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Aviation and oil prices: potentially a negative for airport capital expenditure. Time for PPPs?

The price of a barrel of Brent Crude, the most popular method of tracking oil prices, is today around USD56 a barrel - and this follows a (brief?) rally. A year ago it was trading above USD100.

The falling oil price has already prompted the likes of BP, Shell, Chevron, ConocoPhillips, Russia’s Gazprom and China’s Cnooc to announce cuts in investment. It is occasioned, in the main, by steadily rising supply from non-OPEC countries, and especially from the US, and is, in theory at least, good news for air travellers, if and when airlines feel able to pass on any savings to their customers (assuming they are able to, they may be hedged at higher rates). Some airlines in Southeast Asia and China have already reduced their fuel price surcharge, at least.

But the other side of the industry coin is that some countries may feel the squeeze on their big ticket airport construction projects. Already, they are looking to trim them back. At the very least, smaller construction projects could be postponed or abandoned in many countries, either because the revenues to support them have been reduced or because of declining investment in neighbouring oil facilities and consequential effects on passenger traffic flows, as employees are laid off and executive travel cut back.

This could be the moment when the PPP, already gaining in popularity as a method of ensuring critical airport infrastructure is secured, makes a quantum leap - but the private sector must have confidence in its counterparts in the public arena.

Rising supply is the main cause of the oil price drop

The scale of the price reduction can be instantly ascertained from the chart below, which is accurate to 02-Feb-2015.

Oil prices (USD/barrel) – most recent quarter: 02-Nov-2014 to 02-Feb-2015

The biggest cause of the falling price is rising supply from non-OPEC countries, particularly from the US and Canada, and partly as an offshoot of burgeoning shale oil and gas industries there. The International Energy Agency (IEA) believes that US supply alone will raise total non-OPEC production by a record 1.9 million barrels per day in 2015. (OPEC is responsible for about 40% of the world’s oil supplies).

There is no guarantee that oil prices will remain in this zone and the small but significant increase in the last week is noted. Indeed, according to OPEC's Secretary-General Abdulla al-Badri we have already hit bottom. Not only that; he sees a real possibility that oil prices could dramatically explode to upwards of USD200 per barrel in the future (a figure that aviation analysts worried about incessantly during 2008/9 because at that level operating just about any airline is unsustainable).

The Secretary General is not party to the belief that his organisation will ride in and rescue the oil market by reversing its previous commitment to holding steady on production. Rather, he takes the view that the oil market is ‘self-correcting’ as oil companies have made deep cuts to their spending, which will eventually lead on to lower production growth. Furthermore, the oil rig count in the US is plunging, which is regarded by some as an indicator of a bottoming in oil prices.

Then again, Citi's leading commodity research analyst suggests that the price could go as low as "the USD20 range for a while", reducing Citi's forecast for 2015 of an average price of USD54, down from its previous USD63 forecast.

The simple fact: nobody knows. Not even OPEC.

The long term impact of short term low priced oil will be today's under investment

However, in the midst of all the cutting back as the industry works through the current oversupply Secretary-General al-Badri also warns that the industry is putting future oil supplies at risk by under-investing today. The same may be true for airport investment.

Some oil industry analysts take the view that OPEC is a participant in a game and that an equally likely outcome is that under-investment has the potential at least to cause oil prices to rocket higher if demand grows faster than future supplies. In other words, OPEC is happy to endure short-term pain for the potential of a big long-term gain.

But assuming that, unlikely as it may seem, he is wrong, and that oil prices continue to land south of USD75 for the foreseeable future. Or that they continue to rally for a short time only then plunge below USD50 again.

That will have a serious impact on the ability of many states to balance their budgets. Treasuries do not respond well to instability, notably when they are relying on the income from oil to underwrite their budget.

As the chart below indicates at least 11 states need the oil price to be above USD75/barrel in order to do so.

Marginal breakeven cost of production by country

All but three of these are in the Middle East, West Asia or North Africa.

Furthermore, as this analysis by Deutsche Bank from Oct-2014 makes clear, that breakeven figure has been rising steadily over the years.

Fiscal breakeven price (Brent crude USD bbl) 2006-2015f

Deficits are a bigger problem for some countries than others. Owing to their considerable dollar reserves, the Saudis can afford to overspend for a while at least, while Russia, too, has a cushion. But countries like Nigeria that barely have any reserves are in far greater trouble. Nigeria only has one quarter’s worth of assets to play with oil at USD83/barrel.

Government assets versus lower oil prices

Many of the high cost oil producers are due to be the biggest airport investors

Indeed, in another survey undertaken by the BBC in the UK, only the (non-OPEC) Kazakhstan could sustain oil production at USD50/barrel, that mainly due to the 2014 shutdown of the Kashagan oil field and the payment of “subsistence wages” to oil workers.

There are 115 countries producing oil, from 10.5 million barrels per day (bpd) to just 2,000 in the case of Panama.

Global oil producing countries

The real power, though, resides with the top 30 producers, those that extract more than half a million barrels each day.

All 12 of the OPEC members are represented, with the exception of Ecuador, which currently comes in at number 31 on the list.

The world’s top 30 oil producing nations, over 500,000 barrels/day, including OPEC members

Country

Production (barrels/day)

Share of World production %

Date information provided

OPEC member?

(World)

84,951,200

100%

2014 est

 

1 Russia

10,590,000

14.05%

2014 est

 

2 Saudi Arabia

9,693,200

13.09%

2013 est

Yes

3 United States

9,020,000

12.23%

2015 est

 

4 China

4,372,000

5.15%

2014 est

 

5 Canada

3,856,000

4.54%

2014 est

 

6 Iran

3,518,000

4.14%

2014 est

Yes

7 Iraq

3,400,000

3.75%

2013 est

Yes

8 UAE

3,087,000

3.32%

2013 est

Yes

9 Venezuela

3,023,000

3.56%

2013 est.

Yes

10 Mexico

2,934,000

3.56%

2013 est.

 

11 Kuwait

2,682,000

2.96%

2013 est.

Yes

12 Brazil

2,633,000

3.05%

2013 est.

 

13 Nigeria

2,525,000

2.62%

2013 est.

Yes

14 (European Union)

2,107,001

-

-

 

15 Norway

1,998,000

2.79%

2013 est.

 

16 Algeria

1,885,000

2.52%

2013 est.

Yes

17 Angola

1,840,000

2.31%

2013 est.

Yes

18 Kazakhstan

1,635,000

1.83%

2013 est.

 

19 Qatar

1,631,000

1.44%

2013 est.

Yes

20 United Kingdom

1,099,000

1.78%

2011 est.

 

21 Colombia

1,011,992

0.97%

2013 est.

 

22 Azerbaijan

987,000

1.20%

2011 est.

 

23 Indonesia

982,900

1.66%

-

 

24 India

897,300

1.04%

2013 est.

 

25 Oman

890,500

0.95%

2013 est.

 

26 Argentina

796,300

0.93%

2013 est.

 

27 Libya

700,000

0.85%

2013 est.

Yes

28 Egypt

680,500

0.80%

2013 est.

 

29 Malaysia

693,700

0.82%

2013 est.

 

30 Australia

589,200

0.70%

2013 est.

 

Coincidentally, many of the countries are also the location of some of the world’s largest airport construction projects, as shown in the following table.

The world’s largest airport projects in oil producing countries

Country/oil production rank

Airport

Investment amount
USD billion

Anticipated completion date

UAE(8)

Dubai World Central,

32.3

An ongoing project to 2027

UK (19)

London Heathrow

13

Ongoing to 2019

Egypt (28)

Cairo

11.8

2021

UAE (8)

Dubai International

10.9

4Q2015

US (3)

Atlanta

9

2015 (followed by further investment)

US (3)

Los Angeles International

6.8

2018

UAE (8)

Abu Dhabi International

6.8

2017

Australia (30)

Melbourne Tullamarine

8

2024

Saudi Arabia (2)

Jeddah

7.2

1Q2015

US (3)

Philadelphia

5.2

2015

Kuwait (11)

Kuwait

4.8

2025

Oman (25)

Muscat

4.7

2016

US (3)

Washington Dulles & Reagan jointly

4.6

2015

US (3)

Tampa

4.2

2023

US (3)

San Francisco

4.1

2023

Russia (1)

Moscow Domodedovo

3.9

2023

US (3)

Orlando International

3.8

2017

US (3)

New York La Guardia

3.6

2017

Qatar (18)

Doha

3

2018

India (23)

Mumbai

3

2018

Canada (5)

Toronto

3

2030

Iran (6)

Tehran

2.8

2020

Brazil (12)

Rio de Janeiro

2.2

2016

Norway (14)

Oslo

2

2017

India (23)

Delhi

1.8

2020

Indonesia (22)

Jakarta Soekarno Hatta

1.7

2018

Canada (5)

Calgary

1.7

2017

UK (19)

London Gatwick

1.5

2017

Russia (1)

Moscow Sheremetyevo

1.3

2020

UK (19)

Manchester

1.2

2030

Canada (5)

Vancouver

1

2027

New-build airports

Country

Airport

Investment amount USD billion

Anticipated completion date

China (4)

Beijing (Daxing)

13.1

Jun-2019

China (4)

Chengdu

11.2

2025

Mexico (10)

Mexico City

9.1

2018-2020 (final phase by 2069)!

Brazil (12)

Sao Paulo

3.8

2025

India (23)

Navi Mumbai

2.4

2018?

Australia (3)

Second Sydney

1.6

2022

This report deals mainly (but not exclusively) with those countries where the state has overall responsibility for airport construction and associated investment and where oil revenues are a significant part of its income.

Non-oil dependent states could also experience turmoil in their infrastructure - for example as the result of exposure of neighbouring oil producing states to the situation that exists momentarily, the Gulf being a good example.

There is a possibility that non-oil dependent states could thrive as investment funds are redirected their way but there are always other factors involved and such a possibility requires further research and a separate report.

The Middle East is the most likely region to suffer investment setbacks

Diversified industries help protect UAE airport investments

Two of the largest airport construction projects anywhere are at the existing Dubai International and under-construction Dubai World Central airports in the United Arab Emirates (UAE), totalling in excess of USD44 billion and with completion dates varying from Q42015 to 2027 in the case of DWC. Dubai is expected to become the world’s largest hub for air transport by around 2020, once DWC (aka Al Maktoum) comes fully on stream. Dubai International overtook London Heathrow to the title of world’s busiest international airport in 2014 and is the sixth busiest overall with 70.3 million passengers (+6.1%) in that year.

The UAE’s airports also include Abu Dhabi, an emirate that is more oil dependent than is Dubai, but where economic diversification has encouraged the country’s non-oil and gas GDP to outstrip that attributable to the energy sector to an extent that non-oil and gas GDP now constitutes 64% of the UAE’s total GDP.

Those airports are state-funded but do not appear to be at risk yet, partly because of the diversification of revenue earning activities in Abu Dhabi and the fact that only around 7% of the Dubai emirate's revenues now emanate from oil and natural gas. In any case those reserves are expected to run out in 20 years or so and Dubai has therefore carved an economic future for itself that is more related to trade, entrepôt activities, financial services and tourism; all of which require investment in the final part of the Dubai economic jigsaw, construction.

Overall, the UAE is not considered to be at risk in this respect just yet at least. But the effect of the oil price drop has been more in evidence elsewhere in the region and notably in Kuwait and Oman.

Kuwait's airport project could be broken into three parts, with private investment possible

Like the UAE, Kuwait has amassed considerable foreign currency reserves, which means that they could run deficits for several years if necessary. But low oil prices does focus the mind and influence decisons on government expentiure.

Kuwait is apparently already considering breaking up the USD4.8 billion Kuwait International Airport expansion project into three parts and in Jan-2015 formed a committee to do just that.

Options include adding new terms for current major contractor Kharafi National Engineering and Procurement, breaking the work up into separate private contracts, using government engineering resources for certain infrastructure elements or excluding certain elements of infrastructure development to reduce costs. The development plan as it exists before any cutbacks will increase capacity to 25 million passengers per annum by 2025 (from 13 million) and is expected to be completed by 2020. The Kuwaitis are inherently nervous about this sort of infrastructure; previous plans have been cancelled on several occasions.

On 08-Feb-2015 fears were realised when the Ministry of Public Works tender committee recommended rejecting all bids for the development of new terminal and infrastructure modernisation at the airport. A joint venture between Kharafi National and Turkey’s Limak Holding had submitted the lowest bid, of KWD1.4 billion (USD4.8 billion) but it was reported to be 39% above projected programme costs and failed to meet technical specifications.

Kuwait is considered to be a Middle East leader in diversifying earnings away from oil exports but that has proved to be difficult since the first Gulf War in 1990-91(which in itself had an adverse upward effect on oil prices and, thereby, aviation). Hence petroleum still accounts for nearly half of GDP and 94% of export revenues and government income.

Oman may also be looking at trimming some of its airport projects

Having already reduced the parameters for regional airports, which led to a trimmer Cap Ex already, in 2011, Oman may have other options in mind. Situated on the south eastern coast of the Arabian Peninsula, facing the Indian Ocean, Oman has modest oil reserves, ranking at #25 in the global table and it holds a similar rank for natural gas reserves. A relative regional backwater until the last twenty years or so, Oman was awarded the title of the most improved nation in the world in terms of development during the preceding 40 years by the United Nations Development Programme in 2010 and it has been working hard to improve its tourism product, which is based on culture, history and nature rather than the hedonistic pursuits associated with some parts of the UAE.

That product, which is expected soon to be one of the country’s biggest foreign currency earners, requires airport investment, which is being undertaken by the government, a privatisation procedure involving what was then the BAA and the now defunct ABB Equity Ventures having been abandoned in 2004, three years after it began.

There are five projects under way in Oman; the main two are at Muscat, the capital, and Salalah. Overall, OMR3 billion (USD7.8 billion) is due to be invested in the Muscat airport over a 10-year period and it is one of the largest projects to ever be undertaken in Oman's history. The Salalah airport is expected to be fully operational before the end of 2015.

Disruption to the oil supply took place between 2000 and 2007, prompting a fall in production of over 25% though it has since recovered. Clearly, despite the diversification into mass tourism and other industries oil remains very important to the economy – it continues to account for 46% of GDP - and to the transport construction needed to sustain new industries such as tourism.

The Public Authority for Civil Aviation and Ministry of Transport & Communication are exploring how to diversify participants in the aviation sector and look at self sustaining concepts including PPPs and other mechanisms to attract private participation in aviation at all levels and particularly in developing commercial sources of revenues. That process has most definitely accelerated since the oil price dropped below USD 100 per barrel and is supported by successful privatisations in the utilities sector.

Saudi Arabia has deep pockets and can withstand lower prices

Another Middle East country where the falling oil price might eventually have an adverse effect is Saudi Arabia.

The world has been anticipating that Saudi Arabia, the world's largest oil exporter and OPEC's most influential member, would support global oil prices by cutting back its own production, but there is little sign it wants to do this. The reasons are thought to be so that it might instil some ‘discipline’ among fellow OPEC oil producers, and perhaps to put the US's burgeoning shale oil and gas industry under pressure.

Saudi Arabia is thought to need oil prices to be at the very least USD85 in the longer term, it has deep pockets with a reserve fund of some USD700 billion, so it can withstand lower prices for some time. If a period of lower prices were to force some higher cost producers to shut down, then the country might hope to pick up more market share in the longer run. But there is also some recent history behind the unwillingness to cut production. In the 1980s, the country did cut production significantly in a bid to boost prices, but it had little effect and it also badly affected the Saudi economy.

The amount of investment in Saudi planned and existing airport projects currently totals around USD10 billion, which includes the soon to be completed USD7.2 billion King Abdulaziz International Airport currently being constructed 19km north of Jeddah, and the expansion of terminals 3 and 4 at Riyadh King Khaled International Airport. The projects are part of a broader master plan to upgrade 37 airports in the country by 2020 and the goal of becoming a major aviation gateway for both domestic and international demand. New airports in Jazan, Abha and Arar will be completed in 2015, under the General Authority of Civil Aviation’s (GACA) efforts to improve infrastructure for domestic air travel.

Some of the other OPEC members in the region, such as Iran and Iraq, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for manoeuvre than others. Indeed, as the above chart demonstrates, Iran needs the oil price to be around USD130 as a minimum in order to balance its budget.

Lower prices are bad timing for both Iran and Iraq

Iran has enjoyed some easing of sanctions

There has been some easing of sanctions in connection with international concern over its nuclear policy and the government must be anxious lest it allows the opportunity to improve both its airline fleets and airport infrastructure to slip away. rThe only really major airport project we are aware of currently is the one to build a new terminal (and possibly another runway) at Tehran’s Imam Khomeini International Airport, although there are plans for new airports at Ahwaz (ironically linked to the discovery of a new oil field there) and Mash’had.

In the latter case French and Chinese companies are involved in the financing and at Tehran Aeroports de Lyon and China SCE Property Holdings are reported jointly to be attracted to the chance to bid to operate the Imam Khomeini airport.

Iraq is still in rebuilding mode

Iraq is trying to rebuild in a continuously fractious ‘post-war’ environment in which religious and ethnic tensions predominate, within the framework of the loss of some parts of the country to the rebel organisation ISIS/ISIL, which has made the problem worse by capturing oil wells and undercutting market prices by selling at a significant discount - around USD30-60 a barrel. It is estimated it is making about USD3 million a day through black market sales, the proceeds of which are almost certainly not going to be directed towards constructing new airports.

As long ago as May-2010, plans were unveiled for an expansion of Baghdad International Airport, to double its capacity to 15 million passengers per year. The expansion, on this occasion to be funded by foreign investors, will include the construction of three new terminals and the refurbishment of the existing three terminals, which will each accommodate 2.5 million passengers annually. General upgrade work began in May-2013 and so far Terminal C has been refurbished. Together with the cost of the terminals the total investment is USD2 billion.

More recently, in May-2014, Iraq's Government stated it intends to invest USD50 billion to improve airport infrastructure over an unspecified period, including new terminal buildings, air traffic control systems, safety and security measures, IT systems, maintenance and operational facilities. New airports are also under construction near Duhok and Karbala. Under the circumstances it is going to be difficult for the government to attract foreign investors so the availability and price of oil have even greater significance here.

Falling prices are a double edged sword for Egypt

The fall in the oil price is regarded as a double edged sword in Egypt, where it will cut Egypt's fuel subsidy bill by USD4.2 billion but it could also hit the finances of oil-exporting Gulf allies who have given Egypt billions of dollars in aid.

Gulf oil exporters have thrown their weight behind Abdel Fattah al-Sisi, who orchestrated the overthrow of elected Islamist president Mohamed Mursi in Jul-2013. Saudi Arabia and the UAE consider Egypt a strategic ally in the fight against the Muslim Brotherhood, which they see as a threat to their own ruling orders.

However, the sums provided to Egypt so far are relatively small when compared with the Gulf's savings, so it is likely things would probably have to get a lot worse before they cut aid.

Egypt has never more than partially embraced the privatisation of its airports although there are or have been management contracts at Marsa Alam, Alexandria and Cairo. Egypt has been and is the recipient of loans from the World Bank (a Cairo terminal) and Japan (Alexandria Borg el Arab airport) and the country will need extended largesse to continue unless it can attract the private sector, both domestic and international, to projects which include an increase in overall airport capacity from 30 million now to 60 million by 2050, an overhaul of the air navigation system and the USD10.5 billion five-stage, 20-25 year airport city project at Cairo.

That project is expected to generate direct employment for up to 30,000 workers and indirect employment for another 90,000. (Note the estimated cost of that enterprise continues to fall, from USD18 billion to USD15 billion to today’s estimate of USD10.5 billion).

Russia is in urgent need of private sector support for airport development

Moving away from the Middle East and North Africa it almost goes without saying that the tumbling oil price has had a dramatic effect on the fortunes of one of the world’s largest oil producers, Russia.

Rosneft, the partly state-owned oil giant, has already been bailed out with cheap central bank cash to prevent it defaulting on its debts.

Falling oil prices, coupled with western sanctions over Russia’s support for separatists in eastern Ukraine have hit the country hard. Its economy depends on energy revenues; oil and gas account for 70% of Russia's export incomes. Russia hiked its interest rate dramatically to 17% in order to support the rouble, demonstrating how heavily its economy depends on energy revenues, with oil and gas accounting for 70% of export incomes. Russia loses USD2 billion in revenues for every dollar fall in the oil price, and the World Bank has warned that the country’s economy would shrink by at least 0.7% in 2015 if oil prices do not recover. But, as with Saudi Arabia, Russia looks unlikely to cut production to shore up prices.

The government has cut its growth forecast for 2015, predicting, too, that the economy will sink into recession.

There has been a distinct trend towards private sector participation in Russian airport development over a number of years (see the related report: http://centreforaviation.com/insights/analysis/global-airport-finance-and-privatisation-capa-review-2014-the-big-funds-dominate-transactions-202694).

Even so, there are many projects around the country that require a considerable input of public sector funds merely to renovate runways and other infrastructure including areas such as Crimea that have recently come under Russian control.

18 months ago the cabinet calculated that close to USD10 billion would be needed to improve infrastructure in and around the Moscow Air Hub alone; the funding to be found in the federal, Moscow and Moscow region transportation budgets. Some of this may come from the private sector as Sheremetyevo and Vnukovo airports are to be merged and privatised but there is still a huge public sector requirement to be catered for by dwindling financial resources.

Kazakhstan has a much lower production price

Once a Soviet republic, Kazakhstan is one of the few countries able to balance its budget with such a low oil price as mentioned earlier.

There are numerous large scale airport projects in place and the government investing approximately KZT99 billion (EUR473 million) between 2015 and 2017, involving reconstruction of runways and passenger terminals, the modernisation of Kyzylorda and Shymkent airports, as well as a new passenger terminal building at Astana International Airport.

In Africa, Nigeria is a standout problem case

Energy sales account for 80% of Nigeria’s revenue - and airport privatisation process has stalled

In Africa, the biggest potential casualty by far is Nigeria. As with Iraq and Iran, Nigeria has greater domestic budgetary demands because of a large population size (at 151 million, it is the most populous country in Africa, accounting for 18% of the continent's inhabitants) in relation to oil revenues.

Nigeria is Africa's biggest oil producer and ranks at #13 on the global production list. It has achieved growth in the rest of its economy but despite this it remains heavily oil-dependent. Energy sales account for up to 80% of all government revenue and more than 90% of the country’s exports.

Against this background Nigeria has been attempting to privatise its airports for many years, with some small successes such as Lagos International Airport’s T2, which has been operated under a PPP for several years now. Privatisation is consistently called for, including by FAAN, the Federal Airports Authority, but the process is painfully slow in a country strangled by excessive bureaucracy and other drawbacks. In 2014 the government publicly rejected plans to privatise FAAN because of security reasons, citing the way in which the US government and its agencies had taken a stronger hold on their airports since ‘9/11.’

There remains an underlying desire to privatise airports on a 15 to 20-year concession scheme but the political will is weak. Meanwhile, there is some USD1.7 billion of investment into airports including Lagos, Abuja (the capital) and Port Harcourt, mainly on new terminals.

In Asia, Malaysia is a major regional centre for oil and gas

Southeast Asia has only two countries in the top 30 oil producing nations – Indonesia (23) and Malaysia (29).

Despite Malaysia’s fairly low ranking globally, its oil reserves are the fourth highest in Asia Pacific after China, India, and Vietnam. 669 million barrels were produced in 2014, a reduction of 4% over the previous year. The country is strong in the production of liquefied natural gas, being the world’s second largest exporter and production has risen over the past two decades to serve the growing domestic demand and export contracts. Nearly all of Malaysia’s oil comes from offshore fields. Declines in production at Malaysia’s major producing oil fields in the past decade have led government efforts to encourage investment in enhanced oil recovery and development of smaller and marginal fields, as well as deepwater fields.

The oil and gas industry is very significant here. As a result of rising regional and domestic demand for crude oil and oil products, Malaysia plans to become a regional oil trading and storage hub by increasing the country’s refining and storage capacity.

Most of Malaysia’s main airports have a degree of protection from the machinations of the oil industry where investment is concerned, as they are privatised by way of a stock market flotation over 15 years ago, the first in Asia. But any loss of oil revenues must impact on investor sentiment in general.

For the moment most of the investment dollar is going into Kuala Lumpur International Airport (KLIA) where KLIA2, the new ‘budget’ terminal, opened in May-2014 at a price well over budget of USD1.3 billion. It has since been subject to scrutiny on the grounds of safety concerning ground stability issues.

Nearby Brunei is more dependent on oil

The tiny state of less than half a million people is the 48th largest producer globally making it the fifth ranked in the world by gross domestic product per capita at purchasing power parity and the fifth-richest nation out of 182, based on its petroleum and natural gas fields, according to Forbes. The IMF has estimated that Brunei is one of two countries (the other being Libya) with a public debt at 0% of the national GDP.

With that level of prosperity a fall in the oil price over even a protracted period should not impose too greatly on the delivery of transport infrastructure but in any event Brunei has already completed the necessary development for the foreseeable future with the transformation of what it calls ‘a landmark airport terminal’ and the doubling of capacity from 1.5 million to three million ppa.

The modernisation projects, which included new roads, cost BND130 million (Brunei dollars) or USD95.7 million and were completed in Nov-2014. Just in time, perhaps.

The US – Now a major oil producer, but with collapsing infrastructure

One of the key determinants of the oil price momentarily of course is the United States, the world’s third largest producer, owing to the extra supplies emanating from new sources in different parts of the country, and especially in North Dakota. The growth of oil production in North America, and particularly in the US, has been staggering. US production levels are at their highest in almost 30 years. This growth in America’s energy production, where gas and oil is being extracted from shale formations using hydraulic fracturing or ‘fracking,’ has been one of the main drivers of lower oil prices, essentially severing the linkage between geopolitical turmoil in the Middle East, and oil price and equities.

This additional supply could, of course, end up undermining itself. A point must be reached when the consistently tumbling price ensures that production is no longer viable here, either. On the other hand though, even though many US shale oil producers have far higher costs than conventional rivals, many need to carry on pumping to generate at least some revenue stream to pay off debts and other costs - a sort of Catch-22.

The reasons why airport privatisation has failed to gain any sort of substantial ground in the US has been well documented many times previously. (For a brief synopsis see the related report: http://centreforaviation.com/insights/analysis/global-airport-finance-and-privatisation-capa-review-2014-the-big-funds-dominate-transactions-202694).

But in the meantime, US airports need to complete at least USD71.3 billion worth of essential infrastructure projects before 2017 and the value of the projects we know of is in the same order though much of this is accounted for by multi-year ‘master plan’ led developments at the largest hubs (Chicago, Los Angeles and New York alone account for some over USD15 billion).

The nation is accused by some of its representative organisations of falling progressively behind due to the lack of funds being invested into developing gateways. They also allege the US’ global competitiveness and economic/job growth are imperilled by collapsing transportation infrastructure.

Essential funding for runways (repairs and new where required) usually comes from the FAA, but for other parts of the airport it must be found from local (municipal/county) resources, from bond issues and sometimes from the airlines where they manage terminals.

As things stand it is difficult to envisage a further worsening of infrastructure renewal activity as a direct result of the falling oil price, even if the US is a primary cause of it. America’s commercial income is enormously diversified after all. Indeed, that downward price variation is a major determinant of the improved fortunes of the country’s airlines (American for example projects a USD5 billion saving in 2015), indirectly giving a boost to the airports.

Canada’s east may benefit from the oil price but the west - and its airports - won’t

A similar situation exists in Canada, the world’s fifth largest producer. Oil extraction and refining is, with logging, one of Canada’s main industries and responsible for about 8% of GDP. Canada’s oilfields are mainly in Alberta, including the five major but not yet fully exploited oil sands reserves, where production is estimated by analysts to be profitable at a price of USD30 to USD40 per barrel. Reserves are also found in Saskatchewan and Newfoundland to a lesser degree. The enhanced production there has, together with that in the US, been one of the biggest factors in the falling price globally. A ‘similar situation’ also because most of the airports are still mainly within the public sector even if they are no longer administered by Transport Canada, courtesy of not-for-profit stakeholder managed entities.

We are aware of approximately USD8 billion worth of airport construction projects across the country, of which US1.7 billion is allocated to a new runway and terminal expansion at Calgary Airport in Alberta; the city now also becoming one of Canada’s leading finance centres, possibly soon to rival Toronto.

As with the US, Canada has a much diversified industrial base, but crude oil remains the country’s largest export and a report by Bloomberg in late Dec-2014 predicted that Canada’s economy will probably weaken in 2015 as the slump in oil prices cuts exports and investment. GDP growth is expected to fall to below 2% in 1H2015. A reduction in drilling has already led to a decline in support services for mining, oil and gas companies in Alberta and Saskatchewan.

In infrastructure terms, including airports, the effects are most likely to be felt in the west and central areas, while the eastern part of the country and particularly Ontario and Quebec should experience a beneficial impact from the falling oil price.

Latin American oil producing nations will soon feel the squeeze

In Central and Latin America, Brazil, Venezuela and Mexico are, respectively, the 12th, 9th, and 10th biggest oil producers globally.

Brazil is a major oil consumer, but also a net exporter

According to the Brazilian state-owned Petrobras, the oil and natural gas sector’s contribution to Brazilian GDP increased from 3% in 2000 to 13% in 2014.

Brazil is also the tenth largest consumer of oil products but is a net exporter of oil since 2011. Extraction and distribution is shared amongst 50 companies but Petrobras, previously the monopoly organisation, is the only global oil producer, with output of more than two million barrels of oil equivalent per day.

In addition to the reserves being worked now the offshore Tupi oil field, discovered by Petrobras in 2007, is believed to hold between five and eight billion barrels of recoverable light oil and neighbouring fields may even contain more, which all in all could result in Brazil becoming one of the largest producers of oil in the world.

This is important because another factor in the mix is that Brazil still imports some light oil from the Middle East, because several refineries, built in the 1960s and 1970s, are not suited to process the heavy oil in Brazilian reserves, discovered decades later. (A similar scenario exists in Britain –see below - with regard to the oil quality).

On top of all that, Brazil has the world's second largest known oil shale resources (the Irati shale and lacustrine deposits) and has second largest shale oil production after Estonia.

Taking all this evidence into account Brazil would be prone to an immediate adverse effect from the oil price drop were it not for the fact that it is only a minor exporter of crude because of internal consumption. As a result, the effect of the falling oil price on Brazil so far is mixed.

But the longer term consensus appears to be that the oil-price bonanza is over for Latin America generally, and that its oil-producing nations will soon feel the squeeze. Political stability in the region, heavily dependent on the export of commodities, will also suffer from these price swings.

How would that impact on Brazilian airport construction? While some responsibility has been removed from state operator Infraero in the case of the partially privatised airports in Sao Paulo, Rio de Janeiro, Brasilia, Belo Horizonte and Natal, that organisation is still responsible for driving forward construction activities and meeting deadlines as majority shareholder.

Furthermore, Brazil has a massive regional airport expansion programme in place covering the construction or refurbishment of 270 airports nationwide and little of that will attract private financing. In Dec-2014, the Brazilian Development Bank (BNDES) projected a 49.5% increase in airport investments between 2015 and 2018 compared with the preceding three-year period, to BRL16 billion (USD6.2 billion).

With talk of mass protests again over the construction of 2016 Olympic Games facilities while health and education investment suffers, something has to give and the airport programme must be in the frame.

The position is worse in Venezuela

Venezuela has plans for c. USD700 million of airport investment presently. Venezuela has a similar multi-regional airport modernisation scheme to that of Brazil, albeit on a much smaller scale, and provided for mainly by the public sector. In Venezuela ‘privatisation’ in the airport sector at least has usually meant transferring control from central government to local states, although a 20-year operation and expansion contract was put into place at Margarita International Airport in 2004, involving Flughafen Zurich and a local associate. However, it was quickly declared void.

Venezuela’s economy was severely affected by the economic crisis. The country failed to diversify its oil-dependent economy (40% of its fiscal receipts and 90% of foreign exchange) and thanks to economic mismanagement it was already finding it difficult to pay its way even before the oil price started falling. Inflation is running at about 60% and the economy is teetering on the brink of recession.

The need for spending cuts is clear, but the government faces difficult choices. Removing the subsidies on petrol prices that cost the government USD12.5 billion a year is not on the agenda. A petrol price rise in 1989 saw widespread riots that left hundreds dead.

Venezuela has a public debt of around 50% of GDP and a budget deficit of 16%, which puts it in a very vulnerable position. Again, airport investment would seem to be a candidate for the chop.

New Mexico City airport safe(ish) but surface transport links could be at risk

Finally, Mexico, where the largest airport project in the region, and one of the largest in the world, is almost under way at Mexico City following years of vacillation.

There is some concern in Mexico – the world’s 10th largest oil producer - about the falling oil price and its impact on infrastructure. Moreover, although Mexico’s fiscal situation is stronger than Venezuela’s, it is undergoing a wave of protests and discontent (over, for example, the killing of 43 students and a scandal involving the president and his first lady) that could easily develop into widespread turmoil. Although democratic order itself is not under threat, the government’s capacity to bring about reforms and maintain order will be severely impaired in the coming year.

In the midst of this dissatisfaction the country has been forced to adjust its budget for 2015 to account for new price assumptions, although the old price assumption of USD82 per barrel of oil was considered conservative by regional standards.

In a webinar on 04-Feb-2015 government representatives revealed that two surface transport projects including a rail line have been cancelled because of the oil price decline. At the same time they saw no reasons – yet – why the new USD9.1 billion Mexico City airport project should be modified. The airport is to be financed 58% from public funds and 42% from the private sector. But it should be noted that – strangely - surface transport links to and from the airport have not yet been agreed upon as the airport, 30 km outside the city, comes under a different jurisdiction. The existing airport is in Mexico City and therefore governed by the city council, while the new one is in the State of Mexico’s jurisdiction.

Given the penchant in Mexico to promote bus travel over rail travel (including the ‘high speed’ variety) it would be of little surprise if surface transport schemes to connect with the new airport were axed or at least postponed. The airport itself will surely avoid the axe and even ‘trimming’ but private sector firms (and there are many in Mexico, including the ASUR, GAP and OMA multi-airport operators, two of which are listed on various stock exchanges as well as OHL, which is represented at Toluca Airport near Mexico City) may not be as inclined as they might have previously been to commit to it.

There are some Latin American countries that will probably benefit from the oil price drop as they are mostly net importers by some margin. They include Argentina, Bolivia, Chile and Peru. They will see their industrial production costs decrease and disposable consumer income go up. The benefits for Argentina, however, will be limited, as it is also a relatively large oil producer and does not import much. And its ambitious plans to develop the Vaca Muerta shale field are now at risk, as the break-even price of producing there is above the current oil price.

There is limited airport investment in Argentina (c. USD500 million) and Bolivia (c. USD300 million), but considerably more in Peru (USD1.7 billion, mainly at Lima’s Jorge Chavez International Airport while work will commence on the USD658 million Chincero Cusco airport concession in 2Q2015.

Investment in Chile is dominated by the USD700 million management and development contract for the concession of Santiago de Chile Arturo Merino Benítez International Airport, which was recently won by the Nuevo Pudahuel consortium consisting of Aéroports de Paris (45%), VINCI Airports (40%) and Astaldi (15%).

Airports servicing the North Sea oil fields are most at risk of reduced investment in Europe

This survey ends with a brief consideration of the effects in Europe. As the Top 30 Oil Producing Nations table reveals, Europe is represented by Norway (#15) and the UK #20) although the remainder of the European Union as a whole is placed at #14 (Norway is not a member of the EU).

The United Kingdom is a substantial oil producer, but is now a net importer

The UK has a wide and diverse range of businesses but while some, such as textiles and heavy engineering have declined enormously, oil production should not be underestimated. Oil reserves were valued at an estimated GBP250 billion in 2007 and it is estimated there is still 30-40 years of production left (around 24 billion barrels). But those reserves have been declining so that while from the late 1970s to the early 2000s the UK was a major exporter of oil and gas it is now a net importer.

Even so, the oil and gas industries in the UK generate turnover in excess of GBP35 billion per annum (USD53.6 billion) and the industry is the country’s largest industrial investor. 98% of petroleum is produced from offshore fields, mostly in the North Sea. Typically, a barrel of North Sea crude oil will yield 3% Liquid Petroleum Gas, 25% diesel, 20% kerosene (jet fuel/heating oil), 12% fuel oil (heavy residue for power generation) and just 37% petrol, despite the common belief amongst British drivers that most of it ends up in motor vehicles.

The most likely effect of the falling oil price will be on those airports that service these industries. They lie along the East Coast, from Aberdeen in Scotland down to Norwich in East Anglia. (The recently closed Manston Airport in Kent might also have serviced these industries, along with Southend Airport and the proposed Thames Estuary Airport but they are all south of where the main action is).

Some of these East Coast airports are already having a hard time of it, notably Durham Tees Valley, where passenger traffic declined appreciably again in 2014 from what was already a new low of 159,500, and which is really only sustainable through a regular connection with Amsterdam. Also Humberside, which handles less than 250,000 passengers a year.

It is Aberdeen Airport investment that is likely to be the worst affected however. Around 90% of the UK's oil and gas production and reserves are in the geographic waters around Scotland. The oil and gas sector makes an important contribution to the Scottish economy and was a big factor in the independence debate in 2014. In 2012-13, the output from the Scottish geographic share of the UK oil and gas sector accounted for GBP18.4 billion, 13% of Scottish GDP.

BP has already said it is to cut capital investment by USD6 billion (GBP4 billion), on anticipation of a “new reality” in which the oil price slump is likely to last for several years, varying from USD45-USD60 a barrel and certainly much less than USD100 a barrel. BP is but one of the major oil companies that have collectively pledged to slash more than USD46 billion from their planned capital spending budgets.

Aberdeen, which BP promotes as “the energy capital of Europe,” is the headquarters for its North Sea upstream business, covering offshore operations, terminals and pipelines in both the UK and Norway, employing nearly 4,000 people.

BP reported a USD969 million loss for 4Q2014after taking a USD3.6 billion charge, mostly to reflect the impact of the lower oil price environment.

BG Group, the production arm of the former British Gas Plc, and which is also extensively represented in Aberdeen, also announced a huge hit from the oil price, reporting a USD7.9 billion loss for 4Q2014 on the back of an USD8.9 billion write down and cutting its capital spending by up to USD3 billion.

Aberdeen Airport recently changed hands, moving from the ownership of Heathrow Airport Holdings to that of AGS Airports Limited, a partnership between Ferrovial and Macquarie Infrastructure and Real Assets, along with Glasgow and Southampton airports. When the breakup of BAA began several years ago it was thought that Aberdeen might be retained because of the high commercial value of many of the passengers there. Yields are typically higher than at most regional British airports.

Those values prompted 20 months of planning for a GBP15 million terminal transformation project through to 2018. It is a relatively small sum in the grand scheme of things but big for a small city and airport of only 3.5 million passengers per annum. And it is one which now might be questioned. One factor in Aberdeen’s favour is that it kept on growing right until the end of 2014, despite the oil price dip.

Statoil seeks to shield its big new North Sea field, offering protection to airports on the Norwegian coast

Aberdeen and the two main Norwegian coastal cities of Stavanger and Bergen are, like it or not, closely connected by the oil industry. While international companies such as BP are represented there, the big beast of Norwegian oil production is Statoil, headquartered in Stavanger. Statoil, present in 36 countries, is the world's eleventh largest oil and gas company and the twenty-sixth largest company, regardless of industry, by profit in the world. The company has about 23,000 employees. The government (state) is the largest shareholder with 67% as the company’s name indicates, with the remainder public stock. It has 60% of the total production on the Norwegian Shelf.

As this report is written Statoil declared it was braced for a long period of depressed crude prices and set out plans to slash costs and cut investment. It will cut capital expenditure by a tenth this year, reducing exploration, spending on its US shale prospects, and modification of mature fields.

But it is moving ahead with projects already sanctioned and will soon unveil plans for the Johan Sverdrup oil field, which could cost about USD30 billion to develop fully. Johan Sverdrup is located on the Utsira Height in the North Sea, 140 kilometres west of Stavanger. The Plan for Development and Operation is expected to be discussed by the Storting (Norwegian Parliament) during its spring 2015 session. Production start-up is scheduled for end 2019 and it is a 50-year project.

Reading between the lines Statoil would appear to be more likely to make cuts outside of its biggest projects around Norway and this will offer some protection to the considerable investment being made by the state-owned airport operator Avinor (the world’s 9th biggest by revenues – USD1.6 billion in 2013) in the Bergen and Stavanger airports; also at Oslo, the capital. Bergen and Stavanger airports, together with Trondheim in the centre of the country and also on the coast, are considered so important to Avinor that they comprise three corporate divisions in their own right, along with the fourth, Oslo. The other 42 airports make up the fifth division. Expenditure at Bergen currently totals USD693 million on a new terminal to open in 2017 while USD2.2 billion is allocated also to a new terminal (2) at Oslo.

In all Avinor intends to invest NOK37 billion (EUR4.9 billion/USD5.5 billion) in the 2014-2023 period - the largest investment made by the company since Oslo Airport was constructed.

The only certainty is volatility. Private funding for airports is more likely now

There can be no certainty about the direction the oil price will take; if it will quickly rebound or whether there will be a long period of depressed prices which make production barely sustainable in many countries. What is clear is that most of the biggest producers - the BPs and Statoils for example - believe the latter alternative is more likely. On balance, that will be more beneficial than disadvantageous to airlines and their customers and generate more travel, which has a positive impact on airports.

It is equally clear that the big investments in airport infrastructure in many countries are often dependent on a flow of funds from what have, hitherto, been profitable state investments in oil production or where private producers have undertaken the extraction and paid for the privilege through taxes and royalties. Some of these airport investments do now seen to be at risk and even where infrastructure spending is modest some projects will, at least, be suspended.

Ironically, this set of circumstances may be the push in the direction of airport privatisation, or further push where it already exists, that is required in some countries. Variations on the word ‘private’ appear 23 times in this report but the acronym PPP (public-private-partnership) surprisingly only twice; in respect of Nigeria and Oman.

But as CAPA revealed in the related report http://centreforaviation.com/insights/analysis/ppps-could-reinvigorate-us-airport-privatisation-191920 airport PPPs are becoming increasingly popular globally and especially so where there is a ‘pipeline’ of opportunities for potential private sector investors/operators rather than just random individual ones.

In many of the countries in this report - for example Oman, Saudi Arabia, Egypt, Iran and Iraq (political developments permitting), Russia (ditto), Nigeria, the US etc – that is the case.

There is no doubt there are opportunities to be exploited that will reduce the burden on challenged states - but the private sector will only come to the rescue if it is sure the public one can also play its part; in this new paradigm of ultra low oil prices that may become a more palatable option.

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