[Editor's note: A version of this story appears in the June 2020 edition of E&P. Subscribe to the magazine here. It was originally published June 1, 2020.]  

Economies of the Middle East region, which rely heav­ily on oil, will be severely affected if oil prices do not bounce back in the short term. With the impact of the historic market crash echoing across the region, coun­tries are struggling to offset losses from a key source of national income. Some nations like Saudi Arabia, the United Arab Emirates (UAE) and Kuwait are relying on foreign currency reserves while anticipating higher oil prices to sustain government spending and social pro­grams. However, countries like Iraq face the added threat of possible social unrest if oil prices remain at current levels, according to a recent Forbes report. The country is planning “painful cuts in social benefits relied on by mil­lions of government workers,” the report stated.

Several E&P projects also have been put on hold. According to GlobalData, the low-price environment will put E&P projects due to take final investment decision in 2020 at an elevated risk of deferral as governments are introducing cost-cutting mea­sures. Several projects are already facing operational interruptions and delays, albeit varying in severity.

“The scale and breadth of the pandemic is so severe that it is being felt across the globe, and the Middle East is not insulated from this,” Arindam Das, head of consulting with Westwood Global Energy, told E&P. “Oil companies in the Middle East are cutting down production, canceling rig contracts and trying to understand the output levels that could rebound oil prices…the impact is definitely being felt.”

Saudi Arabia

Despite efforts by Saudi Prince Mohammed bin Salman to diversify the economy by investing in tourism and enter­tainment, the country continues to rely heavily on oil, with 60% of the nation’s GDP directly related to oil revenues. Saudi Arabia recently announced additional production cuts of 1 MMbbl/d, starting June 1, in a bid to support oil prices and stabilize the market. Following the announce­ment, UAE and Kuwait also announced supply cuts.

Even though Saudi Aramco had to slash its capex budgets to protect its balance sheet, analysts expect the national oil company is strongly positioned to weather the market collapse and will proceed with strategically important upstream projects due to low production costs and one of the lowest costs per barrel within the industry.

“Due to its heavy dependence on the crude market, it’s not a surprise to anyone that they are being challenged in the current market conditions,” Das said, adding that even though foreign reserve funds will be instrumental in pro­viding some cushion to Saudi economy in the short term, authorities are scrutinizing public spending, trying to find areas where cuts can be made, as recently indicated by the Saudi finance minister.

Iraq

Numerous industry reports confirm that Iraq will be one of the hardest hit due to low oil prices. In fact, 90% of the government’s revenue comes from oil, which is used to support a payroll of more than 4 million workers as well as payments to pensions and welfare for the poor.

According to a report by AP, the oil-dependent state had been counting on revenues from oil prices at $56/ bbl to fund “badly needed development projects and the bloated public sector.”

However, oil prices between $20/bbl and $30/bbl and Iraq’s compliance with OPEC to cut over 1 MMbbl/d from production in May and June have added to the gloomy prognosis of the already depressed economic conditions in the country.

Basra Gas Co., a joint venture between the Iraqi gov­ernment, Shell and Mitsubishi, has put multiple project contracts on hold due to low oil demand. In addition, due to staff reductions surrounding fears of the spreading pan­demic, Petrochina has reportedly halved production from Iraq’s Halfaya Field while Petronas has halted production completely at the Garraf oil field, according to GlobalData.

Qatar

Qatar’s reliance on gas production provides the country some degree of a safety net due to the strong long-term outlook of gas, Das explained. The country, which exited OPEC in 2018, is known to be operationally flex­ible, adjusting maintenance schedules or keeping a few ships as floating storage. Qatar plans to increase LNG output by about two-thirds while cushioning the industry against the recent fall in oil demand, Oxford Business Group stated in a new report.

State-owned Qatar Petroleum (QP) said although the company is looking at opportunities to reduce its operating costs and capex, it that would not impact the company’s major projects. “QP is in a very good position financially. We have reduced our debt tremendously over the past years. We can weather the storm very easily,” QP’s CEO and President Saad Sherida Al-Kaabi told Reuters.

QP also announced that the coronavirus turmoil would not stop LNG expansion abroad, adding that it plans to move forward with both foreign and domestic expansion despite the market downturn caused by the pandemic. However, QP has postponed the start of pro­duction from its new gas facilities until 2025 following a delay in the bidding process, but the company has no plans of downsizing the North Field expansion—the world’s largest LNG project.

“We are moving full steam ahead with the North Field expansion. There is absolutely no hesitation on that. I think the world still needs this gas with the cancellation of a lot of projects and companies reducing capital expenditure left and right due to the situa­tion,” Al-Kaabi stressed.

He added that the Golden Pass LNG terminal in Texas, in which QP is majority owner, is on schedule, adding that none of the current projects have been “taken off the table.”

UAE

The falling oil prices have appeared to dampen sour gas ambitions of the UAE’s Abu Dhabi National Oil Co. (ADNOC), which has delayed several projects and canceled contracts in an effort to scale down costs. In mid-April, ADNOC terminated $1.65 billion worth of engi­neering, procurement and construction contracts awarded in February to a Petrofac-led group for an ultra-sour Dalma Gas development project in northwest Abu Dhabi. The project was scheduled for completion in 2022.

The Ghasha ultra-sour gas concession, which lies within Dalma, is jointly held by ADNOC and four international oil company shareholders, of which Eni holds the larg­est stakes. In response to the market downturn, Eni had promptly announced plans to cut 2020 capex by 25%, severely impacting new upstream projects. This isn’t good news for the development of the wider Ghasha and Hail fields either, which were set to produce 1 Bcf/d by 2025.

Although the company is identifying opportunities for cost optimization, its corporate strategy currently remains unchanged. The state-owned enterprise also said in an offi­cial statement that it would continue to invest responsibly to deliver on its 2030 smart growth strategy during the mar­ket downturn. However, the ability of ADNOC to steer the downfall, like many other producers in the region, depends on how prolonged the oil slump will be.


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