The GCC leaves 2014 with a vastly contrasting economic outlook to when it entered the year. As the oil price continues to fall, governments will have far lower crude export incomes to maintain their capital spending programmes. It is understandable that there is some unease among the contracting and supplier community regarding the fortunes of the region’s projects market over the year ahead.

Spending programmes

The correlation between government revenues and increased project spending is clear. As the average oil price rose from $20 a barrel in 2002 to more than $100 a barrel in 2008, there was a corresponding increase in annual contract awards from $9.7bn to $126bn over the same period, according to regional projects tracker MEED Projects. Governments, realising they had to capitalise on this windfall and accelerate economic diversification and job creation policies, launched massive infrastructure spending programmes, which have transformed the regional landscape.

However, while increased oil revenues have played a key role in enabling states to raise spending, they are not the sole dynamic behind the projects market’s dramatic rise. Demographic growth, economic liberalisation and increased foreign investment have played just as important a role in the development of infrastructure schemes. As the population has grown, so too has the need for improved power and water infrastructure. Similarly, the loosening of regulations around foreign ownership of property has acted as a catalyst for the region’s impressive real estate performance.

Fears that the fall in the oil price – by more than 30 per cent in the past two months to December – will negatively affect the projects market can be allayed by the fact it is by no means the only factor behind the market’s performance.

There are other considerations to take on board. Firstly, there is sufficient evidence to suggest that the drop in the crude price is a calculated and deliberate attempt by the GCC oil exporters to hamstring the burgeoning North American shale oil and gas industry.

Official statements to that effect, supported by a regional refusal to countenance a drop in production to stabilise prices, is more than enough proof that Kuwait, Qatar, the UAE and Saudi Arabia are comfortable with sustaining bear market conditions, at least for the short term. Having built up a quite substantial foreign currency reserve base over years of plenty, they have enough financial firepower to bridge any potential budgetary deficit in the year ahead, as well as financially support the likes of Oman, Bahrain and Egypt, which do not have the same levels of natural resources.

Secondly, and just as importantly, the GCC states have reached a point of no return in their drive to diversify their economies and create jobs for their rapidly growing local populations. The Arab Uprisings have demonstrated the importance of accelerating this process to allay any potential social unrest. Moreover, there is a significant construction industry and supply chain dependent on government project spending, which would unduly suffer if expenditure were to suddenly fall. In short, the economic and social impact of a projects market decline would be politically unacceptable.

Finally, the historical record shows us that the correlation between the oil price and project spending is not as close as one would think. For instance, until 2013, the best year for contract awards in the GCC was 2009, a year noted for the worst global recession in living memory and a fall in the oil price from an average of $99 a barrel in 2008 to $58 a barrel in just 12 months. While it is true that this was also the year the regional real estate market crashed, this was offset by rapidly increased spending in the oil, gas and power sectors. Conversely, 2008, when the oil price hit a record $147 a barrel, was the second-worst year out of the last eight in terms of contract awards.

That 2009 of all years, with $149bn-worth of contract awards, was the best until the $159bn recorded last year seems somewhat paradoxical. Yet it makes sense if one considers that the global recession brought with it considerably lower material and labour costs. The engineering, procurement and construction (EPC) contractor market became a lot more competitive, and national oil companies such as Saudi Aramco and Abu Dhabi National Oil Company (Adnoc) did not waste any time in taking advantage of the situation; Abu Dhabi spent more than $26bn in 2009 alone on oil and gas contracts, saving more than $5bn in lower EPC costs.

Optimistic outlook

Oil and gas aside, it is also relevant to note that the peak of the Dubai real estate boom in 2006-07 coincided with an average oil price in the range of $67-72 a barrel, not dissimilar from today’s oil price. This, along with the 2009 hydrocarbons project boom, encourages the hypothesis that the projects market can prosper at current oil price levels.

So, if the oil price is not the overriding factor for projects market activity, how is the market anticipated to perform in 2015? To answer, let us first look at 2014.

The good news is 2014 is set to be a record year. On the back of the $159bn-worth of contracts awarded in 2013 – itself a record – the value of deals in 2014 is expected to be even higher. In the 11 months to the start of December, the value of GCC contracts awarded totalled $147bn. With contracts added retrospectively and major deals such as Kuwait Oil Company’s $4.3bn Lower Fars heavy oil development and the $2bn Qatar Rail systems and rolling stock contracts due to be awarded in December, the forecast is for more than $160bn-worth of contracts to be awarded in 2014 as a whole.

There will be several main drivers behind the regional projects market in the year ahead. In addition to macro factors such as population growth, there are localised drivers such as the Fifa 2022 World Cup in Qatar and the 2020 Expo in Dubai. On a political level, the passing of a new public-private partnership law in Kuwait and the election of a more project-friendly National Assembly has smoothed the passage for several key schemes to go ahead. In Oman, the need to develop more remote areas is behind the massive Duqm development project.

Specific focus

Each country continues to have a different sector focus. The UAE and Qatar have a higher proportion of construction projects than other GCC states, while in Saudi Arabia, which faces huge electricity demand growth, there are a greater proportion of power and renewable energy projects. In Kuwait, power projects predominate as the state also invests in building its reserve margin. In Oman, meanwhile, there are numerous water and wastewater schemes.

One of the most striking aspects of the GCC projects market is the rise of rail. In 2013, more than $40bn-worth of contracts were awarded on the Doha and Riyadh Metro networks alone. In 2015-16, awards are expected on the Mecca and Jeddah metros, and the Saudi Landbridge, Etihad Rail and Oman rail programmes. Compared with 2008, when there were no operational rail or metro networks in the GCC apart from the Riyadh-Dammam line, today there are several thousand kilometres of track, with more than 15,000km to come.

Oil, gas and petrochemicals are other sectors expected to show significant increases over the next year. Key projects set to be awarded include the $14bn New Refinery Project at Al-Zour in Kuwait, the major contracts on the $15bn Khazzan tight gas scheme in Oman, the Al-Karaana and Tacaamol petrochemical complexes in Qatar and the UAE, and the Fadhili gas plant in Saudi Arabia. The anticipated lowering of EPC costs will help spur these multibillion-dollar developments.

But it is construction that will remain the largest sector. With the resurgence of the Dubai real estate sector, a substantial increase in spending in Qatar and continued social infrastructure outlays in Saudi Arabia, construction spending will outstrip every other sector.

From a country perspective, 2014 is interesting because it will mark the year the UAE returns to its position as the largest awarder of projects in the region, overtaking Saudi Arabia for the first time since 2009. However, with the pipeline of projects in the kingdom substantially larger than that of the federation, it is unclear whether the UAE can maintain this position in 2015 and beyond.

Overall, Saudi Arabia has close to $700bn-worth of planned and unawarded projects, compared with $285bn in the UAE, although the former does contain some very long-term projections for renewable and nuclear energy spending.

On a sector basis, there are close to $450bn-worth of construction projects planned and unawarded in the GCC, compared with $321bn and $313bn in power and transport respectively.

Confidence prevails

Regardless of geopolitical and economic factors, there are still plenty of reasons to be optimistic about the fate of the GCC projects market. Today, the total value of announced and unawarded projects in the GCC stands at just over $1.4 trillion. This represents a substantial rise on the $1.02 trillion figure for this time last year, the $788bn figure taken in mid-2012 and the $913bn in mid-2011.

While many in the contracting supply chain are concerned about the future, it appears project owners, both private and public, show no such concern. For that reason, we can be confident as we enter the second half of the decade.