Middle East Oil & Gas amid Coronavirus Crisis and OPEC+ Drama

In one of the most dramatic and strangest months in the history of global energy markets, the Middle East took centre stage among all regions in the world while oil and gas investors and analysts were looking with apprehension how the global spread of COVID-19 was shutting down entire nations and industries, decimating oil and gas demand.

Thanks to the huge oil and gas reserves of producers that are core to the Organisation of the Petroleum Exporting Countries (OPEC), the Middle East has always been under the spotlight.

But over the past month, the actions of the largest oil producers in the Middle East – most of all OPEC’s top producer and the world’s largest oil exporter, Saudi Arabia – combined with the coronavirus pandemic that swept through the world to create a perfect storm for global oil and gas markets, plunging the energy industry into its second major downturn in five years.

Global oil demand has tumbled as billions of people went into lockdown, and analysts expect that oil demand loss could reach as much as 30 million barrels per day (bpd) in

April and May—or a 30% plunge compared to the world’s oil consumption prior to the COVID-19 outbreak.

The OPEC+ Collapse

OPEC+, the group of OPEC and non-OPEC producers led by Saudi Arabia and Russia, respectively, was scheduled to hold a regular meeting in early March to discuss how it would proceed with its pact to cut production which was expiring on March 31. The coronavirus pandemic, however, totally upended previous forecasts about global oil demand growth and producers scrambled to assess future oil supply policies in a world of declining demand.

OPEC’s de facto leader Saudi Arabia, the biggest oil producer in the Middle East, argued that the OPEC+ coalition should make deeper cuts in response to slowing oil demand. The leader of the non-OPEC nations in the pact, Russia, for its part, argued that the demand loss is impossible to predict and the OPEC+ group should leave the pact and cuts as-in until June before taking any decision.

OPEC recommended a collective OPEC+ production cut of 1.5 million barrels per day until the end of 2020. But Russia refused to join those deeper cuts and Saudi Arabia and Russia were, for a month, rivals that even used media to accuse each other of breaking up the OPEC+ alliance which had managed supply for more than three years hoping to prop up oil prices.

The collapse of the OPEC+ deal in early March and Saudi Arabia’s statements in the following days that it would boost production significantly and sell its crude oil at deep discounts added to the demand worries in the pandemic to send international oil prices into a tailspin. On March 9, oil prices plunged by 25%, the worst one-day crash since 1991.

The market was spooked by the double supply-demand shock and oil companies from the U.S. shale patch to Europe’s supermajors to independent oil explorers in the North Sea started announcing significant capital expenditure (CapEx) and cost cuts. The oil industry, which had just adapted to $50 oil after a lot of cost cuts in the 2015-2016 downturn, found itself aligning investments and costs to $30 a barrel Brent oil.

Middle Eastern Economies Suffer in the Price Crash

Analysts immediately turned their attention to the first collateral victims of the Saudi-Russian oil price war—U.S. shale, Canada’s oil sands industry, and the UK’s offshore oil and gas sector.

But the major Middle Eastern oil and gas producers are also suffering at such low oil prices despite their proverbial low-cost production costs. Crashing oil prices mean lower oil revenues for the petro-states in the region, where the budgets of all oil producers are heavily dependent on the money the countries make by selling their crude oil and natural gas overseas.

The coronavirus reached the Middle East in March and economies in the region began to scramble to avert the triple shock of COVID-19, plummeting demand for their key export – oil, and oil prices much, much lower than their budget break-evens. Oil producers in the Middle East will see their budget deficits widen and their oil and gas revenues plunge this year, analysts say. Some are well-equipped and better prepared to weather the storm than others, according to experts.

According to an update note by the Institute of International Finance (IIF) from the end of March, if oil prices average $40 per barrel this year, the nine oil exporters in the Middle East and North Africa (MENA) would see their hydrocarbon earnings drop by US$192 billion, or 11% of GDP, in 2020.

“Consequently, the cumulative current account balance would shift from a surplus of $65 billion in 2019 to a deficit of $67 billion in 2020, and the fiscal deficit would widen from 2.9% of GDP to 9.1%,” said IIF Chief Economist Garbis Iradian and Associate Economist Jonah Rosenthal.

Fitch Ratings expects the double price collapse-coronavirus shock to put downward pressure on the sovereign ratings of Middle East and Africa oil exporters.

In the MEA region, Qatar has the lowest break-even price –the oil price required to balance the government budget, all else being equal – at $55 a barrel Brent. Bahrain’s break-even price is $96 per barrel, Saudi Arabia’s is $91, Oman’s - $82 a barrel, Kuwait’s break-even stands at $68 per barrel, and Abu Dhabi’s is $65 a barrel, Fitch Ratings has estimated.

According to Moody’s, the most vulnerable sovereigns in the price crash are Middle Eastern producers Oman, Bahrain, and Iraq, because of their limited capacity to adjust to the shock. Qatar and Saudi Arabia are in stronger fiscal positions, while robust sovereign balance sheets will support Qatar and the United Arab Emirates, and, to a lesser extent, Kuwait and Saudi Arabia.

“Vital income from hydrocarbon exports could fall for key producer economies, dealing a heavy blow to spending on essential services,” the International Energy Agency (IEA) warned in the middle of March.

“Even among the countries of the Gulf Cooperation Council, some of which still have a degree of financial cushioning against worsening market conditions, fiscal deficits are now projected to reach 10%-12% of GDP this year, implying additional financing needs of around USD 150 billion to USD 170 billion,” the IEA said in early April, describing the current events in the oil industry as “a shock like no other in its history.”

Middle East NOCs are in a Better Position To Emerge Stronger from the Downturn

The national oil companies (NOCs) in the Middle East are set to defer some projects and reduce expenditures at $30 oil which saps the sovereign wealth funds.

However, “Relative to the rest of the world, the Middle East should come out of the crisis in a stronger position,” Ian Thom, Research Director, Middle East Upstream, at Wood Mackenzie, wrote in an editorial in mid-April.

“Over the past decade, the Middle East has been eclipsed by US tight oil and shale gas. But now, the region is setting itself up for the longer term as the premier supplier of oil,” Thom said.

Despite the expected CapEx cuts from the NOCs in the Middle East, these companies will fare better than their international oil major rivals, according to WoodMac. NOCs are likely to reduce CapEx by 10-20 percent compared to the average 25-percent CapEx cuts for the rest of the world.

“The region’s share of global CapEx is steadily increasing and this will reinforce its role as the leading global energy supplier,” WoodMac’s Thom says.

OPEC+ Revisited

While NOCs and IOCs are preparing to operate at $30 oil, the OPEC+ group drew up a new production cut agreement, after political pressure and intervention from US President Donald Trump. OPEC+ decided to voluntarily cut a collective 9.7 million bpd of its total production in May and June, and shared a timetable for gradual easing of the cuts and oil supply management until April 2022.

Despite the fact that the new agreement was described as ‘historic’ by the media and the main participants — including Saudi Arabia and Russia – the market and analysts say that the deal came too little too late to prevent a massive oversupply and will, therefore, do little to support oil prices.

The actions of OPEC+ and G20 to reduce the glut “should help bring the oil industry back from the brink of an even more serious situation than it currently faces,” the International Energy Agency (IEA) said in its Oil Market Report in April. But it also warned that the huge overhang on the market could overwhelm global storage capacity by the middle of 2020, saying that “Never before has the oil industry come this close to testing its logistics capacity to the limit.”

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