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How will oil price volatility affect GCC budgets?

Fluctuating oil prices and significant nuclear energy opportunities will lead to sizeable changes in the budgets of GCC member states

Alternative resources: the UAE is building Barakah Nuclear Power Plant (NPP) in Abu Dhabi.
Alternative resources: the UAE is building Barakah Nuclear Power Plant (NPP) in Abu Dhabi.
Left to right: Wael Allan, Arcadis; Campell Gray, Faithful+Gould; Melvyn Ford, Hill International; and, Yaver Abidi, Ramboll Middle East, at Leaders i
Left to right: Wael Allan, Arcadis; Campell Gray, Faithful+Gould; Melvyn Ford, Hill International; and, Yaver Abidi, Ramboll Middle East, at Leaders i

Earlier this month, WSP | Parsons Brinckerhoff told Construction Week what everyone in the region has known – but few have said out loud – for at least a decade.

Speaking on behalf of the consultancy through its corporate Twitter account, Jeff Larking, director of power and water, and Martin Fessey, business development manager for generation, said: “The [Middle East’s] dependence on oil and gas will need to be reduced and replaced with nuclear, and to a lesser extent, renewable [energy].

“Renewable is growing, but cannot meet base-load demand. Nuclear is established in the UAE, [and it will] be followed by [other GCC countries],” the duo added.

WSP | PB also pointed out that whilst it expects renewables to play an important role in the region’s energy future, they will not be sufficient to meet expected demand without the help nuclear power.

The consultancy’s power and water team emphasised that this shift has already begun in the UAE, and that other GCC countries are likely to follow the same path.

Larking and Fessey’s comments came a day after HE Suhail Mohamed Faraj Al Mazrouei, the UAE’s Minister of Energy (MOE), visited the Al Barakah Nuclear Power Plant (NPP) site in Abu Dhabi.

The plant, which is currently under construction, will eventually consist of four nuclear power generating units, with a combined capacity of 5,600MW, providing up to 25% of the UAE’s electricity needs.

“Nuclear energy will play a critical role in the provision of sustainable energy to power the future of the UAE,” Al Mazrouei said during his tour of the Barakah NPP site.

Unit 1 is now 75% complete, and all of the other units are more than 50% complete. Together, they are expected to provide up to a quarter of the nation’s electricity needs by the year 2020, and to save up to 12-million tonnes in carbon emissions every year.

In a similar way to Dubai’s adoption of tourism development over a decade ago, the wider UAE, it would appear, has swiftly learnt the value of diversifying its resources. Barakah NPP is a clear indicator of the country’s desire to spread its risk, which is, understandably, amplified now more than ever as oil prices shatter expectations and strategies all over the world.

According to September 2015 figures from Bloomberg and Emirates NBD, demand for oil is advancing slowly at a global level. Demand growth in 2014, of 600,000 barrels per day (bpd), was the slowest since the financial crisis that shook global economies in 2008.

At the same time, supply has surged ahead; supply figures expanded over 2.3-million bpd in 2014, leading to significant stockpiles around the world. In the Middle East, Saudi Arabia is producing at record levels, and has delivered over 10-million bpd since March 2015. Whilst crude exports have fallen recently, they are being replaced by higher product (petrol/diesel) exports, the findings add.

Speaking at Construction Week: Leaders in Construction Summit UAE 2015, Athanasios Tsetsonis, sector economist at Emirates NBD, unpacked the impact that lower oil prices will have on GCC member states.

“Real growth will be affected by changes in oil production and government spending in the non-oil sector,” Tsetsonis explained.

“Saudi Arabia and the UAE have increased oil production in the first half of 2015, so the impact so far on GDP is positive. Non-oil sectors in both economies have also shown growth in the same duration, although the pace of growth has slowed since the beginning of the year.”

Highlighting the ripple effect of lower oil prices, Tsetsonis said state funds would feel the impact of changes in oil prices, especially in the GCC where the budgets of most member states continue to rely heavily on oil production and revenues. Bloomberg and Emirates NBD’s findings showed that Oman and Bahrain “are most vulnerable from [the] budget perspective”, whilst the UAE – with the region’s most diversified economy – will find that the “impact of lower oil production is not as severe in the first instance”.

Reduced oil revenues will likely result in ramifications across social infrastructure. The most remarkable instance of this in recent times, perhaps, is the UAE’s introduction of deregulated fuel prices, following which petrol prices in the country for August 2015 were increased by 24%.

Furthermore, Saudi Arabia is reportedly eyeing the UAE’s fuel-pricing amendments in a bid to reduce its dependence on oil, and to encourage state savings.

A report by Arabian Business cited Al Watan newspaper, which quoted unnamed sources saying Saudi Arabia “cannot leave gasoline prices at ultra-low levels indefinitely, because that would hurt the [Kingdom’s] economy”.

No information was provided about when the government’s reforms would be implemented, if at all. A source within the Gulf’s oil sector, however, told newswire Reuters that Saudi officials “were seriously thinking about reducing fuel [subsidies] gradually”.

“Riyadh would probably not act as aggressively as the UAE because of political and economic considerations”, the source said, adding: “UAE officials had advised Riyadh to ‘start small’, possibly raising prices [by] just a few percent.”

Al Watan quoted Fahad Al Anazi, deputy chairman of the economic and energy committee in the Shoura Council, a top state advisory body, as saying any changes to subsidies would have to be accompanied by other measures to preserve public welfare, such as providing cheaper public transport.

The provision of state-funded benefits will depend on a steady flow of investments from the government sector.

Yaver Abidi, regional managing director for Ramboll’s Asia and Middle East markets, said the GCC is now witnessing a “shift of priorities”, in terms of which projects – construction or otherwise – receive funding.

“Leadership changes in Saudi Arabia and Qatar have implications [on construction decisions],” Abidi noted, speaking at Leaders in Construction Summit UAE 2015.

“We are seeing slowdowns in trophy projects. We’re beginning to see a shift in priorities. For the first time, these governments are taking action in the regional security situation, and money is moving towards the defense sector.”

Given how the global refugee crisis is shaping up, experts believe the GCC’s construction sector may well have to keep tabs on fluctuations in the oil and gas sector, as well as political developments that could – directly or otherwise – impact the region’s financing priorities.

“The [regional] markets are becoming mature,” Abidi continued. “They’ve been through these cycles before, have the capacity to borrow, and [boast] foreign exchange reserves. We see a rationalisation of portfolios in the region, with more meaningful projects [moving ahead] than frivolous ones.”

Abidi’s estimations coincided with an announcement on Sunday, 6 September, 2015, by Ibrahim Alassaf, chief of Saudi’s Ministry of Finance (MOF), who revealed the Kingdom is “cutting unnecessary expenses” at present.

The move becomes more significant in light of Saudi Arabia’s anticipated budget deficit of $120bn (SAR450bn) for 2015.

Alassaf, who is visiting Washington DC with Saudi Arabia’s King Salman and other top officials, added that projects that are important for the economy will go ahead as planned.

Speaking to CNBC Arabia, he said: “We have built reserves, cut public debt to near-zero levels, and are now working on cutting unnecessary expenses while focusing on main development projects and on building human resources in the Kingdom.

“There are some projects like the ones that have been approved a few years ago and haven’t been carried out until now.

“That means such projects are not currently necessary, and can be delayed,” he added.

Alassaf also stressed the Kingdom’s commitment to projects in critical sectors, such as education, health, and basic infrastructure services, which he said “are not only important for the private sector, but also for the long-term growth of the Saudi economy”.

Also speaking at Leaders in Construction Summit UAE 2015 was Campbell Gray, managing director for Faithful+Gould’s Middle East operations. He said that pre-construction talks have slowed down, adding that numerous market factors have contributed to this trend.

“The decision process has slowed down with Ramadan [recently concluding], and Eid Al Adha upon us,” he said.

“We are now coming into the buying season, so to speak. Saudi Arabia will continue investments, given its demographic of 30-million citizens,” Gray continued.

“[The Kingdom needs] social infrastructure, such as schools, hospitals, and even secondary education.

“We’re bidding for a lot of work in Saudi Arabia”, Gray continued, stating Faithful+Gould was vying for projects both independently and in collaboration with parent group, Atkins in Saudi Arabia.

“Decision making is taking time”, Faithful+Gould’s regional chief stressed.

For the time being, it would appear that Saudi Arabia, if not the entire GCC, is better off delaying its expenditure decisions.

The Kingdom’s net foreign assets declined by a cumulative $65.5bn (SAR245.6bn) in the year to July 2015, Bloomberg and Emirates NBD’s findings said. The latter also expects a 10% decline in Saudi’s total spending this year, despite strong Q2 2015 GDP growth in the Kingdom’s transport and logistics, construction, manufacturing, and trade and hospitality sectors.

Abidi said that in order to achieve stability in the near future, the region must work towards an achievable business target. GCC governments, he stated, have “experienced a lot over the last 20 to 30 years, and know their obligations” towards their citizens.

“I don’t think we’ll see a slowdown or cancellation, but it is difficult to convey the regional situation to our boards,” Abidi added, explaining that it is tricky to paint an accurate picture of regional challenges and growth to those in charge of international companies headquartered outside of the Middle East. “I think we should look for steadiness, [and] not dramatic growth,” Abidi continued.

“It would be foolish to plan for that. It may happen, but it would be best to steady the ship using different types of financing,” Ramboll’s regional MD concluded.

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