The fortitude of Gulf national oil companies’ (NOCs) ongoing transformation into fully-fledged international operators may be tested this year.
But any suggestion that a rise in oil prices beyond the $40s/bl range of late-2016 to today’s $50s/bl range and higher would trigger NOCs’ retreat from their quest for global integration is premature.
After half a century of letting international oil companies (IOCs) play the role of fixer, NOCs are now approaching negotiating tables with more knowledge and independence than ever before. Their steps—sometimes leaps—into new territory mark their biggest overhaul since the days of nationalization in the late 1970s.
The extent of their resolve in this is demonstrated by what they have faced so far. Gulf NOCs’ performance has remained on track against a backdrop of a “lower for longer” oil price era since mid-2014, with bearish sentiment deepening when oil prices dipped to a 12-year low in January 2016.
Alongside this is the U.S. shale oil and gas revolution, corporate restructurings, shortened payrolls and security issues in the wider Middle East.
But the hurdles are not over U.S. production continues to be a challenge and Gulf NOCs must also consider how the Vienna Agreement, the first OPEC-non-OPEC agreement to cut supply in 15 years, will fare in the remainder of the year.
Plus, Eurasia Group expects 2017 to be the most politically volatile since World War Two. For example, what impact will President Trump’s ‘America First’ policies have on state-owned energy giant Saudi Aramco’s ability to flex its muscle as it gets ready to take control of the U.S. refinery, the 600,000 b/d Port Arthur facility?
Political jockeying in China up to September’s election for the new Party of Congress could also have an impact on Gulf NOCs, as coveted Asian importers top their client list.
Producers have spent significant energy protecting their share of markets in the East, and any threat to the sustained health of those markets is a major risk for the newly commercial NOCs.
Indeed, investors have been voicing concerns that could be a Beijing-centered banking crisis in the next few years. Guangzhou-based fund ShoreVest Capital Partners estimated in late-March that China has around $3 trillion in distressed debt. Ratings agency S&P Ratings expects China’s high GDP to stave off a crisis this year, but the outlook remains negative and unsustainable.
Many Gulf NOCs have already made considerable headway and gotten a firm foothold as “Gulf Majors”, including Saudi Aramco, Abu Dhabi National Oil Company (ADNOC) and Kuwait Petroleum Corporation (KPC). Each is keen to integrate a global view into their operations.
Saudi Aramco’s debut IPO for example, has been penciled in for late 2018 and the 5% stake could lead to the world’s biggest IPO at $100 billion—if it proceeds. In late-March, Riyadh diluted some of the market’s doubt by slashing the income tax paid by the energy giant to attract investors.
Most importantly perhaps is that the IPO will force the Kingdom to start being more transparent around data on its oil and gas reserves.
Kuwait also plans to list a power and water company this year, with the two OPEC members’ efforts likely to encourage their neighbors to take their own blueprints more seriously. There is likely to be a recovery from the annual 64% decline, to $1.7 billion, in the value of IPOs across MENA last year, according to data compiled by Bloomberg.
Gulf NOCs’ downstream prowess has also helped to establish the region as the world’s new refining sweet spot in less than a decade. Additional capacity from the Middle East and Asia Pacific is expected to account for 13m b/d of the total 19.5m b/d of global capacity additions needed by 2040—a staggering 67%. Amidst a plethora of refinery projects, two stand out.
The U.A.E.’s Ruwais refinery has ramped up capacity by up to 900,000 b/d and Kuwait’s 615,000 b/d Al Zour refinery will likely come online by 2020. Both are amongst the world’s top ten largest such facilities.
Gulf NOCs’ new mindset is critical to ensure energy and economic security as energy demand soars, with BP Energy Outlook anticipating a 49% growth in the Middle East’s energy consumption by 2035.
Such growth is hardly surprising considering the MENA population nearly quadrupled from around 100 million in 1950 to around 380 million in 2000—a faster growth rate than any other major world region, according to the UN.
Ignore Gulf NOCs’ transformation at your peril. Their path bears a strong resemblance to the international emergence of the Chinese majors a decade ago—now among the world’s most influential players.
Should Gulf NOCs navigate this year’s political and economic minefields, they too will secure their spot at the top of the global energy hierarchy.
Jonty Rushforth, Director, Oil and Shipping Price Group, S&P Global Platts