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Belt and Road woes could benefit the Gulf

31 March 2023

The Gulf region could benefit from the growing signs of strain affecting China’s Belt and Road Initiative (BRI).

Beijing has substantially increased its lending for bailouts to developing countries following a series of debt write-offs, controversies and corruption allegations. As the financial burden increases, Chinese companies and financial institutions could respond by shifting their focus to less risky markets such as the Gulf. 

A study published by the Kiel Institute for the World Economy found that between 2019 and the end of 2021, China extended $104bn in rescue loans to developing nations, almost equal to its bailout lending over the previous two decades. From 2000 until the end of 2021, China carried out 128 bailout operations in 22 countries with a total value of $240bn.

Interest rates

Compared to loans from agencies such as the IMF with interest rates of about 2 per cent, the Chinese emergency loans come with interest rates in the region of 5 per cent, making them unaffordable for some countries. This has led to criticism of China’s aid strategy – claims that Beijing has publicly rejected.

The BRI is a global infrastructure initiative that aims to build a network of trade and infrastructure projects connecting China with more than 100 countries across Asia, Europe, Africa and the Middle East.

The BRI has been a way for China to expand its global economic and political influence by financing and constructing infrastructure projects such as roads, railways, ports and power plants, among others, in participating countries.

Chinese President Xi Jinping formally announced the initiative during a speech at Nazarbayev University in Kazakhstan in September 2013. During the speech, Xi Jinping proposed the creation of a Silk Road Economic Belt and a 21st Century Maritime Silk Road. The initiative promoted regional and global economic development, strengthened cooperation and connectivity among participating countries, and enhanced cultural exchange and mutual understanding.

As well as burdening countries with unaffordable debts, another criticism of the BRI is that it needs to be clearly defined and centrally managed in Beijing. After being announced in a speech, Chinese companies have been tacitly encouraged to support development projects overseas. Without oversight, these projects and associated loans have sometimes failed to succeed commercially.

Regional connection

While the BRI has yet to be clearly defined, the Middle East is part of it. The clearest demonstration came in December last year when Saudi Arabia’s King Salman bin Abdulaziz al-Saud and President Xi Jinping signed a comprehensive strategic partnership agreement in Riyadh, and a series of high-level commitments, including one to harmonise the goals of Saudi’s Vision 2030 with China’s BRI.

If China chooses to become more risk-averse with its BRI investments, Saudi Arabia and several other key Middle Eastern markets could be prime areas of focus. The other countries are the UAE, Kuwait, Iran, Iraq and Egypt. The Gulf countries have large hydrocarbon reserves, which are a strategic priority for China. The revenues they generate also give countries the cash flow to service any loans extended by Beijing.

According to the US Energy Information Agency, China was the world’s second-largest oil consumer behind the US in 2021. It consumed 14.76 million barrels a day, which equates to 15 per cent of the global total.

Egypt is considered strategically important because of the Suez Canal. The waterway enables China to import raw materials from the Middle East and Africa and export finished goods to Europe and other markets. Any disruption to the flow of goods through the canal, such as the blockage caused by the Ever Given container ship in March 2021, can have significant economic consequences for China.

Busy working

China is already backing significant levels of project activity in these countries. Major contract awards secured by Chinese construction companies in Saudi Arabia during 2022 include contracts to build photovoltaic solar power plants, tunnels, roads, bridges and a cement plant.

This year a Chinese-led consortium is well placed to win work on the $7bn Saudi Landbridge project. It was reported in January that negotiations are ongoing for the final cost and financing of the scheme, which involves building a railway network across the kingdom from the Red Sea coast to the Gulf.

China National Nuclear Corporation is also one of the companies bidding for the contract to build the kingdom’s first nuclear power plant.

Chinese companies are involved in various major projects in the UAE, including Etihad Rail, the Hassyan coal-fired power plant and the Mohammed bin Rashid Solar Park. China’s oil and gas infrastructure investments include China National Offshore Oil Corporation (CNOOC), a subsidiary of China National Petroleum Corporation (CNPC), which holds a 4 per cent stake in Abu Dhabi’s hydrocarbon blocks. In addition, Chinese companies are investing in other sectors, such as the development and operation of Khalifa Port’s second container terminal and the China-UAE Capacity Demonstration Park.

In Egypt, China State Construction Engineering Corporation (CSCEC) is working on the New Administrative Capital project east of Cairo. China is also involved in constructing a new industrial zone in the Suez Canal Economic Zone, which aims to attract foreign investment and boost economic growth. For example, at the end of March, it was reported that Chinese company Xinxing Ductile Iron Pipes plans to invest $2bn in iron and steel plants in the economic zone.

In Iraq, Chinese companies are heavily involved in the oil and gas sector. Chinese contractors dramatically ramped up their activities in Iraq’s energy sector, winning 87 per cent of all oil, gas and power project contracts awarded in the country during 2022.

There is plenty of room for Chinese involvement to grow in the future. According to regional projects tracker MEED Projects, there are $1.3tn of projects in the pre-execution stages across Saudi Arabia, the UAE, Kuwait, Iran, Iraq and Egypt.

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Colin Foreman

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    China is playing to the crowd. It … is looking to put a wedge between the US and the wider world, including Southeast Asia
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    Beijing’s broadening reach

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    From Riyadh’s point of view, China’s leverage with Iran, primarily through extensive trade and investment links, made it the ideal broker for an agreement that Saudi Arabia views as key to helping dial down the threat posed by Iran.

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    2025 outlook

    The Mena power projects pipeline remains robust, with over $45bn-worth of contracts under bid evaluation and another $50bn in the prequalification stage as of late 2024, according to MEED Projects.

    Saudi Arabia is likely to remain dominant, particularly if SPPC and the PIF activate a plan by the Energy Ministry to procure 20,000MW of renewable energy capacity annually until it reaches its target for renewables to account for half of its energy production mix by 2030.

    Morocco has the second-largest power projects pipeline thanks to several planned schemes to export clean energy and green hydrogen to Europe. Notably, the tender is under way for the country’s first two solar PV plus battery energy storage system (bess) projects, Noor Midelt 2 and 3.

    Abu Dhabi also maintains a substantial renewables and gas-fired generation project pipeline. It has several upcoming IPPs with a total combined capacity of over 7,000MW, of which more than 6,000MW is in the tendering stage.

    While the procurement process for Saudi Arabia’s first nuclear power plant in Duwaiheen has been delayed, the UAE has plans to procure the next phase of its nuclear power plant project in Barakah.

    Green industrial development in steel and aluminium, as is being undertaken in the UAE, is a driver for ongoing clean energy capacity buildout, notes Karen Young, senior research scholar at Columbia University’s Centre on Global Energy Policy.

    Egypt, Iran, Kuwait and Iraq have the next largest power projects pipelines. The key drivers in each state vary, with populous countries Egypt and Iran seeking to develop integrated green hydrogen hubs and nuclear power capacity, respectively, while Kuwait remains a promising market with extended plans to procure both conventional and renewable energy capacity to address peak demand.

    There are indications that Iraq’s first utility-scale solar PV scheme – a 1GW project being developed by France’s TotalEnergies – will head into the construction stage in the coming months, along with other similar projects for which preliminary agreements were signed by Iraqi authorities in 2021-22.

    Oman is actively pursuing renewable energy capacity, with the state offtaker having tendered the contracts for two wind IPPs in September 2024.

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    In November, Bahrain started the procurement process for its fourth independent water and power project (IWPP) in Sitra, which replaced the previously planned Al-Dur IWPP 3 scheme.

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    The Middle East’s projects market in 2024 has been fuelled by the same heady cocktail of favourable oil prices, continued investment into oil and gas projects, government infrastructure spending, the energy transition, real estate investment and economic diversification that propelled the total value of awards in 2023 to record levels.

    By the end of October 2024, there were $262bn of contract awards across the Middle East and North Africa (Mena) region, according to regional projects tracker MEED Projects. By the end of the year, the 2024 total may top the $290bn recorded in 2023. 

    While economic diversification is a priority for governments across the region, oil and gas remains a key sector for project awards. The three largest contract awards in 2024 were from the sector.

    The top-ranked contract by value was a $20bn deal awarded to Iranian companies Petropars, Oil Industries Engineering & Construction, Khatam Al-Anbiya Construction Headquarters and Mapna Group for the South Pars gas field pressure-boosting project in Iran by Pars Oil & Gas Company.

    Next was the $8bn deal won by China’s Hualu Engineering Technology Company for delivering the Al-Faw refinery in Iraq for Southern Refineries Company.

    The third-largest award was a $5.5bn contract won by a joint venture of France’s Technip Energies, Japan’s JGC Corporation and the UAE’s NMDC Group for the Ruwais low-carbon liquefied natural gas terminal project by Abu Dhabi National Oil Company (Adnoc).

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    Strong performances

    Construction is the second-largest sector after oil and gas, accounting for 23% of awards. Its significance has dropped in 2024 compared to 2023, when it accounted for 32% of contract awards. 

    In terms of value, there were $68bn of contract awards in 2024 until the end of October. If the same pace is maintained during November and December, the 2024 total is expected to be about $81bn, which falls short of the 2023 total of $97bn. 

    While the total value of contract awards may have dropped, there was the largest construction contract award on record in 2024 – a $4.7bn deal secured by Italian contractor WeBuild for the construction of three dams for the Trojena mountain resort at Saudi Arabia’s Neom gigaproject. 

    The power sector accounted for 18% of the total awards during the period, the largest of which was the $5.3bn contract won by Saudi Arabia’s Alfanar Projects and China Electric Power Equipment & Technology Company for the 7,000MW Saudi Central, Western and Southern Regions high-voltage direct current overhead transmission lines project being developed by Saudi Electricity Company.

    When analysed by country, Saudi Arabia and the UAE dominate the market, and together they account for over 60% of contract awards across the region in 2024 up to the end of October. 

    As the region’s largest economy, it is unsurprising that Saudi Arabia accounts for the largest share, with 38.6%, followed by the UAE, which had 22%. The next most significant country was Iran, which came in a distant third with 8% of contract awards. 

    The outsized contribution of Saudi Arabia and the UAE reflects the relative economic stability found in the GCC compared to other countries in the region that are grappling with the impact of conflict and other associated financial pressures. 

    Looking beyond the contract awards numbers, the biggest project announcement in 2024 came in April, when Abu Dhabi investment vehicle ADQ released details of plans to invest $35bn in Egypt. The plans involve ADQ acquiring the development rights for Ras El-Hekma, a planned new city on Egypt’s northern Mediterranean coast, for $24bn. 

    The development has been billed as having the potential to attract over $150bn in investment.

    In October, ADQ appointed its subsidiary Modon Holding as the master developer for Ras El-Hekma. Modon will act as the master developer for the entire development, which covers more than 170 square kilometres (sq km). 

    Modon will develop the first phase, which covers 50 sq km, and the remaining 120 sq km will delivered with private developers.

    Key partners for delivering the project have already been found. For construction, Modon has signed a framework agreement with Egyptian firm Orascom Construction to serve as the primary contractor for the project’s first phase. 

    Modon also signed a deal with Abu Dhabi National Energy Company (Taqa) for developing, financing and operating greenfield utility infrastructure projects, water desalination projects, electricity transmission and distribution projects and wastewater projects at the Ras El-Hekma development.

    While economic diversification is a priority for governments across the region, oil and gas remains a key sector for project awards

    Future prospects

    Looking ahead, the performance of the projects market in 2025 will depend  on the favourable macroeconomic conditions remaining in the GCC, which if the other four members of the six-nation bloc are added, accounted for nearly 72% of the Mena region’s total contract awards during the first 10 months of 2024. 

    The key metric to watch in 2025 will be the oil price. In mid-November, the price of Brent Crude was $72 a barrel, which is below what many in the region, including Saudi Arabia, require if they are to maintain their project spending plans. 

    The outlook for oil prices is uncertain and after oil producers’ group Opec cut its global demand growth forecasts for both 2024 and 2025 for the fourth time, highlighting economic weakness in China, India and other regions, there are concerns prices will dip in 2025. 

    The election of Donald Trump as US president adds to those concerns. He has promised to “drill, baby, drill”, and a sharp uptick in output from the US could cause oil prices to soften further.

    Trump is also a protectionist and has said ‘tariff’ is his favourite word. Most of his new tariffs are expected to be aimed at China, which could mean that Chinese companies look to other markets that remain open to them, including the Middle East.

    The appeal is clear to see. Chinese contractors already command a dominant position in the region – particularly in North Africa and Iraq – and Chinese companies will find great appeal in affluent markets such as Saudi Arabia and the UAE, which can offer large-scale project opportunities.

    The other metric that will drive the projects market in 2025 is real estate. In the UAE, much of the ongoing development work is supported by the buoyant property market, particularly in Dubai, which has grown strongly throughout 2024. 

    According to a report by data and analytics company Reidin, property sales in the UAE reached AED46.52bn ($12.7bn) in October 2024, marking a 55% year-on-year increase. Demand also remains robust, with 19,500 transactions recorded in October, reflecting a 72% rise compared to the same period in 2023. 

    Looking ahead to 2025, Reidin says that the outlook remains optimistic as sustained demand, rising property values and steady inventory turnover are all expected to continue driving growth. 

    While the forecast supports a positive outlook for construction in the UAE, those who have seen Dubai’s property market collapse before will be keenly watching the data in 2025.

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