The Middle East and North Africa (Mena) oil and gas industry is facing challenging times with oil prices collapsing from four years of sustained $100-a-barrel-plus prices.

Capital expenditure in the Mena region has so far been resilient, despite the uncertain market outlook

Since crude prices began to fall in the second half of 2014, there has been much speculation in the market about how spending on new projects would be affected.

Role of Opec

The collapse of crude prices has called into question the role of oil producers group Opec, with Saudi Arabia unwavering in its policy of maintaining production above the group’s quota levels despite calls from some members for a cut in production to support prices.

Any hopes of a change in policy were dashed at the beginning of December when the annual Opec meeting in Vienna passed without any decision to steer the market upwards.

Capital expenditure in the Mena region has so far been resilient, despite the uncertain market outlook. In the first 11 months of 2015, companies in the region awarded $44.3bn of engineering, procurement and construction (EPC) contracts on oil, gas and petrochemicals projects.

There was a total of $247bn-worth of EPC contracts awarded in the first half of the decade in the Mena region, excluding Iran

Source: MEED

Although this is likely to remain lower than the $59bn awarded in 2014, spending was higher in 2015 than in each year from 2010 to 2013. There was a total of $247bn-worth of EPC contracts awarded in the first half of the decade in the Mena region, excluding Iran.

The pipeline of planned projects that have yet to be awarded is even larger than this total, with as much as $331bn-worth of schemes in the early stages, from oil and gas extraction to refining and petrochemicals.

Key projects

While it is inevitable that not all of these projects will make it to the execution phase, it remains to be seen how the collapse of oil prices will affect the drive to carry out future projects and whether governments will prioritise key sectors.

The health of the projects market will remain, as ever, closely tied to a handful of very large schemes proceeding on schedule.

The GCC has been the epicentre of projects spending over the past five years, with just three countries – Saudi Arabia, the UAE and Kuwait – representing almost two thirds of total project awards value.

Kuwait has been by far the largest market over the past two years, driven by the implementation of its huge refinery expansion and rehabilitation programme.

Elsewhere in the GCC, the Qatari market remains quiet, as the country continues its moratorium on developing its major offshore gas assets. Doha’s focus will be on upstream oil in the coming years. Oman has increased spending incrementally every year since 2010, driven by major projects including the Sohar Refinery Expansion, the Khazzan Tight Gas Development and its largest ever petrochemicals project, Liwa Plastics.

 Opec basket price

Huge potential

Outside the GCC, Iraq has had the biggest potential for contractors and, in 2014, it was the second-largest market with more than $13bn spent on oil and gas projects. However, this momentum all but collapsed in 2015 and Iraq’s project pipeline has shrunk considerably.

The impact of lower oil prices on Baghdad’s budget has been exacerbated by the ongoing conflict with Islamic State in Iraq and Syria (Isis), causing many capacity expansion plans to be downsized.

At the same time, the political standoff between Baghdad and the Kurdistan Regional Government on oil revenues has affected expansion plans in Iraqi Kurdistan. Erbil has been unable to pay the international oil companies carrying out its ambitious oil field development programme.

Outside the GCC, spending has largely stagnated or fallen. The conflict in Libya has caused project developments to grind to a halt.

Egypt’s projects market suffered in the first half of the decade due to political upheaval, but there are signs that major upstream projects are starting to gain momentum.

The discovery earlier in 2015 of a deepwater gas field, the largest proven gas field in the Mediterranean Sea, has enormous potential and could supply much of the country’s increasing domestic demand. The field could be brought online by its operator, Italian oil group Eni, as early as 2020, meaning significant investments would be required over the coming years in field development, as well as pipelines and processing infrastructure.

Major unawarded oil and gas contracts
Country Project Net project value ($m) Award year
Saudi Arabia Yanbu oil-to-chemical complex 30,000 2017
Saudi Arabia Yanbu integrated refinery and petrochemicals  20,000 2017
UAE Hail and Ghasha sour gas 15,000 2019
Egypt West Nile Delta development: North Alexandria 12,000 2017
UAE Bab sour gas project 10,000 2017
Egypt Zohr gas field development 10,000 2016
Oman Duqm petrochemicals complex 9,000 2020
Kuwait Olefins 3 petrochemicals 7,000 2017
Oman Duqm refinery 5,000 2016
Algeria Hassi Messaoud peripheral field development 5,000 2016
Source: MEED Projects

Sonatrach projects

Algeria has a pre-execution project pipeline valued at nearly $32bn, although the North African country has typically been one of the least successful at fulfilling its potential, and has trailed other resource-rich countries in the region in terms of spending in recent years.

Much could be decided by the fate of four refinery projects and several gas developments planned by Sonatrach.

Expanding upstream gas-handling capacity and boosting supplies have become major priorities for the region’s governments as they seek to meet domestic demand growth of up to 15 per cent a year from the power, industrial and oil sectors.

With an increase in associated gas production constrained by the relative lack of expansion in oil production – with the exception of Iraq and potentially Iran – the focus has been on developing non-associated gas fields in Saudi Arabia, Iraq, Algeria and Kuwait, as well as moving into the development of sour and tight gas deposits, especially in Abu Dhabi, Oman and Saudi Arabia.

Saudi Arabia awarded its first contract to develop shale gas production in the north of the kingdom in 2015 and, in the next year, it is set to start work on a four-fold expansion of the initial work. At the same time, state oil company Saudi Aramco is starting a series of major offshore field developments after awarding long-term agreements to four EPC contractors for the programme. The first, an expansion of the Hasbah sour gas field, is expected to be awarded in early 2016.

The high cost of developing more difficult gas plays, coupled with the ongoing moratorium on Qatar’s North Field, has resulted in Kuwait and Dubai building liquefied natural gas receiving terminals. These are being followed by facilities in Jordan, Bahrain, Fujairah (UAE), Egypt and Morocco.

The 10 largest contractors in Mena hydrocarbons, 2010-15
  Contract value ($bn)
Petrofac 18.8
Samsung Engineering 18
Saipem 14.7
Tecnicas Reunidas 14
SK Engineering & Construction 12.2
Daelim 12.3
Hyundai Engineering & Construction 8.7
GS Engineering & Construction 7.7
National Petroleum Construction Company 6.2
JGC Corporation 6.1
Source: MEED Projects

Driving factors

Downstream investment in refining has largely been driven by a desire of some states, most notably Saudi Arabia, Algeria, Egypt and the UAE, to increase refined product exports, which fall outside Opec quotas. Some countries must also meet domestic demand, which has been increasing by up to 11 per cent a year in some parts of the region.

The need to improve product specifications through a significant reduction in sulphur content, especially at older refineries, has also been a factor. This is one of the drivers for the expansion of Oman’s Sohar refinery.

Predictably, Saudi Arabia had the region’s largest oil, gas and petrochemicals market when taken over a five-year period, between 2010-15, with a total of $72.8bn awarded, accounting for almost 30 per cent of the total. However, the kingdom has not been the largest market in any of the last three years, and in 2014 it was only the fourth biggest spender on projects.

The kingdom was surpassed by the UAE in 2013 and 2014, and by Kuwait in the last two years.

Kuwait spending

Kuwait has been by far the largest market in 2014 and 2015 and easily the fastest-growing out of any major oil and gas economy in the region.

In the past two years, Kuwait has spent more than $35bn, driven by major projects such as Clean Fuels, the Al-Zour refinery and the Lower Fars heavy oil handling facilities.

As of December 2015, there was an estimated $247bn-worth of planned and unawarded projects in the Mena region. The UAE and Saudi Arabia represent a large chunk of that value with respective project pipelines of $77bn and $74bn. With the value of planned projects in Iraq collapsing over the past 18 months, Egypt and Algeria are now seen to have the third and fourth largest potential with $41bn and $32bn worth of unawarded projects respectively.

After being the driving force of project spending in 2014 and 2015, Kuwait has a relatively small project pipeline of $30bn – one of the only countries where this figure is smaller than the past two years of spending.

For smaller economies, such as Oman and Bahrain, the level of spending in the coming years largely depends on the fate of a few large projects. In both countries, these projects come in the form of large refinery schemes.

In 2016, Bahrain could award its $4bn-plus refinery modernisation scheme. In the fourth quarter of 2015, the developer of Oman’s largest single-phase refinery project at Duqm tendered the main packages with an award also expected in 2016.

Budget cuts

A large amount of uncertainty always exists in trying to forecast which of the hundreds of oil, gas and petrochemicals projects in the planning stage will come to fruition. The fall of global crude prices adds further to this uncertainty, with governments looking at ways to cut costs and meet annual budgets.

In countries with major gas supply issues, such as Saudi Arabia, the UAE and Oman, governments are likely to ring-fence key gas projects as a matter of national strategic importance.

Projects seen as less essential, such as small incremental increases in crude production capacity for example, could be put on the backburner as governments make tough decisions to balance budgets while uncertainty in oil markets remains.

While some countries have a good track record of implementation, many of the projects in the pipeline are in states such as Algeria, Iraq and Egypt, where politics can have a substantial impact on their respective local projects market.