GCC States Get More Financial Muscle But Face Unprecedented Rise In Project Costs.

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DUBAI - The six states of the Arab Gulf Co-operation Council (GCC) have seen their financial muscle expand rapidly since world oil prices have risen in the past seven years. But they have faced a more rapid rise in the costs of projects across the board. They have ventured into bold acquisitions in the West, with Qatar and Dubai competing for control of prominent stock exchanges in the West and Abu Dhabi going for higher stakes.

Despite a petroleum-fuelled boom, however, the GCC region is affected by all global developments, including a credit crisis which has come out of the recent collapse of the US sub-prime. The fall-out from loose lending to those at the bottom of the US income spectrum is spreading across the world and hitting the GCC.

It was in late 1979 that world crude oil prices hit a real high of $109/b, in today's money adjusted for inflation. So when WTI now its $85/b, or $90-100/b by end-2008 as some predict, people remember that crude oil and other sources of energy are still considerably cheaper than they used to be three decades ago. One should see things also in relation to project costs, which have risen more than three-fold since 2002. The value of the US dollar has fallen to its lowest since 1992, on Sept. 28 dropping to an all-time low of over $1.42 to a euro and WTI hit $83.78 (see omt13SaudiProspSep24-07).

Stock markets in New York and London have tumbled and international banks have lost considerably. Most businesses in Middle East, which had assumed the global crisis would bypass them, are suffering as in the case of the region's project finance borrowers.

Borrowing deals in the Middle East, which were coming out expecting to price 60 or 70 basis points above the London inter-bank offered rate (Libor), are now getting close to three digits. No one knows what the full extent of the effects will be on Middle East projects.

Independent estimates for Kuwait's 615,000 b/d al-Zour oil refining project have risen from $2 bn in 2002 to more than $17.5 bn. Two 400,000 b/d oil export refineries planned in Saudi Arabia at a cost of $7-8 bn each in 2005 now are in suspense as each of these plants is estimated to cost over $13 bn at current prices - a development also likely to affect the kingdom's offshore field development to produce 900,000 b/d of heavy crude oil which these two refineries are supposed to process into premium fuels (see down14SaudiRefOct1-07).

International banks lined up to finance such projects in the GCC area are reassessing the market on a week-by-week basis. No one expect it to stop many projects, but their promoters will have to pay more to get them off the ground and use a few more banks than they expected.

Against this perspective, however, Qatar and Dubai are engaged in a latent war for important stakes in the London Stock Exchange (LSE) and the Nasdaq stock market in the US. The stakes went to Dubai recently in a move which has got New York lawmakers worried. But the Qataris, who then were on the verge of acquiring the assets, are fighting back (see below).

Yet the much wealthier state of Abu Dhabi is coming up with big acquisition coups - though with less fanfare than in the case of Qatar or Dubai - as several newly-created companies are buying important assets in the West. The state-controlled power firm Abu Dhabi National Energy (Taqa) has recently agreed to buy Canada's PrimeWest Energy Trust for about $5 bn, including debt. The $26.75-per-share offer represented a 34% premium to PrimeWest's closing price on Sept. 21.

This was the latest in a string of deals between Abu Dhabi and North American properties. Recently, the powerful private US equity company Carlyle Group sold a 7.5% stake in it to Abu Dhabi for $1.35 bn.

The PrimeWest buyout is the sixth overseas acquisition for Taqa since November 2006. Based in Calgary, PrimeWest produces and sells crude oil and natural gas. In 2006, it bought oil properties in Montana, North Dakota and Wyoming. This acquisition gave Taqa a 61,000 b/doe in production of North American oil and gas. Shares of PrimeWest surged nearly 32% on Sept. 24, to $26.26. But Taqa is also moving into GCC opportunities, planning to invest in a Kuwaiti energy venture.

The acquisition of PrimeWest is expected to close by end-November. The deal - the third made by Taqa in Alberta since May 2007 - will not be the last as the company seeks to increase the size of its Canadian subsidiary, Taqa North, from $7.5 bn currently to $20 bn by 2012 through production growth and additional purchases. Taqa CEO Peter Barker-Homek was on Sept. 25 quoted as saying: "Further acquisitions will come, and certainly Canada is an area in which we are looking for further opportunities to grow the business and get to scale". But it is unlikely that Taqa - which has plans to grow from a current international asset base of $21 bn to around $60 bn by 2012 - will nail down any more deals in Canada in 2007, with 2008 a more realistic target.

So far Taqa, which followed up its US$2 bn purchase in May of Calgary-based Northrock Resources by buying Pioneer Natural Resources Canada Inc. in August for $540m, has focused on purchasing conventional oil and gas producing assets in Alberta. It has previously outlined plans to snap up Canadian energy trusts adversely affected by low gas prices and a fall-out from the federal government's corporate tax decision.

The acquisition of PrimeWest - Canada's seventh-largest energy trust, with production weighted to natural gas - fulfils those criteria. It gives Taqa North's output of around 111,000 b/doe - vaulting it to a place among the top 14 oil and gas producers in Canada. Barker-Homek said that, while the trust sector remained attractive for acquisitions, Taqa did not plan to limit itself solely to conventional oil and gas fields and will seek to develop a broad portfolio of Canadian assets. But the company has no plans to look at oil sands opportunities at present, which would provide an additional challenge to the company's attempts to establish itself in Canada.

Taqa, majority owned by the Abu Dhabi government and founded in 2005, is seeking to use its cash-rich position to evolve into an oil and gas player with a strong international presence. It is buying established firms in order to build itself rapidly from a small base.

Samuel Ciszuk, a London-based analyst with consultancy Global Insight, on Sept. 25 was quoted as saying: "In the old days, Middle Eastern oil firms used to take the money from their domestic operations and just send it to European investment banks, but now they're trying to build a business empire themselves. This is an attempt by the UAE to try and build an international upstream energy company, which will help to industrialise the country's economy and maybe even help to provide revenue when their own oil runs out one day".