The end of the boom for the energy market

Published in MEED, 31 August 2014 Around the world, global energy supplies have been rising in recent years, partly as a result of the shale revolution in the US. At the same time, demand in places such as China appears to be softening. The combination is putting pressure on oil prices, which are expected to decline in the coming years.

The Washington-based IMF predicts an average price of $104 a barrel this year, but forecasts a drop to less than $90 a barrel by 2019. This may still be high by historic standards, but it does mean the region’s oil producers will have to deal with a tougher environment in the future.

Many of the Gulf states have relied on recycling their oil revenues into the wider economy to promote growth, but the developing shape of the energy market means this is likely to change in the coming years. Some governments are already scaling back their spending plans, or at least slowing down the rate of growth, and that trend is likely to continue as more inch closer towards budget deficits.

London-based research firm Capital Economics thinks economic growth will fall in all the GCC countries in the coming years. The performance of their non-oil sectors will pick up some of the slack, but not by enough to sustain current growth levels.

The best placed of the six is Qatar, where the government’s large spending plans, not least for the 2022 football World Cup, remain the backbone of the economy. Even so, Qatar is still likely to experience a slowdown.

The UAE is also relatively well placed, not least because of the contribution from Dubai and its non-oil sector, which is the most dynamic in the region. That, in turn, highlights one of the main benefits that other countries could expect if they ever succeed with their economic diversification aims. The UAE’s oil GDP growth is expected to be just 1 per cent in 2015 and 2016, but overall growth rates will be 3.5 per cent or higher in those years, according to Capital Economics’ forecasts.

Saudi Arabia’s growth rate is expected to fall to about 3 per cent next year, with non-oil growth at 3.5 per cent and oil GDP also expanding by just 1 per cent. Riyadh is the key swing producer in the region and may well decide to reduce its output in an effort to keep prices propped up, meaning government revenues will be lower still.

“With lower international oil prices, it is unlikely that Saudi Arabia and the others will increase production,” says Garbis Iradien, deputy director of the Washington-based Institute of International Finance (IIF). “Saudi Arabia has been the stabiliser in the market. When it sees prices going down, it cuts production to keep prices at a certain level.”

At the other end of the scale, Bahrain, which has limited oil reserves, is in a weak fiscal position and its difficulties are only likely to get worse. Capital Economics suggests Manama’s break-even oil price will rise in the coming years even as oil prices fall. “The government’s budget position is looking increasingly unsustainable and fiscal policy will need to be tightened,” it said in a report released on 31 July.

Elsewhere around the region, there are plenty of questions that cannot yet be answered, but will have an important impact on the energy sector. They include the outcome of fighting in Libya and Iraq and how that might affect their ability to sustain current production levels or even expand output in the future.

Most of Iraq’s production is in the south of the country, but there are oil fields in other regions as well, including two close to Kirkuk that were recently captured by forces from the Islamic State in Iraq and Syria (Isis). The same group has also taken hold of fields in Syria and, while its ability to manage oil assets may be limited, it is earning money from crude sales, which is helping to fund its ongoing campaign that could further destabilise the whole of Iraq, and indeed other nearby countries.

Another big unknown is the outcome of the Iranian nuclear talks. If a comprehensive deal can be reached, that should lead to Iranian oil output rising. How quickly it can do so depends on several factors, including the speed with which international sanctions are dismantled and how much time and money is required to revive and restore the country’s oil infrastructure. As it stands at the moment, Iranian oil production has fallen from 4.4 million barrels a day in 2011 to less than 3.6 million b/d last year.

“Iran has lost an estimated $120bn in oil revenues since the beginning of 2012,” claimed a US State Department spokesman on 22 July, when discussing the latest four-month extension to the nuclear talks.

In North Africa, Algeria’s economy is expected to underperform in the coming years and much of that is because of problems in its oil and gas sector. Oil output has dropped sharply over the past six years. The gas sector has been performing better, but production has also been declining and higher levels of domestic consumption are limiting the opportunities for the country to take full advantage of its output.

“Not enough investment is coming into the energy sector in Algeria due to security problems and also because the terms they offer to international companies are not favourable,” says Iradien. “So their production has been declining in volume terms.”

The security situation is worse in Libya, and production levels have been volatile in recent years. From 1.7 million b/d in 2010, output fell to just 479,000 b/d in 2011, before climbing back to 1.5 million b/d the following year and dropping once again to 988,000 b/d last year.

Oil production in Egypt has been steadier, at about 714,000 b/d from 2011-13, although some reports say output dropped to about 670,000 b/d in the first quarter of this year. Gas production has also fallen, from 61.4 billion cubic metres in 2011 to 56.1 billion cubic metres in 2013.

After the turmoil of revolution, the country’s economy may at last be on the road to recovery, but the prospects for the energy sector remain uncertain. The government owes some $6bn to international oil companies, which it has pledged to repay by 2017. In the shorter term, some major projects, such as the West Nile Delta gas scheme involving the UK’s BP, have been suffering further delays.

Of course, lower oil prices are good news for the countries that rely on importing energy. Capital Economics believes the region’s non-oil producers will grow more quickly than the oil economies in 2015 and 2016, after several years of lagging behind them. It predicts GDP growth of 3.8 per cent for non-oil producers in 2015, compared with 3.3 per cent for oil producers, and the gap could be even wider in 2016.

Despite that, it is still the oil exporters that are in the stronger position overall. The future may be slightly tougher for them if oil prices do decline as expected, but most have built up large savings during the boom, which will cushion the blow.