MENA region to see USD 173 bn reduction in net energy investment in 2020-2024 thanks to covid-19, Apicorp says: It looks like covid-19 and the oil crisis might do a number on the region’s energy sector for some time to come, with multilateral development bank Arab Petroleum Investments Corporation (Apicorp) estimating that MENA’s investment in energy will fall to USD 792 bn in the coming five years, down from USD 965 bn Apicorp projected last year in its MENA Energy Investment Outlook report. This drop will be caused by three factors stemming from covid-19: The health crisis and the impact of the lockdown; an oil crisis; and a looming financial crisis. “The downturn from 2020 is expected to be more challenging than previous downturns, and its impact already deeper and longer lasting,” says the report. As such, the report sees a W-shape recovery in the works for the region. In the meantime, natural gas projects will be what’s sustaining MENA.
So, what does the regional abyss look like? The MENA region’s total committed and planned energy investment will fall by USD 173 bn to USD 792 bn in the coming five years. This is down 18% from USD 965 bn the bank projected would be invested in 2019-2023. The private sector’s share in energy project investments is also expected to decline to 19% over the next five years, after having climbed to 22% in Apicorp’s 2019 five-year outlook. This decline will mostly be seen in planned investments, which are projected to fall 24% y-o-y to USD 466 bn, from USD 613 bn last year. Committed investments, which reflect more on the ability to execute projects, are expected to see a decline of 6% y-o-y to across the MENA region to USD 343 bn. That was buoyed by a 2.3% increase in committed investments by the GCC (no surprises there).
For Umm El Dunia, the picture is (only slightly) less bleak. While the total value of planned and committed energy investments do show a 15% decline from last year to around USD 100 bn, we’re actually seeing an increase in the number of planned projects. This is crucial, as Apicorp sees projected investments as a measure of the health of the investment climate. Planned investments are expected to reach USD 65 bn, up from USD 50 bn. That said, the rise is mostly from the state, as the private sector’s share appears to be shrinking to around 15%, down from around 27% in last year’s report. We plan to spend our way out of the global energy crisis by investing in petrochemicals and gas, in keeping with our goal to reduce imports of refined goods and becoming a regional gas hub.
Saudi, UAE, Egypt, and Iraq driving regional energy investments: Regional energy investments are primarily driven by four countries: Saudi Arabia in the gas and power sectors (USD 39 bn and USD 41 bn, respectively); Iraq’s reconstruction efforts and gas-to-power (USD 33 bn); the UAE’s oil capacity maximization (USD 45 bn); and Egypt’s petrochemicals drive (USD 38 bn).
The perfect storm x3: The pandemic hit just as oil prices were moving downwards, driven by a surplus build-up. Throw in a global pandemic, lockdowns, and supply chain disruptions and what you get is the lowest oil demand in history, with Brent prices falling to USD 18/bbl on 20 April. That’s not all folks, as the crisis is raising fears of an impending liquidity crunch that might drive down asset values. “Although central banks and multilateral financial institutions are stepping up, concerns linger that such massive stimulus plans might create enormous unproductive debt overhangs that will slow economic growth,” says the report.
Expect an immense shakeup in oil, marked by M&A and shutdowns: “The first consequence is a possible restructuring of the oil and associated gas industry, accelerating closure of the lowest efficiency parts of the capital stock (producing assets and companies), and M&As,” the report predicts. Apicorp expects that facilities with high operating costs and limited storage access will be the first to go. This has already begun to happen, as global upstream spending was already slashed 30% y-o-y in 2020, and the sector has lost 1 mn jobs so far. Planned upstream spending has been cut by 20-30% across the board by oil majors, national oil companies and large independents. As the oil market writhes and contracts to keep up with demand, Apicorp predicts average Brent prices to stay in the USD 30-40 range in 2020 and 2021 before reflecting a more balanced market.
As an oil-dependent region looks to gas, an oversupply there threatens postponement of new project decisions: Due to a number of country-specific policies — namely, Qatar’s push to better use its gas resources, Saudi Arabia diversifying from oil, Iraqi investments, and Egypt’s push to be a gas hub — 2019 was a record year for new LNG project announcements. However, thanks to both covid-19 and an oversupply problem similar to oil, final decisions on these projects are expected to be postponed. “An oversupplied LNG market with global gas prices at the hubs expected to remain below USD 4/mmbtu for 2020 and below USD 6/mmbtu during 2021 discourages players to pursue additional gas developments.”
Egypt in particular appears to have been hard hit by the oversupply. “Egypt’s LNG exports were already challenged with high feed gas prices at around USD 4.5/mmbtu, as compared to their export netback parity. Egypt’s gas output collapsed to a 19-month low of just 6 bcfd for February on enforced shut-ins. LNG exports fell to just 253 mcfd for February—a quarter of late-2019 levels — and to zero since the last cargo loaded in mid-March.” The report does not address how this could impact Egypt’s goal of becoming the region’s premier energy hub.
That said, gas offers the best hope for MENA: "In terms of planned investments, the biggest gain was in the gas value chain, which jumped by USD 28 bn, a 13% increase compared to last year’s outlook.” Gas continues to be of strategic importance to the region and “the majority will stick to gas development plans for domestic reasons.”
It looks like our electricity oversupply problem is a regional thing: Electricity projects in the region are expected to decline by USD 114 bn, “due to the commissioning of several projects during 2019 in Egypt, UAE and Saudi Arabia.” Earlier this month, renewable energy investors told Enterprise that the electricity oversupply may lead renewables investments slowing down substantially for the next 18-24 months. Apicorp’s report held an equally dismal outlook for renewable energy investments in a number of countries in MENA.
Expect a bumpy and long-term recovery, says Apicorp. “The impact of COVID-19 is already deeper and longer lasting than past downturns. Indeed, the nature of this triple crisis and the profound restructuring in oil and gas will hit energy investments for a potentially long period of time, sowing the seeds of supply crunches and price volatility. Therefore, we expect a W-shaped recovery for the MENA region,” Apicorp CEO Ahmed Ali Attiga said. “International collaboration between the private and public sector will therefore be critical to counter the expected shortfalls in investment,” he noted.
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