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REVIEW OF ENERGY CAPITAL INVESTMENT REQUIREMENTS

IN THE MENA REGION AND THE ARAB WORLD FOR THE PERIOD 2007-2011

REPORT PREPARED AND RELEASED BY APICORP RESEARCH

1ST OCTOBER 2006

© Arab Petroleum Investments Corporation Comments and feedback to: [email protected]

APICORP Research Review of energy capital investments in the MENA region and the Arab world Released 1st October 2006


TABLE OF CONTENTS

Page Executive Summary 4

1 Introduction 9

2 Energy Investment Outlook 12

2.1 Overview

12

2.2 Investments by Country

14

2.3 Investments by Sector

16

2.4 Leading National Segments

18

3 Factors That Could Affect the Investment Outlook

19

3.1 Oil Prices

19

3.2 Project costs

20

3.3 Feedstock Availability

24

4 Capital Structure 25

5 Financing Issues and Challenges 25

5.1 Equity Financing

26

5.2 Debt Financing

26

6

Perceptual Mapping of the Energy Investment Climate 29

6.1 The Attributes

29

6.2 The Mapping

31

7

Conclusions 32



LIST OF TABLES Page

Table 1

MENA Oil and Gas Reserves and Balances, 2005 10

Table 2

Increase in Investment Requirements by Review 12

Table 3

Summary Table of Energy investments by Country and Sector 15

Table 4

A Cross-section Data of the MENA Power Sector 18

Table 5

Leading National Segments 19

Table 6

Assumed Capital Structure by Segment in the MENA Region 25

Table 7

Key Issues for Equity Financing 26

Table 8

Key Issues for Debt Financing 28

Table 9

Sovereign Credit Rating of the MENA Countries 29

LIST OF FIGURES

Figure 1

A Cross-section of Key MENA Oil and Gas Producing Countries, 2005 10

Figure 2

Typical Structure of the Hydrocarbon Sector 11

Figure 3

Distribution of Energy Investments by Country and Sector 16

Figure 4

Evolution of Investments by Sector in Three Successive Reviews 17

Figure 5

Oil Price Scenarios 20

Figure 6

Cost Inflation – The Case of Petro-Rabigh Project 21

Figure 7

Evolution of World Indexes for Energy, Metals and Minerals 22

Figure 8

Project Cost Increases 23

Figure 9

Categorization of Key Gas Producing Countries 24

Figure 10 Trend in Loan Deals in the MENA Region

27

Figure 11 APICORP Perceptual Mapping of the Energy Investment Climate 31



EXECUTIVE SUMMARY 1

1. APICORP Research provides, on a rolling 5-year basis, an annual review of energy investments of the oil, gas, petrochemical and power sectors in the MENA region, i.e. the Arab world and Iran. The review, now in its third consecutive year, has used the same concepts and methodological framework to identify and track key investment trends, new business opportunities and potential challenges. 2. The 2007-2011 Review discusses the current upsurge in capital requirements, the evolving country and sector patterns, the changing capital structure and the resulting challenging financing issues. The analysis is extended to include an updated perceptual mapping of the MENA energy investment climate and how key countries in the region are positioning themselves to be able to bridge the impending funding gap. Overview 3. With a share of 67% of the world’s proven oil reserves and 44% of proven natural gas reserves, the MENA region, is well endowed to bridge the widening gap between rising global energy demand and largely stagnant or even declining supplies from other areas. The region, which in 2005 contributed 37% of the world’s production of crude oil and condensate and 15% of that of natural gas, has pursued ambitious plans to fully develop its potential on the assumption that the call on the region’s hydrocarbon products will continue to grow. 4. In this context, the 2007-2011 review has yielded valuable insights. The most notable is the continuing upsurge in the cumulative capital investment requirements, which now stand at US$395 billion for the MENA region (US$345 billion for the Arab world). As detailed below, this represents a 52% increase over the last APICORP’s annual survey of US$260 billion for the period 2006-2010 (57% over US$220 billion for the Arab world).

Reviews US$ bn Increase US$ bn Increase2004-08 180 - 150 -2005-09 210 17% 175 17%2006-10 260 24% 220 26%2007-11 395 52% 345 57%

Energy investment requirements

APICORP Research

MENA Arab world

5. Past reviews have shown that the energy capital investment has risen mostly as a result of additional projects rather than higher costs. This time, however, the review established that, compared to the number of projects, the average project cost has increased by a proportion of more than three-to-one. As fully analyzed in Economic Commentary no 9, at least three factors have combined to inflate project costs: greater scope, larger scale and, above all, soaring EPC prices.

1 The Executive Summary of this report is reproduced in APICORP Research’s Economic Commentary no 10.



6. It is beyond the purpose of this review, which is in essence descriptive, to dwell on the determinants of capital investment in the MENA region and what drive Project Sponsors to invest. The incentive to expand capital stock basically depends on whether or not the marginal product of capital (additional product produced from additional unit of capital) exceeds its cost. In a context of increasing project costs and interest rates, Project Sponsors' response has been to seek greater scope and scale as a way to enhance the marginal product of capital, and thus the expected long-term rate of investment return. 7. In this regard, it is worth noting that Project Sponsors are probably underestimating what the economists call the “costs of excessive largeness”. Indeed, anecdotal evidence suggests that the economies of scope and scale of current large projects are being offset by the diseconomies of the resulting complexities. Investment by country 8. Reflecting the distribution of hydrocarbon resources, nearly half the planned energy investments are concentrated in three countries namely Saudi Arabia, Qatar and Iran. However, the countries most responsible for the current upsurge are Kuwait, Egypt, Qatar and Libya, whose projected capital investment requirements have risen by a staggering 115%, 86%, 84% and 61% respectively. Despite a moratorium on gas-based projects, Qatar has shown a stronger momentum and, as a result, has moved from third to second place in the country ranking.

0 10 20 30 40 50 60 70 80 9

Mauritania

Jordan

Lebanon

Morocco

Sudan

Tunisia

Bahrain

Yemen

Iraq

Syria

Oman

Libya

Kuwait

UAE

Egypt

Algeria

Iran

Qatar

Saudi Arabia

US$ billion

2005-2009 Review: US$210 billion

2006-2010 Review: US$260 billion2007-2011 Review: US$395 billion

APICORP Research

0



9. Saudi Arabia has continued to top the energy investment ranking with an US$85 billion mark. The corresponding lesser growth rate of 47%, though still impressive, is most likely due to the bigger Saudi capital base and the ability of the leading sponsors - Saudi ARAMCO and Saudi Basic Industries Corp. (SABIC) – to optimize their investments from among a larger portfolio of projects. Investment by sector 10. Of the expected US$395 billion total energy capital investment in the MENA region, the oil supply chain (including the oil-based integrated refinery-petrochemical link) accounts for 39%, the gas supply chain (including the gas-based petrochemical and fertilizer links) for 46% and the oil-or-gas-fuelled power generation sector for the remaining 15%. 11. The Figure below shows the extent to which the investment outlook in each link of the supply chain has evolved. It reveals a much higher increase in the downstream sector, most dramatically in the oil-based refining/petrochemical and the natural gas-based petrochemical and fertilizer sectors.

0

20

40

60

80

100

120

Oil

upst

ream

Oil

mid

stre

am

Oil

dow

nstre

am

Gas

ups

tream

Gas

mid

stre

am

LNG

-GTL

Petro

ch/F

ertil

izer

s

Gen

erat

ion

Oil chain Gas chain Power

US$

bill

ion

2005-2009 2006-2010 2007-2011

API

CO

RP

Res

earc

h

12. Obviously, several factors can change this investment outlook. As indicated in Economic Commentary no 9, soaring EPC costs may prompt Project Sponsors to consider delaying or even cancelling some of their capital projects on the grounds of expected lower returns. In this context and in view of the uncertainty regarding oil prices, the refinery link of the hydrocarbon supply chain would be affected most. Furthermore, the availability of feedstock adds a further element of uncertainty for the petrochemical industry. Capital structure 13. A simple way to characterize the capital structure of investment is through a single debt-equity ratio. To do so we have assumed that the National Oil Companies (NOCs) and, to some



extent, the International Oil Companies (IOCs) first use retained earnings (internal equity) to fund their upstream and midstream activities. As they move downstream the supply chain, they and other investors apply for external funding (debt and external equity). Current indications point to an average debt-equity ratio of 70:30 in the refining, LNG, GTL, and petrochemicals sectors. In the power sector, this ratio, which is trending higher, is put at 75:25. 14. As shown in the Table below, the resulting capital structure of energy investment in the MENA region for the period 2007-2011 is likely to be 53% debt and 47% equity. Compared with the debt-equity ratio of 47:53 found in our last survey, this new structure involves a marked shift towards more debt.

Financing issues and challenges 15. While retained earnings are expected to provide NOCs and IOCs with sufficient funds to self-finance the upstream and midstream sectors, the highly leveraged downstream sector will face an increasingly challenging funding prospect as the total amount of debt highlighted above – some US$42 billion per year – far exceeds the record of US$30 billion raised in the loan market in 2005.2 To finance the impending gap, Project Sponsors will need to borrow through other debt instruments, mostly bonds and sukuk.3 16. The cost of access to the debt capital market depends on projects’ and companies’ investment grade credit ratings, which are almost always capped by sovereign ceilings. The key to such ratings involves improving governance and financial transparency and overcoming inhibition to external scrutiny through enhanced public reporting. Rating is, however, only one element in a set of a complex factors that determine how each country’s investment climate is perceived.

Capital Capital

US$ billion StructureOil supply chain . Upstream 53 13% 100% 0% . Midstream 6 2% 100% 0% . Downstream 93 24% 30% 70%Gas supply chain . Upstream 41 10% 80% 20% . Midstream 14 4% 100% 0% . Downstream 127 32% 30% 70%Power link . Generation 61 15% 25% 75%Total Investments 395 100% 47% 53%

APICORP Research

Equity DebtMENA Region

2 APICORP Research – Compiled using Dealogic Loanware database. 3 Sukuk (singular sakk): Islamic shari’a compliant bonds.



Perceptual mapping of the investment climate 17. APICORP’s perceptual mapping of the energy investment climate of key MENA oil and gas producing countries is based on three attributes: Investment Potential, Country Risk, and the Enabling Environment. The resulting 3-D map (flattened to two dimensions for greater clarity) shows an Ideal Point, which is the centre of gravity of the highest achievable scores.

Vast investment

potential

Limited investment potential

Highcountry risk

Lowcountry risk

Strong enablingenvironment

Weak enablingenvironment

KSAQAT

UAE

KUWBAH

IRQ

MAU

SUD

ALG TUNEGY

LIBSYRYEM

OMA

IDEAL POINT

APICORP Research

IRN

18. Saudi Arabia (KSA) on the one hand, and the cluster formed of Qatar (QAT), the United Arab Emirates (UAE) and Kuwait (KUW) on the other hand, occupy the most desirable quadrant [Vast Investment Potential - Strong Enabling Environment – Lower Country Risk]. They all appear nearest to the Ideal Point. Except for the scattered KSA, IRN (Iran) and Iraq (IRQ) – the latter having yet to drastically improve its security environment to enable investment – all other countries are clustered to reflect similarly perceived investment climates. Conclusions 19. APICORP’s review of energy investments in the MENA region for the period 2007-2011 has underscored sharp project cost increases as the factor most responsible for the continuing upsurge in the capital investment requirements. 20. The resulting capital structure points to a more highly leveraged downstream industry and highlights new challenges for securing the appropriate amount and mix of debt financing. To successfully attract the needed capital, further improvements of the energy investment climate, as tentatively captured in our perceptual mapping, should remain a key focus of policy.



ANNUAL REVIEW OF ENERGY CAPITAL INVESTMENT REQUIREMENTS

OF THE MENA REGION AND THE ARAB WORLD

2007-2011 OUTLOOK

1 Introduction Purpose and Scope. APICORP Research provides, on a rolling 5-year basis, an annual review of energy investments of the oil, gas, petrochemical and power sectors in the MENA region and the Arab world. The review, now in its third consecutive year, has used the same concepts and methodological framework to identify and track key investment trends and opportunities. The 2007-2011 Review discusses the current upsurge in capital requirements, the evolving country and sector patterns, the changing capital structure and the resulting challenging financing issues. The review is extended to include an updated perceptual mapping of the MENA energy investment climate and how key countries in the region are positioning themselves to be able to bridge the impending funding gap. The MENA Region and the Arab World. The MENA region is defined to include the Arab world and Iran. The Arab world is comprised of the 22 members of the Arab League. As characterized, MENA covers an area of 15.1 million sq km (13.5 million sq km for the Arab world) which stretches from the Atlantic coast to the Arabian/Persian Gulf and further to the Caspian Sea and from the Mediterranean littoral to the boundaries of the Sahara Desert in North Africa and to the Arabian Sea shores in West Asia. Underlying the region’s economic significance is an aggregate population of 400 million in 2005 (328 million for the Arab world), a combined GDP of US$1243 billion (1039 for the Arab world) and an impressive endowment in natural resources, chief of which are crude oil and natural gas. Indeed, 67% of the world’s proven oil reserves and 44% of proven gas reserves are located in the MENA region (Table 1). Furthermore, although the region’s share of production (37% for oil and 15% for gas) is relatively low compared with its potential, the call on MENA oil and gas is increasing driven by global economic growth and limited prospects for expansion in other key producing areas.



Table 1: MENA Oil and Gas Reserves and Balance, 2005

Unit MENA World Share

. Proven reserves Gbl 805 1201 67% . Production Mbl/d 30 81 37% . Imports Mbl/d 1 50 2% . Exports Mbl/d 24 50 48% . Apparent consumption Mbl/d 7 81 9%

. Proven reserves Tcm

80 44%426 15%

8 1%122 17%312 11%

Natural Gas180

. Net Production Bcm/y 2763 . Imports Bcm/y 721 . Exports Bcm/y 721 . Apparent consumption Bcm/y 2763

Crude Oil & Products

APICORP Research Using BP Statistical Review of World Energy - June 2006

The region is, however, far from being homogenous and the countries that weigh in the above oil and gas balances are just a few. Nevertheless, there are some 19 countries worth reviewing with the most important of them highlighted in Figure 1. They range from the world's largest strategic hydrocarbon reserve, Iran and Saudi Arabia, to newcomer Mauritania, which has yet to confirm the extent of its recently discovered hydrocarbon resources. Figure 1: A Cross-section of Key MENA Oil and Gas Producing Countries, 2005

0

10

20

30

40

50

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

GDP/Cap (US$ nominal)

Hyd

roca

rbon

rese

rves

(Gto

e)

Qatar

Saudi Arabia

UAE

KuwaitIraq

AlgeriaOmanEgypt

Iran

APICORP Research

Libya



The Database. The review is underpinned by a database of planned and announced public and private projects along the hydrocarbon supply chain. The time frame is a “rolling” 5-year period, which coincides with the planning frame of most of the companies involved. The Database is designed to include energy projects that meet the following criteria: • Projects that are owned or managed by public and/or private companies in the most significant MENA countries. The Country is the one in which the project is located and developed. Cross-border projects involving more than one country such as trans-border pipelines are divided between the relevant countries. An important exception to this approach (which points to its inherent limitation) is the Dolphin Energy project. • Projects involving capital investment expenditure (for expansion, modernization of existing facilities, including enhanced recovery - EOR - of existing hydrocarbon fields and construction of new projects); it does not include operational and maintenance spending, nor investment in distribution and final energy use. • Projects whose total capital investment is equal or greater than US$100 million; • Projects at a stage between concluded feasibility study and commissioning, assuming a lead-time of less than 5 years for the former. Projects still at the stage of feasibility are included but not aggregated in the Investment Summary reports. As structured, the database currently contains some 320 items/projects covering 19 countries for the period 2007-2011. We estimate that it encompasses some 90% of the total investment cost of projects. The Hydrocarbon Supply Chain. The Database is structured along the main segments of the hydrocarbon industry as illustrated in Figure 2. Figure 2: Typical Structure of the Hydrocarbon Sector

Oil

stru

ctu

res

Crude oil

Non-associatedgas

Ethane

Petrochemicals

Gas liquefaction

Gas-to-liquidsMethane

NGLs

Associated gas

Refining

Gasstructures

UPSTREAM MIDSTREAM DOWNSTREAM

Power/Water

APICORP Research



As a result, the energy infrastructure projects are grouped along two supply chains (oil and gas) and, for each chain, along three links (upstream, midstream and downstream). The power sector, which is mixed fuel, is treated as a separate link, downstream of both oil and gas. Main links in Chain Oil chain Gas chain 1. Upstream Exploration Development (incl. NGL separation) 2. Midstream 3. Downstream Refineries/petrochemicals (oil based) Liquefaction (LNG) Gas-to-Liquids (GTL) Petrochemicals (gas based) 4. Power generation (oil/gas fuelled)

Most energy projects fit in one of the above links. However, the boundaries between these categories are not always clear, and some projects may have features of more than one category. In these cases projects will be classified in the category that better reflects their dominant feedstock. For example an integrated refinery petrochemical project using crude oil and refined products as feedstock will be classified in the oil chain. 2. Energy Investment Outlook 2.1 Overview The 2007-2011 Review has yielded several notable findings. One of them is simply the continuing upsurge in the cumulative capital investment requirements, which now stand at US$395 billion for the MENA region (US$345 billion for the Arab world). As detailed in Table 2, this represents a 52% increase over the last APICORP’s annual survey of US$260 billion for the period 2006-2010 (57% over US$220 billion for the Arab world). Table 2: Increase in Investment Requirements by Review

Reviews US$ bn Increase US$ bn Increase2004-08 180 - 150 -2005-09 210 17% 175 17%2006-10 260 24% 220 26%2007-11 395 52% 345 57%

Energy investment requirements

APICORP Research

MENA Arab world



This level of investment is equivalent to about 5.2% of MENA GDP and 21% of MENA gross domestic investment over the projected period. Our past surveys have shown that two sets of factors have combined to significantly influence the level of investment over the review periods. First, are the external factors. Provided crude oil prices are kept at sound levels, global economic growth is likely to maintain its momentum. This is the primary driver of world oil, gas and petrochemical demand, which is assumed to expand faster in the USA, China and other key Asian markets. Second, are factors pertaining to the domestic setting. These include a notable catch up with internal demand particularly for electricity after years of under-investment and rolled-over projects caused by Governments’ budgetary constraints. This, notwithstanding current higher oil and gas fiscal revenues, has prompted governments to progressively shift the burden of funding energy investments to the private sector, which is part of a broader move to lower barriers to private investments. Finally, improved macro-economic management has enhanced the attractiveness of the investment environment in key countries. Past surveys have also shown that energy capital investment has risen in proportion to the rising number of projects and, to a lesser extent, their costs. This time, however, while the number of projects has risen by a modest 11% to 320, the average project cost (project costs vary from US$100 million to US$9,900 million) has gone up by 37% to US$1,235 million. At least three factors have combined to inflate project costs: greater scope, larger scale and, above all, soaring EPC prices.4 It should be noted that in addition to inflated costs, greater liquidity in the capital market and the prospect of sustained growth and revenues have induced Project Sponsors to seek broader scope and greater scale. Obviously, this has added to the total investment capital requirements and resulted in most cases in greater project complexity. It is beyond the scope of this review, which is in essence descriptive, to dwell on the determinants of energy capital investment in the MENA region and what drive Project Sponsors to invest. The incentive to expand capital stock beyond depreciation basically depends on whether or not the marginal product of capital (additional product produced from additional unit of capital) exceeds its cost. In a context of increasing project costs and interest rates, Project Sponsors' response has been to seek greater scope and scale as a way to enhance the marginal product of capital, and thus the expected long-term rate of investment return. In this regard, it is worth noting that Project Sponsors are probably underestimating what the economists call the “costs of excessive largeness”. Indeed, anecdotal evidence suggests that the economies of scope and scale of current large projects are being offset by the diseconomies of the resulting complexities. 4 This is fully developed in APICORP Research’s Economic Commentary no. 9. See also Aissaoui, Ali (2006), “What is Inflating Energy Capital Investment Requirements in the MENA Region: Scope, Scale or Cost?”, MEES 49:36, 4 September.



2.2 Investments by Country Reflecting the distribution of hydrocarbon resources, nearly half the energy investments are concentrated in three countries namely Saudi Arabia (US$85 billion), Qatar (US$58 billion) and Iran (US$50 billion) (Table 3). These three countries contribute to 49% of MENA energy investments. They are followed by a larger cluster of big investors, namely Algeria and Egypt (US$33 billion each), UAE (US$32billion), Kuwait (US$28 billion), Libya (US$15 billion) and Oman (US$14). Together, all 9 countries contribute to 88 percent of total energy investments in the MENA region. However, the countries most responsible for the current upsurge are Kuwait, Egypt, Qatar and Libya, whose projected capital investment requirements have risen by a staggering 115%, 86%, 84% and 61% respectively. Despite a moratorium on gas-based projects, Qatar has shown a stronger momentum and, as a result, has moved from third to second place in the country ranking (Figure 3). Saudi Arabia has continued to top the energy investment ranking with an US$85 billion mark. The corresponding lesser growth rate of 47%, though still impressive, is most likely due to the bigger Saudi capital base and the ability of the major sponsors - Saudi ARAMCO and SABIC – to optimize their investments from among a larger portfolio of projects. In the midst of this diversity, the Gulf Cooperation Council (GCC) area, which account for 64% of total energy investments in the Arab world, exhibits a distinctive pattern. For reasons pertaining to the investment climate and discussed further below, the area is rapidly emerging as the focus of energy investment, innovation and entrepreneurial opportunities.



Table 3: Summary Table of Energy Investments by Country and Sector

U

S$ m

illio

n

Oil

upst

ream

Oil

mid

stre

am

Ref

inin

g

Tot

al o

il ch

ain

Gas

ups

tream

Gas

mid

stre

am

Gas

dow

nstre

am

LN

G-G

TL

Petr

och/

Fert

ilize

rs

Tot

al g

as c

hain

1000

300200

0560

3,4004,400

9702,9007,2303,7707,665

12,15014,01617,50024,10045,640

Mauritania 975 200 0 1,175 100 0 0 0 0 1,275 219 1,494Jordan 100 450 800 1,350 0 0 0 0 0 1,350 603 1,953Lebanon 0 0 600 600 0 300 0 0 0 900 1,689 2,589Morocco 300 0 960 1,260 0 200 0 0 0 1,460 1,817 3,277Sudan 1,055 1,100 1,200 3,355 0 0 0 0 0 3,355 798 4,153Tunisia 1,320 0 1,500 2,820 250 310 0 0 0 3,380 1,267 4,647Bahrain 350 100 750 1,200 400 200 2,800 0 2,800 4,600 912 5,512Yemen 490 0 1,400 1,890 1,550 700 2,150 2,150 0 6,290 568 6,858Iraq 750 250 4,400 5,400 370 500 100 0 100 6,370 1,274 7,644Syria 1,075 250 3,165 4,490 2,550 350 0 0 0 7,390 2,009 9,399Oman 4,960 250 500 5,710 1,350 320 5,560 0 5,560 12,940 1,431 14,371Libya 2,750 0 6,400 9,150 950 570 2,250 1,800 450 12,920 1,957 14,877Kuwait 4,420 250 10,815 15,485 1,425 500 5,740 1,000 4,740 23,150 4,781 27,931UAE 3,950 400 8,150 12,500 7,400 500 4,250 0 4,250 24,650 7,089 31,739Egypt 1,425 700 9,750 11,875 2,100 1,000 10,916 2,250 8,666 25,891 7,023 32,914Algeria 4,410 125 7,647 12,182 3,950 4,600 8,950 3,400 5,550 29,682 3,610 33,292Iran 4,880 750 5,530 11,160 7,560 2,300 14,240 5,600 8,640 35,260 14,328 49,588Qatar 7,270 100 2,900 10,270 8,050 120 37,470 29,400 8,070 55,910 1,700 57,610Saudi Arabia 12,500 1,500 26,800 40,800 3,110 1,500 31,298 0 31,298 76,708 8,141 84,849Arab region 48,100 5,675 87,737 141,512 33,555 11,670 111,484 40,000 71,484 298,221 46,889 345,110MENA 52,980 6,425 93,267 152,672 41,115 13,970 125,724 45,600 80,124 333,481 61,218 394,699

Oil chain

Tot

al h

ydro

carb

ons

Pow

er g

ener

atio

n

Tot

al E

nerg

y

35,908156,709180,809

Gas chain



Figure 3: Distribution of Energy Investments by Country and Sector, 2006-10

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Mauritania

Jordan

Lebanon

Morocco

Sudan

Tunisia

Bahrain

Yemen

Iraq

Syria

Oman

Libya

Kuwait

UAE

Egypt

Algeria

Iran

Qatar

Saudi Arabia

US$ billion

Oil upstream Oil midstream Refining Gas upstreamGas midstream LNG-GTL Petroch/Fertilizers Power generation

APICORP Research

2.3 Investments by Sector Of the expected US$395 billion total energy capital investment in the MENA region, the oil supply chain (including the oil-based integrated refinery-petrochemical link) accounts for 39%, the gas supply chain (including the gas-based petrochemical and fertilizer links) for 46% and the oil-or-gas-fuelled power generation sector for the remaining 15%. Compared with previous reviews, the outlook for each link of the hydrocarbon chain reveals a much higher increase in the downstream sector, most dramatically in the oil-based refining/petrochemical and the natural gas-based petrochemical and fertilizer sectors. (Figure 4).



Figure 4: Evolution of Investments by Sector in Three Successive Reviews

0

20

40

60

80

100

120O

il up

stre

am

Oil

mid

stre

am

Oil

dow

nstre

am

Gas

ups

tream

Gas

mid

stre

am

LNG

-GTL

Petro

ch/F

ertil

izer

s

Gen

erat

ion

Oil chain Gas chain Power

US$

bill

ion

2005-2009 2006-2010 2007-2011

API

CO

RP

Res

earc

h

Oil Sector. Along the oil chain 13 % of total energy investments – or US$53 billion - will be needed to explore and develop new capacity as well as sustain current production, the latter through EOR programmes. The midstream sector - basically transportation and storage - will need US$6 billion or less than 2 % of the total. The remaining US$93 billion, which represent 24% of total energy investments, are related to capacity expansion and new projects in the refining sector. Gas Sector. Along the gas chain, 10 % of total investments – or US$41 billion - will be needed to explore, develop and produce natural gas and the associated NGLs. The midstream sector will absorb US$14 billion or 4 % of the total. The remaining US$126 billion, which represent 32 % of the total energy investments, are related to capacity expansion and new projects for the liquefaction of natural gas (LNG), gas-to-liquids (GTL) transformation and gas-based petrochemical projects. Power Generation. As regards power generation, many countries in the MENA region and the Arab world are still at a stage of development where rapid GDP growth translates into large increases in the demand for electricity. As economic development proceeds, increased urbanization and industrial expansion will lead to even higher demand for this product. As a result, generation capacity for the whole MENA region is expected to double within the next 12 to 15 years. The additional capacity for the period 2007-2011, some 50 GW above the current estimated level of 163 GW, translates into the 5-year cumulative investment of US$61 billion indicated previously.



Table 4: A Cross-section Data of the MENA Power Sector

Capacity (GW)

Production (TWh)

Average capacity

utilizationAssumed 8-

yr Growth

Estimated 2006

capacity (MW)

Expected 2011

capacity (MW)

Capacity increment

(GW)

Resulting capital Investment

(US$ bn)

2003 2003 2003 2003-2011 2006 2011 2007-11 2007-12

Algeria 6.5 29.2 52% 6.5% 7.8 10.7 2.9 3.6

Bahrain 1.6 7.2 51% 7.0% 2.0 2.8 0.8 0.9

Comoros

Djibouti

Egypt 20.0 89.2 51% 4.5% 22.8 28.4 5.6 7.0

Iran 32.0 140.0 50% 5.0% 37.0 47.3 10.2 14.3

Iraq3 6.0 18.0 34% 2.5% 6.5 7.3 0.8 1.3

Jordan 1.8 8.0 51% 4.5% 2.0 2.5 0.5 0.6

Kuwait 9.3 39.8 49% 6.5% 11.2 15.4 4.2 4.8

Lebanon 2.3 10.2 50% 7.5% 2.9 4.1 1.3 1.7

Libya 4.7 18.9 46% 5.0% 5.5 7.0 1.5 2.0

Mauritania 0.2 0.8 46% 10.0% 0.3 0.4 0.2 0.2

Morocco 4.2 15.3 42% 5.5% 4.9 6.4 1.5 1.8

Oman 3.1 10.7 40% 6.0% 3.7 4.9 1.2 1.4

PT

Qatar 2.5 9.5 43% 8.0% 3.1 4.6 1.5 1.7

Saudi Arabia 25.5 153.0 68% 4.8% 29.4 37.1 7.8 8.1

Somalia

Sudan 0.9 2.6 33% 8.0% 1.1 1.7 0.5 0.8

Syria 5.5 23.5 49% 4.5% 6.3 7.8 1.5 2.0

Tunisia 3.3 13.8 48% 5.0% 3.8 4.9 1.1 1.3

UAE 12.5 54.5 50% 7.0% 15.3 21.5 6.2 7.1

Yemen 1.0 3.5 41% 6.5% 1.2 1.6 0.4 0.6

Arab world 110.8 507.7 52% 5.9% 129.8 172.8 39.5 46.9

MENA region 142.8 647.7 52% 5.8% 166.8 221.1 49.7 61.2

APICORP Research

2.4 Leading National Segments The leading links or segments - those whose projected capital expenditures are equal or more than US$10 billion - along the oil and gas supply chain are listed in Table 5. The record level is achieved in the Petrochemical sector in Saudi Arabia, in the LNG sector in Qatar, and in the refining sector in Saudi Arabia.



Table 5. Leading National Segments Leading national segments Country Investments

(US$ million)

Petrochemicals Saudi Arabia 31 LNG-GTL Qatar 29 Refining Saudi Arabia 27 Oil upstream Saudi Arabia 13 Power generation Iran 14 Other gas downstream Egypt 11 APICORP Research 3. Factors That Could Affect the Investment Outlook Obviously, several factors can change this energy investment outlook. EPC costs may prompt Project Sponsors to consider delaying or even cancelling some of their capital projects on the grounds of expected lower returns. In this context and in view of the uncertainty regarding oil prices, the refinery link of the hydrocarbon supply chain would be affected most. Furthermore, the availability of feedstock adds a further element of uncertainty for the petrochemical industry in key countries. The following sections discusses each of these three factors, namely, oil prices, the costs of projects and the availability of feedstock 3.1 Oil Prices Most industry experts agree on the main determinants of current high oil prices. Emphasis is rightly placed on faster than expected demand in China and the USA, lagging investments in the petroleum industry, particularly in the refining sector, and heightened geopolitical uncertainties in the Middle East and other key producing areas. However, few are willing or able to forecast prices given the large number of parameters that must be considered, including speculative behaviours. There are currently three schools of thoughts with regard to the oil price outlook: The “cyclicalists”, who believe that the oil market is fundamentally cyclical and that we are at

the peak of the cycle. This school, which is led by BP, expects oil prices to fall back to around US$40 bbl in the medium term. 5

5 In a rare public declaration on 14 June 2006, BP’s Chief Executive Lord John Browne of Madingley stated: “It is very likely that, in the medium term, prices will stand at about $40 on average. In the very long run, even $25 to £30 are possible.” This view has initially been expressed by BP’s Chief Economist Peter Davies.



The “structuralists”, who believe that it was necessary for the market to move towards a

sustainable long-term price levels to encourage investment along the whole petroleum supply chain. This school, which is led by Barclays Capital, argues for a long-term price of around $60.

The “institutionalists”, who see OPEC as having far more market power to defend a floor

price. This school, which is supported by APICORP Research, assumes that, in a context of a significant weakening of the US dollar, OPEC will stay on alert to defend an oil price around US$60/bl, eventually through a reactivation of their production adjustment mechanism. 6

Figure 5 illustrates the resulting oil price outlook for the period 2007-2011, according to each of these schools. Figure 5: Oil Price Scenarios

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should prices fall to US$40/bl, they would affect expected project revenues and the resulting investment returns. In such a case, the industry would cut back on the most expensive projects, which happen to be in the refining sector.

6 The basic instrument of OPEC’s prorationing policy is a production adjustment mechanism agreed in March 2000 and revised in June of the same year to keep the OPEC basket price within an agreed band. This mechanism seldom worked according to the explicit criteria OPEC set at the time. However, the series of occasional reductions and increases decided by the Organization since then is an indication of its readiness to influence the direction of prices. Also, as long as oil prices were rising, OPEC has refrained from quoting any specific price band, though some OPEC ministers have referred in recent pronouncements to US$60 as a possible mid-point reference.



3.2 Project Costs As noted earlier, past surveys have shown that while rising capital investment was mostly matched with an increase in the number of projects, this time the number of projects has nearly levelled off. From what can now be pieced together, the factors most responsible for the current upsurge are notable changes in scope and/or scale of key projects and soaring project costs across the board. The separate effect of scale and cost and the resulting economy of scale are easy to identify in single output product processes such as LNG, which has exhibited a marked trend towards larger trains. Otherwise, disentangling the effect of scope/scale and cost becomes tricky. This is well illustrated by the Petro-Rabigh project. This JV partnership between Saudi Aramco and Sumitomo Chemical, which has evolved into a world-scale integrated refining and petrochemical complex, has experienced dramatic cost increases. As shown in Figure 6, a first cost update (+43%) occurred a year after Saudi Aramco embarked on the project. Then, a combination of changes in scope/scale (some +45%) and cost (some +30%) were announced at the conclusion of the feasibility study and the establishment of the JV. Finally, a further rise in cost (+17%) was observed at financial close. Figure 6: Cost Inflation – The Case of the Petro-Rabigh Project

Prior to

examining the causes of inflated cost, it may be helpful to identify the key components of a typical average cost structure of a large-scale hydrocarbon or energy project:

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• Capital cost: 90%

• EPC costs 70% • Other costs 20%

• Financing cost: 10% • Total project cost: 100%

Capital cost (capital expenditures plus pre-operating costs) accounts for some 90% of the project cost to be financed. A further 10% represents the cost of financing, which include interest during construction, a reasonably sized reserve fund, and the cost of issuance of permanent financing. As highlighted above, approximately 70% of the total cost is accounted for by the contract price to engineer, procure and construct the project (EPC) and 20% by other costs, which include contingency, taxes, licensing fees, land, pre-operating and maintenance, spare parts, training and test runs. While US$ Libor rates and margins, which have increased from less than 2% to nearly 6% during the last two years, have contributed significantly to raising financing costs, the factors most responsible for the escalation of project costs are those underpinning EPC prices. According to Merrow, 7 these include rising prices of factor inputs, higher contractors’ margins and the systematic pricing of project risks. Input factors prices. Prices of most industrial raw materials, which constitute a significant share of factor inputs in hydrocarbon and energy projects, have soared to levels that even the most sophisticated economists could not anticipate. Reflecting continued strong growth in global demand, metals and minerals prices increased by an annualized rate of 52% since January 2003 (Figure 7). Figure 7: Evolution of World Indexes for Energy, Metals and Minerals

7 Merrow, E. W (2006), “The Cost of Project Risks: Contracting for Large International Projects in the New Era”, Independent Project Analysis, Inc.

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APICORP Research using the World Bank's database



At the regional level, the tightness of supplies in steel, cement and other basic building materials also contributed to the sharp rise in factor costs well beyond normal inflation. Furthermore, the scarcity of skilled labour has added significantly to the cost of recruiting and retaining personnel. Contractors’ margins. EPC resources, which steadily shrank in the 1990s, could hardly keep pace with rapid growth of investment worldwide. As a result, the EPC market has tightened in the last few years, causing contractors’ margins to adjust upward. According to Merrow (ibid.) margins as a percentage of EPC costs were squeezed by Project Owners from an average of 6%-10% pre-1985 to 2%-5% from 1990 to 2002 resulting in significant consolidation. Since 2003, the limited pool of qualified contractors have been in a much better position to negotiate margins of between 9% and 12%. Project risks premiums. Under an EPC contract (typically LSTK, lump-sum turnkey) construction risks are generally allocated to the contractor who is obliged to deliver a ready-to-operate facility at a guaranteed price, by a guaranteed date and at a specified level of performance. Such risks include those specific to the project as well as the risks stemming from contractual terms and conditions. In the current uncertain market environment, however, contractors have become risk averse and, as a result, have factored in their price the cost of absorbing such risks. The potential of reducing costs depends on the impact Project Sponsors can make on the contributing factors analyzed previously. In the current market environment, there is little they can do about the prices of input factors and contractors’ margins. However, as shown in Figure 8 (Merrow, ibid.), Project Sponsors can deflate EPC price increases if they assume some of the project risks. Figure 8: Project Cost Increases (Jan 2002 – Aug 2005)

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Ideally, the development of low-cost risk mitigating strategies should be coupled with a critical evaluation of EPC-LSTKs. As noted previously, these contracts have been designed to achieve effectiveness in cost, lead-time and quality of projects, which reflect the overarching lenders’ requirements for bankability in project finance. However, the bottlenecks they have created and their recklessly escalating costs are raising the prospect of an impending overhaul. Whether or not lenders will be comfortable with the new arrangements ultimately depend on the quality of the Project Sponsors. In the current strong capital inflow and high-liquidity context, enhancing projects’ equity support is the relatively easy part. The hard part is to demonstrate an ability to manage projects effectively and assume more of the risks involved. 3.3 Feedstock Availability Anecdotal evidence suggests that some countries within the GCC are faced with rapidly depleting gas resources. This is more apparent for Kuwait, Saudi Arabia and the UAE, which seem to have been using more gas than they could afford. Figure 9, which plots each country as a function of the share of its proven gas reserves in the total proven hydrocarbon reserves and the share of its total gas consumption in the total apparent energy consumption, illustrates these circumstances.8 While the UAE will be soon receiving natural gas from Qatar through the Dolphin Energy project (an option denied to Kuwait for the time being), Saudi future gas potential depends on the prospects of gas discoveries from the currently actively explored Rub’ Al-Khali basin. Figure 9: Categorization of Key Gas Producing Countries

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8 Gas exports do not appear explicitly. They are incorporated in the apparent energy consumption, which is defined as: Production + Imports – Exports. Obviously, crude oil, natural gas and other primary hydrocarbon derivatives such as ethane, condensate and LPG dominate the equation.



Meanwhile, Saudi Arabia may well ration natural gas and ethane or resort to a waiting list for supplying the growing number of new projects.9 In such a case, the petrochemical sector would suffer most since the power sector can more easily use substitutes such as oil products. 4. Capital Structure A simple way to characterize the capital structure of investment is through a single debt-equity ratio. To do so we have assumed that the National Oil Companies (NOCs) and, to some extent, the International Oil Companies (IOCs) first use retained earnings (internal equity) to fund their upstream and midstream activities. As they move downstream the supply chain, they and other investors apply for external funding (debt and external equity). Current indications point to an average debt-equity ratio of 70:30 in the refining, LNG, GTL, and petrochemicals sectors. In the power sector, this ratio, which is trending higher, is put at 75:25. As shown in Table 6, the resulting capital structure of energy investment in the MENA region for the period 2007-2011 is likely to be 53% debt and 47% equity. Compared with the debt-equity ratio of 47:53 found in our last survey, this new structure involves a marked shift towards more debt. Table 6: Assumed Capital Structure by Segment in the MENA Region

5. Financing issues and challenges

Capital Capital

US$ billion StructureOil supply chain . Upstream 53 13% 100% 0% . Midstream 6 2% 100% 0% . Downstream 93 24% 30% 70%Gas supply chain . Upstream 41 10% 80% 20% . Midstream 14 4% 100% 0% . Downstream 127 32% 30% 70%Power link . Generation 61 15% 25% 75%Total Investments 395 100% 47% 53%

APICORP Research

Equity DebtMENA Region

9 Worth noting is a statement by a Shell official, who was reported by Bloomberg as saying on the occasion of “Opportunity Arabia 3” (Middle East Association, London, 7 September 2006) that “a lack of natural gas and rising costs are slowing the planned expansion plant in Saudi Arabia that it owns with Saudi Basic Industries Corp.”



How equity and debt will be financed and what are the relevant issues is tentatively highlighted in the following sections. 5.1 Equity Financing Provided international oil and gas markets remain supportive, retained earnings are expected to provide NOCs and IOCs with sufficient funds to self-finance the upstream and midstream sectors. To the extent that the fiscal impact of internal equity funding can be minimized, self-financing through retained earnings is the preferred form since it provides both NOCs and IOCs with more control. In the downstream sector, few companies such as SABIC are expected to self finance some of their investments. In the Gulf region in general, private placements, both informally from high net worth individuals and families and, progressively more, from the public at large through Initial Public Offering (IPO) are likely to increase external equity funding. Table 7 highlights some of the key issues being raised by each principal potential source. Table 7: Key Issues for Equity Financing Segment Potential sources Main issues

Retained earning Oil market cycle Up/Mid-stream Strategic equity Government levies Retained earning Oil/Petrochemical cycles

Dividend policies Informal placements Returns/Payback Private placements (IPOs) Valuation/Pricing

Downstream APICORP Research 5.2 Debt Financing While retained earnings are expected to provide NOCs and IOCs with sufficient funds to self-finance the upstream and midstream sectors, the highly leveraged downstream sector will face an increasingly challenging funding prospect as the total amount of debt highlighted previously – some US$42 billion per year – far exceeds the record of US$30 billion raised in the loan market in 2005 (Figure 10).



Figure 10: Trend in Loan Deals in the MENA Region

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To finance the impending gap, Project Sponsors will need to combine the maximum of potential loan sources with borrowing through other debt instruments, as listed below: Loan providers:10

• Commercial banks, both regional and international • Export Credit Agencies (providing both financing and political risk cover) • Local banks and domestic specialized funds • Islamic financing (pure play or increasingly mixed Islamic-conventional tranches) • Multilateral Agencies, with the European Investment Bank focusing on the Arab Mediterranean countries Debt securities • Bonds • Sukuk 11

10 Some major firms have recently extended debt to the Project Companies they sponsor. 11 Sukuk (singular sakk): Islamic shari’a compliant bonds.



Table 8 highlights some of the main issues being raised by each principal potential source. Table 8: Key Issues for Debt Financing Segment Potential sources Main Issues

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APICORP Research In the case of international and regional banks, lending may be limited by their perception of country risks and the resulting limits they set to their country exposure. Sectoral risk concentration constitutes another serious limiting factor for all banks. Awareness of such a risk suggests a monitoring of sectoral exposure in the three leading segments of the industry highlighted previously (Petrochemicals, LNG, Refining), where a proliferation of high-cost projects may raise the issue of programme sustainability. Domestic commercial banks have a further concern. Their lending capacity may be constrained by their asset-liability management. Despite increasing liquidities – a result of lower governments’ issuance of debt securities and, in some cases, an early retirement of public debt – central banks have maintained strict guideline in terms of loan to deposit ceilings.12 Furthermore, some of these banks may not feel comfortable with their asset-liability maturity mismatch as deposits have short-term maturities while their medium to long term lending to the industry is increasing. In contrast to commercial banks, there are specialized funds that continue to arrange medium to long-term soft loans to energy and petrochemical projects. This is particularly the case of Saudi Arabia where the Saudi Industrial Development Fund (SIDF) and the Public Investment Fund (PIF) have recently increased their loan assets and exposure to mixed and private sponsored petrochemical projects.

12 This is particularly the case of Saudi Arabia where SAMA seems to have maintained as a guideline a ceiling on loans of 60% of deposits.



Other significant sources of funds include the international and the domestic bond markets, with the latter developing faster in the Gulf region. In any case, the cost of access to the debt capital market depends on projects’ and companies’ investment grade credit ratings, which are almost always capped by sovereign ceilings. The key to such ratings involves improving governance and financial transparency and overcoming inhibition to external scrutiny through enhanced public reporting. Worth noting, in this regard, is that out of the 19 most economically significant MENA countries, no more than twelve have a sovereign rating and, among these, a smaller fraction has attained investment grade status (Table 9). Table 9: Sovereign Credit Ratings of MENA Countries (Long Term, Foreign Currency)

S&P Moody’s Fitch

Qatar A+ A1 n.a.Kuwait A+ A2 AA-Saudi Arabia A+ A3 A+UAE n.a. A1 n.a.Bahrain A Baa1 A-Oman BBB+ Baa1 n.a.Tunisia BBB Baa2 BBBEgypt BB+ Ba1 BB+Morocco BB+ Ba1 n.a.Jordan BB Ba2 n.a.Iran n.a. n.a. B+Lebanon B- B3 B-Sp

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Rating is, however, only one element in a set of a complex factors that determine how each country’s investment climate is perceived. 6. Perceptual Mapping of the Energy Investment Climate Using three attributes - Investment Potential, Country Risk, and the Enabling Environment - we have developed a perceptual mapping of the main oil and gas producing countries. This is an empirical process that allows researchers to transform their knowledge, insight and judgment into distances represented in a multi-dimensional space. The result is a differentiated mapping that should capture the idiosyncratic circumstances of each country’s energy investment environment. 6.1. The Attributes



Energy investment potential. A distinction is made between investment and investment potential: Normally, investment is a function of future demand, which underpins anticipated industry

growth, and the amount of additional production capacity needed to accommodate that growth. Such an investment is, however, constrained by a number of factors, including precisely country risk and the enabling environment. In contrast, investment potential should be an unconstrained function of assets. In this sense a

clearly defined and easily quantifiable indicator of investment potential is the combined proven oil and gas reserves of each of the 16 selected MENA countries. The relative positioning along this dimension is taken by reference to Saudi Arabia which has been assigned the highest score. Country risk. Country risk is defined as the perceived and/or measured change in the socio-political and macro-economic outlook that could interfere with a country’s contractual flow of investments: The Socio-political outlook focuses on government stability and instability within the national

and regional context and its ability to gain approval of its reform program and the corresponding legislative and fiscal agenda in parliament or any other form of representation. The Macro-economic outlook analyses the trends in economic growth, unemployment,

inflation, the balance of payment and the exchange rate and the articulation and coherence of the government’s fiscal policy with the central bank’s monetary policy. The analytical framework for assessing and incorporating the socio-political and macroeconomic outlooks into country risk factors and a composite risk rating are derived from APICORP’s internal country risk methodology. Enabling environment. The degree of enability of the investment climate, which is underpinned by the hydrocarbon/energy policy and the domestic financial environment, is assessed through the following questions: Hydrocarbon and energy policies: How each government’s vision is perceived? Is it well

articulated into principles, objectives and strategies? Resulting legal, institutional and fiscal framework: Is each government’s policy well

translated into a comprehensive and good quality legislation/regulation and institutions? Financial structures and environment: Is the business environment in that country ripe for

limited or non-recourse project financing?13 How well developed and functioning is the country’s capital market? 13 Project finance is based on a non-recourse or limited-recourse structure where equity and debt - typically 30% and 70% of total project costs respectively - are paid back from the revenues generated by the project. Generally, the project assets being financed are used as collateral.



As these questions cannot be addressed with precise analytical methods, a two-step Delphi technique has been used to determine the degree of enability of the investment environment in each of the 15 countries. Delphi aims at structuring an information process within a panel of experts. The process involves that the panel - individually and collectively - returns the best-informed opinion on the issue. 6.2 The Mapping As shown in Figure 11, the resulting 3-D perceptual map, which has been flattened to two dimensions for clarity, plots all 16 countries. Each plot is at equidistance from the country’s three scores of selected attributes, namely the potential investment, the country risk, and the enabling environment. The map shows an Ideal Point, which is the centre of gravity of the highest achievable scores. Countries are plotted to reflect the resulting values of their respective scores. They appear in different quadrants at varying distances from the Ideal Point. They are isolated or close to each other. In the latter case they are clustered to highlight their similarity Figure 11: APICORP’s Perceptual Mapping of the MENA Energy Investment Climate

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One country with huge hydrocarbon resources and investment potential - Saudi Arabia (KSA) - occupy the most desirable quadrant [Vast Investment Potential, Strong Enabling Environment]. Saudi Arabia, which has made great stride to improve its energy investment environment, notwithstanding limited upstream scope for foreign capital, is increasingly viewed as being a prime investment destination. Somewhat and in contrast, Iran, which is at the limit of this quadrant, appears to be relatively less attractive. Next, in the quadrant [Strong Enabling Environment, Low Country Risk] lies a cluster composed of Qatar (QAT), the United Arab Emirates (UAE) and to some extent Kuwait (KUW). This group



of countries appears to have a low country risk and a strong enabling environment, but their investment potential though important is somewhat lower than that of Saudi Arabia and Iran. The denser concentration of clusters located in the next quadrant [Low country Risk, Limited Investment Potential] is sufficiently contrasted. First is the cluster composed of Bahrain (BAH), Oman (OMA) and Tunisia (TUN). This group is perceived as having a relatively low country risk, a strong enough enabling investment climate but a limited investment potential for lack of sufficient hydrocarbon resources. A further cluster is composed of Algeria (ALG), Egypt (EGY) and Libya (LIB). This group has vaster investment potential and is perceived as having a moderate country risk but a weaker enabling environment. For expediency sake, this cluster has been further stretched to include Syria (SYR) despite its limited hydrocarbon resources. A final cluster is composed of Yemen (YEM), Sudan (SUD) and Mauritania (MAU). These countries are perceived as having a modest investment potential, a much higher country risk, and a deficient enabling environment. Lastly, and for obvious reasons, Iraq (IRQ), which is the fifth country in terms of investment potential after Saudi Arabia, Iran, Qatar and the UAE, stands exceptionally apart in the least appealing quadrant [High Country Risk, Weak Enabling Environment]. Iraq has to drastically improve its security environment to enable investment. 7. Conclusions APICORP’s review of energy investments in the MENA region for the period 2007-2011 has yielded valuable insights. The most notable is the continuing upsurge in the capital requirements, which now stand at US$395 billion for the MENA region (US$345 billion for the Arab world). This represents a 52% increase over the last APICORP’s annual survey of US$260 billion for the period 2006-2010 (57% over US$220 billion for the Arab world). Past reviews have shown that the energy capital investment has risen mostly as a result of additional projects rather than higher costs. This time, however, the review established that, compared to the number of projects, the average project cost has increased by a proportion of more than three-to-one. At least three factors have combined to inflate project costs: greater scope, larger scale and, above all, soaring EPC prices. Reflecting the distribution of resources and a better investment climate, nearly two thirds of the investments in the Arab world are concentrated in the GCC area. For reasons pertaining to the investment climate, the area is rapidly emerging as the focus of energy investment, innovation and entrepreneurial opportunities. Finally, the review has provided evidence of a more highly leveraged downstream industry and highlighted new challenges for securing the appropriate amount and mix of debt financing. To successfully attract the needed capital, further improvements of the energy investment climate, as tentatively captured in our perceptual mapping, should remain a key focus of policy.

review of energy c i r in the mena region and the a w p ... overvi… · 1. apicorp research...

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