There's a tide in the industry's affairs
The 8th Gulf Intelligence UAE Energy Forum drew energy industry professionals and analysts to Abu Dhabi on January 11th, who seemed certain that the industry was traversing through interesting times.
Oil and gas professionals from across the world keenly discussed issues ranging from the impact of geopolitics on the industry and supply and demand politics to Public Private Partnerships (PPPs) and talent acquisition challenges at the annual Gulf Intelligence-hosted UAE Energy Forum 2017. Thanks to the much-anticipated OPEC/non-OPEC agreement and the subsequent rise in oil prices, a relatively more optimistic atmosphere could be felt across the board.
Like previous editions, voting sessions – reflecting the audience’s sentiments regarding key issues, including the oil prices – formed an integral part of the event. According to the poll results, 49% of respondents felt the average Brent oil price will be in the $50/b range this year. Comparatively, nearly a third (29%) expect the average oil price to hover around $60 per barrel; an optimistic sentiment echoed by the International Energy Agency’s (IEA) forecast that global oil supply will move into a 600,000 bpd deficit by June if OPEC and non-OPEC producers sustain the supply cuts that were agreed in late-2016. Some respondents (16%) clearly have their doubts and expect the average price to tumble down to the $40/b range.
On the question of how low Brent crude prices could go this year, 59% of the survey respondents believed prices could not dip below the $40/b range and a similar percentage said they could not foresee prices rise beyond $60 per barrel. Almost a third of the audience (28%) were perhaps overtly optimistic, expecting prices to rise as high as $70 per barrel.
The majority (74%) of respondents said the recent agreement to cut supply represents OPEC’s flag of surrender after a two-year fight for market share. In response to this, the UAE Minister of Energy Suhail Mohamed Al Mazrouei emphasised that the supply cuts, which should lead to a higher oil price, are targeted at bolstering investment into the energy sector, which has witnessed a drop for the past three years along with oil price erosion. Along those lines, Wood Mackenzie released a report recently saying that it too expects investment in exploration and production worldwide to rise by 2% in 2017 to $450bn.
Answering an equally critical question, 47% of respondents expect it to be sometime in 2018 before the inventories of crude and refined oil in industrialised nations, which remain 300mn barrels above their five-year average, to be cleared. A fifth (21%) of respondents said late-2017 is more likely, while another fifth expect it to be in 2019.
The geopolitical impact
Like most discussions about the region, the forum addressed the impact of geopolitics on the energy industry. Former Lebanese prime minister Fouad Siniora came on stage to remind us all of how the once-celebrated Arab Spring has resulted in a bloodbath in some of the regional countries. Such crises have brought risk management and mitigation to the centre stage of business operations across the Middle East, particularly in the energy sector.
With the numerous risks in the region, the recent election of Donald Trump as president of the United States was a topic every attendee wanted discussed at the forum. Trump’s xenophobic remarks have left members of the energy sector wondering how his policies will affect the global industry. Bearing this in mind, Gal Luft, co-director of Institute for the Analysis of Global Security, USA, addressed this concern.
When survey respondents earlier in the day were asked to rank top three geopolitical risks, 65% of them said that Trump’s ‘America First’ philosophy would have the biggest ramifications on the global energy industry.
Luft’s view confirmed this risk, saying that, as US President, Trump has a great deal of influence on the global energy market, “more so than anyone else on the planet. Indirectly through his decisions, he can inject or deny from the market between 1mn to 2mn barrels a day. For example, Libya can add another million barrels a day within a year if the situation stabilised,” should the new administration consider Libya as a priority.
However, he did not agree with the view that Trump’s rein would reduce America’s business relations with the region’s swing producer Saudi Arabia. Encouraged by the high volume of American weapons purchased by Middle Eastern countries, the new administration would be in favour of the existing relationships, he said, highlighting that Trump is a businessman who is driven by a geo-economical approach rather than political ideologies.
Will compliance to the deal be an issue?
While a number of producers have informed their customers about a reduction in supply in line with the OPEC/non-OPEC cut deal that was struck in late 2016, the compliance level is yet to be revealed by the agreeing parties. Supported by past experience, additional doubts arose as a result of some of the members’ reluctance to sign the agreement.
Perhaps giving Iran leeway has created more discontent to the reluctant members. Iraq repeatedly pointed out their need to recover from years of sanctions but to no avail. So far, the country has indeed complied by reducing its oil production, but only under pressure.
Luay al-Khatteeb, director of Iraq Energy Institute and fellow at Columbia University, said that Iraq needed to be dealt with as an exception. Given that a decline in oil revenue, which the country is so heavily dependent on, can jeopardise national security, al-Khatteeb argued that production cuts could impact the security of the entire Arabian Peninsula which is geographically separated from the terrorism zone by Iraq.
“Iraqis lost at least a quarter of a century of market share during wars and sanctions, at least 16bn barrels of its rightful market share. For OPEC to ask Iraq at this crucial time to comply, from my point of view, is not only irresponsible but also unethical. What Iraq really needs is to maximise production to the highest level,” he said.
“We have already 65bn barrels of proven reserves that is still untouched, which could be developed. For this to materialise, it needs at least six to seven years,” he added.
In the view of Neil Atkinson, the IEA’s head of oil industry and markets division, the 25 years of sanctions that Iraq suffered from, reflected in prevalent poverty and high crime rate at home and forcing a swelling number of refugees to other nations, was a “self-inflicted wound.”
“The danger that Iraq was facing before the deal was a risk that the oil prices would fall yet again under $30 a barrel, which would be a disaster for the country and the other producers. Yes, in the long-run Iraq has enormous potential, but it can’t realise its potential unless there is stability as far as the price and the market are concerned,” he added.
Beyond the horizon
Of all the topics that were raised and deliberated upon, none of the experts seemed concerned about the question that the delegates and the press were so keen to know more about. What happens beyond the six-month timeframe set by the current deal?
In recent days, contradictory reports about the agreement’s extension have been doing the rounds, with Saudi Minister of Energy Khalid Al Falih being quoted in one instance as saying that the deal will get extended, and also reportedly saying that an extension is unlikely.
“Do we need to do it beyond 6 months? It’s premature to decide. This will depend on the reaction,” of the market, Al Mazrouei said at the forum.
Reiterating a similar sentiment, Dr. Konstantin Simonov, director general of Russian National Energy Security Fund, said, “I am absolutely sure that Russia will fulfil [the deal]. For me, the main question is what will be the future of this deal for the second half of the year.”
Atkinson also left the question unanswered, saying, “In the future, whether this deal lasts beyond six months, we will have to wait and see.”