Uncertainty hangs over GCC markets

26 May 2015

Low oil prices have forced governments to concentrate only on essential schemes

When Brent Crude prices dropped to $46.59 a barrel on 13 January, companies working on projects in the GCC feared the market was about to collapse.

Since then, oil prices have remained the key driver of sentiment. With a 37 per cent recovery to $65.03 a barrel on 20 May, sentiment has improved. The problem is, with crude prices still below the budget breakeven levels needed for all GCC states except Qatar and Kuwait, optimism remains cautious.

The total value of new contracts signed so far this year reflects this lack of confidence. There were $61bn-worth of contracts awarded in the GCC up to 20 May, down nearly 28 per cent on the $85bn let over the same period in 2014.

This has caused concern that with less new work being secured, diminishing backlogs may create a more significant slowdown in construction activity on site in 2016, while at the same time offering some respite to a market that in 2014 was starting to look overheated.

Market change

“There has been a slight change in the volume and scale of project awards this year – more noticeable this quarter than in the beginning of the year,” says Greg Kane, director of operations at Canadian engineering consultancy WSP PB. “However, in our view, it is not what we would consider overly significant. If we had continued at the pace we saw last year, it could have become difficult for the industry to deliver the volume of work being awarded.”

Some are predicting the oil price effects may be felt later in the year, as could the effects of a strong US dollar

Greg Kane, WSP PB

The biggest fall has been in the UAE, where the value of contracts awarded has dropped from $24bn to $12bn, as low oil prices curb spending in Abu Dhabi and Dubai’s property sector slows down. At the start of the year, when oil prices were below $50 a barrel, government departments in the UAE capital were instructed to reduce spending in 2015 by about 15 per cent. That instruction has led to investment plans being scrapped or rescheduled, with a clear impact on the value of new contracts being let.

Widely considered a counter-cyclical investor, Abu Dhabi’s oil and gas sector has scotched that assumption this year and has been forced to make spending cuts. Abu Dhabi National Oil Company (ADNOC) says it has been asked to reduce operating expenditure by 10-15 per cent and, although it remains committed to hitting its 3.5 million barrel-a-day (b/d) production capacity target by 2017, spending on new projects also appears to have been curtailed.

“Abu Dhabi is more vulnerable to oil prices and it is looking like there is a refocus of money rather than a reduction,” says Chris Seymour, partner at EC Harris, which is part of Dutch firm Arcadis. “Some projects are slowing up; there is no confirmation that it is over oil prices, but that is the feeling. We are starting to feel more confident as oil prices head toward a stable recovery.”

In Dubai, the change has been a drop in property prices rather than oil prices. In early 2014, the emirate’s real estate market was buoyed by the Expo 2020 win in late 2013 and there was a widely held expectation that prices would continue to rise in the lead up to 2020.

Those expectations were dashed this year as consultants reported that prices had fallen. The UK’s Cluttons reports that home values slipped 0.8 per cent in the first quarter of this year, leaving average prices 0.5 per cent lower than a year earlier and 19.4 per cent below the 2008 peak. The consultancy is also predicting further softening for the rest of the year due to a bulging pipeline of new supply, more stringent mortgage rules, higher transactions fees and rising living costs that have dampened demand across the emirate.

Dubai recovery

The bad news from the property market now appears to have been digested by the construction industry and after a period of hesitation, projects are starting to move forward again. “The optimism in Dubai has tempered a little,” says Seymour. “That tempering felt more real at the beginning of year. Now, we are getting into the second quarter and it feels like it is recovering more, and that feeling is certainly supported by enquiries coming into our business.”

The value of awards made in Qatar has also fallen, but for different reasons. During 2014, the authorities in Doha began to acknowledge that the projects market was in danger of overheating. In response to these fears, government clients have delayed schemes not considered vital for hosting football’s 2022 Fifa World Cup.

The most high-profile project to have been affected by this new, more measured approach is the Sharq Crossing scheme. Formerly known as the Doha Bay Crossing, MEED reported in January that the Public Works Authority (Ashghal) had delayed the delivery of the landmark scheme by about a year.

Qatar has also quietly been scaling back its industrial development. In April, Qatar General Electricity & Water Corporation (Kahramaa) shelved its planned Ras Laffan independent water project, a move that followed on from Qatar’s cancellation of the $7.4bn Al-Sejeel petrochemicals complex in September last year and the $6.4 Al-Karanaa chemicals scheme in January this year.

The slowdown in industrial projects is largely due to the effects of the fall in energy prices. As the world’s largest exporter of liquefied natural gas (LNG), Qatar’s economy has been hit by LNG prices dropping in tandem with the fall in crude prices – a problem compounded by increased competition from LNG producers in Australia and the US.

Perhaps surprisingly, given the recent change in leadership, the bright spot of the year has been Saudi Arabia, where the value of awards has increased by 27 per cent this year, to $22bn from $17bn. “Saudi Arabia has not been obviously affected by the fall in oil prices; the level of spend has not changed, but there has been a refocus on [investments] that will have a positive impact on GDP,” says EC Harris’ Seymour.

The best example of this refocus is the slowdown of the stadiums that oil major Saudi Aramco plans to build at 11 different locations across the kingdom. That multibillion-dollar project was being fast-tracked in late 2014, but since the start of the year, virtually no tangible progress has been made.

For oil and gas, all projects under execution, including the $20bn Jizan Refinery, are still going ahead. Where there has been an impact is future projects. Aramco has suspended almost all of its major capital spending in downstream refining and petrochemicals, although there is still investment in gas and gas processing to meet domestic consumption. The $6.5bn Fadhili gas plant that is currently being tendered is the best example of the kingdom’s commitment to this policy. The gas will largely be used to fire power plants.

The power sector remains a key focus for the government as it faces a major struggle to meet rising demand for electricity from a growing population and the industrialisation drive. Three major power plant construction contracts are currently being tendered at Duba, Waad al-Shamal and Fadhili, with awards for all three expected by the end of this year. The kingdom is also pushing ahead with plans to expand the capacity of existing power plants such as the PP9 facility in Riyadh.

For other infrastructure, future spending in the kingdom will be on critical infrastructure rather than symbolic projects. “Government priorities for infrastructure spending are focused on the core infrastructure of roads and highways, railways, ports, service utilities and transport generally,” says Martin Bassett, director of transportation and infrastructure at WSP PB.

“These assets are critical to supporting the growing needs of the region’s major population centres and connectivity between them. There remains a strong, long-term commitment from governments across the region to support economic development, particularly towards furthering the service industry and the high employment opportunities this provides.” 

Optimistic outlook

While infrastructure investment may proceed, the future prospects for the GCC’s projects market remain strongly linked to oil prices. These are still 40 per cent below the $109.69 a barrel they were on 20 May 2014. If prices continue to strengthen, then sentiment will improve further, new projects will move ahead and the total value of contract awards will increase. Conversely, if prices fall, sentiment will be dented and project spending will be subdued.

For the rest of this year, the expectation is that the market will improve. If major schemes that are being tendered, such as Mecca Metro, are awarded, the market will end the year broadly flat when compared with the $170bn of awards that were made in 2014.

“We expect a slightly slower summer period, as is often the case, but a pick-up in the third quarter,” says WSP PB’s Kane. “Some are predicting the oil price effects may be felt later in the year, as could the effects of a strong US dollar. However, we remain broadly positive about the property and construction market in the region for the remainder of 2015.”

The key difference in the second half of 2015 when compared with the same period in 2014 will be that after a period of doubting and review, any projects driving the recovery later this year will be ones that are really needed.

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