Middle East and North Africa investments in oil and gas sector will recover this year, adding $583 billion in the next five-year period underpinned by energy needs of local population as well as stabilising crude prices, APICORP said on Monday.
Oil and gas development bank APICORP (Arab Petroleum Investments Corporation) in its annual energy investment outlook said the region has planned investments of $195 billion and $159 billion in oil and gas respectively for the period of 2017-2021, up 2 per cent from its previous outlook. Meanwhile, committed investments will rise by 17 per cent over the same time period, amounting to $121 billion in oil and $108 billion in gas.
“We expect the MENA region to continue investing heavily as major energy-exporting countries expand the size of their energy sector and strengthen their positions in global markets. The GCC and Iran are driving investment in the region and will be well positioned when prices start to increase,” APICORP said.
The International Energy Agency (IEA) said global investments in oil and gas fell by 24 per cent in 2016 compared with 26 per cent in 2015, marking one of the biggest back to back drops in history. However, the IEA expects investments to recover in 2017.
Projects under study represent the largest portion of planned investments, at $282 billion, the report said, adding that due to the current investment climate and uncertain outlook, APICORP doesn’t anticipate that all projects under this phase will move to the execution phase. “In our view, contracts under design and EPC phases are more likely to materialise in the medium term,” it said. Projects under EPC amount to $125 billion, while those under design reach $78 billion.
Saudi Arabia and Iran represent 37 per cent of planned investments, with $124 billion and $103 billion, respectively, over the outlook period, as both countries look to boost their upstream oil and gas programmes. Saudi Arabia has concrete plans to increase gas production and to promote the role of gas in its energy mix – it is currently diverted entirely for domestic use in power generation and industry.
For Iran, total planned investments are $103 billion, of which the majority will go towards oil and gas projects. This highlights the country’s desire to boost its oil and gas sectors. Major projects include the $4.5 billion Kish gas development and the $8.5 billion Iran Gas Trunkline - currently at the design phase - that plans to connect Iranian gas to Europe via a proposed pipeline to Turkey.
Given the removal of sanctions last year, the government has pushed efforts to attract much needed foreign investments, with the Iran Petroleum Contract (IPC) set to revitalise its energy sector. But there are obstacles to attracting foreign investment. New entrants will have to deal with local regulation and dispute arbitration regimes, both of which suffer from a lack of transparency, if they want to succeed.
Bassam Fattouh, director at the Oxford Institute for Energy Studies said foreign investments in Iran will hinge upon IPC, the new model for contracts. “Their production has plateaued in the past month. Foreign investments hinge upon IPC and it’s important if they want to increase production.”
Iran will also need to maintain its commitments to the letter under the nuclear agreement to avoid the “snap-back” of sanctions. Iran’s internal political rivalries will need to be kept in check if the oil sector is to flourish. Already, there are promising signs in the oil sector as the government and Total are nearing an agreement to develop phase 11 of the giant South Pars field.
For Egypt, the main concern is the acute gas shortage and rising power demand. Gas development projects underway will potentially make Egypt a net energy exporter, but not in our medium-term outlook. ENI’s recently discovered Al-Zohr field in the Mediterranean will be Egypt’s main focus in the medium term. Estimated investment in the giant gas field is around $12-14 billion, and we expect this project to be fast-tracked given the importance of the field to Egypt’s energy security, APICORP said.
Planned investments in the UAE is $51 billion, of which $18 billion is at the EPC phase. The ADCO consortium - which accounts for more than half of the UAE’s oil output - will drive up upstream investment in our outlook. Recently, BP acquired 10 per cent of the consortium, with the remaining going to China’s CNPC (8 per cent) and CEFC (4 per cent). This completes the concession which already included France’s Total, Japan’s Inpex and South Korea’s GS who combined won 18 per cent of the concession.
In Kuwait, planned projects over the period stand at $60 billion, with over 50 per cent in the oil sector. More specifically, the country plans to invest $6 billion to develop the first phase of heavy crude reservoirs. In petrochemicals, Petrochemicals Industries Company (PIC) is likely to go ahead with the Olefins 3 Project, estimated at $7 billion, which is expected to be awarded in 2018. The country is looking at financing options including bonds and sukuks to fund some of their projects.
Iraq is playing catch up at very challenging times when global energy investments are declining. Its planned projects currently stand at $52 billin, a figure weighed down heavily by above-ground difficulties that continue to threaten existing investments. Up to $6 billion worth of awarded contracts have been put on hold and a further $3 billion cancelled since 2014.
Meanwhile, low oil prices are damaging the government’s budget, despite oil production reaching a record average of above 4.4m b/d in 2016. To maintain these high levels of production, the country and IOCs will need to continue investing in upstream development.
Planned projects for the remaining GCC countries will reach $97 billion. Oman’s oil production averaged around 1m b/d in 2016, with the majority of its exports going to China. However, the largest share of its planned projects are in downstream and petrochemicals. One of the largest projects is the Duqm refinery, which is expected to see a large portion of its $6 billion budget invested over the next five years.
Among the challenges towards renewed investments in planned projects, is regional turmoil as well as governments’ ability to rationalise spending amid tightened budgets.
“This will depend on local needs, for example Egypt’s priority is gas,” Mustafa Ansari, analyst, energy research said at APIRCORP’s report presentation. “Less mature economies will invest mainly in oil and gas. Every country is unique – they will see where the most value is as they don't have the luxury to invest in more areas in the current oil price environment.”
Iran leads the region with an estimated $51 billion and is mostly focused on the oil and gas sector. The country has prioritised development of the South Pars gas field, where around $13 billion will be invested over the outlook period. In upstream oil, the focus will be on the West Karun oil fields, particularly Yadavaran and Azadegan, expected to be the source of most of Iran’s short-term output-capacity growth. In the downstream, the Siraf refinery project, with a budget of $2.4 billio, will bring capacity up by over 480,000 b/d.
Second is the UAE, at around $50 billion, with upstream investments in Upper Zakum and power projects like the Barakah nuclear power plant. Iraq comes third, at $46 billion. Oil investments account for $24 billion with the ENI-led Zubair and the PetroChina-led Halfaya two of the largest upstream development projects in the country.
Saudi Arabia has committed an estimated $42 billion for the outlook period, of which $13 billion will be in the power sector. The 4GW Jizan integrated gasification combined-cycle power plant will alone cost $8.5 billion. The remaining investments are spread evenly across oil and gas, with the $6.5 billion Fadhili gas plant one of the largest investments due on line towards the end of our outlook period.
Kuwait and Oman have committed $42 billion and $26 billion, respectively. In Kuwait, downstream projects represent more than half of investments under execution. The Al-Zour refinery will alone account for $17 billion. KNPC will invest $16bn as part of the Clean Fuels Project aimed at upgrading and expanding Mina Abdulla and Mina Al-Ahmadi refineries. As for Oman, the government is prioritising investments in upstream gas. The BP-led Khazzan and Makarem project is the largest gas development in the country, with estimated total spending of $16 billion. In downstream, the $4.5 billion Liwa petrochemical plant is expected to be completed in 2020.
North Africa represents the majority of remaining investments. Egypt and Algeria have together committed $52 billion. In Egypt, power-generation projects are necessary and account for $15 billion, with the Siemens-led 4.8GW combined-cycle power plants in Beni Suef among the largest projects. The BP-led West Nile Delta represents the majority of investment in gas under execution. Algeria will invest $4 billion on gas as it focuses on developing its midstream sector as part of the country’s plan to expand total pipeline-network capacity. In Morocco, investments are focused in power generation with renewable-energy projects, such as the Moroccan Solar Plan, at the forefront of its plans.
Libya, Syria and Yemen - thwarted by ongoing civil wars - will see very little investment over the period. In fact, Libya is the only contributor out of the three to our outlook, committing around $3 billion in oil and gas.
Overall, according to our estimates, $622 billion could be invested over the next five years over and above what has already been committed, bringing total committed and planned investments up to $960 billion – a 7 per cent increase from last year’s forecast. The region continues to prioritise investments within the energy sector. Planned investments increased by 2 per cent whereas committed investments increased by 17 per cent from our previous outlook. This represents the transition of many projects and investments from the planned to committed phase as contracts are awarded following a more positive outlook. For committed investments, the largest increase was in the gas sector where investments in projects under execution saw an increase of 42 per cent in the medium term, followed by investments in power and oil at 13 per cent and 10 per cent respectively.