The prevailing unrest in certain areas in the Middle East and North Africa (MENA), along with rising costs, will hamper investment in the upstream hydrocarbon sector, a report by the Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Organization of Arab Petroleum Exporting Countries (OAPEC), said Sunday. Although the region is home to more than 60 percent of the world's extractable oil deposits, investment in hydrocarbon projects by MENA countries is estimated at only around $2.7 trillion until the year 2035, a fraction of the total global energy projects worth nearly $37.5 trillion, the report noted. It cited a report by the International Energy Agency (IEA) showing oil supply accounts for $10 trillion, representing 26 percent of the total capital. The report, written by Apicorp's senior consultant Ali Aissaoui, said natural gas accounts for $9.5 trillion, representing 25 percent while coal projects are estimated at $1.2 trillion, nearly three percent and biofuels at $400 billion, accounting for about one percent. The highest share is that of the power sector, which includes electricity generation, transmission and distribution systems. This sector accounts for $16.9 trillion representing 45 percent of global energy supply investment. The report noted that cost inflation is the most important factor driving the increase in energy investment in MENA and other parts of the world. The report which was presented to an international energy forum in Kuwait early this week, listed factors for the likely causes for delay in upstream projects in MENA which also holds over 40 percent of the world's gas, such as: • A deteriorating business climate and higher perceived risks; • Potential renegotiations of agreements in the wake of changing regime circumstances; • Prudent or conservative oil and gas depletion policies; • In case of conflict, durable loss of production due to serious damage to infrastructure; • A serious constraint on financing. All policy advisor institutions have established that the costs of energy projects worldwide have at least doubled during the last decade or so, largely due to rising cost of input factors, it added. Moreover, costs in the upstream sector have been found to correlate closely to both oil prices and the levels of exploration and development activities," the report said. "MENA is normally expected to invest $2.7 trillion upstream through to 2035 out of $3.9 trillion of total energy investment…. however, investment in the medium term, which stems from a bottom-up approach, may not be forthcoming," said the study. Further, the report said financing of energy projects is basically determined by the structure of capital requirement, which Apicorp has established to be 43 percent debt and 57 percent equity for MENA oil and gas as a whole. Debt, which is dominant in the downstream sector, is sourced externally. "With still limited opportunities for raining funds from the capital markets, both domestic and international, debt is typically provided through the syndicated loan market….unfortunately, this market has collapsed in the wake of the eurozone debt crisis, as most European banks have pulled out of the region," it said. "In contrast, equity, which is a dominant part of the upstream sector, is generally financed internally through retained earnings and state budget allocations….therefore, equity could only be secured if oil prices remain above $100 a barrel, which corresponds to the current estimated average fiscal break-even price within the OPEC area." The study said that amid major shifts in the patterns of global demand and supply, the MENA region is expected to provide the bulk of crude oil production growth, and a large amount of natural gas. "This involves upstream investment of over $100 billion per year through to 2035 in the IEA's central scenario. It is far from certain that such inflated levels of investment will be forthcoming. In the medium term, which takes a bottom-up approach, the causes for delay are all likely when not already a reality," it said. "In this context, continuing global demand growth ought to have dramatic impacts on prices. In the longer term, which takes a top-down approach, MENA and its core producers are treated as passive residual suppliers with little regard to their policy objectives and constraints."
