OGV Energy's Middle East Energy Review – September 2020

Just as OPEC and its Russia-led partners in the OPEC+ group began to ease the record crude oil production cuts in August, the cartel downgraded its global oil demand outlook for 2020, citing longer-lasting impact from the coronavirus on economies and oil consumption. 

Major oil exporters from the Middle East saw their oil revenues further sliding and deficits widening in the second quarter, while the single biggest oil-exporting company in the world, Saudi Aramco, reported significantly lower profits for April-June, highlighting the fact that the oil price collapse hit national oil companies as it did international oil majors.   

OPEC sees weaker oil demand than previously thought

Global oil demand is expected to drop by 9.1 million barrels per day (bpd) in 2020, OPEC said in its closely-watched Monthly Oil Market Report (MOMR) for August. This is a larger demand loss than the cartel had estimated just a month ago. The expected decline in demand is around 100,000 bpd larger than OPEC had forecast in July. 

OPEC now expects the global economy to shrink by 4.0% in 2020, a larger contraction compared to the 3.7% drop expected in the July forecast. The deterioration in the economic outlook is a result of the high uncertainty surrounding the recovery in the economic activity and the possibility that a second wave of COVID-19 could bring localised lockdowns in many parts of the world. 

The outlook for 2021 is equally unclear. OPEC sees global oil demand growing by 7.0 million bpd next year, unchanged from the forecast in July.

“The forecast assumes that COVID-19 will largely be contained globally, with no further major disruptions to the global economy,” OPEC noted in its report.

“Large uncertainties prevail, possibly resulting in a negative impact on petroleum consumption going forward. During exceptional times the normal relationship between disposable income and oil demand does not hold up,” OPEC said about the prospects for 2021.

Saudi Aramco profits plunge, but dividend stays

Saudi Aramco reported in early August its financial results for the second quarter, not surprising anyone with the 73% plunge in profits as oil prices and oil demand crashed.

“Strong headwinds from reduced demand and lower oil prices are reflected in our second quarter results,” Saudi Aramco’s president and chief executive Amin Nasser said, commenting on the results.

Despite the profit plunge, Aramco maintained its second quarter dividend of US$18.75 billion as planned.
Another bright spot in the earnings report was that Nasser said markets had started to recover. 

“We are seeing a partial recovery in the energy market as countries around the world take steps to ease restrictions and reboot their economies,” he noted.

Middle Eastern oil exporters see oil revenues slide

While Aramco reported significantly lower profits for the second quarter, the Kingdom of Saudi Arabia saw its oil revenues further slide in May, after they had declined in April, too. Saudi Arabia’s income from oil exports plunged by 65% year over year, data from Saudi Arabia’s General Authority for Statistics showed at the end of July. The share of oil exports in total exports decreased from 78.6% in May 2019 to 65.4% in May 2020, the data showed.

Saudi Arabia posted a deficit of 109 billion Saudi riyals (US$29 billion /£22 billion) for the second quarter, data from the Kingdom’s finance ministry showed. Revenues from oil, which account for most of total Saudi revenues, plunged by 45% year over year in the second quarter.   

Another major oil producer and exporter in the Middle East, Kuwait, also saw widened deficit due to the low oil prices at the end of the 2019/2020 fiscal year ended on 31 March. According to Kuwait’s Finance Ministry, the actual deficit jumped by 68.6% on the year to the equivalent of US$18.4 billion. Kuwait’s government revenues dropped by 16.2% in the 2019/2020 fiscal year compared to the previous fiscal year. Of the revenues in 2019/2020, as much as 89% came from oil, Kuwait’s finance ministry data showed. 

ADIPEC goes virtual

The pandemic has upended not only the finances of the oil exporting countries, especially those in the Middle East. COVID-19 has changed the international conference and exhibition calendar and many events are now being held online or postponed.

One of the world’s biggest energy networking events, Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC), will be held virtually this year, the strategic partner and host of the event, the Abu Dhabi National Oil Company (ADNOC), said.

“The decision to hold an online event ensures the ADIPEC Strategic and Technical Conferences will continue to provide the thought leadership that will frame the future oil and gas landscape and connect global organisations to shape the industry’s future,” ADNOC said in a statement at the end of July.

UAE’s ADNOC upgrades refining capabilities 

ADNOC said in the middle of August that it is investing US$3.5 billion in the ongoing upgrade of refining capabilities in Ruwais and strengthening the role of Ruwais as a critical driver for industrial growth for Abu Dhabi and the UAE.

The Crude Flexibility Project (CFP) at Ruwais will allow ADNOC to process the Upper Zakum crude grade, extracted from Abu Dhabi’s offshore oil fields, along with over 50 other types of different crudes.

When completed in the middle of 2022, the project will allow ADNOC to process up to 420,000 bpsd (Barrels per Stream Day) of heavier and sourer grades of crude oil, as part of the 840,000 bpsd refinery in Ruwais.

“This investment is another step in our progress to develop Ruwais into a dynamic, global hub for downstream activity, further strengthening ADNOC's role as a key driver of the UAE's long-term industrial growth and economic diversification,” said Dr. Sultan Ahmed Al Jaber, ADNOC Group CEO and UAE Minister of Industry and Advanced Technology. 

Dr. Al Jaber commented on oil market dynamics and ADNOC’s plans in an interview with IHS Markit Vice Chairman Daniel Yergin for the latest CERAWeek Conversations in August.

According to ADNOC’s top executive, there is a robust return of oil demand, especially in China. The companies in the oil and gas industry, however, need to stay nimble and cautious going forward, focusing on costs.

“They will need to continue their focus on cost and being cautiously optimistic as we adjust to the multiple structural macroeconomic changes taking place around us today in the world,” Dr. Al Jaber told IHS Markit.

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