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OGV Energy’s Middle East Energy Review – July 2020

OGV Energy’s Middle East Energy Review – July 2020

 

The Middle East and its key oil and gas producers were the spotlight of media attention once again this month, after the OPEC+ group of oil producers from OPEC and about a dozen non-OPEC nations decided to extend their record collective cut of 9.7 million barrels per day (bpd) by one month until the end of July.  

Meanwhile, credit rating agencies continued to warn that the ongoing cuts and the stubbornly low oil prices will weigh on the economic growth and fiscal resilience of many oil and gas producing countries in the Middle East.

While OPEC and its Middle Eastern members are grappling with lower revenues due to low oil prices and reduced exports, a former OPEC member from the Persian Gulf, Qatar, is setting in motion its plan to boost its liquefied natural gas (LNG) outputs and exports. 

OPEC+ extends record cuts

The OPEC+ coalition held a virtual meeting on 6 June and decided to roll over the current level of cuts of 9.7 million bpd through the end of July, instead of to the end of June, as initially planned.

According to the original agreement from April, the OPEC+ group agreed to cut 9.7 million bpd from their combined production for two months—May and June—and then ease the cuts to 7.7 million bpd until the end of 2020. After that, the production cuts would be further eased to 5.8 million bpd from January 2021 and remain in effect until the end of April 2022.

Considering the dynamic situation on the oil market with a still highly uncertain pace of global demand recovery, the group will likely tweak the agreement a few more times.

At the meeting in early June, OPEC+ extended the record cuts by one month, but conditioned the extension on all members of the group complying 100 per cent with their quotas. Those who did not comply with their shares of the cuts, such as Iraq and Nigeria, for example, have to over-comply in July, August, and September in order to compensate for the over-production in May and possibly June.

Unlike in previous OPEC+ agreements, OPEC’s leader and biggest producer Saudi Arabia was quite blunt regarding compliance, signalling that non-compliance would not be tolerated.   

“We have no room whatsoever for lack of conformity,” Saudi Energy Minister, Prince Abdulaziz bin Salman, said on the virtual press conference following the extension of the cuts.

Unlike in previous OPEC+ deals, the leader of the non-OPEC group in the pact, Russia, was on board with the cuts from the start of negotiations, and joined the Saudi call for full compliance with the production reductions at times of unprecedented demand slump.

Iraq vows compliance

Iraq, OPEC’s second-largest producer, notoriously non-complying with the previous OPEC+ cuts, confirmed it is committed to the deal.

Iraq confirms “its commitment to the voluntary oil production adjustments of June and July 2020, as well as the voluntary adjustments for the period following the end of July, despite the economic and financial challenges,” Iraq’s new Oil Minister, Ihsan Abdul Jabbar Ismael, told the Saudi energy minister in a phone call after the OPEC+ meeting.

Over the past weeks, Iraq is said to have reduced its production and exports more than it did in May—a sign that it is trying to do its part of the production cuts, despite its complex political situation and despite the fact that it has to discuss those cuts with international oil majors who operate some of the country’s largest oil fields.

Iraq is expected to export 2.8 million bpd of crude oil in June as part of its commitment to the OPEC+ cuts, minister Ismaael has said. Analysts, however, see this significant reduction in exports – by around 800,000 bpd from the levels in May – as difficult to achieve.

According to Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade, at IHS Markit, Iraq will likely struggle to have its exports average 2.8 million bpd in June, considering that data from IHS Markit Commodities at Sea suggests that exports in the first half of June averaged around 3.2 million bpd.

“This means shipments for the rest of the month will need to drop to 2.35 million b/d in the second half of June for Iraq to meet its target. This looks difficult to achieve,” Katsoulas said in the middle of June.

Middle East economies hit by oil prices & pandemic

The outlook on the sovereign ratings of the countries in the Middle East and North Africa (MENA) is turning negative, Fitch Ratings said in a report in early June.

Fitch has placed four of the 14 rated MENA sovereigns on Negative Outlook, following revisions for Oman (which was also downgraded), Iraq, Jordan, and Morocco, “reflecting the painful hit to public and external finances and growth as a result of the coronavirus and the fall in oil prices,” the rating agency said.

The World Bank, for its part, said in its Global Economic Prospects report in June 2020 that the oil price collapse during the pandemic is yet another reminder for energy-exporting emerging market and developing economies (EMDEs) to diversify their oil-dependent economies. The price crash also highlights the need for some oil exporting countries to eliminate remaining energy subsidies.  

“Current low oil prices are an opportunity to review energy-pricing policies, including remaining energy subsidies,” the World Bank said.

Ayhan Kose, Director of the World Bank’s Prospects Group, commented:

“Even if oil prices rise as global oil demand recovers, the recent plunge in prices is another reminder for oil-exporting countries of the urgency to continue with reforms to diversify their economies.”

Qatar Prepares for LNG Export Growth

While Middle Eastern oil exporters are grappling with low oil prices and production cuts, the region’s top LNG exporter Qatar is preparing for an export boom in a few years. 

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.

Qatar Petroleum entered into three agreements to reserve LNG ship construction capacity in South Korea, which will be used for Qatar Petroleum’s future LNG carrier fleet requirements, including those for the ongoing expansion projects in the North Field and in the United States.

Under the agreements, Korean shipyards Daewoo Shipbuilding & Marine Engineering (DSME), Hyundai Heavy Industries (HHI), and Samsung Heavy Industries (SHI) will reserve a major portion of their LNG ship construction capacity for Qatar Petroleum through 2027.

“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.

“These agreements will ensure our ability to meet our future LNG fleet requirements to support our expanding LNG production capacity and long-term fleet replacement requirements,” Al-Kaabi said.   

Read the latest issue of the OGV Energy magazine HERE.

Published: 06-07-2020

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