in Saudi Arabia, a flat level of awards in the UAE, and the award of major projects such as the Doha Metro Red Line packages in Qatar (despite the possible postponement of Blue, Green and Golden Line packages) and the initial engineering, procurement and construction packages for the Kuwait National Petroleum Company Clean Fuels Project, the 2013 total should reach $137-140bn.

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