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Higher oil prices lower appetite for debt-fueled expansion
July 21, 2018, 4:00 pm
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Oil and gas producers in Saudi Arabia, Kuwait and the UAE plan to spend more than $600 billion on energy projects over the next five to 10 years, shows a new report on the construction activity in the region.

Oil and gas producers, pipeline operators and refiners in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates that together form the six-nation Gulf Cooperation Council (GCC) bloc, borrowed $6 billion through loans and bonds in the first half of 2018, the slowest start in four years, according to data compiled by Bloomberg.

The relatively low-key borrowing was in contrast to the energy companies in the United States that issued a record $74.3 billion in debt to drive their resurgent shale production in the first six months of this year. The differing debt appetites between the six Arab exporters and US shale producers reveal that, following higher oil prices that has so far recorded an 18 percent increase this year, GCC oil exporters are now relying more on cash and less on external financing for their existing operations and new projects.

The relatively low-level borrowing by the GCC states in the first half of 2018 follows a banner year of borrowing in 2017. Energy industries in the GCC countries, which together pump about 17 million barrels per day, borrowed a record $28.7 billion in 2017, with nearly half of that ($12.8 billion) borrowed in the first half of that year. With lucrative external assets and copious wealth funds garnered during high oil price days, oil and gas producers in the GCC have also historically been less dependent on debt that their counterparts in the US

In another divergence between hydrocarbon producers in the GCC states and those in the US is that in the US borrowings tend to rise along with oil prices to finance drilling activity, while Gulf Arab producers seek debt when prices are low, and companies have to remit more money to state coffers to help plug budget deficits.

Oil industry analysts say that having raised the funds they needed last year, the GCC states are unlikely to raise more debt instruments in the near-term, especially given the high prevailing oil prices. Ironically, higher crude prices are also spurring the debt-fueled gush in US shale production. According to data from the US Energy Information Administration (EIA), the US was currently pumping a record 10.9 million barrels a day, and has averaged 10.4 million barrels per day so far this year. Shale producers in the US appear to be convinced that the shale boom is more sustainable, and hence the rush for more debt.

Recent official announcements show that oil and gas producers in Saudi Arabia, Kuwait and the UAE plan to spend more than $600 billion on energy projects over the next five to 10 years. While some of that will be financed by debt, especially for refineries and petrochemical plants, borrowings are nevertheless likely to be subdued in 2018 because many of the projects will not be launched anytime soon, say industry-watchers. Latest available data show that so far this year the biggest borrowing in the GCC has been by Abu Dhabi National Oil Company that floated a loan for $3 billion. In second place is Kuwait Integrated Petroleum Industries Company that borrowed about $1.3 billion to finance the construction of its liquefied natural gas import terminal. In the UAE, oil field services provider Shelf Drilling Holdings and borr Drilling took out a combined $1.25 billion loan, while in Saudi Arabia, the joint venture Saudi Aramco Total Refining & Petrochemical Industries Company issued a $150 million revolving credit line.

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