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 $40 per barrel range of late 2016 to today’s $50 per barrel 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 the 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 nationalisation in the late 1970s.
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 shale oil and gas revolution in the US, corporate restructurings, shortened payrolls, and serious security issues in the wider Middle East.
There still remain some hurdles, however. US production continues to be a challenge, and Gulf NOCs also have to 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 year since World War II.
A glance at the calendar quickly reveals why. The surprise results of the US election saw US President Trump take his seat in the Oval Office in January this year, and the UK activated Article 50 in late March to move towards Brexit. 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 largest refinery in the US, the 600,000 barrels per day (bpd) Port Arthur facility? And will major liquefied natural gas (LNG) exporters in the Gulf region be able to protect their dominant role in the UK’s LNG import market amid competition from across the Atlantic and Russia?
Political jockeying in China up to September’s election for the new Party of Congress could also have an impact on the Gulf NOCs’ playbook, as coveted Asian importers top their client list. The producers have made considerable efforts to protect 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 the stars could align for a Beijing-centered banking crisis in the next few years. Guangzhou-based fund, ShoreVest Capital Partners, estimated in late March that China has around $3tn in distressed debt. Ratings agency, S&P Ratings, expects China’s high gross domestic product (GDP) to stave off a banking crisis this year, but emphasises that the outlook remains negative and unsustainable.
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Many Gulf NOCs have already made considerable headway and achieved 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 its operations. Saudi Aramco’s debut initial public offering (IPO), for example, has been penciled in for late 2018, and the 5% stake could lead to the world’s biggest IPO at $100bn – 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 important, perhaps, is that the IPO will force the kingdom to start removing bricks from the fortress of secrecy it has constructed 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 neighbours to take their own blueprints more seriously this year.
There is likely to be a recovery from the annual 64% decline, to $1.7bn, in the value of IPOs across the Middle East and North Africa (MENA) last year, according to data compiled by Bloomberg.
Gulf NOCs’ downstream prowess has also helped 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 13 million bpd of the total 19.5mn bpd of global capacity additions needed by 2040 – a staggering 67%.
Amid a plethora of refinery projects, two stand out. The UAE’s Ruwais refinery has ramped up capacity by up to 900,000 bpd, and Kuwait’s 615,000 bpd Al Zour refinery will likely come online by 2020. Both are among the world’s top 10 largest such facilities.
Gulf NOCs’ new mindset is critical to ensuring 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 100mn in 1950 to around 380mn in 2000 – a faster growth rate than any other major world region, according to the United Nations.
Ignore the transformation of Gulf NOCs 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.
