In a new report, the Arab Petroleum Investment Corporation (Apicorp), the investment fund of the Organization of Arab Petroleum Exporting Countries (OAPEC), states that the ongoing oil market crisis and COVID issues did not have a detrimental effect on committed gas investments in the Middle East and North African (MENA) region.
Apicorp reports that gas investments have been steady in comparison to 2019 with planned investments showing an increase of 29% to reach $126 billion. The main driver for the current increase in investment is a regional drive for cleaner power generation and the use of natural gas and condensates as a feedstock for the petrochemical industry.
In its MENA Gas & Petrochemicals Investments Outlook 2020-2024, Apicorp reports on the MENA region’s planned and committed investments for the period 2020 to 2024. Remarkably, somehow contrary to overall global developments, the region’s petrochemicals sector shows a y-o-y increase of US$4 billion in planned projects in comparison to 2019. At the same time, total committed projects showed a decrease of US$13 billion, this is largely caused by the completion of several projects in 2019. Apicorp’s report also indicated that the share of government investments in committed and planned gas projects (92%) is higher than it is in the petrochemical sector (72%).
The MENA situation is a white swan at present, as global gas demand has also been hit by COVID-19, global lockdowns, and a major economic recession. At present, Apicorp assesses that global gas demand has decreased by 4%, with Asia, the U.S., and Europe is the most affected continents. The 2020 situation stands in stark contrast with 2019, a record year for LNG Final Investment Decisions (FIDs). Apicorp remains reasonably optimistic about the foreseeable future, as it has only reduced the annual growth rate for global gas demand during 2020-24 to 1.5% compared to the pre-Covid-19 estimate of 1.8%. Even that the tenure of the report is slightly optimistic, Dr. Ahmed Ali Attiga, Apicorp’s CEO, stated that “the decrease in gas demand has put fiscal pressure on the government and private sectors alike, and we expect a few committed projects to continue facing strong headwinds in terms of payments, supply chain issues, and potential project delays.” Dr. Leila R Benali, Chief Economist, Strategy, Energy Economics, and Sustainability, Apicorp, added: “The impact of Covid-19 on MENA gas demand and the petrochemicals sector will accelerate the industrial share of domestic demand. As outlined in our Mena Gas & Petrochemicals Investments Outlook 2020-2024, gas demand is expected to grow by approximately 3.8%-4% on average compared to 6% in 2019. This downward revision is due to slower GDP growth and industrial output, the effect of price reforms, nuclear power projects coming online, and the increased share of renewables. Additionally, a prolonged depression of LNG prices will put further pressure on a few LNG exporters in the region during a time when pipeline exports were already taking a hit.”
When looking at the report, Apicorp’s optimism is based on the ongoing downstream value chain integration. Main gas players such as Saudi Arabia, Iraq, and Iran are still committed to their respective gas investments. Saudi Arabia and Iraq are looking mainly at gas-to-power projects, while Iran is increasing its emphasis on petrochemicals. The UAE also is committed to its US$22 billion gas development masterplan, which includes the well-covered unconventional and sour gas projects. As the gas world is always watching Qatar’s output expansion plans, the huge US$22 billion planned investment is still on the table. Some however are questioning the total viability and commercial attractiveness of Doha’s LNG expansion in the light of a global LNG glut.
As part of future gas success stories in the region, Apicorp expects that other regional NOCs will take the same route as ADNOC has done. The UAE oil & gas giant has sold a minority stake in its ADNOC’s Gas Pipeline Assets for $20.7 billion to international investors. Still, the future could be different already.
As is shown by the lack of progress in Egypt’s offshore developments, the immense negative impact of the COVID demand destruction, fundamentals have shifted to the negative. The planned Qatari LNG megaprojects are another concern. Investors will become wary of future investment projects if demand is improving or if long term prices aren’t improving. Going all-in on gas-to-power and petrochemicals for regional natural gas projects is risky. The total power supply in the GCC and North Africa is shifting towards an oversupply situation. Potential power export options are bleak, as infrastructure is lacking and the economic slowdown is taking a serious toll on power demand. An economic slowdown in key markets, such as Saudi Arabia, the UAE, or Egypt, will also affect demand for gas-based products, and key markets in Europe or Asia, such as India, also are not reflecting increased demand for petrochemicals.
Apicorp’s emphasis on regional domestic demand and supply is rational. Import substitution is financially and economically attractive. Still, domestic markets are not mature or large enough to be taking on the future supply of natural gas and petchem products.
Strong export markets are needed, and while global markets are all facing lower demand, MENA’s gas volumes are not the only ones hitting global markets. Others are setting up the same natural gas monetization schemes, and all are vying for a piece of the same cake. Maybe current natural gas investments are already too late, as the “Golden Age of Gas” isn’t materializing as many producers were hoping for.
The abovementioned makes current and future investments in more upstream projects highly risky. The main threat, however, comes at present from the very volatile global oil markets. MENA gas market investments are 100% linked to global oil prices. The current oil price slump, removing multibillions of revenues from the coffers of MENA governments, will have result in a lower appetite in Riyadh, Abu Dhabi, or Cairo for planned projects. Financial pressure on Aramco, ADNOC, QP and EGPC, is building. Their respective governments need additional financing to support ongoing economic development in order to keep their electorate happy. As long as oil prices are hovering below $55-60 per barrel, new gas projects will face increasing scrutiny, no matter what official plans and rosy figures in reports suggest. Some Arab countries are already in survival mode, flashy new projects which are not bringing enough additional employment opportunities are going to be axed first.