Oil price drop stress tests GCC projects

26 May 2015

There are long term positives to the slowdown

Apart from potentially crippling shale output from the US, it has been difficult for the GCC to find any positive from the fall in oil prices.

Capital expenditure has been curtailed, decision-making delayed and, according to regional projects tracker MEED Projects, there has been a 27 per cent fall in the value of contracts awarded so far this year when compared with the same period last year.

While work on projects where construction has already started is still proceeding, the slump in awards is a problem for construction companies. With less new work coming in and existing projects being completed, backlogs are diminishing. Unless new work is secured in the second half of this year, the fear is that firms could be forced to downsize to reflect the reduced level of activity in 2016.

There may, however, be a positive. The period of uncertainty has forced project clients to reassess their spending plans to make sure that whatever money they do now spend either makes a financial return for the private sector investor, or for a government, boosts productivity and GDP.

The stress tests should result in a more robust projects market for the future, and that is no bad thing in the long term. Assuming this levelheadedness prevails, the positive will be amplified further if oil prices increase and governments have more money to spend.

An uptick in activity may start after the summer as consultants working on future projects make reassuring comments that new work will be forthcoming. The problem for construction companies confronted with a short-term drop in backlog is that these new projects may not come to the market fast enough.

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