OGV Energy's Middle East Energy Review March 2022

Investments in technology, an offshore gas discovery, and OPEC’s latest views on the global oil market featured in the oil and gas industry in the Middle East in the past month. The OPEC+ alliance of Middle East-dominated OPEC and non-OPEC producers led by Russia continued to increase their overall production quota, but the group has been significantly under-producing compared to targets, widening the gap between intended and actual oil supply, which tightens the market.    

OPEC+ Rubberstamps Another Output Increase

At the regular monthly meeting on 2 February, OPEC+ decided to increase monthly production levels by another 400,000 barrels per day (bpd) in March, for a total production quota for the group at 41.294 million bpd.

The two leaders of OPEC+, Saudi Arabia and Russia, will each have 10.331 million bpd production target.

Despite yet another boost in nameplate production quotas, OPEC+ is already lagging behind by an estimated 900,000 bpd from targets and the gap will likely grow in coming months as more members hit their capacity to pump crude oil, analysts say.

The market continues to question the ability of the OPEC+ alliance to ramp up overall production as much as quotas allow. Signs have started to emerge that Russia could be close to capacity and many African OPEC producers are struggling to produce to quotas.

In addition, the higher the production, the less spare capacity the group has, exposing the oil market to heightened volatility in case of sudden supply disruptions. According to many analysts and investment banks, only two Middle Eastern members of OPEC, the organisation’s top producer, Saudi Arabia, and the United Arab Emirates (UAE), have spare capacity to further increase production.

“Chronic Underperformance” from OPEC+

The gap between OPEC+ output and its target levels surged to a massive 900,000 bpd in January 2022, estimates from the International Energy Agency (IEA) showed in its monthly Oil Market Report for February.

“If the persistent gap between OPEC+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices. But these risks, which have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out,” the IEA said.

“If OPEC+ cuts are fully unwound, world oil output could rise by 6.3 mb/d in 2022. That would erode effective spare capacity, which could fall from 5.1 mb/d to 2.5 mb/d by year-end,” the Paris-based agency noted.

The IEA described the underwhelming supply boost from OPEC+ as “chronic underperformance” and in the middle of February, when oil prices hit $95 per barrel, the IEA’s Executive Director Fatih Birol urged the group to narrow the gap between actual production and target levels and “hopefully provide more volumes to the market.”

OPEC: Near-Term Oil Demand Prospects “Certainly on the Bright Side”

OPEC’s Monthly Oil Market Report for February showed that the organisation raised its crude oil production by just 64,000 bpd in January 2022, well below the 254,000-bpd increase in output allowed under the OPEC+ deal.

The report also showed a more optimistic view from OPEC about oil demand in 2022. Although the organisation only slightly raised its oil demand estimate by 10,000 bpd, it expressed confidence that global oil demand will continue to rebound to average 100.8 million bpd this year, which would exceed the pre-COVID level from 2019.

Of note are some of the optimistic forecasts – with the caveat that no harsh mass lockdowns will be imposed this year – in which OPEC said “As most world economies are expected to grow stronger, the near-term prospects for world oil demand are certainly on the bright side.”

“The main challenges for 2022 remain the containment of the COVID-19 pandemic and any resulting restrictive measures, supply chain disruptions, inflation, and labour shortages that could dampen economic growth,” the organisation noted.

“Nevertheless, upside potential to the forecast prevails, based on an ongoing observed strong economic recovery with the GDP already reaching pre-pandemic levels, supported by fiscal stimulus, and global trade levels reaching an all-time high in volume terms. Moreover, mobility is expected to gain further momentum, particularly with regard to the travel and tourism sector,” OPEC said.

In company news, national oil giants Saudi Aramco and the Abu Dhabi National Oil Company (ADNOC) announced several deals and a new offshore discovery off Abu Dhabi.

Saudi Aramco has bought 7.4 percent in industrial software innovation firm Cognite, by buying all of Aker BP’s shares in the company, Cognite said in early February.

Cognite is a digitalisation partner of Aramco in the Middle East, currently aiding in digitalsing and improving the efficiency of Saudi Aramco’s operations through Cognite’s Industrial Data Platform. 

“To have the world’s leading energy company invest in Cognite is a strong show of faith in our trajectory, and in the value of contextualised, actionable data as the foundation to shape a more efficient, more sustainable industrial future,” John Markus Lervik, CEO and co-founder of Cognite, said in a statement.  
Saudi Aramco also officially launched a US$1-billion venture capital fund, Prosperity7 Ventures, planned to be a global financial venture capital fund, with a long-term view to support the development of next-generation technologies and business models. Investments of the VC fund include early-stage enterprise, blockchain, financial and industrial technologies, healthcare, and education solutions.

In the UAE, Abu Dhabi’s oil firm ADNOC has created a new, wholly-owned subsidiary, ADNOC Murban RSC Ltd, which will become the primary debt capital markets issuing and rated entity for ADNOC Group.

ADNOC Murban intends to closely monitor market conditions and explore potential funding opportunities, ADNOC said at the end of January.

In early February, ADNOC announced the discovery of natural gas resources offshore of the Emirate of Abu Dhabi. Interim results from the first exploration well in Abu Dhabi’s Offshore Block 2 Exploration Concession operated by Italy’s Eni, indicate between 1.5 and 2 trillion standard cubic feet (TSCF) of raw gas in place, ADNOC said. 

“After completing the well drilling in Q2 2022, the size of the well final findings will be assessed,” said Eni, which holds a 70-percent stake and is the operator of Offshore Block 2. The block was awarded to Eni in January 2019 as a result of the first-ever competitive bid round for exploration blocks launched by ADNOC. PTT Exploration and Production Public Company Limited (PTTEP) of Thailand holds the remaining 30 percent in the block.

“The discovery of material natural gas resources in Offshore Block 2 underscores how ADNOC’s expanded approach to strategic partnerships is enabling us to accelerate the exploration and development of Abu Dhabi’s untapped hydrocarbon resources and create long-term value for the UAE, in line with the Leadership’s wise directives,” said Dr. Sultan Ahmed Al Jaber, Minister of Industry and Advanced Technology and ADNOC Managing Director and Group CEO.

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