Persian Gulf state producers issue debt to keep investments on track: Fuel for Thought

Arabian Peninsula oil and gas producers are tapping international markets for unprecedented amounts of cash as they strive to broaden their economies and further strengthen their strategic petroleum sectors.

While seeking economic diversification, Gulf oil producers also realize that the key to their future prosperity lies not in supplanting their petroleum sectors but in making them more efficient and globally competitive. With an eye to optimizing financial reward as oil prices recover, they are therefore attempting to keep investment levels in their strategic oil and gas sectors high, even as state finances are squeezed.

In April, Abu Dhabi, the leading UAE emirate which produces nearly all the OPEC member’s crude, raised $5 billion from the sale of five- and 10-year securities in what was then the region’s biggest international bond sale.

A month later, leading international LNG exporter Qatar launched what still stands as the region’s largest bond sale when it sold $9 billion of Eurobonds in three tranches. That pushed total 2016 debt offerings by Middle East and North Africa region states to $29.3 billion.

Oman, the largest Arab oil producer outside OPEC, earlier this month raised $2.5 billion from its first international bond sale since 1997, selling $1 billion of five-year notes and $1.5 billion of 10-year bonds.

All are likely to be outdone by Saudi Arabia, which local and international media have reported is planning to issue as much as $15 billion in bonds this year on international markets.

Sovereign entities are also seeking to tap foreign debt markets, which are currently seeing an influx of capital due to the volatility of global equities and commodities.

Majority state-owned Petroleum Development Oman, which produces the bulk of Oman’s oil and gas, has confirmed being in talks to borrow $3.4 billion from an international finance house, the Times of Oman reported early this month.

Despite the drop in oil prices all have substantial external financial buffers to cushion the effects of low oil prices on their economies over the medium-term. That even includes Oman, a relatively less wealthy GCC state.

Moody’s Investors Service, in assigning a “definitive Baa1” rating to the recent Omani bond issue Wednesday, said that although it expected the sultanate’s government debt to rise to 33% of GDP next year from under 5% at the onset of the 2014 “oil price shock,” Oman’s fiscal buffers, at around 85% of GDP last year, would provide support through the process of fiscal and external adjustment.

External finance to force change

In the region at large, there has been a major push since the latest oil-price collapse to implement fiscal and economic reforms. Across the region, fuel and energy subsidies have been slashed, corporate taxes raised, and foreign investors are being courted as partners for infrastructure and energy projects as never before.

That explains PDO’s plans to take on foreign debt as it sticks to its target of reaching 600,000 b/d of crude output capacity this year.

“This step will change the culture and working style of PDO because now they are responsible to this financing firm on their project performances, on company performances and so on,” Times of Oman reported the sultanate’s oil and gas undersecretary, Nasser al-Aufi, as commenting.

The need to further strengthen Saudi Aramco’s efficiency and global presence is also part of the reasoning behind Saudi Deputy Crown Prince Mohammed bin Salman’s proposal for an initial public offering of the Saudi national petroleum company’s shares. If a 5% stake in Aramco were to be floated internationally, that would raise as much as $100 billion in equity capital, some analysts have estimated.

Some other oil-producing regions in the area can only dream of having equivalent international financing options.

Iraqi Kurdistan, for example, dropped earlier plans to issue foreign debt as it was too expensive, which is partly because Kurdistan is not a sovereign state.

Despite strong local popular supports for such a move, there are substantial obstacles to the region declaring independence, not least the prospect of souring relations with Turkey, through which most Kurdish crude is exported by pipeline. Nonetheless, Kurdish political leaders are again proposing to hold a long-postponed referendum on independence. Erbil’s exclusion from the sovereign debt market in its hour of need could provide a final push towards the break-up of Iraq.

Source: Platts