USSABC: KSA's oil and gas sector "continues momentum"

CW highlights key points from the USSABC) Contract Awards Index (CAI) for Q1 2020

Saudi Arabia, Oil, Gas, US-Saudi Arabian Business Council (USSABC), Middle east

The Kingdom of Saudi Arabia is home to multi-billion-dollar gigaprojects, which are collectively contributing to help the Gulf nation diversify its oil-reliant economy in line with the Vision 2030.

From the 336km2 ‘entertainment, sports, and arts destination’ Qiddiya to the 24,000km2 The Red Sea Project to AMAALA — an ultraluxury resort destination, NEOM, Diriyah Gate as well as Riyadh Metro, King Salman Park, and King Abdullah Financial District (KAFD), all these projects and more are shaping Saudi Arabia’s future.

However, Q1 2020 had been a time of slowdown, due to the outbreak of COVID-19, which not only invited strict safety and social distancing measures, but witnessed complete lockdown in many countries. Saudi Arabia was no exception.

This, naturally, affected various sectors, further witnessing a significant drop in the value of contract awards in the first quarter of 2020.

According to the US-Saudi Arabian Business Council (USSABC) Contract Awards Index (CAI), the value of contracts awarded in the kingdom in Q1 2020 glided by 8% y-o-y to reach $12bn (SAR45.2bn), despite increasing 28% compared to Q4 2019.

The drop was mainly due to the “downturn in the number of projects for the remainder of 2020 resulting from COVID-19 and the reduction in global oil prices”.

By the end of Q1 2020, USSABC’s Contract Awards Index climbed to 216.6 points, despite having “briefly dipped” below the 200 point mark in January for the first time since May 2019. The CAI briefly fell to 196.98 points in January before climbing up to 212.9 in February, and ending at 216.60 in March.

Yet, the CAI in Q1’20 grew by 28% y-o-y reflecting on the spike witnessed throughout the rest of 2019, and into the first quarter of 2020.

The value of contract awards was led by the military sector, which secured 33% of the contracts valued at $4bn (SAR 15bn), followed by oil & gas with 25% worth $3bn (SAR 11.2bn); and petrochemicals with 18% corresponding to $2.2bn (SAR 8.3bn), together these sectors accounted for approximately 76% of the total value of contracts.

According to the USSABC report, the military sector was led by two megaprojects including the construction of the King Salman airbase and of the King Faisal air academy, with each of the projects being valued at $2bn (SAR 7.5bn).

The kingdom’s oil & gas sector, on the other hand, continued its momentum from 2019. Saudi Aramco continued to award contracts for the development of the Marjan oil field as well as Safaniya and South Ghawar in the Eastern Province.

Meanwhile, Q1 also saw a notable pickup in the value of petrochemicals contracts, as Saudi Arabia continued to develop its downstream oil & gas capabilities in line with Vision 2030.

Water, power, and real estate contracts accounted for 18% of the total value of the awarded contracts, while 6% were in other sectors.

Provincial breakdown

According to the USSABC report, the Eastern Province recorded the majority of contract awards covering 48% of the total contracts in Q1 2020. This figure is equivalent to $5.8bn (SAR 21.8bn).

All of the contracts in the oil & gas and petrochemicals sector were awarded in the Eastern Province, which accounted for $5.2bn (SAR 19.5bn). The power, real estate, and transportation sectors also contributed to the contracts awarded in the Eastern Province.

In Riyadh, on the other hand, contracts awards stood at $4.4bn (SAR 16.6bn), equivalent to 37% of the total contracts awarded in Q1 2020. Riyadh was dominated by the military sector, with other contributing sectors being real estate, healthcare, and transportation.

Furthermore, the Madinah region recorded $752m (SAR 2.8bn) worth of contracts, with one of the major contracts being $700m (SAR 2.6bn).

While the Makkah region contributed $533m (SAR 2bn), equivalent to 5% and was led by the education and power sectors.

The oil and gas sector registered the second highest value of awarded contracts during Q1 2020 with $3bn (SAR 11.2bn). On a   y-o-y basis, the oil and gas sector remained relatively stable, as it declined by only 4% during Q1 2020. Meanwhile, the sector grew by 46% q-o-q as the pace of the contracts slowed at the end of 2019.

Saudi Aramco awarded Samsung Engineering C&T a contract worth $800m (SAR 3bn) in February, where the contractor will be responsible for the development of the Marjan cogeneration independent steam and power project (ISPP).

The scope of the project includes the construction of a 700 to 900MW power plant, construction of substations, a 20,000m2 desalination plant, a seawater intake system, installation of three heat recovery steam generators, along with associated works. The project is expected to be completed by Q1 2023.

In the petrochemicals sector, two large contracts were awarded in Q1 2020.

Saudi Arabian Stock Market-listed Advanced Petrochemical Company signed a deal with South Korea’s SK Gas to construct and operate a propane dehydrogenation (PDH) and polypropylene (PP) plants in the kingdom’s Jubail Industrial City, with the project value being $1.8bn (SAR 6.8bn).

Advanced Petrochemical Company’s subsidiary Advanced Global Investment Company (AGIC) and SK Gas formed a joint venture (JV), Advanced Polyolefins Company, which will work on the plants.

Together the plants will have a nameplate capacity to manufacture 843,000 tonnes per year, as well as 764,756.7 tonnes of propylene and 800,000 tonnes per year of polypropylene.

Construction on the plants is expected to begin in 2021, and is expected to be completed by Q4 2024.

Within the water sector, Saudi Water Partnership Company (SWPC) picked a consortium comprising ACWA Power, Gulf Investment Corporation (GIC), and Al Bawani Water & Power Company as the preferred bidder for the Jubail 3A independent water project (IWP). Once operational, it will have a capacity to produce 600,000m3 per day.

Located in the South of Jubail City, the plant will serve Riyadh, Wassim, and Eastern provinces by providing potable water. The project also includes storage tanks of one day production as well as in-house solar power to reduce the power consumption from the network. 

Jubail 3A is a part of Jubail Phase 3 IWP that also includes Jubail BB with 570,000m3 potable water capacity per day.

Contract awards outlook

Despite the slowdown caused by the COVID-19 pandemic, the government’s capital expenditure spending during Q1 2020 further strengthened the construction sector.

According to the report, the kingdom had spent approximately 4% less on its capital expenditures y-o-y.

Another positive development was an 81% y-o-y increase in the infrastructure and transportation sector, which also represented 22% of the annual budget.

In order to address the negative effects of the pandemic, Saudi Arabia put in place stringent fiscal measures, which has amounted to more than $72bn (SAR 270bn) worth of budgetary cuts and stimulus plans.

According to USSABC, the next two quarters of 2020 will reveal the extent to which the pandemic has affected the construction sector in the kingdom.

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