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OPEC to embark on US$300bn infra spending drive

Gaurav Sharma 15/12/2011 Vienna, Austria (IJ Online) – The 12 member nations of the Organization of the Petroleum Exporting Countries (OPEC) are to embark on an oil and gas upstream infrastructure investment drive to the tune of US$300 billion between 2011 and 2015, the oil producers’ group clarified to IJ News on the sidelines of a ministerial summit. The stated medium term investment figure, which has been the subject of some ambiguity in the range of US$290 billion to US$315 billion, is based on a crude oil price assumption reference case of US$85 to US$95 per barrel for the current decade, an OPEC secretariat spokesperson told IJ News.

OPEC Secretariat Headquarters in Vienna, Austria, © Gaurav Sharma 2011

Based on the latest upstream project list provided by member countries, the OPEC database records 132 projects for the five year period between 2011 and 2015 which translates into US$300 billion by deal valuation assuming all projects reach financial close. Many of these – especially Algerian, Kuwaiti and Qatari initiatives – are widely expected to involve debt finance.

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The investment figure would result in a net increase of up to seven million barrels per day (bpd) above current OPEC production levels by 2015. These projects would be on top of ancillary oil and gas infrastructure projects such as pipelines and export terminals, the spokesperson clarified. Of all 12 members, the Qataris have always been active in debt finance market for oil and gas projects (as the recent financial close of Barzan project demonstrates) while the Kuwaitis have made public knowledge of their respective investment plans several times over the course of the year. However, Algeria has emerged as the surprise package accounting for US$47 billion worth of upstream projects between 2011 and 2015; which is 15.7 per cent of the total OPEC figure. Algerian oil minister Youcef Yousfi told IJ News that theirs was not some sort of a vanity exercise. “Based on forward planning, our (planned) field developments are expected to add new capacity in the region of 100,000 bpd by 2015. The investment cap via Sonatrach (Algeria‟s national oil company) would facilitate this and we would seek strategic partnerships with the wider market and within OPEC,” the minister added. On the flipside, while projects from both Iran and Venezuela are duly listed in the OPEC database, the Iranians, for whom the debt markets would largely be off-limits courtesy of international sanctions, are unlikely to give project financiers much joy. Concurrently, market commentators also believe Venezuelans would see operating risks being priced-in to the debt finance on account of the Chavez administration‟s nationalist streak. “Therefore it might be unaffordable for the Venezuelans at best and „allegedly‟ not needed at worst. However, unlike Iran there is likely to be participation from both Spanish banks and the country‟s oil and services companies owing to historic connections,” opined one commentator.

OPEC's 160th meeting concludes in Vienna, Austria – seated (R to L) OPEC Secretary General Abdalla Salem El-Badri and President Rostem Ghasemi © Gaurav Sharma 2011.

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Earlier, OPEC agreed to maintain oil production quotas at 30 million bpd. Overall, most commentators welcomed the OPEC medium term upstream infrastructure investment figure and the group members‟ hints at approaching the debt markets. For some, investment is a macroeconomic imperative. Wim Thomas, chief energy adviser at oil major Shell, believes that the wider industry, producers and consumers have to adapt to changing circumstances in what is an era of volatility. “We probe scenarios based on the existing signals around – global energy consumption patterns, climate change issues and the macroeconomic environment. On the energy side, the question is simple – where could we be in 2050 from where we were in 2000? A „business as usual‟ world would need about three times as much energy in 2050 as it did in 2000 because of fast growing emerging economies, especially in Asia,” Thomas told IJ News. “Now, if we turn our attention to the supply side of the equation, we reckon that producers could double energy production over that period. The IEA forecasts that US$38 trillion of investment would be needed to meet world energy demand over the next 25 years. Nonetheless there will be a supply-demand gap and the challenge would be to bridge that gap either with extraordinary supply increases or extraordinary demand reduction,” he concludes. With task at hand clear to both OPEC and non-OPEC project sponsors, some commentators believe the prospects of project finance and limited recourse funding are good for NOCs. Michael Wachtel, partner at law firm Clyde & Co notes, “The prospects for OPEC member NOCs should be good provided they are willing to provide the usual covenants and protections to the lenders by amending their standard form production agreements and in some cases having enabling legislation passed to make the necessary amendments effective. From our experience the trend is that they are more and more willing to do this in order to access limited recourse finance, although negotiations remain challenging in some areas.” He thinks that international commercial banks are more relevant to NOCs in cases where they wish to use limited recourse finance. “Often NOCs are a country's major source of revenue and compared to IOCs they therefore have relatively fewer requirements for full recourse borrowing facilities,” Wachtel adds. NOCs are generally able to borrow money with the usual lending facilities on both a limited recourse and full recourse basis. However, the banking crisis and the scarcity of capital may have increased the cost of this access to finance according to commentators including Wachtel and none of the OPEC delegates randomly polled here by IJ News displayed any aversion to approaching the debt markets. However, OPEC is less forthcoming on downstream investment especially in light of the challenges faced by the refineries business. A communiqué suggests the member nations are only committed to a reference case scenario, wherein using a guide price of US$85 to US$95 per barrel, an estimated “US$1.2 trillion would be needed between 2011 and 2035. This

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would be split as US$210 billion for existing projects, US$300 billion for required additions and US$700 billion for maintenance and replacement.” The speed and employment of investment capital and debt procurement is likely to differ across the OPEC board but again Qatar and Kuwait are likely to be the main movers and shakers. Akin to the upstream infrastructure figure, the downstream investment data also excludes ancillary infrastructure beyond the refinery gate such as pipelines and ports.

This report was first published by Infrastructure Journal on Dec 15th, 2011.

All content © Copyright 2011 Emap Limited, all rights reserved.