Bassam Fattouh, the director of the Oxford Institute for Energy Studies, talks about the outlook for the oil and gas industry.
What would be the likely strategy from Gulf Opec towards incoming US shale?
There is no clear or specific Opec strategy towards US shale. Opec could decide to test US shale response further on the upside, but the response is more or less predictable: if Opec pushes for a higher price, it needs to accommodate higher production from US shale to support prices. US shale is not going anywhere. Opec has to live with a flexible source of supply, which has shifted to the middle of the cost curve, whose productivity will continue to improve, and willing to hedge.
Do you see any likelihood of continued cuts through 2019?
Opec/Non-Opec have set a clear objective of bringing down the level of inventories towards their five-year average. If this is not met in 2018, they could decide to extend the cut in 2019. I think Opec would avoid a repeat of the excessive stock build we saw in the last few years and they may have to continue to manage their output to keep the market balanced depending on market conditions. The market is concerned about Opec exit strategy after the expiry of the deal. There may be no such strategy.
Can compliance from Opec and particularly non-Opec continue in 2018?
So far, Opec compliance has been very high and this will most likely continue for the simple reason: Saudi Arabia, which has undertaken the largest cut so far and one of the few countries that can increase production substantially, is determined to bring down inventories and keep prices supported at current levels driven in part by its higher revenue requirements. Other countries like Venezuela will continue to see their output decline with or without the agreement; others like Iraq will continue to produce above their quotas, but the potential to increase from here is limited in the short-term without attracting additional foreign investment.
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Do you see investment returning to the oil and gas industry in 2018?
Investment in the oil and gas sector in the [Arabian] Gulf region did not stop and most NOCs [national oil companies] have ambitious plans to increase productive capacity and to diversify into refining/petrochemicals.
Can we expect acceleration of privatisation efforts by Gulf NOCs in upstream and downstream sectors?
I doubt whether we will see privatisation efforts accelerate in the upstream sector. Other NOCs in the region will be looking carefully at the IPO of Saudi Aramco and will be asking themselves whether they want to follow on a similar path.
What is the outlook for downstream sector activity in the region? Are Gulf NOCs likely to acquire refining and chemicals assets abroad in 2018?
Despite ambitious plans to diversify away from oil, downstream integration through the full value chain by investing in refining and petrochemicals and being closer to consumers will continue to be an integral part of Gulf exporters’ strategy as this is where they see their main source of their comparative advantage. However, there is a pressure on the oil and gas sector to show that it can generate value, establish linkages with rest of the economy, generate jobs, and play a constructive role in diversifying the economy through further extension of the value chain. This implies that local content policies will become more important.
