APICORP forecast: MENA region will make $1tn investment in energy sector over next 5 years
According to the MENA Energy Investment Outlook, around $345bn has been committed to projects under execution while an additional $574bn worth of development is planned.
Arab Petroleum Investments Corporation (APICORP), the multilateral development bank focused on the energy sector, published its annual MENA Energy Investment Outlook.
The report forecasts that the MENA region will see a number of critical energy projects pushed through over the next five years, despite the uncertain geopolitical backdrop. Around $345bn has been committed to projects under execution while an additional $574bn worth of development is planned.
The overall economic outlook remains similar to the forecasts estimated this time last year, with growth of around 3.2% forecast for both 2018 and 2019. Global investment in the industry is expected to pick up and parts of the MENA region are expected to see a corresponding improvement in investment. Saudi Arabia is expected to lead the way, but the uncertainty over the possible re-imposition of sanctions on Iran mean that it may struggle to attract the foreign investment it needs to develop its industry. Iraq is also facing challenges, despite the improving security situation.
Saudi Arabia and the UAE represent 38% of planned investments, with $149bn and $72bn respectively, over the outlook period, as both countries look to boost their upstream oil and gas sectors. For Egypt, the main focus is ramping-up of gas production and meeting rising power demand. Planned investments in the country are $72bn, with the power sector making up over 50% of the total.
Elsewhere, planned projects in Kuwait stand at $59bn over the same period, with over 50% in the oil sector. More specifically, the country intends to increase oil output to 4mbd within the next few years. Similarly, in Algeria, planned projects stand at around $58bn with the Hassi Messaoud Peripheral Field Development accounting for a significant portion of investments in upstream oil. The country will seek to invest in upstream oil and gas to meet its target of increasing production by 20%. However, low fiscal buffers and competing pressures on revenue may impact Algeria’s efforts to execute its ambitious capacity expansion plans.
Other major investment in the oil and gas sector will be made in Iran, with an estimated $67bn in planned projects in the coming period, and Iraq, at $47bn. Oil investments account for $27bn with the ENI-led Zubair and the PetroChina-led Halfaya, two of the largest upstream development projects in the country. However, the outlook for those countries is much less certain, with a significantly higher degree of political risk.
There are three main challenges that could potentially hinder the growth of investment in the region. The first is that the global investment in the oil and gas sector are closely interlinked with oil prices, and though the situation as a whole is improving, prices are not expected to return to the high levels seen prior to the sharp drop in 2014.
Another challenge to growth is the rising cost of capital, as some governments will find it harder to attract foreign investment. However, supported by its high reserves, and low debt to GDP ratios, the GCC was successful in issuing record debt of over $50bn in 2017, surpassing the previous year’s record of $37bn. Saudi Arabia represents the bulk of this, with over $21bn of debt raised, followed by Abu Dhabi and Kuwait with $10bn and $8bn, respectively. Oman ($8bn) and Bahrain ($3bn) also tapped the international market.
Finally, the regional geopolitical environment remains fragile, and persistent conflicts in the region are creating instability that deters investors and causes them to become cautious in investing in the entire region.
2017 certainly saw improvements and rebalance in the region. The period of weakest economic growth and oil prices seems to have passed, but the recovery phase will take longer and is not without its challenges. GCC governments have announced expansionary budgets following a few years of tightening expenditures because of lower oil revenues, and will prioritise critical investments in their energy sectors.
Commenting on the report, Dr Ahmed Ali Attiga, CEO, APICORP, said: “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.”
“Our unique mission as a multilateral development bank for the Arab world puts us at the epicentre of the regional energy market, and our reputation as a trusted partner for financing projects is stronger than ever. With our detailed insight into the nature and amount of required investment in the region, we are well placed to support governments and private sector organisations seeking to execute landmark energy projects.”
Mustafa Ansari, senior economist, APICORP, added: “We see three important trends materialising in our outlook: the first is higher allocation of capital towards the power sector, which now accounts for the bulk of planned investments as demand for electricity continues to increase. The second is the increase in committed investments, reflecting an improving investment climate and a healthy transition of projects from the planning phase towards execution. And third, the private sector has an increasing role to play in financing energy projects in the Middle-East that will help ease fiscal pressures on governments.”
Ghassan Al-Akwaa, energy sector specialist, APICORP, added: “The emphasis on diversification has never been more important and we are witnessing this across all sectors. Renewable energy will continue to see its role in the power generation mix increase while governments will continue in their efforts to integrate the supply chain and invest in new mega refining and petrochemical projects, opening many opportunities for private investments.”
The MENA Energy Investment Outlook report is published annually by APICORP and offers insight into the region’s most strategically important industry. Providing unique estimates for both committed investments and planned investments, it delivers a highly accurate indication of the execution likelihood of a given project. The publication is part of APICORP’s range of specialised research products catering to the needs of energy professionals in the private and public sectors and the wider financial community around the globe.