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Tumult/Reform in the Middle East

Weak oil prices hung over the region in 2016, a year of more war but also some efforts at renewal

Saudi Arabia's plan to reinvent itself dominated the Gulf's political and economic landscape in 2016. Yet across the Middle East, struggle was rife. Weak oil prices blew a constant headwind. Unveiled in Saudi Arabia in April, Vision 2030 - the brainwave of powerful deputy crown prince Mohammed bin Salman (and jargon-wielding consultants) - was nothing short of a roadmap for the kingdom to break free of oil dependence. Greater detail arrived in June, with publication of the National Transformation Programme. It was riddled with key performance indicators on everything from sewage to tourism. For Saudis, though, the transition had begun at the start of the year, when the government raised fuel prices.

Equally significant was the announcement, in January, of an IPO for Aramco. Only 5% of the company will be sold off, but the sound of bankers' lips smacking was palpable. The news sat awkwardly with Saudi Arabia's oil-export policy, of letting the market drift. Soon enough, that policy's architect, oil minister Ali al-Naimi, was replaced by Khalid al-Falih. By September, Saudi Arabia was pushing an Opec/non-Opec deal to curb supply and lift prices.

A condition of a new Opec deal seemed to be that Riyadh would let Iran keep increasing production. On that score, Tehran's post-sanctions oil recovery in 2016 was startling. It began the year producing less than 3m barrels a day and by October it was up to 3.6m b/d.

The two countries otherwise spent 2016 deepening and exporting their rivalry. Saudi Arabia's war in Yemen against the Houthis dragged on, and drew international condemnation. Syria's conflict, another arena for Iran and Saudi Arabia's proxy conflict, worsened. Russia, backing Bashar al-Assad's regime, bombed rebel-held parts of Syria without mercy.

Iraq suffered in 2016, even while southern production and exports hit post-Saddam highs. Shipments via the Basra terminals were running at 3.28m b/d in September. Still, an IMF loan was necessary to keep the economy functioning. In the north, downgrades damaged Kurdistan's reputation among investors. A spat between Erbil and Baghdad shut the export pipeline to Turkey for five months. Kurdistan's economy floundered. A deal in September reopened the line and Kurdish exports rose to more than 0.5m b/d. The region's government even began paying some of its upstream investors. The oil agreement with Baghdad - where for much of the year opponents stopped prime minister Haider al-Abadi from forming a government - was especially significant in light of the fight against Islamic State (IS). In October, Kurdish Peshmerga and Iraqi federal troops, supported by Western special forces, launched a campaign to liberate Mosul.

IS was also under fire in Libya. By October, the terror group was cornered in Sirte and greatly diminished. But 2016 was full of chaos in Libyan politics. A UN-appointed government struggled for authority. For most of the year, oil output languished and even dipped beneath 200,000 b/d - an eighth its 2011 level. Then, in September, forces loyal to the east's rival government captured the oil infrastructure in the centre of the country. Production leapt to 0.6m b/d by end-October. Islamists responded with an attempted coup in October. It failed, but events seemed to be passing by the UN-appointed government.

Egypt's economy worsened in 2016, although the upstream offered good news. Real progress came at gas projects offshore, where Eni sped ahead with development of its 30-trillion-cubic-feet Zohr gasfield. Other nearby gas projects advanced. Egypt also lost some traffic through the expanded Suez Canal, as shippers chose a longer route around southern Africa to avoid new higher tariffs. A big Saudi economic aid package seemed to falter for political reasons in the autumn, when Aramco stopped delivering oil products Egypt.

Back in the Gulf, Kuwait's government tried to lift fuel prices over MPs' objections. When parliament was dissolved in October, it seemed possible. The UAE announced plans to restructure state company Adnoc. Qatar revamped its liquefied natural gas-ex-port strategy, obliging Asian customers when they asked for cheaper and more flexible contracts. It helped the country keep market share in southern Asia, where imports of Qatari gas rose by almost 50%.

For all the Middle East and North Africa's energy exporters, the weak oil price in 2016 brutalised budgets. Only Iran, recovering from sanctions, enjoyed solid growth. No wonder the region's Opec members ended the year scrambling to agree supply cuts.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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