In its December report, titled Panorama MENA, the Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE) took a closer look at hydrocarbon sector in the GCC and found its inherent risks mitigated so far.
Despite diversification efforts in GCC countries, the oil and gas sector still constitutes the main source in terms of export and budget revenues. Moreover, this sector indirectly provides the necessary funding for the development of other industries within the strategy of economic diversification.
The GCC region has some indisputable advantages, such as large proven oil reserves in the world, lower costs of exploitation, openness to foreign investments and large multinational companies, investments aiming at increasing production capacities, high production potential and successful economic diversification.
But despite these strengths, some risks remain as well. The COFACE report names the following as most pronounced: regional conflicts, risk of instability; drop in oil prices, deterioration of fiscal balances; growing energy consumption due to the rising diversification; risk of unused production capacity due to global oil supply higher than demand and the concentration of main export markets (Asia).
Currently, the most prominent risk is tumbling oil prices. “The decline in oil prices may result in a slide in budget and export revenues of all the oil exporters in the GCC region as the dependence on oil revenues is still high despite the efforts of economic diversification.
The weakening demand from Asia, a major export market, and painful recovery in Europe may also drag down the oil prices in the upcoming period, putting downward pressures on the profit margin of companies operating in this sector across the region.
A rise in Iranian oil production in case of an easing of international sanctions and the increasing oil production from the North America may also reduce the demand for oil of the GCC countries,” warns the report and adds that the fall in oil prices may also lead to lower investor confidence, and result in delays or cancellations of some projects. Lower capital expenditures could also weigh on growth performances.
Another important source of risk is the political tensions and violence in the region. “Regional conflicts remain a key threat for the oil exporting countries, resulting in a necessity to ensure security of energy complexes against possible attacks.
Other regional issues such as the tensions about the Strait of Hormuz which is a strategic choke point for global oil shipment also constitute a risk for the companies,” says COFACE. As an example the report mentions the tensions between Iran and the UAE, after Iranian threats to block the Strait of Hormuz.
This prompted the construction of the Abu Dhabi Crude Oil Pipeline (ADCOP) in 2012, pipeline carrying oil from the Habshan oil fields to Fujairah oil storage hub, bypassing the Strait of Hormuz, on which Qatar also depends heavily.
Possible economic slowdown in Asia represents another significant risk for GCC hydrocarbon sector. “In recent years, the relations between the GCC countries and Asia have become more pronounced as Asian countries accounted for approximately 60 percent of the region’s total external trade.
Due to the regional uncertainties and tensions in countries like Iran, Sudan and Libya, China imported the largest part of its crude oil needs from the Saudi Arabia which provided 19 percent of China’s daily oil need. The GCC countries export oil, gas, petrochemical products and plastics mainly to Asia.
Under these circumstances, a sustained slowdown in Asian economies would pose a threat to the extremely high budgeted infrastructure projects and social spending across the GCC region,” states the report.
Ambitious plans despite challenges
Nevertheless, the GCC states’ show no intention to veer away from yesterday’s ambitious investment plans, the report found. Saudi Arabia’s Aramco announced last August, it is planning to invest around USD 40 billion a year over the next 10 years in maintaining oil production capacity steady, and to double gas production.
UAE has investment projects to improve the infrastructure at existing oilfields in place, as well. With current crude oil production capacity of around 2.8 million bpd, the country is aiming to raise it to 3.5 million bpd by 2017 to meet the rising demand.
The Ruwais refinery in Abu Dhabi, the biggest in the country, is currently undergoing expansion, with total budget of the project estimated at USD 10 billion. According to the Business Monitor International, Abu Dhabi said it was planning to spend USD 60 billion to increase its production capacity above 3.6 million bpd by 2019.
UAE also has the seventh proved natural gas reserves of the world at around 6.1 trillion cubic metres according to OPEC and is developing LNG projects, the most recent to be installed in the emirate of Fujairah. Qatar, admittedly the world’s largest exporter of liquefied natural gas, could come under pressure due to rising competition from new suppliers of LNG, COFACE says, which in turn could weigh on the country’s main hydrocarbon revenue.
Qatar is intensifying its economic diversification efforts, but this increases the country’s energy demand and natural gas consumption and Qatar Petroleum announced early in 2014 it was planning to invest around USD 11 billion in the development of the existing Bul Hanine oil field to boost oil production capacity.
The Barzan Gas Project’s Train 1 and Train 2 would also contribute significantly to the country’s natural gas production with an expected supply of around 2 billion standard cubic feet per day. According to EIA the country exports around 85 percent of its LNG; most of it to Asian markets, which makes the country heavily dependent on the economic circumstances in this part of the globe.
Kuwait also aims to increase its oil production from current 3 million bpd to 4 million bpd by 2020 by developing new fields. The country plans to compensate the decline in the maturing Burgan field by rising production in five northern oilfields (Ratqa, Abdali, Bahra, Sabriya and Raudhatain), says the report.