MIDDLE EAST ENERGY SITUATION AND OUTLOOK IRAQ ENERGY FORUM 2017 2017 1
OVERVIEW OF GLOBAL ENERGY MARKETS 2
Energy exports/imports (million tonnes) 1990 1995 2000 2005 2010 2014 2015 2020 2025 2030 2035 SHIFTING DEMAND: NEW ORTHODOXIES 1. North America will become largely self-sufficient in oil But what about impact of low prices on shale? 2. OECD demand is in permanent decline But some recent revival, particularly in US 3. China is the key driver of demand Import growth driven by China and other emerging economies Saudi Arabia, Angola and Russia top crude suppliers to China 4. India is the bright spot for demand Yes, but still small compared to China US TO BECOME ENERGY EXPORTER 400 200 0-200 -400-600 -800-1000 SHARE OF GLOBAL DEMAND TO EMERGING MARKETS 40% 35% 30% 25% 20% 15% 10% 5% 0% US China India China Emerging excl. China Source: BP Energy Outlook 2035 3
Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Mb/d Mb/d WORLD LIQUID FUELS PRODUCTION AND CONSUMPTION BALANCE 98 96 94 92 90 88 86 84 82 3 2.5 2 1.5 1 0.5 0-0.5-1 -1.5 Implied stock change and balance (RHS) World liquid production World liquid consumption Global oil inventory builds in 2015 averaged 2.1 million b/d Inventory builds expected to slow to average 1.4 million b/d in 2016 and 0.4 million b/d in 2017 Balance reached around Q3-Q4 2017? Source: EIA 4
Jan 2013 Mar 2013 May 2013 Jul 2013 Sep 2013 Nov 2013 Jan 2014 Mar 2014 May 2014 Jul 2014 Sep 2014 Nov 2014 Jan 2015 Mar 2015 May 2015 Jul 2015 Sep 2015 Nov 2015 Jan 2016 Mar 2016 Crude oil production outage (Mbpd) Brent oil price ($/barrel) CONTINUING HIGH LEVEL OF SUPPLY DISRUPTION 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 140 120 100 80 60 40 20 0 Iran Libya Nigeria Indonesia Iraq Kuwait Saudi Arabia Other Non-OPEC Brent Oil Price Source: EIA; Qamar research 5
OPEC DEBATE AND POLICIES 6
Price DYNAMICS OF INTRA-OPEC COMPETITION DEMAND SUPPLY High-cost producers enter OPEC cuts Supply, demand 7
OPEC CHALLENGES 1. Rise of shale production - higher prices will encourage shale to rebound 2. GCC production response - nobody willing to cut production 3. Return of Iran 4. Growing Iraq output SUPPLY RISE OF SHALE PRODUCTION As long as crude oil prices are around the breakeven range of US shale oil, then US oil production growth will be slow. Production will likely decline over the long term, which in turn will have a positive impact on oil prices. Source: Rystad Energy 8
VIEW ON OIL FROM OIL EXPORTING NATIONS 9
1/14 3/14 5/14 7/14 9/14 11/14 1/15 3/15 5/15 7/15 9/15 11/15 1/16 Oil-directed rigs CORE MIDDLE EAST OIL DRILLING REMAINS STEADY 350 300 250 200 150 100 Yemen Saudi Arabia Qatar Oman Kuwait Iraq UAE 50 0 Source: Baker Hughes; OPEC 10
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 Liquids production (kbpd) ENERGY SUMMARY Iran s new upstream investment contract gets government approval Many other sanctions unrelated to the nuclear accord remain in effect Production of 3.814 Mb/d in February 2017 compared with 2.944 Mb/d in January 2016 Several MOUs with international energy companies (Shell, Saipem, Wintershall, Total ) Iran to start gas pipeline exports to Basra, Iraq (25 million cubic meters/day) Oman and Iran finalise gas pipeline route Strengthening energy ties with India and other Asian countries IRAN OIL PRODUCTION 5,000 4,000 3,000 2,000 1,000 Sanctions Relatively rapid recovery 0 Of which onshore Of which offshore Source: Qamar research 11
Fiscal Breakeven Oil Price BREAKEVEN OIL PRICE AND PRICE DECLINES MENA Oil Exporters $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 2009 2010 2011 2012 2013 2014 2015 2016 Kuwait Qatar UAE Saudi Arabia Oman Bahrain Libya Iraq Algeria Iran Middle Eastern countries have the lowest price at $25 per barrel Source: IMF 12
LIKELY RESPONSES TO LOWER PRICES 1. Budget cuts white elephant projects 2. Drawing down foreign assets 3. Payment delays 4. Domestic & foreign debt issuance 5. Subsidy cuts 6. Privatisation of non-core assets 7. Taxation (introduction of 5% VAT in 2018) UNLIKELY RESPONSES 1. Cuts to security/defence spending 2. Cuts to planned oil & gas capacity expansion 3. Currency devaluation 4. Privatisation of crown jewel or strategic assets (but see Aramco!) RESPONSE DEPENDS ON POSITION Bahrain Kuwait Oman Qatar Saudi Arabia UAE Iran Iraq Fiscal reserves Budget breakeven Revenue diversification Subsidy reform Economic diversification Oil sector maturity 13
SUBSIDY REFORM FOR MENA EXPORTERS 1. UAE Diesel unsubsidised for some years Gasoline prices raised to world market levels in June 2015; adjusted monthly Electricity, water price rises in Dubai, Abu Dhabi 2. Saudi Arabia: Saudi Arabia cuts electricity, fuel, gas subsidies in Dec. 2015 3. Qatar: hiked utility prices; Jan 14, Woqod announced a 30% hike in gas prices, causing unleaded petrol to reach $0.36/litre 4. Iran December 2010 reform largely eliminated subsidies for gasoline, diesel, natural gas, electricity, water Compensated by cash payments Little political opposition; largely successful at first But now undermined by falling value of rial; domestic inflation; non-payment of bills; government deficit 5. Bahrain, Oman: Increases in natural gas prices to industry Oman cut fuel subsidy in 2016-68.7% opposed the move 6. Yemen: disastrous, hasty price increases led to collapse of the regime 7. Kuwait: Diesel, kerosene price rises introduced then withdrawn; Ministry of Finance proposed slashing fuel and electricity subsidies - expected to face stiff opposition in parliament 8. The others: Iraq, Algeria, Libya.? 14
ARAMCO IPO Idea floated by Prince Mohammed bin Salman Several trillion $ value? Probably not Listing up to 5% of stock within the next year Official value ~$2 trillion; our estimate (with tax cut) ~$1.4 trillion Many questions on valuation, listing location, disclosure (reserves) and politics Part of driving economic reform Diversification & growth, more than just revenues SAUDI ARABIA 15
CONCLUSIONS Global oil & gas competition Resource abundance Market rebalancing? Political obstacles OPEC Global economic shifts The pivot to Asia Middle East response Economic challenges and reform Threats to stability New opportunities 16
CONTACT DETAILS Robin Mills, Fellow, Iraq Energy Institute CEO, Qamar Energy, Dubai, UAE robin@qamarenergy.com +971 4 364 1232 17