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Preparing for a turbulent flow – Part 1

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According to the Word Bank, the GDP of the 20 main hydrocarbon producing countries across the Middle East and Africa plunged by 12.9% to US$3.25 trillion in 2015. With crude oil and natural gas prices showing no signs of recovery, this figure could shrink further this year.

The Middle East took the bigger hit as its main hydrocarbon exporters reported a combined 14.2% decrease in their economies, from US$2.289 trillion in 2014 to US$1.964 trillion last year. Saudi Arabia’s economy shrinking shrank by 14.3% to US$646 billion. Iran reduced 7.4%, from US$425.3 billion in 2014, to US$393.7 billion last year.

The US Energy Information Administration (EIA) has forecast Brent crude to trade at an average of US$43.73/bbl, after plunging from US$98.89/bbl in 2014 to US$52.32 in 2015.

Kuwait, Iraq and Qatar suffered the biggest losses. Kuwait’s GDP plunged by over 31% from US$163.6 billion to US$112.8 billion, while Iraq’s war-torn economy lost nearly a quarter of its value, from US$223.5 billion to US$168.6 billion. Qatar’s LNG-driven economy shrank by 20% to US$167 billion.

The World Bank was unable to provide any data on Syria, which may have the world’s most devastated economy due to ongoing civil wars.

Africa’s 12 main hydrocarbon economies decreased by a combined 10.9%, from US$1.447 trillion in 2014 to nearly US$1.29 trillion last year. Nigeria dragged down the average as its economy shrank by 15.4%, from US$568.5 billion in 2014 to US$481 billion in 2015. Egypt reported a 9.7% surge, to US$330.1 billion, thanks to its more diversified base.

Algeria and Angola were also hit by the collapse in crude prices. Algeria’s GDP was cut by 21.9% to US$166.8 billion, while Angola’s downsized by nearly 20% to US$102.6 billion.

Of the two regions, the Middle East faces the greater threat of further economic contraction, as it’s more dependent on hydrocarbon exports and is becoming more politically unstable, what with violence and increased activities by Islamic terror groups.

Rystad’s estimate of Middle East oil reserves

Rystad Energy has delivered more bad news for the Middle East. It believes the region’s oil reserves are much smaller than reported. Rystad’s estimates could challenge the annual data provided by BP, which has been the industry reference for the state of the world’s oil and gas reserves.

According to BP, Venezuela has the world’s largest oil reserves of 300 billion bbls, with Saudi Arabia in second with 267 billion. Rystad believes Saudi’s reserves are 20% smaller at 212 billion bbls, and that Venezuela has 95 billion bbls of recoverable crude.

Rystad also reported lower reserves than BP for Iran (143 billion vs 157 billion bbls), Iraq (117 billion vs 143 billion bbls) and Kuwait (52 billion vs 101 billion bbls).

The company said it distinguishes between the reserves data in existing fields, new projects and potential reserves from recent discoveries and in yet undiscovered fields.

Low oil prices fuelling political instability

In a survey of the Middle East and Central Asia, the IMF said that political upheaval and socio-economic turmoil in the regions could worsen amid the “exceptionally challenging policy environment,” caused partly by low oil prices.

Persistently low oil prices have not only reduced economic growth, but also opened up large budget and trade deficits, and increased financial stability risks throughout the regions.

Brent crude now trades at less than US$50/bbl after averaging more than US$100/bbl for several years until 2013. The IMF expects this to fall to US$36 before recovering to US$42 in 2017 and US$51 by 2021.

As a result, the combined economic growth of the six Middle Eastern countries and Algeria is forecast to slow to 2.1% this year, down from 3.1% last year and 3.6% in 2014. The 60% collapse in oil prices has turned the countries’ fiscal and external surpluses into deficits, and has sharply raised their unemployment and financial sector risks.

The survey also warned that Europe and Asia are at risk from “significant spillovers [from] the proliferation of conflicts in the Middle East and North Africa (MENA) region.”

Offering a contrarian view, Rystad said the economies of the Middle East are far from headed for collapse. The firm’s Senior Partner and Chief Analyst, Per Magnus Nysveen, predicts the region’s economies “will soon recover and then remain strong for several decades as oil prices will have to rise.”

He said the oil price recovery will be fuelled by the lack of investment in non-OPEC countries, along with the failure of companies to fully replace their global reserves over the last years.

OPEC export revenues hit 12 year low

The decline in GDP figures of the leading oil-dependent countries is reflected in their lower export revenues, according to the US EIA.

For 2016, export revenues of the OPEC will plunge to a 12 year low of nearly US$341 billion, the agency predicts. This coincides with the agency’s forecast for the Brent crude price to fall to a 12 year low of US$43.73/bbl in 2016, compared with US$38.26 in 2004.

After reaching a peak of US$921 billion in 2012, when Brent averaged US$111.63/bbl, OPEC’s export revenues have been declining. The Middle East, which holds over 47% of the world’s oil reserves, accounted for 75% of OPEC’s export earnings last year.

The EIA said that Saudi Arabia remained the leader, despite a 47.4% collapse in export earnings, from US$247 billion in 2014 to US$130 billion last year. While Iraq was second with US$57 billion, Kuwait was third, despite a 50% fall in earnings. Iran, whose rising exports contributed to the global supply glut and kept oil prices down, earned US$27 billion last year.

Nigeria, Algeria, Angola and Libya earned a total of US$80 billion in 2015, down 49% from US$158 billion in 2014.


Despite a 13% rise in oil production, Iraq’s economy decreased by 2.4% last year as the price of Brent crude plunged from approximately US$93.26/bbl in 2014 to US$52.32 last year.

The IMF is lending Iraq US$5.4 billion. This three year loan is directed at helping to protect the country’s most vulnerable population. However, despite the domestic political turmoil, Iraq has raised its oil production to average 4.4 million bpd in the first five months of 2016.

For 2016, the IMF expects Iraq to export 3.6 million bpd of its 4.2 million bpd production. Crude export earnings are projected at just US$45.3 billion.

Last year, Iraq earned a total of over US$52 billion from approximately US$47.5/bbl for the 3 million bpd of crude exported. This represented a sharp drop from 2014’s export revenue of US$88.5 billion, when it collected an average US$97.5/bbl on the 2.5 million bpd sold.


Despite being freed from most trade sanctions this year, Iran may struggle to lift crude oil production beyond 500 000 bpd due to a combination of “technical and political hurdles,” said Moody’s Investor Service.

Iran could be fully re-admitted into the global economic system after being turfed out for several years for allegedly developing nuclear weapons under the cover of a nuclear energy programme. Early this year, the International Atomic Energy Agency (IAEA) reported that Tehran had met key conditions under an international agreement to prevent nuclear weapons development.

With the sanctions issue almost resolved, Iran now faces the unexpected threat of prolonged weak energy prices, which have dampened investor interest and dried up the supply of capital for new oil/gas projects.

According to Moody’s associate analyst, Waheed Sheikh, Iran will struggle to attract the estimated US$150 billion - US$200 billion of capital needed to modernise its ageing oil infrastructure. Iran’s oil production fell from 3.8 million bpd in 2010 to 2.8 million bpd in 2015, according to the EIA. Meanwhile, its domestic energy consumption has surged 52% from 2004, to 252 million t of oil equivalent in 2014.

With the industry reduced to operating in survival mode, Iran’s re-opening to the world could not have come at a worse time. Total and Statoil have issued nominal statements of interest, while Royal Dutch Shell said it is still “too early” to go back.

ExxonMobil and Chevron Corp. will take their cue from the US government, which is insisting that Iran must still meet all conditions related to terrorism and ballistic missile development.

Without the injection of international capital and expertise, Sheikh said Iran will not be able to develop the oil and gas reserves to support long-term exports.

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