With half the world's known reserves of oil and gas sitting in the fields of Saudi Arabia, Abu Dhabi, Qatar and the rest of the region, not many people think of the Middle East as having problems with energy.
However, analysts at HSBC said that low, subsidized prices across the region are driving fuel shortages and this means the major producers in the region are going to need to spend huge amountson new refining capacity to meet demand.
They forecast a boom time for suppliers, contractors and retailers.
“Middle Eastern energy consumption growth of about five percent a year is underpinned by subsidized retail prices for electricity and the transport fuels as well as by cheap gas for the chemical and other industries,” John Tottie, an analyst at HSBC in Saudi Arabia, wrote in a research note.
With refining capacity and gas productions not keeping pace with demand, many countries are importing more and more energy despite having huge reserves themselves, Tottie added.
“Saudi Arabia in particular faces a growing shortage of oil products: Without new refining capacity we forecast the Kingdom will import 248 billion liters of gasoline and diesel this decade at a cost of 170 billion dollars,” he said.
Despite Qatar being the world’s third-largest exporterof liquefied natural gas Kuwait started importing LNG in 2009 from as far afield as Australia and Malaysia to meet domestic demand.
“The UAE followed in 2010, even though it was already the world’s tenth-largest importer of pipeline gas in 2009. Iran, too, is seeking higher imports despite having the world's second-largest gas reserves. Bahrain is considering an LNG import terminal, and Oman is also seeking higher imports,” said Tottie.
“We believe that the recent unrest in MENA means that few policymakers outside Iran are willing to significantly raise prices," he added. "Yet the increase in imports is a source of unease in a region seeking to capture more of the hydrocarbon value chain and create jobs for a young and growing population.”
With huge investment needed to access reserves in the region and end imports from outside the Middle East, Tottie sees big opportunities for investors who buy companies that will benefit from this investment.
One stock where Tottie sees the potential for a 36 percent return is Aldrees Petroleum and Transport.
“In our view, leading Saudi fuel retailer Aldrees Petroleum and Transport offers the most direct exposure to high and growing Saudi Arabian oil consumption. We initiate on Aldrees with an Overweight rating and 60 Riyal target, offering 36 percent potential return,” said Tottie.
Another stock Tottie likes is Dana Gas from the UAE.
“We view Dana Gas as well-positioned to capitalize on the region’s growing natural gas shortage and initiate with an 0.82 Dirham target, offering 31 percent potential return, and an Overweight rating,” he wrote.
“Dana has a successful track record in Egypt, growing production at 14 percent pa since 2007. With higher production from the Kurdistan Region of Iraq and the start-up of the Zora field in the UAE we forecast a healthy 23 percent growth rate per annum,” Tottie added.