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Can power rentals make up for low GCC liquidity?

Portable power providers will leverage the rental business until market fluidity returns amidst declining global crude values.

ANALYSIS, Business

As market activity wrapped up in 2015, details about the GCC’s diesel genset market emerged, providing a glimpse of what the new year held for the regional construction industry. According to Saudi Arabia Diesel Genset Market (2015-2021) by 6Wresearch, the Kingdom’s diesel genset market is forecasted to grow at a compound annual growth rate (CAGR) of 13.55% between 2015 and 2021.

The demand for diesel genset is expected to thrive on account of growing public infrastructures, industrial base, retail and hospitality sectors, and supplying power in remote areas.

The situation is similar in the UAE, where the expansion of public transport infrastructure has led to increased demand for generators. 6Wresearch’s report added major construction activities anticipated in the country this year and near future – such as the expansion of Dubai Metro, road infrastructure, and Dubai Expo 2020 – will boost the local generator market.

Ravi Bhandari, analyst at 6Wresearch’s energy and power division, says the energy and utilities sector in Saudi Arabia is also driving genset demand in the country.

“Saudi is an oil producing nation and almost 90% of its extracted oil is exported in the international market,” Bhandari tells Construction Week.

“Unavailability of grid power in remote locations has resulted in an increased appetite for diesel gensets, motivated by power deficit during peak hours, especially summer months. Demand is also growing from construction sites and industries where grid power is unavailable. Power demand in the Kingdom is growing at the rate of 7.5% annually, and generators play vital role in bridging the gap between demand and supply of electricity,” he adds.

Clearly, portable power remains a lucrative sector in the Middle East, where transmission has historically been riddled with challenges.

As Tim Spearing, global product manager at Lucy Electric’s automation business said to Construction Week in October 2015, the Middle East faces many challenges in achieving a stable, reliable, and high-performance electrical distribution network due to its rate of growth.

Experts suggest this is one of the factors boosting the deployment of portable power technology in the GCC region.

“Large scale industries are gradually shifting to rental power, as it helps maintain productivity, minimise capital costs, and sustain overhead costs,” Bhandari explains.

“It also saves the extra cost that incur during transportation and installation of equipment. Industries located in off-grid areas opt for rental power solution for uninterrupted supply of power as they have to pay only for electricity generated from power plant, with the rental company responsible for the maintenance and service of generators,” he continues.

These views are echoed by Lee Cox, managing director at Rental Solutions and Services (RSS) in the UAE.

With roots in temporary cooling and water desalination, RSS has evolved into a temporary power provider since its 2007 launch, with a project portfolio that includes notable projects such as Atlantis the Palm, Yas Island Abu Dhabi, and Dubai Metro. The company is also providing 5.5MW for a Veolia water treatment plant in North Oman.

Speaking to Construction Week, Cox says 2015 marked a heightened preference for equipment rentals over purchase in the GCC.

“Generator rental companies like RSS have benefitted during the fluctuating oil prices in 2015, as companies are taking less risks with their capital expenditure.

“Construction, oil and gas, and heavy industries which were purchasing generators for their projects have now opted for rental, [thus] reducing the size of their purchased fleet. Hiring a temporary generator will allow these companies to safeguard their cash flow,” he continues.

Cox says Qatar and Saudi Arabia were amongst the most notable geographic markets for temporary power in the region, adding the demand for rental “is still on the rise especially during a time of uncertainty in oil prices at the moment”.

“Depending on the usage, urgency and longevity of the project, companies have a choice to purchase or rent,” he adds.

“In the case of construction projects, the economic conditions dictate that the rental market for power is much more viable than purchasing generators.”

Maintenance costs are understandably a crucial detail while picking between rental and purchase. As the RSS chief opines, expenditure can be reduced – especially in the contemporary market, where cash flow is a concern – if equipment upkeep costs are retained by the rental firm.

Steve Caygill, general manager for Byrne Rental’s UAE operations, predicts the demand for temporary power will increase on the back of this factor.

“Demand will most notably [grow for] diesel gensets in the UAE, since reduction in diesel pricing has reduced operational costs at site level,” Caygill adds.

“A consistent trend emerging from contractors is they are not seeing a long list of secured projects beyond 2015/16, and therefore, their long term strategy to raise capital expenditure for new plant and equipment is minimal. This is where rental options have gained momentum and provide solid cost control, applicable on a site-by-site basis.”

The rental trend is likely to gain further traction as GCC member states slice public spending to cope with the drop in global oil prices. With crude currently hovering around the $36 barrels per litre (bpl) mark, it is altogether possible that project development across sectors will suffer a slowdown until market fluidity returns.

This investment hesitation also impacted the compressor segment in 2015, according to Gaby Rhayem, regional director for MENA at Doosan Infracore.

“The business of portable power compressors or light towers is connected to [heavy] industry, such as construction and oil and gas, where compressors are used on job sites and for blasting operations. We saw that the construction business was alright in 2015, especially supported by activity in Saudi Arabia, where construction was very strong,” Doosan’s Rhayem says.

“The same can be said for Qatar and Kuwait. But we saw a shrink in activity due to the decline in oil prices, and globally, the compressors sector dipped by 10% to 15%, compared to 2014. Construction in Saudi could drop similarly this year, and compressors tend to follow the trend of [declines] in businesses like construction.

“I think we’ll see a drop of 10% to 15% in the compressors business this year as well, mainly since any business related to oil and gas will be affected by its plunge,” Rhayem adds.

It is unclear when the global crude market will recover from its persistent problem of oversupply. As Scott Thompson, chief investment officer of hedge-fund strategies at Ford Rock Asset Management told Wall Street Journal, “there is no intention of reducing the amount of oil that’s being produced, at least by the Saudis and a lot of the Middle East”.

That the economy of China – one of the Middle East’s largest oil importers – is also facing a slump, only exacerbates fluidity concerns for the hydrocarbon-dependent economies of the region.

However, Asif Sayeed Khan, general manager for plant and equipment at GENAVCO, is more sanguine about the region’s equipment sector.

“Dubai isn’t very dependent on the oil economy model, but as the largest Emirate in the UAE, Abu Dhabi has a higher percentage of oil revenues, which have taken a hit due to low oil prices,” he tells Construction Week.

“So you’ll see in our group’s operations that the oil and gas sector has been impacted, but the quarry business, which was dormant for some years, has now returned to the fore as aggregate demand for Dubai Expo 2020 and 2022 FIFA World Cup Qatar grows.”

Khan says GENAVCO’s 2015 growth was 4% to 5% higher than its 2014 performance, when it had surpassed its record 2008 figures as well.

Despite scepticism about the GCC’s project pipeline in 2016, Khan is confident about the region’s investment-worthiness, especially as governments amend annual budget patterns to allocate infrastructure development and social growth.

“If the government, like in Dubai, for instance, has committed to spend money in the infrastructure, transport, and other economic sectors, then the market should be able to grow. But some others in the industry might say the situation isn’t promising. Caution is key,” Khan adds.

GENAVCO’s 2015 portable power clientele included ADNOC, Dragon Oil, Etisalat, and Al Wasl Properties, which is working on the Dar wasl project in Dubai.

The firm also worked on the Al Maktoum Airport expansion project in Dubai South. Furthermore, Khan reveals GENAVCO is in the midst of formulating rental agreements with firms distributing across the GCC, which he says is an indicator of project activity in the region.

He concludes: “The feeling is that 2016 will be better than 2015 in terms of portable power. I don’t think the oil and gas sector will dip any further; the only option for it is to recover. Regional budgets and forecasts are closer to reality after the correction phase, and I’m optimistic about this year.”

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