7 minute read
Middle East
Energy Review
By Tsvetana Paraskova
The Middle East was once again in the spotlight of the global oil and gas markets this past month. The OPEC+ group and one of its leaders, Saudi Arabia, decided to gradually ease their oil production cuts, while Iran began talks with the world powers, including indirect talks with the United States, about a potential return to the nuclear deal that could ultimately lead to the lifting of the US sanctions on Iran’s oil exports.
Oil exporting nations in the Middle East are set to benefit from the recent recovery in oil prices and from the expected rise in global oil demand as the world emerges from lockdowns, the International Monetary Fund (IMF) said in its latest outlook on the region in April, expecting the fiscal breakeven oil prices of the major Middle Eastern oil producers to decline in the next two years.
Several major agreements and contracts with major oil and gas firms were also announced in the Middle East in the past few weeks.
OPEC+ Eases Cuts in Sign of Confidence in Oil Demand Growth
The OPEC+ alliance decided at its meeting in early April to gradually add over 1 million barrels per day (bpd) of oil supply on the market over the next three months. The group is set to increase its production by 350,000 bpd in each of May and June and by more than 400,000 bpd in July. Additionally, Saudi Arabia will also gradually ease its unilateral cut of 1 million bpd over the next few months, beginning with monthly production increases of 250,000 bpd in each of May and June. The decision from OPEC and its allies again surprised the oil market, which was largely expecting the coalition to roll over the April level of cuts into May. OPEC+, however, signalled with the planned easing of the cuts that it sees demand improving with people travelling more and economies stimulating growth with relief packages.
Iran Could Legitimately Return Oil to the Global Market
Iran and the signatories to the Joint Comprehensive Plan of Action (JCPOA) started talks in Vienna about a possible return of the Islamic Republic and the United
States to the so-called Iran nuclear deal which could, ultimately, lead to the US lifting the sanctions on Iran’s oil exports placed by the Trump Administration in 2018.
The talks are difficult, and the US and Iran are not talking directly. The two parties still appear distant in their positions regarding a return to the deal. Iran insists that the US lift all sanctions before it scales back uranium enrichment activities and returns to compliance under the JCPOA, but the United States insists that Iran should first comply with the terms of the deal before Washington could start considering the lifting of the sanctions, including those on Iran’s oil exports.
Analysts largely believe that a potential return of Iran’s oil will not create a new shock on the market. First, because Iran has quietly and covertly likely ramped up its crude oil exports to the world’s largest oil importer, China, which has never actually stopped buying Iranian oil since the US sanctions were imposed in 2018. Second, the return of US-allowed exports would also come with advance notice and everyone on the market, including the OPEC+ group – from whose cuts Iran is exempted – would recalibrate supply if necessary.
Even if the talks on the nuclear deal achieve some progress, it could still be months before Iran’s oil returns. The market could absorb those additional barrels, analysts believe, because demand is expected to bounce back later this year, especially in the third and fourth quarters.
IMF Sees Higher Oil Prices Helping Middle East Exporters’ Growth
Real GDP growth in the Middle East and North Africa (MENA) region is expected to pick up 4.0% in 2021, the International Monetary Fund said in its latest regional economic outlook in April, upgrading the growth forecast by 0.9 percentage point from the October 2020 outlook.
The regional economic outlook also showed that all MENA oil exporters—except for Iran— will see their fiscal breakeven oil price, the oil price at which the fiscal balance is zero, lower in 2022 compared to previous years.
The expectations are based on assumptions that the authorities will keep the current policies in place and that the simple average of the Brent, Dubai Fateh, and WTI crude oil prices would be $52.64 a barrel in 2021 and $50.07 a barrel in 2022, the IMF said. In the case of the world’s largest oil exporter, Saudi Arabia, the fiscal breakeven oil price is set to drop to as low as $65.70 in 2022, compared to $76.20 this year, and $81.90 in the last pre-pandemic year 2019, according to the IMF. The United Arab Emirates (UAE) is set to see its fiscal breakeven oil price at $60.40 next year, down from $68.20 in 2020 and $64.60 this year. Qatar has the lowest fiscal breakeven oil price among all oil-exporting countries in the region, with its breakeven oil price expected to drop to as low as $40.40 in 2022, from $46.20 in 2020 and $43.10 in 2021.
Deals & Contracts
Several major agreements and contracts with major oil and gas firms were also announced in the Middle East in the past few weeks.
Saudi Aramco signed in early April a major US$12.4 billion infrastructure deal with a consortium led by EIG Global Energy Partners to optimise its assets through a lease-andlease-back agreement involving its stabilised crude oil pipeline network.
Under the deal, a newly-formed entity, Aramco Oil Pipelines Company, would lease usage rights of Aramco’s crude oil pipeline network over a 25-year period.
Italian engineering, drilling and construction company Saipem was awarded a new contract worth over US$1 billion and related to the North Field Production Sustainability Pipelines Project located offshore and onshore the northeast coast of the Qatar peninsula. The scope of work for this award includes three export trunklines starting from their respective offshore platforms to the Qatargas North and South Plants in Ras Laffan Industrial City, as well as associated onshore tie-in works and brownfield activities on existing onshore and offshore facilities, Saipem said in late March.
The UAE launched a new crude futures contract and signed agreements to explore the potential of hydrogen development and the hydrogen market.
On 29 March, the Abu Dhabi National Oil Company (ADNOC) and Intercontinental Exchange (ICE) marked the official start of trading of the UAE flagship crude oil, Murban, as a futures contract on the new ICE Futures Abu Dhabi (IFAD) commodities exchange.
In mid-April, ADNOC Group CEO Sultan Ahmed Al Jaber said on a virtual hydrogen forum that ADNOC was keen to explore the hydrogen market with India’s public and private sectors to support India’s growing demand for energy and need for cleaner fuels.
A few weeks before that, Abu Dhabi’s sovereign investment vehicle, Mubadala Investment Company, signed a Memorandum of Understanding (MoU) with Italian energy infrastructure operator Snam to collaborate on joint investment and development initiatives on hydrogen. Under the agreement, Mubadala and Snam will carry out assessment activities, including technical and economic feasibility studies, to explore potential projects and solutions to promote hydrogen development in the UAE and globally.
Also in the UAE, Italy’s Eni was awarded Block 7 in the onshore of Ras Al Khaimah, under an Exploration and Production Sharing Agreement.
“The acquisition of Block 7 represents another step in Eni’s positioning in the Middle East and in the UAE in particular, where Eni holds the largest exploration acreage among the IOCs present in the country with more than 26,000 km2 gross, comprising eight exploration blocks onshore and in shallow waters offshore across the Emirates of Abu Dhabi, Ras Al Khaimah and Sharjah,” the Italian major said in a statement.
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