Unbundling expected as GCC utilities face subsidy reforms

Energy companies based in member states of the Gulf Cooperation Council (GCC) could seek to offload chunks of their business as governments in the region forge ahead with subsidy reforms, according to a Moody’s report released yesterday.

Low oil prices are forcing public authorities to support their balance sheet by increasing tariffs in sectors including electricity, water and petrol, with the likes of Saudi Arabia, Qatar, the UAE and Oman all slashing consumer subsidies over the last few months.

While this should buoy all utilities in the long-run, some may benefit more quickly than others, according to Moody’s.

“In the short term, distribution companies that operate in unbundled systems, such as those in Oman, will benefit the most from the reductions in subsidies to end-consumers as their revenues are directly linked to tariffs,” said Julien Haddad, an analyst at the ratings agency, in a research note.

This could give further impetus to a trend already observed in Gulf markets, where greater private sector participation in sectors that have so far largely been the preserve of state-owned entities is increasingly welcomed.

As they seek to adapt to an extended period of depressed hydrocarbon prices, utilities are engaging in efforts to make their operations more efficient, such as reducing system losses. By freeing up cash for longer-term purposes, such measures could catalyse much needed capex investments. Both would make them more attractive investment targets for market participants.

But the dynamics with the greatest potential would be renewed momentum behind higher involvement of private players in power generation and the further unbundling of utility businesses.

“While IPPs and independent water and power projects (IWPPs) represent an important share of generation in Oman, Abu Dhabi and Qatar, they currently play a minor role in Saudi Arabia, the region's largest electricity market,” Haddad said.

“[Unbundling] can help in the privatisation of the systems, and generate sources of cash for the governments in their quest to balance their budgets.”

Moody’s expect oil prices to average $33 a Brent crude barrel in 2016 and $38 in 2017.

“We think recent reductions to energy subsidies are likely to be followed by further cuts ahead of their potential phasing-out over the long term,” the note said. “Actions governments have taken so far to address the damaging effect of low oil prices fall short of the scale of economic and fiscal reforms required to achieve budget balance.”