Gulf projects shock: Spending may actually rise in 2009

01 February 2009
Government spending is set to continue on priority projects: ones that increase gas availability and power and water production.

The following sentence will shock. More money may be spent on projects in the GCC in 2009 than in 2008.

According to energy industry analysts Contax, capital expenditure on energy projects in the region totalled about $60bn in 2008. Contax also forecasts that the sector will spend almost $70bn in the year to come. Non-energy project expenditures, which amounted to about $200bn in 2008, may not grow, but they probably will not fall.

The differentiating factor is the spending plans of GCC governments. Income projections from oil have been slashed, with oil prices expected to be little more than half their 2008 highs.

But GCC governments will probably balance their budgets in aggregate in 2009. Abu Dhabi, Kuwait and Qatar are again forecast to report surpluses. The GCC Six can also draw down on savings accumulated in the past five years, estimated to amount to some $500bn.

Reviewing, not stopping

This will allow them to continue spending on priorities: projects that increase the availability of gas, that lift power and water production and that benefit the permanent GCC population.

In oil and gas, GCC governments are reviewing their options rather than hitting the stop button. Opec has announced that it will cut total production by 3 million b/d from its mid-2008, and world oil demand is forecast to fall. There is no pressing need for Gulf countries to increase crude capacity.

Nevertheless, spending that helps to increase gas production will go ahead:

  • Saudi Arabia's 900,000 b/d Manifa field project falls into this category because of its non-associated gas output.

  • Saudi Aramco has secured lower bids for the Karan gas field development, which is continuing.

The biggest victims of the slump are petrochemical projects:

  • Global plastics prices have tumbled because of a market glut.

  • New Qatari plants have been postponed.

  • Others in the region are now certain to be frozen.

But key public projects will not be:

  • In Kuwait, spending by the Ministry of Electricity & Water and the Public Works Ministry is not being trimmed.

  • Qatar's Public Works Authority (Ashgal) told MEED's Qatar Projects Conference that all planned projects will proceed. These include further expansions of the national highway system, 30 new kindergartens and schools and the redevelopment of the Doha Asian Games Olympic village into a medical complex.

  • Qatar has no pressing need for new power capacity. But the Qatar General Water & Electricity Corporation (Kahramaa) plans to push ahead with Qatar's first large-scale reverse osmosis (RO) plant and a huge water storage project.
    Abu Dhabi has signalled that will finance the construction of the Shuweihat 2 complex, which is designed to produce 1,500 MW of electricity and 450,000 cubic metres a day of water, if the banks cannot.

  • In January, the Saudi Electricity Company (SEC) announced that it will consolidate nine independent power projects with total capacity of almost 10,000 MW into three contracts to encourage bids. If the private sector will not finance them, the Saudi government might.

Strategic transport projects are going ahead:

  • In January, Qatar announced the award of a contract for a further phase of the New Doha International Airport.
    The modernisation of Kuwait airport is expected to proceed.

  • At the end of 2008, the contract was awarded for the construction of the third concourse at the Dubai International Airport.

  • Bids are being invited for the first elements of the New Doha Port.

  • Saudi Arabia is poised to award the contract for the Mecca-Medina railway.

  • Work on the Bahrain-Qatar Causeway, the transport project of the year, should start in the summer.

The biggest challenges mainly lie in projects that require private finance. The appetite for real estate has disappeared and developers are finding alternative sources of finance almost impossible. This is hitting Dubai hardest, but all GCC markets are suffering from the global banking and property slump.

Mobilising credit

But the Gulf projects balance sheet is surprisingly encouraging. In some markets, engineering and construction companies are still hiring.

The environment, however, has radically changed. Competition is increasing and margins will be squeezed. The good news is that steel prices in most markets are now less than half the level recorded in July.

With project finance hard to find, contractors able to mobilise credit for their clients will be at a distinct advantage. This is shifting attention to export credit agencies. China and Japan are showing the strongest interest in backing their contractors in the Gulf.

After five years of breakneck expansion, the Gulf construction market is getting back to basics. Costs will have to be managed. Clients will once again have options. And companies enjoying strong relationships with clients will do better than their rivals.

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