Letter from the Middle East: NOCs juggle priorities
From boosting oil production to throttling it back and with challenging oil and gas dynamics in both the short and longer-term, the region’s producers have their hands full
Opec machinations and the minutiae of the coronavirus’s impact on energy demand may attract most energy reporting attention, but the Middle East’s NOCs are quietly dealing with a set of unprecedented shocks to their businesses. So far, they are mostly managing, but their long-term plans have been cast into doubt.
Before the pandemic, the region’s largest NOCs were planning for a gradual end to Opec+ cuts and at last beginning to regain market share; a need to expand their gas production to meet local demand and grow exports; and a gradual transition to a different set of demand and climate drivers. In line with these imperatives, they were investing in more challenging gas reservoirs, thinking about their carbon footprints, and expanding refining and petrochemical businesses—both at home and in the markets of their main Asian customers.
Initially, the concern was to maintain continuity of operations and avoid infection at production sites. Recent investments in automation and remote working have paid off. Kuwait Oil Company is now returning to on-site work, with 30pc of staff initially coming back.
But Covid-19 remains a potent threat. Iran, one of the hardest-hit countries initially, is suffering a second wave; Iraq’s outbreak is accelerating; and war-torn Yemen is tragically now facing a severe pandemic. In Gulf Cooperation Council (GCC) countries, death rates remain low: the UAE appears to be returning to semi-normality, cases are falling from high levels in Qatar and Kuwait’s rates are flattish. However, numbers are rising worryingly in Saudi Arabia, Oman and Bahrain.
In March, Saudi Aramco and Abu Dhabi’s NOC Adnoc were asked to ramp up production dramatically and bring forward capacity expansion plans. Then from May, they and other NOCs have had to scale back output even more sharply to meet revised Opec+ obligations. Some arm-twisting by Riyadh has brought recalcitrant members into line. But Mid-East Gulf producers have a tricky balancing act of cutting costs today and planning to regain their market share on an uncertain timescale while still retooling themselves for a climate-friendly future.
Finding sufficient demand for the Gulf’s new gas supplies is now more of a concern
Opec+ cuts brought with them further challenges, such as how to meet gas demand as the Gulf heads into its summer peak. Iraq, which is short of gas and power anyway, has weighed how to distribute cuts between its fields most efficiently, with associated gas being a key factor.
Demand for fuel, and jet fuel in particular, has been hard hit—as it has around the world—requiring refining and trade flow rejigs. There are signs that electricity demand fell in some Gulf countries in April, and, with substantial numbers of expatriate workers departing, energy consumption is likely to be weaker than previously expected. Saudi Arabia is forecast to lose 1.2mn expatriates this year, and 100,000 have already departed Kuwait. GCC economies are forecast by the IMF to shrink by 7.6pc in 2020, including the impact of the Opec+ cuts.
Massive investments in gas were underway or planned in Saudi Arabia, the UAE and Oman, in addition to Qatar’s expansion of its world-leading LNG exports by the middle of the decade. Some of these, such as Adnoc’s Dalma offshore sour gas field, have been pushed back, partly to renegotiate better prices from contractors, but nothing appears to have been sidelined yet. Adnoc did succeed in raising $10.1bn by selling 49pc of its gas pipeline unit to a consortium of international investors in June, a welcome influx of capital and a sign of confidence in the UAE’s prospects and the robustness of its domestic gas demand.
7.6pc – Decline in GCC economies in 2020
Finding sufficient demand for the Gulf’s new gas supplies is now more of a concern, given the economic slowdown, reductions in subsidies and the rise of non-gas generation. Nuclear and coal-fired plants are set to start up in the UAE this year, and solar power is gaining across the region.
Saudi Arabia is about to announce another world-record low solar bid for its latest project, beating the 1.35¢/kWh offered for Abu Dhabi’s 2GW Al Dhafra plant in April. Such renewable gains are one welcome sign of diversification towards a less oily future, amid an otherwise tough landscape.
Robin M. Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis