Unrest sweeping the Middle East and North Africa (Mena) will ally with soaring costs to block investment in the upstream hydrocarbon sector while financing remains a major problem, an official report said on Sunday.
Although the region is home to more than 60 per cent of the world’s extractable oil deposits, investment in hydrocarbon projects by Mena countries is estimated at around $2.7 trillion until the year 2035, a fraction of the total global energy projects worth nearly $37.5 trillion, said the report by the Saudi-based Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries (OAPEC).
It cited a report by the International Energy Agency (IEA) showing oil supply accounts for $10 trillion, representing 26 per cent of the total capital.
Natural gas accounts for $9.5 trillion, representing 25 per cent while coal projects are estimated at $1.2 trillion, nearly three per cent and biofuels at $400 billion, accounting for about one per cent.
The highest share is that of the power sector, which includes electricity generation, transmission and distribution systems. This sector accounts for $16.9 trillion representing 45 per cent of global energy supply investment.
The study, sent to Emirates 24|7, said cost inflation is the most important factor driving the increase in energy investment in Mena and other parts of the world.
It noted that all policy advisor institutions have established that the costs of energy projects worldwide have at least doubled during the last decade or so, largely due to rising cost of input factors.
Furthermore, costs in the upstream sector have been found to correlate closely to both oil prices and the levels of exploration and development activities,” said the study, authored by Apicorp’s senior consultant Ali Aissaoui.
“Mena is normally expected to invest $2.7 trillion upstream through to 2035 out of $3.9 trillion of total energy investment….however, investment in the medium term, which stems from a bottom-up approach, may not be forthcoming,” said the study, presented to an international energy forum in Kuwait this week.
It listed the following factors for the likely causes for delay in upstream projects in Mena which also holds over 40 per cent of the world’s gas.
--A deteriorating business climate and higher perceived risks; --Potential renegotiations of agreements in the wake of changing regime circumstances;
-- Prudent or conservative oil and gas depletion policies;
-- Tougher economic sanctions on the region’s biggest holder of combined oil and gas reserves;
-- And in case of conflict, durable loss of production due to serious damage to infrastructure;
The study said financing of energy projects is basically determined by the structure of capital requirement, which Apicorp has established to be 43 per cent debt and 57 per cent equity for Mena oil and gas as a whole. Debt, which is dominant in the downstream sector, is sourced externally.
“With still limited opportunities for raining funds from the capital markets, both domestic and international, debt is typically provided through the syndicated loan market….unfortunately, this market has collapsed in the wake of the Eurozone debt crisis, as most European banks have pulled out of the region,” it said.
“In contrast, equity, which is a dominant part of the upstream sector, is generally financed internally through retained earnings and state budget allocations….therefore, equity could only be secured if oil prices remain above $100 a barrel, which corresponds to the current estimated average fiscal break-even price within the Opec area.”
The study said that amid major shifts in the patterns of global demand and supply, the Mena region is expected to provide the bulk of crude oil production growth, and a large amount of natural gas.
“This involves upstream investment of over $100 billion per year through to 2035 in the IEA’s central scenario. It is far from certain that such inflated levels of investment will be forthcoming. In the medium term, which takes a bottom-up approach, the causes for delay are all likely when not already a reality,” it said.
“In this context, continuing global demand growth ought to have dramatic impacts on prices. In the longer term, which takes a top-down approach, Mena and its core producers are treated as passive residual suppliers with little regard to their policy objectives and constraints.”
The study said that in the medium term, assuming no demand destruction, more oil spare capacity needs to be available to cushion anticipated oil supply shortages and avoid further price upsurge.
“To be sure, Saudi Arabia remains committed to providing a major portion of that capacity. But how that can be planned in face of lead-time investment uncertainty in other Mena countries with significant upside production potential?,” it said.
“In the longer term, fiscal conditions permitting, very prudent depletion policies will likely continue as long as economic diversification is not enough to succeed. In such a case, can a new paradigm of cooperation be established to better address producers’ socio-economic expectations and allay their post-oil anxiety?”