OGV Energy's Middle East Energy Review

Middle Eastern oil producers, with their continued production cuts as part of the OPEC+ deal, played a role in oil prices hitting in February 2021 the $60 per barrel mark for the first time in more than a year. OPEC, its key members from the Middle East, and the OPEC+ alliance with non-OPEC producers led by Russia are optimistic that the oil market is on its way to rebalancing and that global oil demand will rebound in the second half of the year.

While major producers in the Middle East continued to rein in oil supply in their attempt to tighten the market, the biggest companies in the region announced expansion projects and strategic agreements, while major international companies signed contracts with some of the national oil companies in the Gulf.

OPEC+ moves to tighten oil market

The production cuts from OPEC and the broader OPEC+ alliance, plus the additional 1 million barrels per day (bpd) reduction in production from Saudi Arabia, the largest producer in the Middle East and the largest oil exporter in the world, have supported the crude oil price rally over the past two months. Prompt Brent and West Texas Intermediate prices exceeded the threshold of $60 a barrel in February while the futures curve in both Brent and the US benchmark fell deeper into backwardation, signalling a tightening market.

“With the crude oil market currently switching into backwardation, we are hopeful that 2021 will be a good year for overall demand,” OPEC Secretary General Mohammad Barkindo said at the monthly meeting of the OPEC+ technical panel in early February.

Barkindo opened the virtual meeting by highlighting the improving prospects for the global oil market and the global economy, which is expected to grow by 4.4% this year, compared to a decline of 4.1% in 2020.

The Joint Ministerial Monitoring Committee (JMMC) of the OPEC+ group also expressed optimism that 2021 would be a year of recovery. Overall compliance of the OPEC+ alliance with the production cuts stood at 101% in December 2020, the committee said.

“The Committee observed that, while economic prospects and oil demand would remain uncertain in the coming months, the gradual rollout of vaccines around the world is a positive factor for the rest of the year, boosting the global economy and oil demand,” the JMMC said.

In its February Monthly Oil Market Report, OPEC reduced by 100,000 bpd its oil demand growth outlook for 2021 compared to the January report, and now expects global demand to rise by 5.8 million bpd from 2020 to average 96.1 million bpd. The downward revision was mainly the result of extended lockdowns in major mature economies.

“While the global economy is showing signs of a healthy recovery in 2021, oil demand is currently lagging, but is forecast to pick up in the 2H21,” OPEC said in its Monthly Oil Market Report in February.

Qatar greenlights world’s biggest LNG project

While the major oil producers in the Middle East are trying to tighten the market with the OPEC+ cuts, expecting a rebound in oil demand later this year, Qatar, which left OPEC in 2019, is doubling down on its major export commodity—liquefied natural gas (LNG).

Qatar Petroleum announced on 8 February it had taken the final investment decision to build what it says would be the world’s biggest LNG project in terms of capacity.

Qatar Petroleum sanctioned the development of the North Field East Project (NFE), which is expected to boost Qatar’s LNG production capacity from 77 million tonnes per annum (mmtpa) to 110 mmtpa. The project, scheduled to start production in the fourth quarter of 2025, will cost US$28.75 billion.

The North Field East Project is likely to be the biggest project sanctioned across the global upstream business this year, Wood Mackenzie research director Giles Farrer said, commenting on the announcement.

“Qatar is pursuing market share. This FID is likely to put pressure on other pre-FID LNG suppliers, who may find Qatar has secured a foothold in new markets,” Farrer added.

In addition, the Qatari project, at a long-term breakeven price of just over $4 per million British thermal units, is right at the bottom of the global LNG cost curve, alongside Arctic Russian projects, WoodMac’s Farrer noted.

The sanctioning of the project puts Qatar on track to return as the world’s largest LNG producer by 2030, while also making the Middle East the world’s top region for oil and gas project sanctioning in 2021, Rystad Energy said in a report.

Qatar’s liquefaction capacity is set to increase to 110 million tonnes per annum, which would represent 18% of the global total at the end of the decade, currently estimated at 600 million tpa, Rystad Energy noted.

Middle East set to accelerate project approvals after 2020 shock

In addition, “Rystad Energy expects rising oil prices to trigger sanctioning of global projects worth about $100 billion this year, of which the Middle East is set to contribute almost 40%, or $40 billion,” the independent energy research and business intelligence company said.

More than 26 Middle Eastern projects, worth a total of US$50 billion, have been delayed over the past year, with Qatar’s LNG project making up the lion’s share as it was pushed to 2021. At the beginning of 2021, the Middle East region had projects worth US$98 billion due for sanctioning between 2021 and 2023, according to Rystad Energy.

“With NFE now sanctioned, further investment commitments largely depend on developments in the UAE, where ADNOC aims to boost oil and gas production capacity and has a $40 billion project pipeline till 2025,” the energy research firm said.

“In Saudi Arabia, the oil price downcycle has hit ongoing bidding processes and we estimate the giant Zuluf oil development worth $12 billion will be sanctioned in 2023. Recovering prices are also likely to spur sanctioning activity in other parts of the region, especially in Oman, Iraq and Iran,” Rystad Energy noted.

Deals and Contracts

Companies operating in the Middle East have signed several major contracts and acquisition deals since the middle of January.

bp will sell 20% in Oman’s Block 61 to PTT Exploration and Production Public Company Limited (PTTEP) of Thailand for US$2.6 billion, said the UK-based supermajor which will remain operator of the block, holding a 40% interest, following completion of the sale.

“We are committed to bp’s business in Oman – this agreement allows us to remain at the heart of this world-class development while also making important progress in our global divestment programme,” said bp’s chief executive officer Bernard Looney.

“We look forward to working closely with PTTEP, our other partners, and the Government of Oman on the continued success of Khazzan and Ghazeer, and to explore further opportunities in Block 61,” Yousuf Al Ojaili, vice president, bp Oman, noted.

Also in Oman, Petrofac has been awarded two contracts worth a combined US$300 million through Petroleum Development Oman (PDO). The first contract is a direct EPC contract for PDO’s Marmul Main Production Station (MMPS) - Gas Compression project. The scope of work for the 30-month, lump-sum turnkey contract includes engineering, procurement, construction, commissioning, start-up and initial operational support. The second contract is a project delivery contract with Petrofac’s partner and main PDO contract holder Arabian Industries Projects LLC, for selected PDO concession areas in the North of Oman. The scope of this seven-year contract is for provision of reimbursable engineering services, integrated project support and management services, and has an option to extend for three years, Petrofac said.

The Abu Dhabi National Oil Company (ADNOC) awarded on 10 February the exploration rights for Abu Dhabi’s Offshore Block 4 to Cosmo E&P Albahriya Limited, a wholly-owned subsidiary of Japan’s Cosmo Energy Holdings Co., Ltd. Cosmo will hold a 100% stake in the exploration phase, investing up to US$145 million (AED532 million) in exploration and appraisal drilling, including a participation fee, to explore for and appraise oil and gas opportunities in the block that covers an offshore area of 4,865 square kilometres northwest of Abu Dhabi city.

Norwegian oil and gas operator DNO ASA said on 11 February it had bought ExxonMobil’s 32% interest in the Baeshiqa license in the Kurdistan region of Iraq. The acquisition, pending government approval, would double DNO’s operated stake to 64% (80% paying interest). DNO had bought its first 32% interest from ExxonMobil and assumed operatorship of the Baeshiqa license in 2018.

“Following the stabilisation of oil prices and export payments in Kurdistan, DNO is stepping up spending on new opportunities,” DNO’s executive chairman Bijan Mossavar-Rahmani said.

Halliburton announced it was awarded a contract from Kuwait Oil Company (KOC) to collaborate on their digital transformation journey through the maintenance and expansion of digital solutions for their North Kuwait asset.

“By using cloud computing, IoT and real-time technologies to drive new ways of working, we can improve production planning, scheduling and enable virtual and autonomous reservoir optimisation,” said Nagaraj Srinivasan, senior vice president of Landmark, Halliburton Digital Solutions and Consulting.

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