Middle East Energy Review December 2020

Middle Eastern oil and gas producers started 2020 with optimism that the OPEC+ oil production cuts were rebalancing and stabilising the market. Oil prices were trading above $65 per barrel in early January and spiked to nearly $70 when Iran’s top General Qassem Soleimani was killed by a US drone attack at the Baghdad airport.

While the world was watching the latest flare-up in the US-Iran tension in the Gulf and its potential repercussions on the oil and gas production in the Middle East and on oil prices, the ‘black swan’ event of the year appeared.

The Black Swan

The coronavirus that first appeared in China quickly spread to other parts of the world and by late February-early March, governments were already imposing travel restrictions and lockdowns in an attempt to contain the COVID-19 infections.

Economies reeled from the closure of hospitality services and tourism, air travel restrictions, and non-essential shops closure. Oil and gas demand took a hit from limited travel, increased work-from-home, and slowdown in all industries. Oil prices started to slide in February and the largest oil and gas producers in the Middle East began fretting that declining global oil demand will create a new major glut on the market. The OPEC+ coalition of OPEC – where Middle Eastern producers are the most influential – and a dozen non-OPEC countries led by Russia started bickering about what to do with their production cut pact in light of the crashing global demand.

OPEC+ rift and reconciliation

The leaders of the OPEC+ coalition – Saudi Arabia and Russia – broke their three-year-long bromance amid disagreements over how to manage oil supply to the market. Saudi Arabia, the most influential OPEC member and its largest producer, went on an all-out price war with Russia and flooded the market with oil in April, additionally pressuring prices down. The brief but devastating price war in March and early April added to the already grim outlook for oil.

Saudi Arabia and Russia, also urged by US President Donald Trump, patched up their differences in April, and agreed in a new pact that OPEC+ withhold a record 9.9 million bpd from he oil market in the hope of stabilising prices.

By that time, however, oil storage in the world had swelled to record levels. The price of the U.S. benchmark oil, West Texas Intermediate, crashed to below zero at -$38 on 20 April—the first time ever the price of oil had plunged into negative territory.

Middle East oil & gas economies hit hard by COVID, price crash

All economies in the world suffered from the impact of the coronavirus in the second quarter, but the oil-dependent economies in the Middle East suffered a double whammy from the pandemic-related lockdowns that hit non-oil revenues and from the crash in oil prices that severely constrained oil revenues.

The biggest oil and gas producers in the Middle East enacted austerity measures to reduce government expenditures at a time when their oil revenues – a large part of Middle Eastern government budgets – were crashing. The world’s biggest oil exporter Saudi Arabia, for example, tripled the value added tax (VAT) to 15% from 5% beginning in July 2020 and discontinued the cost-of-living allowance for government workers as of June 2020. The Kingdom also halted major infrastructure projects.

In the second quarter of 2020, Saudi Arabia’s economy contracted by 7%, with unemployment rate hitting a record high. The flash estimate from the General Authority for Statistics of Saudi Arabia showed that the economy shrank less in the third quarter, but was still in contraction. Gross domestic product (GDP) at constant prices dropped by 4.2% in the third quarter of 2020 compared to the same quarter of 2019.

The markets and oil prices stabilised in the third quarter, and oil was trading in a narrow range of around $40 a barrel for most of the period between July and September. However, the second COVID wave in many major economies, including in the UK, Europe, and the US, threatens the fragile oil demand recovery seen since June.

Renewed pressure on prices and demand is bad news for the economies of the Middle Eastern oil and gas producers which depend to a large extent on income from hydrocarbon sales.

The six countries in the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—will see their economies shrink by 6.0% in 2020, before rising by 2.3% in 2021, the International Monetary Fund (IMF) said in October in its update on the Regional Economic Outlook for the Middle East and Central Asia.

Fitch Ratings revised down in early November its outlook on Saudi Arabia to ‘negative’ from ‘stable,’ to reflect “the continued weakening of its fiscal and external balance sheets, which has been accelerated by the coronavirus pandemic and lower oil prices, despite the government's strong commitment to fiscal consolidation.” Fitch expects the Saudi budget deficit to widen to 12.8% of GDP in 2020 (equivalent to about US$90 billion), from 4.5% of GDP in 2019. This reflects a 33% drop in oil revenue, a 5% decline in non-oil revenue, and 1% higher spending compared with last year.

Because of the close relation between the government and the Saudi state oil giant Aramco, Fitch also revised its outlook on Saudi Aramco to ‘negative’ to reflect the influence the state exerts on the company through strategic direction, taxation, and dividends, as well as regulating the level of production in line with OPEC commitments.

Saudi Aramco reported reduced profits in each of the three quarters of 2020 so far, due to the price and demand crash, but continued to commit to paying $75 billion in annual dividends to shareholders, the biggest shareholder being the Kingdom of Saudi Arabia with over 98%.

Middle East producers continue to sign deals to monetise resources

While the world watches every move of Saudi Arabia in OPEC and the OPEC+ coalition for clues about oil supply from the Middle East, other oil and gas producers in the Gulf have made big announcements this year about projects to monetise their oil and gas resources and increase their production in the medium and long term.

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 in 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.

“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.

In November, ADNOC and France’s Total announced the delivery of the first unconventional gas from the United Arab Emirates (UAE), from the Ruwais Diyab Unconventional Gas Concession located 200 kilometres west of Abu Dhabi city.

ADNOC LNG also signed in November long-term supply agreements with Vitol and Total.

“These agreements demonstrate the success of our commercial strategy in unprecedented times and confirm the market’s growing confidence in demand for natural gas,” ADNOC LNG’s chief executive Fatema Al Nuaimi said.

Qatar Petroleum signed on 1 June what it called “the largest LNG shipbuilding agreements in history” to secure more than 100 ships for its LNG growth plans.

“As I have previously stated, we are moving full steam ahead with the North Field expansion projects to raise Qatar’s LNG production capacity from 77 million today to 126 million tons per annum by 2027 to ensure the reliable supply of additional clean energy to the world at a time when investments to meet these requirements are most needed,” said Saad Sherida Al-Kaabi, Qatar’s Minister of State for Energy Affairs and President and CEO of Qatar Petroleum.

“We expect that oil demand will grow to over 105 million barrels per day by 2030, and continue to supply over half the world’s energy needs for many decades to come,” ADNOC’s Al Jaber said in his keynote address at this year’s online Abu Dhabi International Petroleum Exhibition Conference (ADIPEC).

“At the same time, the petrochemicals sector will continue to grow at a healthy pace through and beyond 2050, in line with a steadily expanding global middle class. These are long-term positive trends and they highlight the central role that our industry can and should play in a post-Covid recovery,” Al Jaber noted.

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