Oil producers plan $ 740 bn investment in energy projects

Updated 07 October 2012

Oil producers plan $ 740 bn investment in energy projects

JEDDAH: Oil producers in the Middle East and North Africa plan to invest $ 740 billion in energy projects in the next five years, led by the Kingdom, according to Arab Petroleum Investments Corp.
Saudi Arabia tops the list with committed investments of $ 165 billion, mostly generated by Saudi Aramco and Saudi Basic Industries Corp. (SABIC), followed by the UAE that plans to invest $ 107 billion in the period, added the report from Apicorp Research.
Algeria overtook Qatar and Iran as the third-biggest investor, with $ 71 billion of potential spending, largely the result of catch-up investment.
Iran's energy spending program has been put at $ 68 billion, said the report.
Despite moving up the rankings ahead of Qatar and Kuwait, Iraq with $ 56 billion worth of capital requirements is still far below its huge potential.
The report said MENA energy capital investment is expected to add up to $ 740 billion for the five-year period 2013-17. Compared to past assessments, which have been uniformly and consistently revised to reflect the full scale and scope of the power sector, investment appears overall on the rise again, driven mainly by costs and a catch-up effect, the report said.
It said investment has been affected to different degrees in countries still facing political and economic uncertainties and/or a precarious environment. This is the case in Egypt, Libya and to a larger extent Yemen.
Notwithstanding sustained expansion of investment, power supply has fallen short of needs. To catch up with unmet potential demand, medium-term capacity growth, which has been worked out on a country by country basis, is expected to be much higher than that of economic output: 7.8 percent for the period 2013-17 against 4.5 percent for GDP.
According to the APICORP report, the cost of an "average energy project," which has risen almost three times between 2003 and 2008, has resumed its upward trend after somewhat stabilizing in the middle of the global financial crisis. However, the relatively moderate 7 percent upward trend underpinning the current review should not mislead. The extent to which project costs are predictable depends on the outlook for the price of engineering, procurement and construction (EPC), and its components.
In a context of widespread deleveraging, the financing of energy projects is expected to be structured with less debt. On one hand, the upstream, midstream and T&D systems in the power sector will continue depending heavily on internal funding in the form of either corporate retained earnings or state budget allocations. On the other, the hydrocarbon downstream, which has traditionally relied on debt, typically in a proportion of 70 percent, will need more equity.
In addition to the deteriorating investment climate, three issues continue to confront investors - rising costs, scarcity of natural gas supply and funding limitations.
Countries in the region can finance projects on their own as long as the basket of OPEC crudes stays at more than $ 100 a barrel, the report said.

Negative rates forever? Central bankers look for an exit

Updated 21 October 2019

Negative rates forever? Central bankers look for an exit

  • Negative interest rates are now a fact of life in Europe and Japan, and multiple other countries including the US are lowering their target policy rates
  • Negative interest rates may be hiding “deep underlying problems,” a “sign of sickness for developed economies,” says Iceland's Central Bank chief

WASHINGTON: The world’s most powerful policymakers are struggling to alleviate the pain of a slowing global economy with few levers left to pull and growing concern that one of them, negative interest rates, already is creating problems of its own.

In an ideal world, elected officials would pull more of the weight with fiscal programs and structural reforms that would improve growth and allow interest rates to rise.

But over three days of conversation here, the dilemma has become clear: Whether it is the US-China trade war, tightfisted spending in Germany, or the drawn-out Brexit, broader government policies are moving in the other direction — driving central bankers to mount further rescue efforts, and likely leading to even more negative yielding debt.

“We still have tools which could be used as necessary,” said Bank of Japan Governor Haruhiko Kuroda. “I don’t think the effect of monetary policy has declined significantly or materially.” Still, Kuroda said that a prolonged low interest rate situation could have “side effects on the financial system. You have to be careful.”

Negative interest rates are now a fact of life in Europe and Japan, and multiple other countries including the US are lowering their target policy rates.

“It is not really clear how we are going to get out of this,” Stanford University economics professor John Taylor said at a meeting of the Institute of International Finance.

He spoke at a central banking panel that showed just how much the landscape has shifted in the decade since the 2007 to 2009 financial crisis. Far from debate over whether unconventional policies are appropriate or not, the discussion is now about whether traditional central banking can even survive — or whether oddities like negative rates have become self-reinforcing, and whether central banks will need to begin overtly financing government programs to get the fiscal spending that may provide an exit from them.

“We have got to make it easier for politicians to run fiscal policy when monetary policy is essentially not operating well,” said former Federal Reserve vice chair Stanley Fischer, now a senior adviser with investment management firm BlackRock.

Conversation at the International Monetary Fund and World Bank meetings this week was dominated by two concerns — a global economic slowdown driven by “policy shocks” that might have been avoided, and the risks to pension funds, banks, and overall financial stability posed by the roughly $15 trillion, estimated by the IMF, in bonds that now pay a negative interest rate.

With easier monetary policy being used to dampen the impact of the trade war and other risks, some analysts worry about the moral hazard of central bankers underwriting the very policies they feel are slowing growth.

“There is a kind of benign view that central banks are just kind of doing their best to offset the damage done by one set of policymakers in one side of the government,” said Brian Coulton, chief economist at Fitch Ratings. “There is a real danger in misplaced faith in the capacity of central banks to fix all these growth challenges.”

Yet they may have no choice. IMF economists slashed their forecasts for global growth to the slowest pace since the 2008-2009 financial crisis, ahead of the conference, setting the tone for a somber mood.

In a communique issued on Saturday, the IMF’s steering committee said member countries should “employ all appropriate policy tools, individually and collectively, to mitigate risks.”

With interest rates close to or below zero, asset purchases are now the main policy tool for some central banks. The ECB, for example, has cut its key rate to a record low of minus 0.5 percent and launched an indefinite bond buying program that will likely keep it in the market for years to come.

“The risks surrounding the euro area growth outlook remain tilted to the downside,” outgoing ECB President Mario Draghi said at the IMF meeting on Friday. “The Governing Council continues to stand ready to adjust all of its instruments.”

Beyond the euro zone, the US and Japan, other nations are also easing rates. The Russian central bank, which has been cutting rates this year as economic growth slowed and inflation waned, will be ready to act “more decisively” when cutting interest rates, Governor Elvira Nabiullina said.

Ukraine central bank Deputy Governor Kateryna Rozhkova said the bank intends to cut the key policy rate gradually.

While lower rates support growth, the consequence of ultra-accomodative policy is that it can breed higher risk taking, as investors search for yield, said experts.

“We do worry about the side effect, which is that investors are reaching for yield,” said Tobias Adrian, financial counselor and director of the IMF’s monetary and capital markets department. “That is ultimately what is driving high yield bonds into negative territory in some parts of the world.”

Adrian pointed to leverage rising in the corporate sector and said the IMF saw stretched valuations in some equity markets, many corporate bond markets, and government bond markets around the world.

Negative interest rates may be hiding “deep underlying problems,” said Ásgeir Jónsson, governor of the Central Bank of Iceland. They’re a “sign of sickness for developed economies.”