As the world financial system teeters on the brink of collapse, the energy industry has been a lone bright spot, feeding off record oil prices to undertake the largest expansion in oil, gas and alternative energy capacity in history.
Day rates for drilling rigs and engineers have soared, oil companies are swimming in profits and farmers around the world are reaping a harvest of record prices for their crops, which can be turned into ethanol and biodiesel to supplement crude production.
But a severe tightening of credit and the ensuing contraction of the global economy would be a death knell for many of the world's marginal energy producers, ranging from exploratory oil wells in the Sahara desert to research firms seeking to develop algae as a competitive source of biodiesel, analysts say.
For state oil firms like the Abu Dhabi National Oil Company and the international oil majors, the effects will be difficult to detect since they can fund projects out of the huge cash reserves they have amassed in recent years from record-high oil prices.
But smaller firms are much more vulnerable.
Robin Mills, the petroleum economics manager at Emirates National Oil Company in Dubai, said the credit crunch would have a significant impact on oil development projects in North Africa, especially Algeria and Egypt, where small companies have taken exploration blocks in obscure corners of the desert.
"There's definitely an effect on the projects funded by the smaller companies," he said, noting that many of those companies raised their operating capital by selling off large slices of equity in reserves they hoped to discover.
"It's become very difficult for them to get funding at all," he said.
In the current environment, initial public offerings (IPO) and bond sales were now more difficult for all oil companies, said John Vautrain, a senior vice president at Purvin and Gertz, an oil consultancy.
Mr Vautrain said that financing of large projects would likely be affected by the decline in the bond market, since oil companies often issued bonds to cover their long-term debt obligations on a project after they had completed construction.
Independent alternative energy companies rushing to put up wind farms and solar thermal plants were also likely to get hit hard by the shortage of easy capital, Mr Mills said,
Many such firms in North America relied on venture capital and represented an uncertain investment for risk-averse banks, he said.
Over the longer term, however, a forecast decline in the oil price represents a more potent threat to energy companies than the credit crunch, since it makes high-cost oil production less attractive and diminishes the incentive for investing in alternative energy producers.
The price fall is led by shrinking demand, a result of the slowing of the global economy. Each month, demand forecasts for oil have been lowered as the economic malaise deepens.
Opec officials have vowed to support the price, which has been on a downwards slump since July, and today's marginal production costs can probably hold oil prices above US$70 a barrel. But Mr Vautrain said he doubted that Opec's control over supplies could keep the price at $100 amid a worldwide economic recession.
"That price level could never be defended," he said. "It was based on a market mentality that doesn't exist today."
If prices fell substantially, biofuels producers would be the first to close up shop, analysts said.
"I think the biofuels guys, that's yesterday's news," Mr Vautrain said. "That whole programme was ill-conceived."
The production of biofuels from staples such as corn and sugar cane has been widely blamed for increasing worldwide food prices, and governments are now less likely to support the industry with subsidies amid a fall in oil prices and complaints that it is worsening conditions for the world's poorest.
Wallace Tyner, a professor of agricultural economics at Purdue University in Indiana, estimates that without government subsidies, oil prices would have to hold at about $100 to make ethanol production from corn competitive with fossil fuels. "It will be an industry that will stay small and absorb agricultural surpluses," Mr Vautrain said.
If oil prices continue their retreat, next up on the chopping block will be the so-called "strippers", the companies that focus on squeezing additional oil out of depleted reservoirs. In Texas, the benchmark oil price for "strippers" to make a profit used to be about $20, Mr Vautrain said, but costs had increased markedly since then.
When oil prices collapsed in 1986, many of the strip wells were capped permanently.
"If the crude price collapses, you'll get the same impact," Mr Vautrain said.
Far more worrying for its potential impact on world oil supply, however, is the effect that falling prices could have on efforts to develop crude from costly non-conventional sources, including the oil sands projects in Canada and heavy oil conversion in Venezuela.
According to Opec estimates, by 2030 these crude sources will produce 7.5 million barrels per day, making up almost seven per cent of the total supply. Last week, Christophe de Margerie, the chief executive of Total, the French oil major which is financing an oil sands project in Alberta, warned that the venture would be under threat if oil fell below $90 a barrel.
Some estimates have put the break-even price point at $85 a barrel for the most expensive oil sands projects.
But those estimates are based in part on continued high prices for oil services workers and equipment, which would doubtless fall amid a sustained economic downturn. Plus, much of the costs of oil sands conversion came from the high cost of energy, which would also fall in line with the decline in crude prices, Mr Vautrain said.
If the current crisis continues unabated, and crude prices fall substantially, it will shake up the world energy industry. Small companies will be bought up or go bankrupt and major expansion projects will be put on hold.
But a major oil company would not sink billions of dollars into a project on the assumption that abnormally high prices would continue, Mr Mills said.
"I don't think these guys are making investment decisions based on $90 a barrel," he said.
cstanton@thenational.ae
COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
Business Insights
- As per the document, there are six filing options, including choosing to report on a realisation basis and transitional rules for pre-tax period gains or losses.
- SMEs with revenue below Dh3 million per annum can opt for transitional relief until 2026, treating them as having no taxable income.
- Larger entities have specific provisions for asset and liability movements, business restructuring, and handling foreign permanent establishments.
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Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
COMPANY%20PROFILE
%3Cp%3E%3Cstrong%3ECompany%3A%3C%2Fstrong%3E%20Eco%20Way%3Cbr%3E%3Cstrong%3EStarted%3A%3C%2Fstrong%3E%20December%202023%3Cbr%3E%3Cstrong%3EFounder%3A%3C%2Fstrong%3E%20Ivan%20Kroshnyi%3Cbr%3E%3Cstrong%3EBased%3A%3C%2Fstrong%3E%20Dubai%2C%20UAE%3Cbr%3E%3Cstrong%3EIndustry%3A%3C%2Fstrong%3E%20Electric%20vehicles%3Cbr%3E%3Cstrong%3EInvestors%3A%3C%2Fstrong%3E%20Bootstrapped%20with%20undisclosed%20funding.%20Looking%20to%20raise%20funds%20from%20outside%3Cbr%3E%3C%2Fp%3E%0A
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Directed by: Craig Gillespie
Starring: Emma Stone, Emma Thompson, Joel Fry
4/5
Three tips from La Perle's performers
1 The kind of water athletes drink is important. Gwilym Hooson, a 28-year-old British performer who is currently recovering from knee surgery, found that out when the company was still in Studio City, training for 12 hours a day. “The physio team was like: ‘Why is everyone getting cramps?’ And then they realised we had to add salt and sugar to the water,” he says.
2 A little chocolate is a good thing. “It’s emergency energy,” says Craig Paul Smith, La Perle’s head coach and former Cirque du Soleil performer, gesturing to an almost-empty open box of mini chocolate bars on his desk backstage.
3 Take chances, says Young, who has worked all over the world, including most recently at Dragone’s show in China. “Every time we go out of our comfort zone, we learn a lot about ourselves,” she says.
UAE v Gibraltar
What: International friendly
When: 7pm kick off
Where: Rugby Park, Dubai Sports City
Admission: Free
Online: The match will be broadcast live on Dubai Exiles’ Facebook page
UAE squad: Lucas Waddington (Dubai Exiles), Gio Fourie (Exiles), Craig Nutt (Abu Dhabi Harlequins), Phil Brady (Harlequins), Daniel Perry (Dubai Hurricanes), Esekaia Dranibota (Harlequins), Matt Mills (Exiles), Jaen Botes (Exiles), Kristian Stinson (Exiles), Murray Reason (Abu Dhabi Saracens), Dave Knight (Hurricanes), Ross Samson (Jebel Ali Dragons), DuRandt Gerber (Exiles), Saki Naisau (Dragons), Andrew Powell (Hurricanes), Emosi Vacanau (Harlequins), Niko Volavola (Dragons), Matt Richards (Dragons), Luke Stevenson (Harlequins), Josh Ives (Dubai Sports City Eagles), Sean Stevens (Saracens), Thinus Steyn (Exiles)
How it works
1) The liquid nanoclay is a mixture of water and clay that aims to convert desert land to fertile ground
2) Instead of water draining straight through the sand, it apparently helps the soil retain water
3) One application is said to last five years
4) The cost of treatment per hectare (2.4 acres) of desert varies from $7,000 to $10,000 per hectare
Kill%20Bill%20Volume%201
%3Cp%3E%3Cstrong%3EDirector%3C%2Fstrong%3E%3A%20Quentin%20Tarantino%3Cbr%3E%3Cstrong%3EStars%3C%2Fstrong%3E%3A%20Uma%20Thurman%2C%20David%20Carradine%20and%20Michael%20Madsen%3Cbr%3E%3Cstrong%3ERating%3C%2Fstrong%3E%3A%204.5%2F5%3C%2Fp%3E%0A
Pakistan Super League
Previous winners
2016 Islamabad United
2017 Peshawar Zalmi
2018 Islamabad United
2019 Quetta Gladiators
Most runs Kamran Akmal – 1,286
Most wickets Wahab Riaz –65
