Energy market opportunities in the Gulf region

Strong government investment and low taxes and debt levels make the Gulf region one to watch

 

In 2012, foreign direct investment (FDI) into the Gulf Cooperation Council (GCC) area rebounded to close to pre-crisis levels, boosted by renewed investment in hydrocarbons. The region had seen a decline in investment as key development projects were called off, but is now recovering.

FDI has since gone up 13.8 percent in the six-nation cooperation zone between 2011 and 2012, according to the Kuwait-based Gulf Investment Corporation. Increased government investment and booming local equity markets have both contributed to the renewed foreign interest in the region, according to a recent ‘asset management barometer’ released by the Qatar Financial Centre Authority (QFCA).

The report indicated that Qatar and the UAE “seemed to offer the most potential” among countries in the region. Part of the aim of the report is to determine future trends, and it is based on telephone interviews with 45 senior bankers in the GCC, Egypt and Morocco. Bankers are reported to have expressed the desire to return to a more ‘risk-on’ approach in finance, chiefly characterised by asset managers moving from fixed income to equities.

Yousuf Mohamed al-Jaida, Chief Strategic Development Officer at the QFCA said the barometer revealed important upcoming trends for the GCC region. “It reveals confidence in the continued expansion of GCC and MENA (Middle East and North Africa) markets in 2013. Fund managers expect more weighting towards equities and away from fixed income, encouraged by government investment and progress in developing financial centres around the region.

“They would also like to see more regulatory convergence. Regulation is seen as having the biggest impact on the conduct of business and as the major cost. There is strong support for shariah-compliant finance, but again fragmented regulation is a hindrance.”

A lot of energy
The region as a whole commands over 40 percent of the planet’s known oil reserves, and the six countries have always been key players in the energy industry. Saudi Arabia, in particular, because of its wealth of fossil fuels, is instrumental in determining market trends. Since the shale gas boom started in the US, the Kingdom has been keen to broaden its energy portfolio by investing in alternative energies and water.

“In the coming years, far more attention will need to be placed on demand supply management,” explains Debbie Stanford-Kristiansen, the International Events Director at PennWell Corp Middle East. “To ensure sustainable growth in the long-term, more investment needs to be channelled towards energy-efficiency measures, such as clean fuel and renewable energy supplies, improving water efficiency, investing in new water desalination capacity and buying or leasing agricultural land abroad.”

Saudi Arabia, in particular, because of its wealth of fossil fuels, is instrumental in determining market trends

There is a wealth of investment opportunities arising in the GCC area. The region has recently turned its attention to solar power. According to Stanford-Kristiansen, “In view of the demand-supply gap and abundant availability of sunlight as a resource in the GCC, more emphasis needs to be placed on solar power as a viable energy source to meet emerging needs. In order to cater to peak loads, GCC governments need to implement new projects to mitigate ageing power infrastructure and support new diversification plans.”

Saudi Arabia’s minister for oil, Ali al-Naimi, has suggested the Kingdom is likely to invest in alternative energy sources in order to service domestic demand, and to remain competitive in the oil export market. There is particular interest in unconventional shale reserves. “We have rough estimates of 600 trillion cubic feet of unconventional shale gas. The potential is very huge and we plan to exploit it,” the oil minister said, during a Credit Suisse press conference.

Not a lot of taxes
The QFCA report has also suggested that the GCC region is recovering from the political unrest that affected neighbouring regions in 2011. However, 38 percent of the bankers interviewed believe that political unrest is the largest negative impact on local markets. This view is not corroborated by auditors Ernst and Young (E&Y), who have claimed that the time is ripe for investing in the GCC because of its large internal markets and stable political environments.

At its MENA Tax Conference 2013, E&Y also suggested that foreign investors are returning to the region because of favourable tax rates. The GCC attracted over 79 percent of FDI projects in the MENA region between 2003 and 2011, making up over 62 percent of the value of business projects and over 65 percent of the jobs created. “One of the factors defining the fiscal landscape in the MENA region is the low corporate tax rate prevalent in many countries, with the effective corporate tax rate in Qatar at 10 percent, Oman 12 percent; Iraq and Kuwait 15 percent, and Saudi Arabia at 20 percent,” explains Sherif El-Kilany, the MENA tax leader for E&Y.

Despite the lull in FCI in 2011, the GCC remains a favourable environment for investment. Particularly as the US and Europe continue to struggle with out of control debt. GCC countries, conversely have traditionally boasted strong government investment, low debt and reliable income from fossil fuels. The growth in Islamic financial services in the region will face some challenges ahead as the GCC countries seek more uniformity in regulation, but there is much promise in the sukuk market.

Saudi Arabia alone issued $10.5bn in sukuk in 2012, a 278 percent increase from 2011. The GCC’s sukuk issuances are estimated to surpass the $35bn mark in 2013, according to Mohammed Dawood, Managing Director at HSBC Amanah. There is little doubt that investor’s appetites have been whetted by opportunities in the Gulf region.

Several industry leaders have played a key part in bolstering the GCC’s economy, including winners of the GCC Investment and Development Awards 2013.