OGV Energy’s Middle East Energy Review

Major oil producers in the Middle East, grouped in the OPEC+ coalition, decided in the middle of July to ease their record production cuts of 9.7 million barrels per day (bpd) starting on 1 August.

The OPEC+ group noted improved market conditions and recovering global oil demand, but international lenders and rating agencies continue to warn that the COVID-19 economic crisis and the collapse in oil prices will weigh heavily on the economies and government budgets of the major oil exporters in the Middle Eastern region.

OPEC+ eases output cuts but not rushing to boost oil exports

The OPEC+ coalition of oil producers, led by OPEC’s biggest producer and the world’s largest oil exporter, Saudi Arabia, and by Russia, decided on 15 July – as widely expected – to ease the record collective cuts to 7.7 million bpd through the end of the year, seeing improving market conditions and compliance with the cuts.

The meeting of the Joint Ministerial Monitoring Committee (JMMC), co-chaired by Saudi Arabia and Russia, “observed that there were encouraging signs of improvement as economies around the world open up. While there could be localised or partial lockdowns re-imposed in some places, the recovery signs are clear, both in physical and futures markets.”

While the cuts are being eased to 7.7 million bpd from 1 August, the actual production reduction is expected to be deeper because the OPEC+ producers who have lagged in compliance – Iraq, Angola, Nigeria, and Kazakhstan – have promised to over-comply with their shares of the cuts in the third quarter to compensate for loose compliance in May and June.

The OPEC panels, the JMMC and the Joint Technical Committee (JTC) meeting that usually precedes it, will be meeting every month until the end of the year to take stock of the oil market and the trend in demand recovery. As of the middle of July, OPEC was pleased to see that oil demand had bounced back from the lows of more than 20 million bpd in April, but demand is still expected to drop by 8.9 million bpd annually for the whole of 2020, OPEC Secretary General Mohammad Barkindo said at the JMMC video meeting.

“Given considerable uncertainties, the expected rebound in 2021 will be short of covering the lost demand this year and will not reach pre-crisis levels of 100 mb/d soon,” Barkindo said, echoing views of analysts that global oil demand will likely take more than a year to reach pre-COVID levels, if at all.

Despite fears of a second wave of the coronavirus and the possibility of new localised lockdowns, OPEC+ as a whole signalled it was pleased with the way it had managed the market after the brief oil price war in April.

“Although this is a cautious and gradual process, and there could be localised or partial lockdowns re-imposed in some places, the recovery signs are unmistakable, both in physical and futures markets,” Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, said at the JMMC meeting.

“As we move to the next phase of the agreement, the extra supply, resulting from the scheduled easing of the production cut, will be consumed as demand continues on its recovery path,” Prince Abdulaziz bin Salman said.

Despite the higher production resulting from the eased cuts, the world’s largest oil exporter pledged to keep its exports unchanged in August.

“I can tell you that in the Kingdom Saudi Arabia, due to the increase in demand from utilities and other sectors, as lockdowns ease, we estimate approximately 500,000 barrels per day of extra demand in August. So, despite a higher production target in August, there will be no change in our exports,” the minister noted.

Low Prices, Coronavirus Crisis Weigh on Mideast Economies

While the biggest oil producers in the Middle East are withholding supply to the market, their economies are under pressure due to the lower exports, lower oil prices, and the impact of the coronavirus pandemic on economic activity in the non-oil sector.

The low oil prices in April weighed heavily on the oil revenues of the oil producers in the Middle East. Case in point – the value of Saudi Arabia’s oil exports plunged by 65.4%, or by US$12.1 billion (45.3 billion Saudi riyals), year over year in April, data from Saudi Arabia’s General Authority of Statistics showed on 25 June. The value of Saudi oil exports plunged by 23.5% compared to March, the statistics office said. 

The share of oil exports in total exports dropped to 64.7% in April 2020 from 77.4% in April 2019.
Combined oil revenues of the Middle East, North Africa, Afghanistan, and Pakistan Oil Exporters (MENAPOE) are set to decline by more than US$270 billion this year compared to 2019, the International Monetary Fund (IMF) said in its Regional Economic Outlook Update: Middle East and Central Asia in July.

“Downward revisions in oil GDP reflect sharper-than-anticipated drop in crude production; oil export receipts are now projected to decline by more than $270 billion in 2020 relative to 2019. Non-oil GDP in these economies has also been marked down as stay-at-home rules and other COVID-19 containment measures are causing larger-than-expected disruptions to the tourism, hospitality, transportation, and retail sectors,” the IMF noted.

MENA oil-exporting countries are now expected to see a 7.3% contraction in economy in 2020, a downward revision of 3.1 percentage points compared to IMF’s regional forecast from April. The IMF also revised down its estimates for economic growth in 2021 by 0.8 percentage points to 3.9%. These large downward revisions “reflect the 'double whammy' from oil price fluctuations (and supply cuts) and the pandemic-linked lockdowns,” the fund’s analysts said.

The six countries of the Gulf Cooperation Council (GCC) alone—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are expected to see their cumulative government deficits swell to US$490 billion between 2020 and 2023, according to S&P Global Ratings.

Middle East Cuts Oil & Gas Capex, FIDs

The Middle East, like all other regions around the world, will see reduced investment in oil and gas projects, Wood Mackenzie said in a report at the end of June. According to WoodMac’s global upstream research team, capital expenditures (capex) in the Middle East in 2020 are expected to be US$16 billion lower than initial estimates, following the collapse in oil prices and global demand in the pandemic. In addition, Wood Mackenzie expects a sharp drop in imminent final investment decisions (FIDs) in the Middle Eastern region. 
 
Abu Dhabi Strikes US$20.7 Billion Energy Infrastructure Deal

While most of the market attention was focused on oil and the poor demand for natural gas in the pandemic, the Abu Dhabi National Oil Company (ADNOC) announced on 23 June one of the largest global energy infrastructure transactions in which infrastructure investors and operators and sovereign wealth and pension funds will invest in ADNOC gas pipeline assets valued at US$20.7 billion. A consortium of six investors consisting of Global Infrastructure Partners (GIP), Brookfield Asset Management, Singapore’s sovereign wealth fund GIC, Ontario Teachers’ Pension Plan Board, NH Investment & Securities, and Snam will collectively buy a 49% stake in ADNOC Gas Pipeline Assets LLC, while ADNOC will retain the 51% majority stake.

“Today’s landmark investment signals continued strong interest in ADNOC’s low-risk, income-generating assets, and sets another benchmark for large-scale energy infrastructure investments in the UAE and the wider region,” said Dr. Sultan Al Jaber, UAE Minister of State and ADNOC Group CEO. 

Read the latest issue of the OGV Energy magazine HERE.