Oil and gas contractors feel interest rate pinch
24 February 2023
Commentary
Wil Crisp
Oil & gas reporter
Rising interest rates are eating into the profits of some contractors developing oil and gas projects in the Middle East and North Africa (Mena) region and are likely to force them to put up prices for clients.
Although contingent upon the agreed financing arrangements, higher interest rates will likely leave many contractors paying more to borrow the money they spend on project execution.
This month, the central banks of the UAE, Saudi Arabia and Bahrain raised their benchmark borrowing rates after the US Federal Reserve raised its key interest rate in its first policy decision of the year on 1 February.
GCC currencies, except for that of Kuwait, are pegged to the US dollar and therefore follow US monetary policy.
The Fed increased its policy rate by 25 basis points as it continued to push to bring inflation down towards its target range of 2 per cent and restore price stability.
This was the eighth rate increase since the US central bank started raising rates in March last year and pushed rates in the US to their highest since the 2008 financial crisis.
Rising interest rates have raised costs significantly for some contractors executing projects in the Mena region, dramatically reducing profit margins.
Contractors that have taken out loans to execute projects using a build-operate-transfer (BOT) contract model are among those hardest hit.
Under a BOT contract, a public entity grants a concession to a company to finance, build and operate a project.
The company usually deploys debt and equity upfront to build the project and then operates it over the long term to recoup its investment. It then transfers control of the project back to the public entity.
Because the company only usually starts paying off its loan gradually once the project is completed and the facility is operational, it can take many years to pay back. The higher interest rates are likely to significantly impact the contractor’s profits.
Contractors that have taken a loan to execute a project using the engineering, procurement and construction (EPC) contract model are also likely to be negatively impacted by higher interest rates, but to a lesser extent.
This is because EPC contractors are usually fully paid for their work when the project is completed, allowing them to pay off their loan far more quickly than if a BOT contract model has been used.
The additional costs associated with higher rates are likely to be especially problematic for contractors wrestling with supply chain issues and higher material costs due to inflation.
For clients looking to tender major oil and gas projects, the higher interest rates could mean a project may see less enthusiasm from contractors if it tenders a contract using the BOT model.
If they use this model, they can also expect to see higher prices quoted as contractors try to pass on the cost of higher interest rates.
Register for MEED's guest program now to access this article.
Exclusive from Meed
-
-
-
Saudi contractor wins $354m Alkhobar mall contract29 June 2026
-
-
UCC Saudi wins $400m Diriyah MEP and finishing deal29 June 2026
All of this is only 1% of what MEED.com has to offer
Subscribe now and unlock all the 153,671 articles on MEED.com
- All the latest news, data, and market intelligence across MENA at your fingerprints
- First-hand updates and inside information on projects, clients and competitors that matter to you
- 20 years' archive of information, data, and news for you to access at your convenience
- Strategize to succeed and minimise risks with timely analysis of current and future market trends
Related Articles
-
Chinese contractor wins Qiddiya Northwest transport hub
29 June 2026
Saudi gigaproject developer Qiddiya Investment Company (QIC) has awarded a contract to build a new transport hub in the entertainment city of Qiddiya on the outskirts of Riyadh.
The contract was awarded to Beijing-headquartered China State Construction Engineering Corporation.
The project is located within the resort core zone of the development.
MEED understands that its scope covers the construction of a parking structure for up to 2,000 vehicles; a transport hub consisting of a passenger flow system, ticketing and transit-related activities; retail, food and beverage, and hospitality facilities; mechanical, electrical and plumbing systems; and soft and hard landscaping works.
Earlier this year, MEED exclusively reported that QIC had tendered a contract to build a new transport hub.
Local firm Ammico Contracting undertook the site enabling works.
QIC is accelerating plans to develop additional assets at Qiddiya City.
Last week, MEED reported that QIC had invited contractors to prequalify for a contract to build an indoor sports arena within its Qiddiya entertainment city project.
The multipurpose arena is designed to International Olympic Committee standards.
It will be located in District 18, in the Uptown South area of Qiddiya.
Once completed, the indoor arena will be capable of hosting a wide range of sports, cultural and entertainment events.
The arena will feature numerous sports courts for basketball, handball, futsal, volleyball, tennis, boxing and gymnastics.
It will have a seating capacity of 18,000 spectators.
QIC’s other major projects include an e-sports arena, the National Tennis Centre, Prince Mohammed Bin Salman Stadium, a motorsports track, a racecourse, the Dragon Ball and Six Flags theme parks, and Aquarabia.
QIC opened the Six Flags theme park to the public in December last year.
The park covers 320,000 square metres and features 28 rides and attractions, including 10 thrill rides and 18 aimed at families and young children.
The Qiddiya project is a key part of Riyadh’s strategy to boost leisure tourism in the kingdom.
https://image.digitalinsightresearch.in/uploads/NewsArticle/17474943/main.jpg -
Saudi’s WTCO considers equity model for water schemes
29 June 2026
Saudi Arabia’s Water Transmission Company (WTCO) is understood to be considering changes to the delivery model for the flagship Jubail-Buraidah and Ras Mohaisen-Baha-Mecca independent water transmission system (IWTS) projects.
According to a source familiar with the plans, WTCO is in ongoing discussions with potential partners to establish a special purpose vehicle (SPV) that would take equity stakes in the two projects.
The proposed changes could push procurement for the project into 2027, the source said.
The schemes will have a combined water capacity of almost 1.4 billion cubic metres a day (cm/d). The Jubail-Buraidah IWTS comprises an approximately 348-kilometre-long greenfield water transmission system with a capacity of 840,650 cm/d, delivering water from the Ashmasiah reservoirs to cities and towns in Al-Qassim province.
The Ras Mohaisen-Baha-Mecca IWTS involves constructing an approximately 325km-long greenfield IWTS with a capacity of 542,000 cm/d, delivering water from Ras Mohaisen to the Adham and Aradhiyah regions.
The Jubail-Buraidah project is large by WTCO standards. The company’s second phase of the Khobar-Hofuf system, completed in 2024, was 140km in length and had a capacity exceeding 530,000 cm/d.
Bidding for both schemes has been extended several times since tendered last September under the public-private partnership model.
Most recently, the bid submission deadline was moved to 2 August for the Jubail-Buraidah IWTS and to 9 August for the Ras Mohaisen-Baha-Mecca IWTS.
As previously reported, local firms Alkhorayef Water & Power Technologies, Mutlaq Damook Al-Ghowairi Contracting, Saudi Services for Electro Mechanic Works and Al-Rawaf Trading & Contracting, among other companies, were expected to submit bids for the main contract.
Under the revised structure, the SPV would appoint the engineering, procurement and construction (EPC) contractor directly.
WTCO was established in 2020 as part of Saudi Arabia’s water sector restructuring to develop and operate water transmission infrastructure on a more commercial basis, with a greater emphasis on private-sector participation and alternative financing models.
There are also plans to tender a contract for phase two of the Ras Mohaisen water transmission system project. This includes laying water transmission pipelines 408km in length with a capacity of 400,000 cm/d. This project is estimated to cost about $600m.
https://image.digitalinsightresearch.in/uploads/NewsArticle/17474889/main.jpg -
Saudi contractor wins $354m Alkhobar mall contract
29 June 2026
Register for MEED’s 14-day trial access
Riyadh-based construction company Lynx Contracting has won a SR1.3bn ($354m) contract to build the Al-Khobar Downtown Mall and Boulevard project.
The contract was awarded by local developer Arabian Centres Company (Cenomi Centres). The contract duration is three years from the construction start date.
In a stock exchange filing on the Tadawul, Cenomi Centres said the scope includes “design, engineering, construction, supply, installation, testing, commissioning, obtaining all required regulatory approvals and all related works up to the final handover and full operation of the project”.
The contract is the first major deal signed since the UAE’s Al-Futtaim Group acquired a 49.95% stake in Saudi Arabia’s Cenomi Retail in a deal worth about SR2.5bn ($667m) in July last year.
Al-Futtaim said it acquired the shares at a price of SR44 ($11.73) each from Cenomi Retail’s existing shareholders. These include Fawaz Abdulaziz Alhokair, Abdul Majeed Abdulaziz Alhokair, Salman Abdulaziz Alhokair, Saudi FAS Holding Company and FAS Real Estate Company.
Dubai-headquartered Al-Futtaim Group is one of the region’s most established private businesses, with operations spanning the automotive, financial services, real estate, retail and healthcare sectors.
In the retail sector, the group operates brands including Zara, Massimo Dutti and Bershka in the region.
> Be recognised among the best in the industry at the MEED Projects Awards 2026 …
https://image.digitalinsightresearch.in/uploads/NewsArticle/17474642/main.jpg -
Iran extinguishes fire at Mahshahr petrochemicals complex
29 June 2026
Firefighting teams have extinguished a fire at the Mahshahr petrochemicals complex in Iran’s Khuzestan province, according to domestic news reports.
The fire broke out at a facility operated by Karun Petrochemical Company on 26 June during an operation to remove debris following recent attacks on facilities in the area, the company said.
Earlier this month, the facility was hit by Israeli strikes, forcing an evacuation.
Karun Petrochemical Company produces a range of products.
It has a nameplate capacity to produce 40,000 tonnes a year (t/y) of toluene diisocyanate (TDI) and 40,000 t/y of methylene diphenyl diisocyanate (MDI).
It also has the capacity to produce 30,000 t/y of aniline and 92,300 t/y of nitric acid (HNO3).
TDI and MDI are both used primarily as building blocks to create polyurethane products.
TDI is mostly used to make flexible polyurethane foams, and MDI is usually used to create rigid foams, adhesives, sealants and elastomers.
Aniline is also used to make urethane polymers and in the dye industry, where it is a precursor to indigo, which is used to dye jeans blue.
Nitric acid is a highly corrosive mineral acid, and its main industrial use is the production of fertilisers.
The Mahshahr petrochemicals complex is one of the most important petrochemical complexes in Iran. It was also previously hit by Israel in strikes in April.
On 4 April, Israeli forces targeted at least eight major petrochemical complexes in the Mahshahr region, along with critical supporting infrastructure, including power plants that supply electricity to the industrial zone.
Mahshahr accounts for approximately 28% of Iran’s petrochemicals production.
Iran’s petrochemicals industry is the country’s second-largest source of export revenue after crude oil.
The country has a nominal production capacity of about 95 million t/y of petrochemicals, although actual output prior to the latest conflict was significantly lower due to persistent shortages of electricity and natural gas.
Iran has invested tens of billions of dollars in developing its petrochemicals infrastructure, and if facilities are severely damaged, rebuilding would pose a major financial and technical challenge.
https://image.digitalinsightresearch.in/uploads/NewsArticle/17468886/main.jpg -
UCC Saudi wins $400m Diriyah MEP and finishing deal
29 June 2026
UCC Saudi, the local branch of Qatar’s UCC Holding, has won a SR1.5bn ($400m) contract at Diriyah Square in the Diriyah Two area.
The scope includes package four at Diriyah Square, covering mechanical, electrical and plumbing (MEP) and finishing works.
The contractors had submitted their best and final offers for the contract in October last year, as MEED reported.
Diriyah Square lies at the centre of the Diriyah project and will offer hospitality, residential, retail, leisure and entertainment facilities.
The contract is another significant contract win for UCC Saudi at the Diriyah project in recent weeks. Earlier this month, MEED exclusively reported that Diriyah Company had awarded a SR2.7bn ($727m) contract for the main construction works on the development’s Waldorf Astoria superblock.
The Waldorf Astoria superblock is a mixed-use development comprising a Waldorf Astoria hotel, Waldorf Astoria-branded residences, commercial and residential facilities, and office space.
The Waldorf Astoria hotel will feature 200 keys, while the residential component will comprise 47 branded residences.
The project is located on the Grand Boulevard South and Northern Arterial Road in the Boulevard Northwestern district at Diriyah Gate 2.
The Diriyah masterplan envisages the city as a cultural and lifestyle tourism destination. Located northwest of Riyadh’s city centre, it will cover 14 square kilometres and combine 300 years of history, culture and heritage with hospitality facilities.
https://image.digitalinsightresearch.in/uploads/NewsArticle/17448342/main.jpg