Ali Aissaoui, Senior Consultant Economics & Research |
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Tel: +966 13 859 7138 Mobile: +966 50 580 1584 Email : aaissaoui@apicorp-arabia.com www.apicorp-arabia.com |
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Ali Aissaoui, Senior Consultant Economics & Research |
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Tel: +966 13 859 7138 Mobile: +966 50 580 1584 Email : aaissaoui@apicorp-arabia.com www.apicorp-arabia.com |
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I have just returned from Riyadh where I attended as a panelist the IEA-IEF-OPEC Symposium on energy outlooks. This was followed by my participation as a discussant in a Thought-Leaders’ Roundtable co-sponsored by the IEF and KAPSARC. Both events were aimed to contribute towards a better understanding of developments that are shaping oil markets and investment trends.
As usual the main part of the Symposium was intended to further explore the areas of consensus and divergence between the energy outlooks regularly released by the IEA and OPEC. In practice, this takes a form a “beauty pageant” between the two institutions. However, for the first time since initiated in 2011, this exercise was complemented by an independent review and benchmarking prepared by Duke University Energy Initiative that greatly enriched the discussion. The Symposium also addressed the many uncertainties stemming from current energy outlooks and how likely they are to affect investment decisions.
The thought leaders’ roundtable discussion, which adopted the same format than the symposium, focused on oil market volatility, investment and spare capacity. In this latter respect, the key question explored was whether US shale oil can act (bottom up) to substitute for (top down) output regulation by OPEC and Saudi Arabia. Performing the role of swing producer assumes that the atomized independent US shale oil producers can offer global market the needed spare capacity. The corollary is that, provided US crude oil exports are no longer prohibited, world oil prices would be mainly decided by the marginal cost of producing shale oil.
As far as I am concerned I covered OPEC investment outlook. More precisely, I attempted to answer the two following questions: First, is OPEC willing to invest if the oil price, at which global supply and demand balance, is widely uncertain? Second, should OPEC be willing, is it able to invest? Before answering these questions, it was useful to briefly explore what the future holds for OPEC.
OPEC will continue to face long-term structural changes and uncertainties in both its external and domestic landscape. On the global stage, the profound shifts in energy demand and energy supply patterns we have been witnessing in recent years are likely to deepen. Surely, there will be further effects of the energy security-climate change nexus on petroleum markets. On the demand side, efficiency progress in vehicles and alternative transport fuels will likely continue reducing the importance of oil. On the supply side, current challenges from the potential impact of light tight oil (LTO) and other unconventional oil sources will become more compelling should the ‘US Shale Revolution’ spread successfully to other parts of the world. Looking further ahead, one wonders what other ‘energy revolutions’ lie in store at the confluence of technology and innovation, politics and policy, and the economics of viability of frontier oil development?
On the domestic front, OPEC members are heading down an unsustainable energy consumption path causing huge opportunity costs from lost export revenues. Policy makers’ responses to rapidly rising energy demand (resulting from profligate consumption patterns) have tended to focus more on the prospect of supplying alternative energies and less on managing demand. While energy efficiency pronouncements have yet to materialize, energy pricing and subsidy reforms remain a real policy and political conundrum. In these circumstances, our projections indicate that export share of oil production is likely to shrink further from the current 60% to just 40% by 2040.
In the medium term, OPEC will face difficult internal dynamics, even if it manages to retain global market share. This stems from the fact that Iraq, Iran and Venezuela are major potential sources of capacity and output growth. Normalization of Iran’s relations with the West and a return to stability in Iraq would lead to production gains that could challenge Saudi Arabia’s leadership. Furthermore, growing exports of oil products risk eroding the demand for crude oil in some importing countries. In this respect, Saudi Arabia, which has recently invested heavily in export-oriented refineries, may now be perceived more as a “refiner” whose influence on crude oil prices is diminishing. Indeed a shift from trading crude to trading products risk rendering quotas on production meaningless as a tool to govern exports and prices.
But is OPEC willing to invest if the oil price at which global supply and demand balance is widely uncertain? Among other factors, price trends influence consumption and production, which in turn drive price changes. To assess the range of potential interactions between supply, demand and prices, the 2014 IEO (US EIA) considers three price cases: the Reference (central) case where prices trend towards $141 per barrel in 2040 (in 2012 dollars), and two alternative cases: a Low Oil Price and a High Oil Price cases where prices hit $75 and $204 per barrel, respectively by 2040. These three cases illustrate some, but not all, of the range of uncertainties in the future of the oil market.
As oil prices are likely to oscillate between these extreme scenarios, the corresponding call on OPEC oil would be expected to be between 43.7 million b/d and 65.3 million b/d in 2040. Therefore a major challenge for OPEC and its members as they develop their investment strategy will be finding a trade-off between pre-commitment and flexibility before such wide uncertainty is resolved.
Should OPEC be willing, is it able to invest? Our perceptual mapping of the energy investment climate, which combines three attributes (potential investment, country risk and the enabling environment for the development of the oil industry), suggests a poor overall score for more than half of the OPEC countries, among which are those previously identified as having the biggest potential for growth. In addition, in the context of low oil prices, financing is emerging as a major impediment to investment.
Financing is a pivotal element in investment decisions. It is basically determined by the structure of capital requirement, which we have found to be one-third debt and two-third equity for OPEC medium-term energy investment. Equity, which is a dominant feature of the upstream industry, is sourced internally either through corporate retained earnings or, more significantly, through state budget allocations. Therefore, its funding depends on the extent oil prices recover towards countries’ fiscal break-even prices. Accordingly, most member countries will hardly be able to finance their share of upstream investments so long as their fiscal break-even costs are above the ‘normal’ OPEC weighted average, which, as a result of continuing expansionary fiscal policies, has remained at $100-plus per barrel.
Finally, debt, which is a dominant feature of the downstream industry, is sourced externally. Despite recent success in the issuance of bonds and sukuk, predominantly in the GCC, external financing of energy investment continues to rely heavily on a still distressed dollar-denominated loans market, notwithstanding greater involvement of export credit agencies (ECAs) and local banks. This market will hardly fully recover without international banks
renewing their commitment to the OPEC area. Meanwhile, meeting the potential debt requirements will remain a daunting challenge.
In conclusion, more than any other factor, uncertainty about future price paths is likely to hamper investment decisions and the pace of OPEC capacity expansion. The higher the price the more incentive there is to invest; but high prices entail lower call on OPEC oil, leading in turn to lower prices. The current down price cycle, which is reviving old dilemmas (and soon dramas) is not conducive to investment in general. In this context, OPEC investment outlook could be further undermined if policymakers fail to address new challenges, including: rationalizing domestic consumption to generate greater petroleum export revenue; improving the investment climate and creating a better enabling environment for business; as well as moving towards sustainable, non-oil-rent-dependent alternative sources of funding
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Algeria Wakes Up to a Looming Crisis
I am pleased to inform you that ENI’s quarterly OIL magazine has just published an article I authored under the Editor’s title “Algeria: The Threat of a Possible Crisis”. The theme of the magazine’s issue is about “Winners & Losers” in the context of the current oil price collapse.
The following is a quoted excerpt from the introduction and conclusions of the article. For any further reproduction or republication of part or all the article, please contact Gianni Di Giovanni, the Editor in Chief of the magazine. You may also wish to freely subscribe to OIL, which provides authoritative analysis of current trends in the world of energy, with particular attention to economic and geopolitical developments (www.abo.net).
Prime Minister Abdelmalek Sellal’s ominous statement early this year that Algeria “faces a crisis” does not forebode well for the nation’s outlook. He and his government seem to have suddenly woken up to the real dimensions of the global oil market collapse. The sharp fall in prices, which was mainly caused by a supply shock from the growth momentum in North American unconventional oil production, then aggravated by OPEC’s unwillingness to mitigate it, is likely to overwhelm government’s ability to respond. Already in the benign environment that prevailed before prices spiraled downward, the government could hardly cope with a myriad of socio-economic problems. As Algeria’s woes could worsen, the financial resources saved during past oil market uptrends might not be sufficient to help deal with the most urgent challenges.
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As Algeria’s economic prospects remains closely bound to the state of its hydrocarbon sector, the collapse of oil prices has served as a strong reminder of the country’s extreme vulnerability. In the current critical context, neither the available fiscal buffer nor the new framework for attracting FDI in the hydrocarbon upstream sector, would entirely overcome the heightened challenges the country faces, including funding expansionary budgets and moving forward the process of recovery in the oil and gas industry. Furthermore, the government does not seem to have a realistic grasp of the threats and challenges from a new, unpredictable opposition that its inconsistent policies and lack of participation have provoked. Favoring participation requires a significant change in the Algerian policy-making mindset. This mindset, which has been shaped by old experiences and traditional ways of identifying problems and devising policies, is far too rigid to effectively deal with the challenges – and indeed the opportunities – that lie ahead. Challenges will hardly lead to opportunities without an informed public debate and the articulation of a coherent, credible, and consensual vision to steer the country out of a looming crisis and lead it in a more viable direction.
Connect with me on <www.linkedin.com/in/aliaissaoui>
I am pleased to inform you that ENI’s quarterly OIL magazine has just published an article I authored under the Editor’s title “Algeria: The Threat of a Possible Crisis”. The theme of the magazine’s issue is about “Winners & Losers” in the context of the current oil price collapse. The following is a quoted excerpt from the introduction and conclusions of the article. For any further reproduction or republication of part or all the article, please contact Gianni Di Giovanni, the Editor in Chief of the magazine. You may also wish to freely subscribe to OIL, which provides authoritative analysis of current trends in the world of energy, with particular attention to economic and geopolitical developments (www.abo.net). Prime Minister Abdelmalek Sellal’s ominous statement early this year that Algeria “faces a crisis” does not forebode well for the nation’s outlook. He and his government seem to have suddenly woken up to the real dimensions of the global oil market collapse. The sharp fall in prices, which was mainly caused by a supply shock from the growth momentum in North American unconventional oil production, then aggravated by OPEC’s unwillingness to mitigate it, is likely to overwhelm government’s ability to respond. Already in the benign environment that prevailed before prices spiraled downward, the government could hardly cope with a myriad of socio-economic problems. As Algeria’s woes could worsen, the financial resources saved during past oil market uptrends might not be sufficient to help deal with the most urgent challenges. … As Algeria’s economic prospects remains closely bound to the state of its hydrocarbon sector, the collapse of oil prices has served as a strong reminder of the country’s extreme vulnerability. In the current critical context, neither the available fiscal buffer nor the new framework for attracting FDI in the hydrocarbon upstream sector, would entirely overcome the heightened challenges the country faces, including funding expansionary budgets and moving forward the process of recovery in the oil and gas industry. Furthermore, the government does not seem to have a realistic grasp of the threats and challenges from a new, unpredictable opposition that its inconsistent policies and lack of participation have provoked. Favoring participation requires a significant change in the Algerian policy-making mindset. This mindset, which has been shaped by old experiences and traditional ways of identifying problems and devising policies, is far too rigid to effectively deal with the challenges – and indeed the opportunities – that lie ahead. Challenges will hardly lead to opportunities without an informed public debate and the articulation of a coherent, credible, and consensual vision to steer the country out of a looming crisis and lead it in a more viable direction. Connect with me on
<www.linkedin.com/in/aliaissaoui> Ali Aissaoui,Senior Consultant Economics & Research Tel: +966 13 859 7138 Mobile: +966 50 580 1584 Email : aaissaoui@apicorp-arabia.com www.apicorp-arabia.com
I have just returned from Dubai where I participated in Moody’s 10th Annual GCC Credit Risk Conference as a guest speaker.
This full day event, which was held under the general theme of « After the Fall: Understanding Oil Trends and Consequences for the Gulf Region », centered on two sessions: GCC sovereign resistance to oil-market stresses and who will feel the pain from low oil. This was followed by three concurrent practical workshops: credit considerations for family-owned companies; Moody’s new methodology for analyzing MENA banks; and a market overview of Islamic finance with a focus on hybrid sukuk.
While the conference was designed to gain new insights into the fairly sophisticated analyses of Moody’s Investors Service, it also offered an opportunity to hear from external guest speakers. The first was Bassam Fattouh who assessed current developments in the oil markets, analyzing their causes and implications and exploring their global perspectives. The second was myself presenting the GCC energy investment outlook and highlighting new trends and challenges in the broader MENA context.
The oil market situation worked as a general introduction to the main topics of the conference. My take on Bassam’s presentation is that the rapid growth in US light tight oil should not be seen as just a supply shock to the market. By shifting the perception of oil supply availability from scarcity to abundance, it has fundamentally affected both prompt prices and the longer prices. It has also changed the international dynamics and trade patterns of crude oil and oil products with far-reaching implications for price differentials and marketing strategies. Looking ahead, there are still many uncertainties, as oil markets balances will be shaped by the way supply and demand will ultimately adjust in response to low oil prices and changing market expectations and sentiments. Furthermore, the perception of a loss of an important supply feedback (stemming from the November 2014 shift in OPEC policy) will continue to affect market sentiments and volatility as well as increase the risk premium on investment in energy projects.
The latter conclusion offered a perfect transition to my own presentation. But since the overarching theme of the conference was about credit risk arising from investment activities, I will focus the remaining of this brief account on APICORP’s perceptual mapping of the energy investment climate in the region, which clearly attracted the audience’s interest.
The oil price collapse and the uncertainties surrounding its recovery have combined with persistent political turmoil to adversely, though unevenly, affect the region’s business risk outlook. The degree to which this has been the case is often determined using a proxy indicator of country risk, most conveniently in the form of a sovereign credit rating. In recent years, the region’s rating landscape has indeed dramatically evolved in response to the aftermath of the Arab uprisings: Tunisia, Egypt, and to a lesser extent Bahrain were downgraded, while Libya was suspended from being rated. Also, in the stir of Syria, the ratings of both Jordan and Lebanon were lowered. Whereas Algeria, Iraq, Iran, Syria, Yemen, Libya, Mauritania and Sudan have remained unrated. Nonetheless, despite Bahrain’s lower credit rating and current negative outlook, the GCC countries have maintained their strong position. As a result, there has been a marked bifurcation trend between GCC and non-GCC countries (omitting from the latter unrated countries).
However, using sovereign ratings as a proxy means that we are relying on a definition of country risk that focuses on the likelihood that the sovereign borrower will meet its debt obligations. More relevantly, country risk should be related to the likelihood of events and policies impacting business and investment. In this respect, an alternative, less conventional measure of the degree to which MENA energy investment climate has been affected is provided using a ‘perceptual mapping’. This is a multidimensional scaling analysis combining in our case three attributes: potential energy investment; country risk; and the enabling environment for the development of the oil, gas and energy industries. In the resulting 3D map each point has three coordinates corresponding to each country’s scores of selected attributes. The map shows an Ideal Point, whose coordinates are the highest achievable scores. Countries’ perceived investment climates appear at varying (Euclidean) distances from the Ideal Point taken as a benchmark. Notwithstanding considerable uncertainty, our perceptual mapping, if interpreted correctly, provides a more nuanced insight into the complex situation investors face in the region.
Accordingly at this time, Saudi Arabia appears well positioned, nearest to the benchmark. Next, are Qatar and the UAE putting some distance between themselves and Kuwait. The two remaining GCC countries, Oman and Bahrain, seem to have managed to secure the next best positions, in spite of Bahrain’s vulnerability to lower oil prices. Beyond the GCC, Iran and Iraq continue to be pulled up by their respective investment potential
notwithstanding their deteriorating country risk and the enabling environment for business. Algeria has not managed to improve its position, despite some policy progress, while Libya has definitely regressed to being among the farthest from the ideal point, including Yemen and Syria. Looking ahead, it is difficult to foresee any significant improvement to the current mapping.
A detailed agenda of Moody’s 10th Annual GCC Credit Risk Conference is available at: www.moodys.com/newsandevents/events/detail_/4400000009045/ed
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