The innovative, groundbreaking and risky Middle Eastern real estate industry, most exemplified by the weird and wonderful creations in Dubai, is crashing. Some would think that with oil prices tumbling the region's offshore industry would be heading the same way. However, as national oil companies have all but taken control from the international oil companies (IOC), a determination to be able to flex with supply and demand fundamentals means that, in large, drilling continues.
Despite a slowdown in the number of contracts being awarded towards the end of 2008 – many companies are waiting to see how they can maximise value from their on and offshore projects – a number of recent indicators point to an industry still riding the crest of an oil wave. And those set to profit the most may be the service providers being contracted in to engineer the flow of oil wealth to the Middle Eastern economies.
Corporate finance and broking house HansonWesthouse director Malcolm Graham-Wood says there is less opportunity for the oil majors to find the easy oil and that comes down to national oil companies taking a much bigger position.
"Instead of giving a lot of money away to the majors they are doing a lot of work themselves and hiring service companies to do the engineering for them. The service companies are starting to realise there is a lot of money to be made."
So, as Shell announces it is pushing ahead with aims to grow its Middle East operation, while at the same time relocating Dubai staff to Glasgow, Krakow or Kuala Lumpur offices, service firms such as Weatherford, Kentz, Petrofac and Halliburton are moving in.
At your service
Halliburton set the trend when it moved its CEO and major executives from Houston, US to Dubai to be closer to its customer base. Its stature as the world's second largest oil services company meant that at the time this move raised serious home security questions on Capitol Hill in Washington. Despite disputes over the company's past conduct in Iraq and Nigeria, its 2008 fourth quarter results showed a 17% year-on-year growth, according to chief executive Dave Lesar speaking during Halliburton's Q4 earnings call. "Our fourth quarter results demonstrated our relentless focus on delivering solid performance despite the prospects of a weakening market environment. We set quarterly operating income records for all of our international regions," Lesar said.
Halliburton is not alone in its success, however. Others have also been shining small lights of hope into the global economic slowdown. Engineering specialist Petrofac has won a $2.3bn contract to develop the onshore Asab oilfield for state-owned ADCO and Scorpion Offshore has secured financing for a shallow-water jack-up rig called Offshore Freedom. In addition, primarily onshore-focused Kentz has won major contracts in Saudi Arabia and formed a joint venture with oil logistics firm GPS to undertake marketing and tendering contracts in the oil and gas markets.
Kentz business development manager for the Middle East Michael Ross Lonergan says that although the Middle East market is generally onshore, future offshore contracts are certainly on its radar. In his opinion, Saudi Arabia is one of the most promising markets. "Saudi Arabia has the biggest spend onshore and the biggest offshore field development. In the past three to four months the awards of contracts have been low as oil companies have pushed for an expansion in the bidding process. But Saudi has plans up until 2013 and the big ones are staying in place."
In Graham-Wood's opinion, however, eyes should be cast towards Qatar. "It is one of the most exciting, shining lights in the Middle East.
"It has the second biggest gas field in the world, the North Field, and it is developing Ras Laffan industrial city where it is bringing gas onshore and getting it ready for export." Graham-Wood says that it is the long-term nature of these plans that mean they are shielded slightly from the credit crunch. "These schemes take at least ten years to get up and running. If you have an investment there you aren't going to change it because of wild short-term gyrations in the oil price. Investments made on long-term economic models will continue."
Ras Laffan Industrial City stretches over more than 100km² and is one of the major developments of Qatar's pledged $30bn investment into its power and water sector. However, rising building costs mean that the engineering of some projects is being revised and re-evaluated. Kuwait and United Arab Emirates are also pumping money into downstream infrastructure and both are offering opportunities for service providers.
"The Middle East region constitutes around two thirds of our business. It has had quite significant growth over the past four years. This year we want to maintain our position," says Lonergan. "With the [economic] slowdown the competition has become more intense than it was before. The market has been hot here for the past few years and the heat has gone out of it slightly."
Keeping position, new opportunities
For smaller engineering firms without an exposure to the mature offshore fields in the Middle East, securing contracts in the future will prove challenging. For those already in position keeping their business will be a priority going forward. "Companies genuinely pride themselves on their safety record and working time down through injury. If you are not already in the market it is going to be hard going and if you are getting contracts the most important thing will be to keep them," Graham-Wood says.
A frontier market going forward will be Iraq, which, bit-by-bit, is opening up to foreign firms looking for new opportunities. Most notably is Shell's joint venture with Iraq's state-owned South Gas Co. This 25-year deal turned heads not only for its joint venture status but also because it may lay the framework for deals going forward after Iraq has formerly passed an oil bill – due to be expected in the next six months.
"Iraq is at a very early stage but there is significant change that we are watching very closely. The Shell deal is very significant and there are another eight or nine tenders for gas and oil fields waiting to be developed and announcements are expected around July," Lonergan says.
Although many of the oil fields around the Middle East are mature, the money and desire is there to develop them. Some in the region are desperate to avoid the price spikes of 2008 and the subsequent recessions in 2009. For service companies with a foot in the door, the on and offshore industry in the region is still hot enough to make a tidy profit.