A combination of low prices, the slump in demand and delays in dozens of major projects created a spectacularly gloomy mood for the region’s energy industry in the first quarter of 2009.

It represented a dramatic change for governments, particularly in the Gulf, which only a year earlier had embarked on some of their biggest spending plans to date as oil prices accelerated to an all-time record of $147 a barrel in July 2008.

The subsequent collapse in oil prices to nearly $30 a barrel by the start of this year meant national oil companies (NOCs) in the region had to take a cautious approach and contemplate a slowdown following almost a decade of uninterrupted growth.

Oil cartel Opec was even more aggressive, announcing three separate rounds of production cuts since September 2008 in a bid to steady prices.

Yet despite widespread pessimism in the industry about the prospects for upstream and downstream deals, the Middle East energy sector has held up remarkably well.

Saudi Arabia and Qatar, which have driven much of the growth in the market over the past five years, have been quiet, but Algeria and the UAE have taken up much of the slack, particularly in the second quarter of this year.

Abu Dhabi signed a $3.5bn deal for the development of its Sahil, Asab and Shah (Sas) full-field development in January, while its $12bn onshore Shah gas development is also moving ahead, with an official tender due in late June.

With oil prices pushing beyond the $70 a barrel mark in June for the first time in more than six months, an enthusiasm for new projects appears to be spreading.

Algeria has barely tapped its potential in recent years due to complex bureaucracy and tough contract terms, but pipeline schemes worth billions of dollars are finally coming to the market this year, while a plan to revitalise some of its ageing refineries has also begun.

Jordan, which imports all of its oil, also signed an eye-catching deal in May with the UK/Dutch Shell Group to explore its huge oil shale deposits, which could lead to up to $50bn in investment over the next 20 years.

“If you are looking at the first part of 2009, then the UAE and Algeria really are leading the way,” says a Middle East energy analyst at one UK energy consultant. “They obviously feel they now have a clearer view of the construction market and can make informed investment decisions.”

These two markets are the most promising in the Gulf and North Africa regions respectively. In the UAE, Abu Dhabi, which accounts for 90 per cent of the country’s production, is planning at least $28bn worth of projects in 2009. Alongside the Sas and Shah sour gas projects, Abu Dhabi National Oil Company (Adnoc) and its subsidiaries are also pushing ahead with the $5bn-plus Integrated Gas Development, which will increase production from the offshore Umm Shaif field by more than 700 million cubic feet a day, and the $3.8bn ‘1.8 million project’ to boost oil production at the Qusahwira, Bida al-Qemzam, Ruwais and Bab fields.

Spending plans

The ambitions laid out by Algiers are even more impressive. The country plans to spend $69bn on energy projects between 2009 and 2014, and as much as $120bn by 2020. In the short term, the projects going ahead include developing the $4bn El-Merk production hub in the east of the country, the $5bn plus GK-3 pipeline in the northeast, and a $1.2bn upgrade of a refinery at Skikda.

One theme common to all oil producers is the search for more competitive prices, after commodity and raw materials costs dropped earlier this year. Saudi Arabia, Iraq, Libya and Algeria have also tightened the screws on oil majors and contractors by asking for a deeper commitment to developing local expertise.

Saudi Aramco and Adnoc have been the first to move on price, slicing billions of dollars off their developments.

Countries including Egypt, Qatar and Oman, which are taking more time to assess the market before proceeding with large refinery projects, may come to regret their delays. Raw materials prices rose in May for the first time since mid-2008 and contractors will again face tense negotiations with clients over how much of the cost increases should be passed on.

Projects elsewhere in the region offer a mixed picture. Kuwait’s plan to develop a large new refinery at Al-Zour is in tatters after contract awards made in 2008 were cancelled because of opposition in parliament. Kuwait National Petroleum Corporation (KNPC) has indicated that the project may again move ahead following elections in mid-May. However, the stop-start nature of the project means doubts persist.

In Iran, international sanctions continue to strangle the vast majority of foreign investment. Tehran’s plan to rely on Asian, rather than European, investors is failing to overcome the problem, and its gas sector continues to labour under a series of unrealistic targets.

Its neighbour, Iraq, continues to attract interest with its ambitions to let international oil majors take charge of more than 20 oil fields by the end of 2009. However, its need for billions of dollars in loans to keep its economic development plans on target has created a complex investment model.

“At a time when oil majors are under intense pressure to justify their investments, throwing several billion dollars in the direction of Iraq remains a very big call,” says a Middle East executive at one European oil major.

In North Africa, Egypt had mixed results from its latest bid round, awarding just four out of seven gas exploration blocks in May 2009 after limited interest. Another bid round for its oil fields later this year may also struggle.

Libya has been busy renegotiating contracts with a host of international oil companies in an effort to keep more hydrocarbons revenues for itself. Yet falling oil prices have hit Libya harder than most and it has now abandoned plans to increase production to 3 million barrels a day (b/d) by 2012 in favour of a more modest aim of 2.3 million b/d by 2013.