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Tue 24 Aug 2010 04:00 AM

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$230bn landscape

Contax Partner's Capex Corner: GCC Capex award realisation. Is history repeating itself in 2010? Words: Kathleen Bury, Director of Market Analysis  Nora Ismagilova, Business Analyst, Market Analysis.

Contax Partner's Capex Corner: GCC Capex award realisation. Is history repeating itself in 2010? Words: Kathleen Bury, Director of Market Analysis  Nora Ismagilova, Business Analyst, Market Analysis.

As we began 2010, the future GCC energy project landscape with $230bn worth of projects planned for award in the year, showed strong signs of ignoring and defying the world's economic challenges. National oil companies and governments sought to push strategic hydrocarbon and energy related investments through to ensure that, despite the current product supply and demand imbalances, they would be positioned for the upturn. This commitment to securing their future market position is further strengthened by their announced investment plans, which in some cases saw unprecedented investment levels.

Historical trends analysed by Contax Partners, however, shows that the perceived investment amount is not always found to be the reality and that a significant proportion of projects are postponed and cancelled; in 2008 the Capex award realisation rate stood at 30% and in 2009 it rose by a couple of percent only. This analysis begs the question, will history repeat itself in 2010, and if so, what realisation rate are we expecting to see?

Within the first 6 months of 2010 and at the time of going to print, c.$30bn worth of energy and energy related projects have been awarded in the GCC, with an additional c.$12bn still due for award in June. Although this award activity is considered to be positive given the current economic situation, it was expected in January that H1 would see $88bn worth of projects awarded. This delta equivocates to a H1 Capex award realisation rate of 34%.

Based upon this analysis, it appears as though 2010 could follow a similar trend to previous years. For organisations operating or wanting to operate in the region, it is critical that the ‘realistic' situation is analysed and used as the basis for decision making, rather than the ‘perceived' situation. What offers far more meaning, however, is to understand the typology of projects that are being affected, especially when the need for targeted business development is at the top of most corporate agendas. In an effort to offer further insight on this, Contax Partners regularly analyses the project Capex market from a variety of angles. For the purpose of this article, three angles have been selected; country, sector and project size.

In January, the two largest markets, Saudi Arabia and the UAE, planned to award a combined total amount of c.$157bn, nearly c.68% of the GCC's total planned energy and energy related project Capex for the year. For H1, these two ‘boom' markets planned to award c.$67bn worth of projects. At the time of going to print, however, H1 has seen Saudi Arabia and the UAE only award c.$23bn worth of projects, thus resulting in H1 Capex award realisation rates of 23% and 48% respectively. Interestingly, however, although Qatar's energy investment boom has slowed down considerably over the past year or so, Qatar's H1 realisation rate is by far the highest, standing at 84%.

From a sector perspective, over the past few years, the power sector has been the largest of the energy sectors in the GCC from a Capex perspective. When looking at the planned project market in January, the data showed that this situation was likely to continue in 2010 as c.$53bn worth of projects were due for award in the year. Following closely behind was the refining sector, which anticipated the award of c.$52bn worth of projects. Together, these two sectors accounted for 45% of the GCC's total planned Capex for the year.
To date, each of these sectors has seen extremely low Capex award realisation rates, 21% and 13% respectively. Interestingly, the oil and gas production and petrochemical sectors saw far more positive and promising realisation rates with 42% and 156% respectively. The key turnaround sector here is the petrochemical sector which saw a significant slowdown in project awards last year as a result of the global decreased demand for petrochemical products. Based upon this analysis, it looks as though the much awaited and talked about petrochemical upturn is beginning to happen.

In the early 2000s, projects with Capex figures around the $500m mark were considered to be large scale projects. Today, these are considered to be small-medium scale projects. To analyse the Capex realisation question from an alternative perspective, by project size, we have grouped the projects into three main categories; small scale projects - those with a Capex value less than $500m, medium scale projects - those with a Capex value between $500-$1000m and large scale projects - those with a Capex value greater than $1bn.

If we look back to 2008 (a peak year of activity) and 2009 (during the economic crisis), it is evident that, based upon the number of projects, the small scale project category had the greatest Capex award realisation rate that was consistently above 70%. Looking at the category from a Capex value perspective, again the small scale project category has always maintained a greater than 60% rate. Given these trends, it could be said that small scale projects have a high Capex award realisation rate as they are not so affected by market conditions and therefore a safe bet to ensure sustainable revenue generation. Looking to the medium scale projects, the trend witnessed with small-scale projects is certainly not the case. From both a number of projects and project value perspective, the medium scale projects are seen to have a relatively volatile Capex award realisation rate that is affected by the market conditions.

The need for greater assessment when targeting these projects to ensure they have the greatest chances of being realised is critical. Finally, looking to the large scale project category, it is evident that it typically has the lowest Capex award realisation rate and again is subject to various volatility pressures; the sheer sizes of the project that are being constructed today and the associated complexity around the planning and execution of these projects, the levels of investment required and the associated challenges around the securing of funding and finally the global product demand and supply situation which questions the internal rate of return (IRR) for a number of these projects.

To increase your chances of short term business survival and solid positioning for long term success, a ‘mixed bag' approach to the selection of opportunities, continuous monitoring of the Capex award realisation rates across various categories and the subsequent assessment of their likelihood of proceeding (Contax Partner's project tiering methodology) are key. Do you know the realisation rates and tiers of the projects that you are currently targeting?

To further discuss how the Business Advisory Team can help you understand the changing market dynamics, the potential realization rates and likelihood to proceed tiers for your projects, the full set of opportunities open to you and the best strategy/approach to ensure the opportunities are successfully secured, please contact Ann-Marie Carbery Antoun at AnnMarie.Carbery@contaxpartners.com. We look forward to speaking with you!