THE OIL FREE FALL

And its im­pact on the GCC economies, par­tic­u­larly Qatar.

Qatar Today - - FRONT PAGE - By V L Srini­vasan

Hit­ting sev­eral pock­ets of tur­bu­lence, oil prices have crashed by over 60% from $115 in June 2014 to $46 per bar­rel in the last week of Jan­uary 2015 – and are likely to plum­met fur­ther to $40 in the not too dis­tance fu­ture.

Saudi Ara­bia, one of the big­gest oil ex­porters, has made it very clear that it was ready to face the con­se­quences even if the price fell to $20 per bar­rel in the com­ing weeks. It is re­ported that the King­dom will end up los­ing QR465.92 bil­lion ($128 bil­lion) rev­enues if the oil prices are pegged at $50 per bar­rel for one year.

Sev­eral re­ports have been do­ing the rounds, af­ter the Or­gan­i­sa­tion of Petroleum Ex­port­ing Coun­tries (OPEC) met in Novem­ber 2014 and re­fused to cut pro­duc­tion. One the­ory has been that the de­ci­sion was taken, at the be­hest of the US and its al­lies, to “hurt” the oil-cen­tric state economies such as Rus­sia and Iran. But the catch is that th­ese de­clin­ing prices will af­fect Saudi more than any­one else, since their econ­omy is so in­trin­si­cally de­pen­dent on oil. De­spite nu­mer­ous ini­tia­tives and bil­lions of dol­lars spent on ef­forts to di­ver­sify the Saudi econ­omy, oil pro­ceeds con­tinue to ac­count for 90% of ex­port earn­ings, ap­prox­i­mately 80% per­cent of gov­ern­ment rev­enues and about 40% of GDP.

Rus­sia, which has al­ready been hard-hit due to West­ern sanc­tions, has been strug­gling to in­su­late its econ­omy from fur­ther col­lapses but the de­clin­ing oil prices have re­duced the value of its ex­ports, putting down­ward pres­sure on its cur­rency. Peg­ging the oil price at $100 per bar­rel, the Rus­sian Par­lia­ment has re­cently ap­proved a three-year bud­get (2015-1017) but Moscow may ex­pe­ri­ence deep re­ces­sion and de­fault on its debts if the oil prices fail to rise in the com­ing months.

The devel­op­ment also hit Iran's econ­omy, which was limp­ing back to near nor­malcy. Sanc­tions over the years have brought down Iran's oil ex­ports con­sid­er­ably and its lead­ers are blam­ing fel­low OPEC pro­duc­ers of col­lud­ing with the West to keep oil prices low.

While Europe is cut up with Rus­sia for its sup­port to Syria and also for pre­cip­i­tat­ing the cri­sis in Ukraine, the US for­eign pol­icy is aimed at ex­ert­ing pres­sure on Iran (which is also sup­port­ing the Syr­ian regime led by Bashar Al As­sad), to limit its am­bi­tions dur­ing the nu­clear talks with the West.

Iran needs the oil price to be around $140 per bar­rel to bal­ance its books and an­other OPEC mem­ber, Venezuela, needs $117 per bar­rel to avoid the ig­nominy of de­fault­ing on its debts and also to meet its fis­cal com­mit­ments.

Be­sides Iran and Rus­sia, the two GCC coun­tries - Saudi Ara­bia and Kuwait - are also likely to bear the brunt as oil sales ac­counted for 90% and 92%, re­spec­tively, in the over­all bud­get in­come for th­ese two coun­tries in 2013.

On the other hand, Iraq too has warned that it has lost 50% of its oil rev­enues due to the price slump and had no money even to buy weapons to fight the Is­lamic State. In other words, Iraq has ac­cused the GCCbased OPEC mem­bers of ag­gra­vat­ing the cri­sis in the vi­o­lence-hit Mid­dle East.

The other ver­sion is that non- OPEC coun­tries like the US and Canada have stepped up crude oil pro­duc­tion to chal­lenge the hege­mony of OPEC, and the lat­ter

“We be­lieve that gas has a strong ad­van­tage not only as a source of en­ergy but as a source of cleaner en­ergy. And gas de­mand is likely to be fur­ther aug­mented.”

HE Mo­hammed bin Saleh Al Sada

Min­is­ter for En­ergy and In­dus­try

hit back by re­fus­ing to cut back oil pro­duc­tion.

What­ever the case is, the in­ten­tions of the four GCC coun­tries – Kuwait, Saudi Ara­bia, Qatar and the UAE – are the same and they do not want to sur­ren­der their mar­ket share in the global oil mar­ket for years to come.

Th­ese four na­tions are of the view that they can sur­vive the oil price slide as their pro­duc­tion cost is less, while the US en­ergy in­dus­try can­not com­pete with them as it can­not af­ford to pro­duce oil at a high price and sell cheaply.

The good news, how­ever, is that the Euro­pean Cen­tral Bank's quan­ti­ta­tive eas­ing plans on Jan­uary 22, to buy Euro­pean bonds worth QR4.73 tril­lion ($1.3 tril­lion), is ex­pected to push up oil prices in the com­ing months.

“Oil prices should be around $60 a bar­rel by the end of this year as de­mand from Europe in­creases be­cause of the eco­nomic stim­u­lus from the Euro­pean Cen­tral Bank,” HE Sheikh Ahmed bin Jas­sim Al Thani, the Min­is­ter of Econ­omy and Com­merce, said dur­ing the World Eco­nomic Fo­rum sum­mit at Davos in Switzer­land last month.

As of now, there are no in­di­ca­tions of an oil price re­bound due to over­sup­ply from the US and Canada, fall­ing de­mand in the Euro­pean Union be­sides the slow­ing of the Chi­nese econ­omy. All th­ese fac­tors are likely to im­pact the global econ­omy.

The US En­ergy In­for­ma­tion Ad­min­is­tra­tion (EIA), which es­ti­mates that the price plunge will re­sult in a rev­enue loss of $257 bil­lion (QR935.48 bil­lion) to OPEC in 2015, says that fur­ther re­vi­sions to fu­ture bud­get plans may be re­quired by many of its mem­bers, par­tic­u­larly Venezuela, Iraq and Ecuador, be­cause of lower oil prices and large un­cer­tainty over fu­ture global eco­nomic growth and crude oil pro­duc­tion lev­els.

The OPEC's de­ci­sion prompted the In­ter­na­tional En­ergy Agency (IEA) to re­mark that there was too much oil in the world and not enough buy­ers. “There are two mil­lion bar­rels per day of crude oil pro­duc­tion that don't have a home,” the Vi­enna-based or­gan­i­sa­tion says.

Ac­cord­ing to the In­ter­na­tional Mon­e­tary Fund, Saudi Ara­bia, Kuwait, Qatar and the UAE, whose oil pro­duc­tion rep­re­sents 63% of their to­tal ex­ports, are es­ti­mated to have com­bined re­serve as­sets of around $855 bil­lion (QR3.11 tril­lion).

Among them, Saudi Ara­bia has amassed $794.38 bil­lion (QR2.89 tril­lion) to see it through times of low oil prices. While th­ese huge re­serves can shield th­ese coun­tries for a short time, the low oil prices will eat into their fis­cal sur­pluses leav­ing them high and dry if con­tin­ued for a long time.

The con­tin­u­a­tion of Ibrahim Ali Al Naimi as Saudi Ara­bia's Oil Min­is­ter, af­ter the death of King Ab­dul­lah on Jan­uary 23, con­firms that the new King Sal­man bin Ab­du­laziz Al Saud will not de­vi­ate from the pol­icy de­ci­sions of his pre­de­ces­sor on oil prices.

Al Naimi told the OPEC meet­ing last Novem­ber that it was not in OPEC's in­ter­est to cut oil pro­duc­tion as it aims at de­fend­ing mar­ket share rather than sup­port­ing price. Echo­ing sim­i­lar views, PwC (Mid­dle East) En­ergy, Util­i­ties & Min­ing Leader Paul Navratil says that the de­ci­sion of the large-pro­duc­ing coun­tries in OPEC, specif­i­cally those with sur­plus bud­get re­serves, is to "pro­tect mar­ket share" rather than solely shoul­der the re­spon­si­bil­ity of re­duc­ing out­put at the gain of the mar­ginal bar­rel pro­duc­ers.

“The other coun­tries in OPEC, which are not awash in funds, need to main­tain pro­duc­tion as a means to gen­er­ate much-needed gov­ern­ment in­come, al­beit lower due to the price, and can­not af­ford to have a dou­ble hit of lower vol­umes and lower prices,” he says.

Navratil also says that the GCC-based OPEC coun­tries are likely to al­low the oil price fluc­tu­a­tion to pur­sue its course of find­ing equi­lib­rium and most gov­ern­ment bud­gets this year, which have been set us­ing higher oil prices in their es­ti­ma­tions, will be util­is­ing their fi­nan­cial re­serves to weather this cur­rent volatil­ity.

A les­son learnt from ear­lier oil gluts in 2008-09 is that sig­nif­i­cant cost sav­ings can be re­alised by “stay­ing the course” and rene­go­ti­at­ing prices with key sup­pli­ers who are keen to main­tain their own or­der books, Navratil says.

“We ex­pect the po­ten­tial sav­ings to be in the or­der of 20% to 30% in many in­stances, which is suf­fi­cient enough rea­son for the GCC to con­tinue with its plans to build in­fra­struc­ture and fur­ther di­ver­sify their industrial bases and economies - pro­vided we all be­lieve there will be a price re­cov­ery in the not too dis­tant fu­ture,” he says.

Salam Awawdeh, Part­ner and En­ergy & Re­sources Con­sult­ing Leader at Deloitte Mid­dle East, says that the oil pro­duc­ers have no in­ten­tion to cre­ate an oil glut as the busi­ness is driven by “hard-headed com­mer­cial de­ci­sion-mak­ing” rather than emo­tion but the de­ci­sion-mak­ers have be­come less uni­fied than in the past.

There is an in­creas­ing di­ver­gence within

“We all have to get used to living in a more and more ef­fi­cient way. Geopol­i­tics are not de facto an off­spring of oil, but like wa­ter mov­ing down a hill it finds its way into ev­ery crevice.”

Sean Evers Man­ag­ing Part­ner Gulf In­tel­li­gence

OPEC in de­ci­sion-mak­ing be­tween GCC and non- GCC mem­bers due to the in­di­vid­ual op­er­at­ing cir­cum­stances of each mem­ber (mar­ket share strat­egy, types of crude, tech­ni­cal dif­fi­culty of ex­trac­tion, avail­abil­ity of in­fra­struc­ture, abil­ity to meet quo­tas, fis­cal strength).

“It is no se­cret that the pro­duc­tion cost is much lower for OPEC mem­bers in the GCC than oth­ers. Non- OPEC de­ci­sion-mak­ing is, how­ever, also less uni­fied due to the emer­gence of ma­jor hy­dro­car­bon pro­duc­ers such as the US, whose op­er­at­ing con­di­tions are cer­tainly dif­fer­ent from those of Rus­sia,” he says.

Be­sides, the pric­ing am­bi­tions of large com­modi­ties trad­ing houses, many of whom hold phys­i­cal stocks of oil (and in­creas­ingly, nat­u­ral gas) can be dif­fer­ent from, if not the op­po­site of, the hy­dro­car­bon- pro­duc­ing coun­tries.

“If this frag­men­ta­tion were not enough, we also have the in­creas­ing emer­gence of nat­u­ral gas as a fos­sil fuel which is priced separately from oil. For ex­am­ple, here in Qatar, gas is far more strate­gi­cally im­por­tant than oil due to Qatar's lead­er­ship of the LNG com­mu­nity. Due to this, it is im­pos­si­ble to fore­see what the oil price will do and very few peo­ple have achieved this fore­sight,” Awawdeh points out.

Dev­as­tat­ing ef­fect

The signs of the shrink­ing foot­print of in­vest­ments in the oil and gas in­dus­try were clearly vis­i­ble with the oil tremors not only be­ing felt by Iran and Rus­sia but also in the GCC re­gion, the US and in other oil pro­duc­ing coun­tries.

Venezuela, which is a mem­ber of OPEC, has landed in a fi­nan­cial mess fol­low­ing the oil price plunge and its pres­i­dent Ni­co­las Maduro sought help from Qatar and other coun­tries to wrig­gle it­self out of the cri­sis.

The worst fears that in­vest­ments in the oil and gas sec­tor would be hit were con­firmed with Shell and Qatar Petroleum scrap­ping the QR23.3 bil­lion ($6.4 bil­lion) Al Karaana Project as it was eco­nom­i­cally un­fea­si­ble.

“Qatar Petroleum and Shell have de­cided not to pro­ceed with the pro­posed Al Karaana Petro­chem­i­cals Project. The de­ci­sion came af­ter a care­ful and thor­ough eval­u­a­tion of com­mer­cial quo­ta­tions from EPC (en­gi­neer­ing, pro­cure­ment and con­struc­tion) bid­ders, which showed high cap­i­tal costs ren­der­ing it com­mer­cially un­fea­si­ble, par­tic­u­larly in the cur­rent eco­nomic cli­mate pre­vail­ing in the en­ergy in­dus­try,” Shell said in a state­ment in mid-Jan­uary.

Un­con­firmed re­ports even sug­gest that the pres­ti­gious QR43.68 bil­lion ($12 bil­lion) Sharq Cross­ing Project in Doha may be de­layed by a few years and the rea­son for this could be the fall­ing oil prices.

Saudi Ara­bia also is fore­cast to cut its ex­pen­di­ture by 18% to QR833.56 bil­lion ($229 bil­lion) in 2015 com­pared with last year, ac­cord­ing to re­ports.

Saudi Ba­sic In­dus­tries Corp (Sabic), one of the world's largest petro­chem­i­cals groups, re­ported a 29% plunge in Q4 2014 net in­come and the com­pany's chief ex­ec­u­tive, Mo­hamed Al Mady, says that his com­pany's out­look for 2015 de­pended on oil prices and was there­fore un­pre­dictable. Sabic is among the GCC's largest-listed com­pa­nies and has earned $1.16 bil­lion (QR5.82 bil­lion) in the three months to De­cem­ber 31.

In the US, the oil in­dus­try pulled back from high-cost ar­eas of op­er­a­tion, slash­ing jobs and spend­ing as the com­pa­nies can­celled drilling rig con­tracts in the Gulf Coast. More than 1,500 ac­tive drilling rigs have gone out of busi­ness by mid-Jan­uary and the oil rig fall is said to be the big­gest since 1991.

The ef­forts of the Naren­dra Modi gov­ern­ment in In­dia, which was look­ing to re­duce the coun­try's fis­cal deficit in the next fi­nan­cial year be­gin­ning in April by sell­ing off shares in part in the profit-mak­ing Oil and Nat­u­ral Gas Cor­po­ra­tion (ONGC) and in In­dian Oil Cor­po­ra­tion (IOC) re­spec­tively, re­port­edly fell flat with in­vestors hav­ing sec­ond thoughts in view of the de­vel­op­ments.

De­spite th­ese set­backs, Awawdeh sees light at the end of the tun­nel.

“As far as con­trol­ling the oil price slide, one has to as­sume that the de­mand for hy­dro­car­bons will in­crease in the long term as emerg­ing mar­kets such as In­dia, China and Africa be­come more de­vel­oped, and that this de­mand will out­strip the decline in OECD coun­tries due to en­vi­ron­men­tal aware­ness and in­no­va­tion as well as el­e­vated in­di­rect tax­a­tion,” he says.

An­other ef­fect would be that non-fos­sil fu­els and al­ter­na­tive en­ergy will sup­plant fos­sil fuel con­sump­tion in those very coun­tries where de­mand growth is ex­pected to be high­est. It is in­ter­est­ing to note that China is ag­gres­sively pur­su­ing the devel­op­ment of non-fos­sil fuel en­ergy sources to tackle well-pub­li­cised en­vi­ron­men­tal is­sues in some of its largest cities.

“Although LNG prices are based on Ja­panese Crude Con­sor­tium driven for­mula, which is oil in­dexed, the drop in gas prices has not been as se­vere as oil prices and there­fore, the im­pact on Qatar is not as high as in coun­tries which de­pend only on oil.”

Gopal Bala­sub­ra­ma­niam Head of Oil and Gas (Mid­dle East and South Asia) and Part­ner and Head of Au­dit KPMG, Qatar

they are well-po­si­tioned to weather such de­vel­op­ments.

The con­fi­dence of th­ese coun­tries stems from the fact that the LNG de­mand is grow­ing at a faster pace com­pared with that of oil as the IEA, in its re­port en­ti­tled “World En­ergy Out­look 2014,” says that the global gas de­mand would be around 5.4 Tril­lion Cu­bic Me­tres (TCM) in 2040.

The IEA re­port also says that gas draws level with coal as the sec­ond-largest fuel in the global en­ergy mix, af­ter oil. The main re­gions push­ing global gas de­mand higher are China, which will be­come a larger gas con­sumer than the Euro­pean Union around 2030, and the Mid­dle East.

The Min­is­ter for En­ergy and In­dus­try, HE Mo­hammed bin Saleh Al Sada, ad­mit­ted in De­cem­ber that the drop in oil prices has af­fected the price of nat­u­ral gas as both mar­kets were in­ter­con­nected.

How­ever, he said that both sup­ply and de­mand for LNG are in­creas­ing. “We be­lieve that gas has a strong ad­van­tage not only as a source of en­ergy but as a source of cleaner en­ergy. And gas de­mand is likely to be fur­ther aug­mented,” the Min­is­ter adds.

Keep­ing in mind the pro­jected de­mand and the pos­i­tive out­look for nat­u­ral gas, coun­tries like Australia are pour­ing bil­lions of dol­lars in to de­vel­op­ing LNG projects to pro­duce as much as 350 Mil­lion Met­ric Tonnes per An­num (MTPA). If they are com­pleted on time, pro­vided there is no up­ward re­vi­sion in project costs, they would more than dou­ble the cur­rent ca­pac­ity, which is less than 300 MTPA, by 2025.

The other rea­son that has been driv­ing the de­mand for nat­u­ral gas is the Fukushima nu­clear mishap in Ja­pan in 2011, af­ter which Ja­pan has shut down all other nu­clear power sta­tions and opted for LNG as fuel for power gen­er­a­tion.

Be­sides Ja­pan, the de­mand for gas has gone up con­sid­er­ably in Far East coun­tries like Malaysia, In­done­sia and Sin­ga­pore, and Qatar, as the world's big­gest LNG ex­porter, has ben­e­fited enor­mously from its sta­tus as a sta­ble, long-term sup­plier to the high-value Asian mar­ket.

An­other fact from which Qatar can take com­fort is that most of the long-term agree­ments with the Asian buy­ers will not ex­pire till 2021 and they are likely to ex­tend the agree­ments as Qatar is the low-cost LNG sup­plier at present and is flex­i­ble as far as price ne­go­ti­a­tions are con­cerned.

This is not the first time Qatar has sur­vived a scare. When the shale gas boom crowded out ex­pected LNG im­ports to the US, Qatar di­verted its sup­plies to Asia and earned a rep­u­ta­tion among its buy­ers for its re­li­a­bil­ity con­sid­er­ing the un­cer­tain­ties that may plague the up­com­ing and planned LNG projects.

On whether Qatar would be im­pacted, Awawdeh says it de­pends over what time frame oil price move­ments are mea­sured, as well as the in­di­vid­ual op­er­at­ing cir­cum­stances of each OPEC coun­try (types of crude, tech­ni­cal dif­fi­culty of ex­trac­tion, avail­abil­ity of in­fra­struc­ture, abil­ity to meet quo­tas, fis­cal strength) – Nige­ria and Saudi Ara­bia are quite dif­fer­ent.

“If there is a price cor­rec­tion to­wards the end of this year – which a num­ber of com­men­ta­tors pre­dict – then the ef­fects on some ( but not all) coun­tries will be rel­a­tively small. If we are in for a per­ma­nently low oil price en­vi­ron­ment from now on, then it

“Oil prices should in­crease to an av­er­age of $60 a bar­rel by the end of this year as de­mand from Europe in­creases be­cause of the eco­nomic stim­u­lus from the Euro­pean Cen­tral Bank.”

HE Sheikh Ahmed bin Jas­sim Al Thani

Min­is­ter of Econ­omy and Com­merce

is a ques­tion of the sur­vival of the fittest,” he adds.

How­ever, Doha Bank Group CEO Dr R Seethara­man says that the plum­met­ing oil prices will have no im­pact on Qatar's econ­omy and on the on­go­ing in­fra­struc­ture projects in the coun­try.

“The slide in oil prices will not af­fect or chal­lenge the fi­nan­cial abil­ity of Qatar as its econ­omy has been di­ver­si­fied and in­vest­ments have been made in var­i­ous non- hy­dro­car­bon sec­tors. This is ev­i­dent from Qatar's eco­nomic growth of 5.7% in Q2 of 2014 as ro­bust non-oil ac­tiv­ity out­weighed a decline in the hy­dro­car­bon sec­tor,” he says.

He also dis­misses re­ports that Qatari banks will be un­der pres­sure to fi­nance megapro­jects due to fall­ing prices. “Mar­ket liq­uid­ity is not an is­sue and we can fund the projects. We can al­ways bor­row from in­ter­na­tional mar­kets and then lend here. As long as Qatar is fi­nan­cially sta­ble, the in­ter­na­tional mar­kets will be ready to lend to us. I don't fore­see any short-term pres­sure on ac­count of oil price fluc­tu­a­tions,” he adds.

KPMG's Head of Oil and Gas (Mid­dle East and South Asia) and Part­ner and Head of Au­dit in Qatar, Gopal Bala­sub­ra­ma­niam, says that Qatar is in a unique po­si­tion amongst the OPEC coun­tries, more so among the GCC economies where oil is the main con­trib­u­tor to their GDP. How­ever, in Qatar, nat­u­ral gas is the main con­trib­u­tor with LNG pro­duc­tion at 77 MTPA. Qatar's LNG is mainly sold on long-term sales and ,pur­chase agree­ments along with spot deals.

“Although LNG prices are based on the Ja­panese Crude Con­sor­tium driven for­mula, which is oil in­dexed, the drop in gas prices has not been as se­vere as oil prices and there­fore, the im­pact on Qatar is not as high as in coun­tries which de­pend only on oil,” Bala­sub­ra­ma­niam says.

Ac­cord­ing to him, for more than a decade, with the ex­cep­tion of a few months in 2008, ev­ery oil-pro­duc­ing coun­try had a great run, with oil prices at $70-$80 up­wards, so a drop was def­i­nitely due - but not this dras­tic drop. For GCC oil-pro­duc­ing coun­tries, pro­duc­tion costs are low and to deal with the price drop, they only need to re­duce the sur­plus they make to avoid los­ing at the cur­rent price or even if it goes down to $10 per bar­rel.

How­ever, those coun­tries where the cost of pro­duc­ing oil is up­wards of $50 per bar­rel are in­cur­ring losses. “I think the OPEC coun­tries want to avoid be­com­ing marginalised, hav­ing held the supremacy on crude for so long. So it is a ques­tion of wait­ing to see who can stick it out by pro­duc­ing the same lev­els, and for how long” Subra­ma­niam says.

Very rare mo­ment

Gulf In­tel­li­gence Man­ag­ing Part­ner Sean Evers says that the world is wit­ness­ing a “very rare mo­ment” where the oil mar­ket has been be­hav­ing like any other open com­pet­i­tive lib­eral mar­ket, be it bot­tled wa­ter or sham­poo.

The prices will con­tinue to slide down­wards un­til there is a crys­tal clear in­di­ca­tion that sup­ply may be­come tight, and there could be mul­ti­ple trig­gers from Known Knowns, and Un­known Un­knowns - black swans to good old-fash­ioned ro­bust global eco­nomic growth.

“Or per­haps, con­trary to cur­rent sound bites, OPEC will in due course, i.e. June, re­turn to its his­toric role as the swing pro­ducer and cur­tail pro­duc­tion,” Evers says.

He says that the US was once the world's largest oil pro­ducer, then they al­most

“The slide in oil prices will not af­fect or chal­lenge the fi­nan­cial abil­ity of Qatar as its econ­omy has been di­ver­si­fied and in­vest­ments have been made in var­i­ous non-hy­dro­car­bon sec­tors. This is ev­i­dent from Qatar’s eco­nomic growth of 5.7% in Q2 of 2014 as ro­bust nonoil ac­tiv­ity out­weighed a decline in the hy­dro­car­bon sec­tor.”

Dr R Seethara­man Group Chief Ex­ec­u­tive Of­fi­cer Doha Bank

“It is no se­cret that the pro­duc­tion cost is much lower for OPEC mem­bers in the GCC than oth­ers. Non-OPEC de­ci­sion-mak­ing is, how­ever, also less uni­fied due to the emer­gence of ma­jor hy­dro­car­bon pro­duc­ers such as the US, whose op­er­at­ing con­di­tions are cer­tainly dif­fer­ent from those of Rus­sia.”

Salam Awawdeh Part­ner and En­ergy & Re­sources Con­sult­ing Leader Deloitte Mid­dle East “The de­ci­sion of the large­pro­duc­ing coun­tries in OPEC, specif­i­cally those with sur­plus bud­get re­serves, is to pro­tect mar­ket share rather than solely shoul­der the re­spon­si­bil­ity of re­duc­ing out­put at the gain of the mar­ginal bar­rel pro­duc­ers.”

Paul Navratil En­ergy, Util­i­ties & Min­ing Leader PwC Mid­dle East

dropped out of the top 10, and now they are back again due to in­no­va­tion and tech­nol­ogy, but he will not bet against them one day re­turn­ing back to their anonymity as a ju­nior oil pro­ducer. And the cy­cle will prob­a­bly con­tinue over the com­ing decades with more and more volatil­ity.

“But oil isn't los­ing any of its gold shiny top-kid-in-the-en­ergy-class lus­ter any­time soon. It is here to stay for prob­a­bly the re­main­der of the 21st cen­tury. So, like the mother-in-law, we all have to get used to living with her in a more and more ef­fi­cient way. Geo-pol­i­tics are not de facto an off­spring of oil, but like wa­ter mov­ing down a hill it finds its way into ev­ery crevice,” he says.

Evers says that at cur­rent prices, the oil rev­enues of the Gulf States could be QR1.45 tril­lion ($400 bil­lion) less in 2015 than in 2014 and by any mea­sure that is go­ing to sting. “But think­ing of it on a per­sonal level - how would it af­fect you if your salary was sud­denly cut in half - you would prob­a­bly dig into your bank ac­count sav­ings if you had any (Saudi, Qatar, the UAE, Kuwait), but if you don't have any sav­ings ( Venezuela, Nige­ria, Iran) then you are go­ing to be in deep pain and mak­ing rapid and deep cuts to gov­ern­ment ex­pen­di­ture,” he points out.

He also feels that OPEC need not cut pro­duc­tion. “Why should they? Act­ing as the world's oil price con­troller has seen their global mar­ket share rapidly decline over the last decade from 40% to 30% – as the say­ing goes, don't keep bang­ing your head against the wall and ex­pect a dif­fer­ent re­sult. Some­times you have to try some­thing dif­fer­ent to get the re­sult you de­sire,” Evers adds.

Fu­ture per­fect

Hong Kong-based Bern­stein Re­search says that the oil in­dus­try is fac­ing a chal­lenge in a gen­er­a­tion in 2015, although prices are ex­pected to re­cover and cap­i­tal ex­pen­di­ture cuts are likely to be smaller in Asia Pa­cific than else­where around the globe.

Bern­stein ex­pects oil prices to re­cover later this year as sup­ply and de­mand out­side OPEC re-bal­ances, but the an­a­lysts are not rul­ing out a near-term fall to­ward the his­tor­i­cal cyclic bot­tom, which they say is the mar­ginal cash cost of $50 per bar­rel.

Bern­stein es­ti­mates a re­cov­ery would re­quire non- OPEC sup­ply growth to drop be­low 1% and global de­mand growth to re­cover to more than 1.5%. Although there are signs of re-bal­anc­ing, with dou­ble digit capex cuts and ris­ing SUV sales in North Amer­ica, ev­i­dence of a tight­en­ing of sup­ply and de­mand re­main am­bigu­ous, Bern­stein adds.

Navratil says that the oil price will find its floor – a com­bi­na­tion of sup­ply/de­mand eco­nomics and the mo­men­tum cre­ated by the ac­tive play­ers in the traded global oil mar­ket.

“Once this hap­pens, it is widely thought that the oil price will re­turn to a level that is more re­flec­tive of the true cost of the mar­ginal bar­rel. That point will largely be in­flu­enced by the amount of pro­duc­tion which does not get de­vel­oped, is moth­balled or shut in, and is fi­nan­cially stranded as a re­sult of the cur­rent price en­vi­ron­ment. The more pro­duc­tion is af­fected, the more up­wardly skewed the price re­cov­ery will be,” he says.

Subra­ma­niam is also of the view that small-time oil pro­duc­ers with high pro­duc­tion costs will even­tu­ally exit as they can­not con­tinue to in­cur cash losses, and this will re­sult in a grad­ual in­crease in prices

Source: EY as­sess­ments of data from mul­ti­ple sources

Source: EIA

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