Energy year in review: Middle East oil majors gain optimism

A rise in prices means many see an improving environment that will prove conducive for return of investment

An Aramco oil refinery in Dahran, Saudi Arabia. Regional oil companies are looking to develop their downstream sectors. Getty Images

If 2016 was the year of reckoning for the oil and gas industry, particularly in the Middle East, 2017 has been one of checks and balances and by the early summer optimism was returning.

“We believe that continuation with the same level of cuts, plus eventually adding one or two small producers … will be more than adequate to bring the five-year balance to where they need to be by the end of the first quarter 2018,” Saudi Arabia’s energy minister Khalid Al Falih told a news conference in Riyadh in May.

Since then, the price of Brent has more or less performed better, steadied by the monthly quota of cuts implemented by members of Opec and non-members, led primarily by Russia.

Prices averaged around US$50 for most of the year, until the fourth quarter when it surged just above $64 towards the beginning of November and mid-December. The trigger points being the fallout over Kurdish referendum that saw supplies disrupted from one of the Middle East’s oldest oilfields at Kirkuk as well as disruptions to a North Sea pipeline.

However, for Arabian Gulf producers the prices were good enough to plan some radical streamlining of their national oil companies’ strategies and push for privatisation.

The world’s biggest oil company Saudi Aramco was said to have hired the investment banks HSBC, JP Morgan and Morgan Stanley to prepare for an initial public offering of 5 per cent shares of its estimated $2 trillion valued company in 2018. The oil juggernaut is mulling a dual listing, one on the Saudi Tadawul exchange, which opened up to qualified foreign investors in 2015 and one overseas - with New York, London, Hong Kong or even a private placement considered as options.

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Meanwhile, the UAE's Abu Dhabi National Oil Company (Adnoc), which announced a partnership model earlier in the year to engage its biggest consumers China and Japan as stakeholders in upstream, mid and downstream segments of the business, has moved ahead of its Gulf peers in terms of privatisation. In December, it floated 10 per cent of its retail business, Adnoc Distribution, through which raised Dh3.1 billion.

In 2018, the UAE oil major also plans to set up an oil trading unit, following the lead of Aramco, Petroleum Development Oman as well as Iraq's State Organisation for Marketing of Oil, which have all set up such entities to boost revenues.

In the downstream sector, Saudi Aramco joined hands with Saudi Basic Industries (Sabic) - the region's largest listed firm and the fourth-largest chemicals company in the world - to build a $20bn oil to chemicals plant on the eastern coast of the kingdom.

Bahrain, the region’s smallest oil and gas player, has also finally awarded contracts for the planned $4.2bn expansion of its sole refinery at Sitra, which will raise its refining capacity up to 360,000 barrels a day (bpd) with plans also being considered for an aromatics facility to be built with Kuwait’s Petrochemical Industries Company.

However, not all are convinced that the climate for investment is ripe enough yet in the regional energy industry.

Speaking at the region’s largest oil and gas gathering Abu Dhabi International Petroleum Exhibition and Conference (Adipec), the UAE’s energy minister Suhail Al Mazrouei noted that an oil market that saw prices dip below $40 a barrel and rise above $60 a barrel was “not healthy” for investment.

“We’re hoping that next year we will have less volatility in the market and the prices will be fair for investments to return,” he said.

The Gulf's big producers are, however, prepared to spend big next year. Saudi Aramco has unveiled a spending programme of $414bn for the next decade as it looks to bring more gas online from its eastern fields. The UAE has also sanctioned a capex programme of $109bn to be spent over the next five years in unlocking some of its sour gas reserves as well as acquiring downstream assets abroad - a path Kuwait Petroleum Corporation has pursued in recent years.

An emerging trend from 2017 that is likely to be carried over into the new year is the growing role for Chinese and Asian producers in the upstream sector. Abu Dhabi awarded an 8 per cent stake in Adnoc Onshore to China National Petroleum Corporation (CNPC) and a further 4 per cent to China Energy. A CNPC subsidiary was also awarded an engineering contract to expand production from the onshore Bab field.

“Many of the players in the industry, including Asian players would like to position themselves in high reserve/low cost areas of the Middle East despite the rising geopolitical tensions,” said Bassam Fattouh, the director of the Oxford Institute for Energy Studies.

"Of course, other players have diverted most of their capital to the short investment cycle in the US, especially at times when many are concerned about peak demand and stranded assets. In the longer-term, three areas would matter the most in terms of oil production growth: the Gulf, US shale, and Russia and these areas will continue to attract investment,” he added.

However, the big story in the sector is the Aramco floatation. National oil companies in the region will be eyeing the IPO and its outcome will probably shape the region’s energy industry for good.