(MENAFN- Khaleej Times) Current crude price to make lenders cautious.
Dubai: The current low price of crude oil and natural gas is unlikely to have a widespread impact on the credit quality of global project finance debt over the next year to 18 months but the cost of financing of projects in the Gulf is likely to escalate Standard & Poor’s said.
Standard & Poor’s credit analyst Karim Nassif said if oil prices remain in the $50 per barrel range for a sustained period or fall further then the “outlook may prove problematic.”
Speaking at a media roundtable Nassif said that 71 per cent of S&P’s 282 rated global project financings including most of those for oil and gas projects carried investment-grade ratings.
“We expect many of these projects will continue to benefit from long-term contractual agreements break-even points that were designed with low oil and gas prices as a base the presence of substantial available liquidity to the issuer or varying degrees of sovereign support” he said at the release of a report titled ‘Low Oil And Gas Prices Are Unlikely To Dent Most Global Project Finance Ratings For Now.’
Nassif said low oil and gas prices also make transportation project financing more attractive as lower fuel prices encourage more highway and air travel and indirectly more train travel through the effect on power prices.
“The current price of crude could make some lenders more cautious in underwriting new long-term projects until there is more visibility about the depth and length of the oil price slump. A longer-than-expected slump will also in our opinion cause issuers to be more discerning in the selection of projects they undertake forcing them to decide between urgent projects and those that are desirable but which can be put on hold” said S&P’s credit analyst Timucin Engin.
“It’s also likely that some projects will increasingly seek to offset part of the volatility risk of oil and gas prices through the use of private-sector partners and increased credit enhancement from supranational lenders” he said.
Ruling out a decline in the liquidity of GCC banks Engin said that the impact of oil price dip on liquidity and cost of funds could be visible if the price decline continues over the next few more quarters.He said that the UAE and Dubai do not face any immediate challenge to funding projects as the country has a robust AA rating that supports strong investor confidence.
According to S&P the effect of sustained low oil and gas prices on some power projects will vary depending on the complex interaction of regulation contractual obligations and fuel costs.However despite the pressure of low oil prices many governments have a commitment to use project finance as an effective tool to meet essential infrastructure needs both within and outside of the oil and gas industry said the report.
“They take the long-term view and have not allowed the recent price drop to influence capital spending. Saudi Arabia Kuwait and the UAE have all announced limited changes to their capital budgeting plans for 2015-2016 despite low oil prices” the ratings agency said.
S&P said that the dip in oil and gas prices has encouraged Gulf producers to reorient their focus on downstream projects rather than curb spending altogether. Gulf states are expanding their refineries to develop a downstream industry and export more value-added products diversify away from oil and gas income and meet rising domestic needs for fuel.
“We expect the total capacity of Gulf refineries to increase to approximately 7.4 million barrels per day (bpd) by about 2022 70.5 per cent more than the current 4.3 million bpd.”
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