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Industry players generate energy

Despite worrying signs about the global oil market's oversupply situation and the subsequent decline in crude prices, over 250 industry professionals gathered at the Gulf Intelligence UAE Energy Forum in Abu Dhabi last month.

ANALYSIS, Industry Trends

Falling oil prices are never far from the top of the agenda, especially at an event attended by Oil Ministers from around the GCC, company owners and senior energy executives. In total, the 7th Gulf Intelligence UAE Energy Forum brought together over 250 energy stakeholders to Abu Dhabi to deliberate on crucial issues and events impacting the oil and gas industry in the Middle East.

Held under the patronage of HE Suhail Mohamed Faraj Al Mazrouei, UAE Minister of Energy, the event was also attended by Dr. Emmanuel Ibe Kachikwu, Nigerian Minister of State for Petroleum Resources and OPEC President, to name two of the high-profile dignitaries who made some vital comments about the state of affairs in the energy industry. Making an inaugural address to the event on behalf of Mazrouei (who came in later in the day), Dr. Matar Al Neyadi, Undersecretary in the UAE Ministry of Energy said, “2016 will be in an interesting year for the UAE. The nation has strong economic fundamentals.”

In his speech, Neyadi reiterated the fact that the UAE became the first country in the GCC last year to do away with fuel subsidies, a major economic reform policy. The UAE in August last year decided to lift subsidies on fuel prices, by making them ‘market-linked’. Chaired by Neyadi, the Fuel Price Committee – which includes members including the Undersecretary of the Ministry of Finance, CEO of ADNOC Distribution, and CEO of Emirates National Oil Company (ENOC), has been announcing fuel prices on the 28th of each month (for the following month).

As the forum proceeded, various other energy industry heavyweights took to the stage to address the gathering or to participate in panel discussions, which were moderated by senior partners from Gulf Intelligence, as well as celebrity CNN anchor John Defterios. Intermittently, to keep the audience engaged, multiple poll questions on various industry trends and events were posed, with voters given 10 seconds to choose their answers.

Snap polls mirror public opinion

The first major question, quite aptly, that was posed to the audience was the way ahead for global crude oil prices. A majority - 51% - of respondents voted that oil prices are unlikely to rise above an average of $40 per barrel this year, putting additional pressure on governments and energy companies to cut their capital costs further. While 28% voted saying prices would remain around $30 a barrel, another 13% said prices could settle at $50 a barrel. The remaining 3% turned out to be an optimistic lot as they felt oil prices could recover to above $60 a barrel.

In retrospect, 41% of respondents expected oil prices to average $60/barrel in 2015 during the same GI Industry Survey in January last year. Contrastingly enough, oil prices continue to fall to new lows – presently trading at below $30 a barrel, as OPEC’s policy to maintain market share – a move that has contributed to falling oil prices – has not weakened output from non-OPEC producers, including US shale oil producers. The oversupply is set to continue in 2016, it is wide believed.

Lower oil prices have taken a hefty toll on governments whose budgets are heavily supported by energy revenues, including OPEC members. Oil and gas companies are also slashing expenditure and increasing staff redundancies in the GCC and beyond. Nearly 45% of respondents to another poll question on the topic said that the restrained budgets in the Gulf will be the top macroeconomic factor affecting the oil and gas sector in 2016, followed closely by China’s economic weakness (38%). The weakening economies in the majority of BRIC countries (Brazil, Russia, India and China) and the US’ decision to increase interest rates will not have as much of an impact, with only 10% and 8%, respectively.

To another burning question on climate change and global warming, a strong majority (71%) said that oil producers and companies will revise down their reported recoverable reserves of fossil fuels following an agreement at the COP 21 climate change meeting in Paris last December to limit global warming to below 2°C and strive to keep temperatures at 1.5°C above pre-industrial levels.

OPEC emergency meeting

Member states of the Organisation of Petroleum Exporting Countries (OPEC) may decide to gather for an emergency meeting in March, if oil prices do not improve, the cartel’s president has said. “The oil prices are moving lower faster than the oil barrels can come off the market,” Kachikwu told Defterios during an interview at the forum.

“We (OPEC) may hold an emergency meeting towards the end of the first quarter (end of February or March) if prices remain at current levels,” Kachikwu added. He revealed that ‘a couple’ of member states had requested for such a meeting, ahead of the group’s scheduled meeting on June 2, “to discuss and reconsider strategy”, without naming the two countries.

Kachikwu told the audience that Saudi Arabia‎ has never held the position that it does not want to talk. “In fact, it was very supportive of a meeting before June, at the time when we held the December meeting, if a consensus calls for it.” OPEC decided to keep the output level unchanged at their meeting on December 4 in Vienna. Oil prices tumbled by more than 60% since 2014 due to overproduction and weak demand; from a peak of $115 per barrel in June 2014, prices have currently tumbled below $30 per barrel.

Later during the forum when Defterios invited both the UAE and Nigerian oil ministers for a candid interview session, Mazrouei seemed hesitant to nod to such a proposal of an OPEC emergency meeting. “There is a mechanism to call for an Opec meeting. Anyone can ask the Secretary General putting the reasons to have the meeting. What are we going to agree is that we need to be convinced. I am not convinced that Opec solely, unilaterally can change the strategy just because we have seen the low in the market,” he said.

He reiterated that OPEC was not ‘solely responsible’ for the global oversupply of oil, adding that the UAE has no plans to increase production this year. He said that the OPEC strategy to defend market share is working. “We have seen reduction in the yearly gradual increase in production from non-OPEC nations. It’s working for the customers, with the customers allowing the market to balance itself. The strategy of OPEC is to allow the market share...fair market share. Let the people compete and price be the judge.”

Mazrouei said that there is going to be a correction before the end of 2016 in oil prices: “We are going to see a correction. The market fundamental tells us this. The increase in demand at the end of 2015 was higher. The market will solve it. That is the only fair assessment of the current situation. The first six months going to be tough. It will be gradual. We will get out of the mess. We tried in OPEC to help as much as we can.”

Mazrouei further said that no projects will be cancelled due to drop in oil prices, although there is a concerted effort to reduce costs. “This is the trend all producers are doing. We are seeing good results. We are reducing the costs but not cancelling projects,” he said.

On Iranian oil entering the market, he said all OPEC members including Iran have the right to increase their production. “We are not going to restrict anyone from producing. There is no such mechanism. It took eight years for the UAE to increase the capacity and cost $75bn. It takes lot of time to conduct a project and come up with a mechanism. That’s our experience. Good luck if anyone can do it in six months.”

The South Asian equation

The ambitious India-Iran-Pakistan gas pipeline may not materialise due to differences between India and Pakistan, former Indian ambassador to the UAE, Oman and Saudi Arabia, said at the forum.

“We made tremendous progress. The problem was the state of our relations with Pakistan. The problem is not with Iran. We reached up to the price stage. But then the problems began due to the collapse of Musharraf regime (former Pakistani president Pervez Musharraf). I do not believe the pipeline will happen,” Talmiz Ahmad commented.

He said India does not have potential oil reserves and 80% of import is from the Gulf region. “The import dependency will be 90% in the medium term to long term. There might be a shift towards renewables and nuclear energy, but it is uncertain as of now. India will continue to be a fossil fuel based economy.”

India is now negotiating with Iran to build $4.5bn under-sea gas pipeline bypassing Pakistan, according to media reports. The planned pipeline from the Iranian coast via the Gulf of Oman and Indian Ocean to India’s Gujarat state is proposed to carry 31.5mn standard cubic metres of gas per day and is expected to be built in two years.

Meanwhile, a top energy official from Pakistan seated at the same panel discussion said the country is building its own pipeline from Gwadar port to mid-country for LNG supply, which will have additional capacity for any import of gas coming from Iran. “Once we get the right signals from the international community and from the government to go ahead, we are all set to go and build the interconnectivity pipeline with Iran,” Zahid Muzaffar, chairman of Oil & Gas Development Co Ltd (OGDCL), Pakistan’s national oil and gas company, told the forum.

The American perspective

The deal unveiled by US Congressional leaders to lift longstanding restrictions on US crude exports comes as a big surprise to world oil markets. It also poses important new questions for the rest of the world - where the US could, intriguingly, be jostling with Iran for market share.

“The OPEC has a history of underestimating US shale oil production,” Dave Ernsberger,oil expert at Platts, told journalists gathered at a special media roundtable post the forum. “The US is currently producing around 500,000 barrels per day (bpd). We might see that figure rising to 1mn bpd by the end of this year,” he said.

Ernsberger also revealed that US shale oil producers have taken a hit due to the low oil prices and the pressure exerted by the OPEC producers in the global crude oil market, as a result of which many rigs are going offline. “There are about 650 rigs operating in the US right now, one-third of what was at the peak,” he told Oil & Gas Middle East.

He further said that the US is likely to export a few thousand more barrels by the end of 2016. “It seems more likely that refiners in Europe and Asia will be weighing up offers to buy crude from Iran and Iraq long before they turn their attention to what it would cost to get their hands on big volumes of Eagle Ford Shale, or any other US crude or condensate,” Ernsberger said.

“This deal (lifting of the US export ban) is a once-in-a-generation shift in the world oil markets. The lifting of crude export will long be remembered as an exclamation mark, powerfully punctuating the end of the US’ remarkable mental journey from oil importer to oil exporter, and serving as a call to the rest of the world to be ready for a new US mindset, when prices do eventually recover.”

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