Japan’s need for energy security has long driven relations with the Gulf states, but, under the banner of economic diplomacy, Gulf-Japan ties are diversifying.
Gulf Arab energy producers are increasing investments in oil and gas projects after several years of weaker activity following the mid-2014 price collapse. The strong recovery in oil prices in the fourth quarter of 2017 has renewed optimism that markets have now stabilized and will continue to strengthen in 2018, fueling spending and sanctioning of projects across the energy sectors, from upstream oil and gas production to the downstream refining and petrochemical industries.
Prices for international benchmark Brent rose to an average $54.75 per barrel (/bbl) in 2017, up a strong 25 percent over 2016 levels. The annual average, however, masks the strength of prices in the final three months of the year, with Brent a robust $61.50/bbl compared to $52.50/bbl from January-September. Oil prices posted the strongest opening week in five years in 2018, with Brent now trading around $68/bbl, or more than $13/bbl above the 2017 average.
After declining from 2014 through the first half of 2017, a wave of new oil and gas projects were posted in the second half of the year, and contract awards are expected to accelerate in 2018. An estimated 361 active oil and gas projects worth $331.4 billion in the Gulf Cooperation Council states were sanctioned as of November 2017, according to a report by BNC Network. Investments in the hydrocarbons industries in the Middle East and North Africa hit an eight-year low in 2016 of $32.4 billion but in early 2017 were forecast to sharply rebound to $294 billion for the year. The strong recovery in oil prices has since propelled project spending even higher.
Oil Remains the Bread and Butter
While economic diversification has become the mantra during the oil price downturn, the monetizing of the region’s oil wealth has remained an economic imperative to fuel growth for all six members of the GCC. State energy companies have been steadily increasing development of gas resources over the past few years to meet surging demand for domestic markets, but companies are refocusing their efforts on maintaining and expanding oil production capacity given its critical role in increasing government revenue. Following a 5 percent decline in 2017, the top five national oil companies in the GCC states are expected to increase spending on exploration and production by 3 percent in 2018, according to Barclays.
With more than $1 trillion in global capital spending delayed or cancelled for the 2015-20 period following the oil price crash in mid-2014, Gulf Arab producers are positioning themselves to increase oil production capacity and capture a higher market share as global oil demand accelerates. The cutback in international oil and gas capital expenditures has led a number of forecasters to predict a looming supply shortfall post-2020, especially against a backdrop of robust global oil demand growth of an estimated 1.2 million barrels per day (mb/d) through 2022.
Gulf Arab state energy companies issued record debt in 2017 to fund expansion plans and bridge fiscal deficits amid lower borrowing costs. GCC national oil companies issued debt of $28.7 billion in 2017, compared to just $7.5 billion in 2014, and borrowing via bonds and syndicated loans is expected to increase again in 2018 to help fund new projects. State-run Abu Dhabi energy companies combined account for almost 40 percent of Gulf borrowing in 2017.
The GCC top three oil producers have budgeted a steep $635 billion for projects by 2025 as they seek to maintain or expand their production capacity. Saudi Arabia’s state oil company Aramco in December 2017 raised its 10-year spending plan to $414 billion, almost 25 percent higher than the $334 billion initially budgeted for 2017. The company’s plan includes $134 billion to spend on drilling and well services and $78 billion to maintain oil production capacity. Contract awards for upstream expansion projects have been announced that could provide up to 1.5 mb/d of new capacity from five offshore fields. The Khurais field, at 300,000 barrels per day (kb/d), is expected to be brought online in 2018 followed by the Marjan (300 kb/d) and Zuluf (600 kb/d) fields in 2021 and the Berri field (250 kb/d) in 2022. Aramco has also awarded a slew of work contracts for the Safaniya field in 2017 but it is unclear if the projects are aimed at maintaining current production levels at the world’s largest offshore oil field or if they will add new capacity.
Saudi Production Capacity Set to Increase?
Saudi Arabia has maintained oil production capacity of around 12.2-12.5 mb/d for more than a decade but a new, higher target may be on the horizon. Aramco spends heavily to maintain production levels and at the same time brings new fields online to relieve pressure from mature fields in order to optimally operate the country’s reserves and extend production plateaus. Saudi officials regularly emphasize that project spending is earmarked for compensating for natural field decline rates elsewhere and “resting” workhorse fields rather than adding to total capacity, but with the call on OPEC crude expected to rise in the medium term, additional capacity may be needed. Indeed, the latest raft of contract awards may suggest that the kingdom is planning to raise its overall production capacity levels closer to 13 mb/d in anticipation of increased demand for its crude by 2025.
Saudi officials reportedly see oil revenue increasing by 80 percent from 2017-23. The estimate is based on projected oil prices averaging $75/bbl and production increasing to 11.03 mb/d in 2023. This implies the kingdom needs to raise sustainable production capacity to around 13 mb/d to adhere to its long-stated goal of maintaining a spare production cushion of 2 mb/d.
Aramco also signed a memorandum of understanding with petrochemicals producer Saudi Basic Industries Corp to build a $20 billion complex converting crude oil to chemicals in the kingdom, which would be the largest crude-to-chemicals facility in the world. The project would process 400 kb/d of light crude oil to produce nine million tons of chemicals and base oils annually. It is expected to start operating in 2025 but contracts for the project are not expected to be issued until late 2018 or 2019.
Abu Dhabi and Kuwait Target Higher Production Capacity
Abu Dhabi’s Supreme Petroleum Council approved Abu Dhabi National Oil Company’s (ADNOC) plans for increased capital expenditure of approximately $109 billion over the next five years on November 27, 2017 as part of the company’s plan to raise production levels from around 3.1 mb/d to 3.5 mb/d by the end of 2018 or early 2019. ADNOC has been at the forefront of forging new partnership models and restructuring its operations, from the landmark $2.2 billion share swap with legacy partner BP to embarking on more joint ventures in the country’s upstream projects with Asian partners, especially from China and Japan. After a decade of delays, Abu Dhabi is poised to bring on new production capacity from the offshore Upper Zakum field and onshore Nasr, Sarb, and Umm Lulu fields this year.
Kuwait has budgeted $112 billion for oil and gas spending to 2022 with a stated target of raising capacity from 3.1 mb/d to 4 mb/d by 2020. While the lofty 4 mb/d target looks remote given project delays, a number of contracts have been awarded to increase production from existing fields with enhanced oil recovery techniques as well as development of heavy oil reserves in the north, which combined could add 400 kb/d. The first phase of the Lower Fars Heavy Oil Development Program in the Ratqa field is on track to produce 60 kb/d in 2018 and further plans are moving forward to raise capacity at the field to 270 kb/d.
New Projects in the Pipeline for Oman, Qatar, and Bahrain
The Gulf’s smallest oil producers Qatar, Oman, and Bahrain, with a combined output of under 2 mb/d, are increasing investments as well but the goal is largely to maintain or marginally increase current production levels. Qatar’s gas riches dwarf the country’s modest oil production but nonetheless oil remains an important revenue source. Qatar Petroleum announced in the first quarter of 2017 that it is aiming to raise its capacity by 55 kb/d to just over 725 kb/d, with new contracts awarded for the redevelopment of the Bul Hanine field.
Oman launched its award-winning Khazzan gas field in November 2017 but oil development still remains a priority. Oman increased its 2018 oil and gas production expenditures to 2.1 billion Omani riyals ($5.45 billion), a 15 percent increase from 2017. State-owned Petroleum Development Oman plans to invest more than $20 billion over a five-year period to sustain its long-term production capacity of 1 mb/d or slightly higher. Oman’s current projects include the development of the Rabab Harweel Integrated Project, which will produce 60 kb/d in 2019. Petroleum Development Oman is also developing the Bahja-Rima cluster oilfield, with incremental production capacity of 95 kb/d expected online by 2021. Oman tapped international debt markets in September 2017 to secure $1 billion to fund its expansion programs following a $4 billion loan in 2016.
The bulk of Bahrain’s modest oil production is from the 300 kb/d Abu Safah field, which it shares equally with Saudi Arabia. Aramco produces the field in its entirety on behalf of both countries. Bahrain’s only other production comes from the Bahrain Oil Field, which requires significant work just to maintain levels of around 45 kb/d. The country, however, is not without its aspiration, with the Bahrain Petroleum Company planning several groundbreaking initiatives focusing on unconventional oil offshore exploration and development, although it is unclear if there will be a measurable impact on the country’s overall production levels.
Amid the downturn in oil prices, national oil companies started aggressively restructuring their operations to maximize efficiency, and reinventing their business models to include more international partnerships to adapt to a lower price environment from the heady days of $100/bbl crude. Gulf producers are also offering more attractive contract terms aimed at developing long-term relationships and partnerships with international oil companies that can provide financial and advanced technological resources.
Now, with higher capital expenditures available to meet aggressive capacity expansion targets, the current list of projects should put Gulf producers in good stead post-2020 when strong growth in shale output is expected to subside and brisk global oil demand growth increases the call on OPEC crude supplies, including that of GCC members.
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