Apicorp Report: W-Shaped Recovery for MENA as Energy Investments Plunge

The Arab Petroleum Investments Corporation expects energy investments in the Middle East and North Africa to decline by $73 billion between 2020 and 2024, compared with its pre-coronavirus forecast. Considering the devastating human toll of the pandemic and its impact on the global economy, the number is not as dramatic as expected, but it may be too early to draw definite conclusions.

According to Apicorp’s analysis, the investment cuts across the MENA region are not uniform. While the overall trend is for a downward revision, committed energy investments by the Gulf Arab countries are seen increasing by 2.3% compared with a 6% fall in the MENA region as a whole, “signifying a higher execution rate” in the Gulf Cooperation Council states. The most significant increase is in the gas value chain, it notes.

Shrinking investment in the energy sector globally will result in lost output that Apicorp suggests is not likely to be restored before 2023. However, the coronavirus’ impact on demand has been immediate due to full or partial lockdowns imposed by governments to prevent the spread of the deadly virus, reduced land and air transportation movements, and wholesale shutdowns of businesses and industrial plants. Oil demand is now projected to fall by 8 million barrels per day in 2020 compared with 2019, the largest single drop in history. This tipped an oversupplied market into an imbalance that forced oil producers, led by Saudi Arabia and Russia, to call off a battle for market share as U.S. oil prices sank into negative territory. The slump in international oil prices, which fell to half their January level in response to an April supply glut, is still reverberating across the industry, forcing the oil majors to write down assets and review investment strategies.

National oil companies are the dominant players and resource guardians in the Middle Eastern oil-producing states so any change in their strategies will have repercussions on the future supply and demand balance. National oil companies accounted for approximately 30% of all investment in oil projects in 2018, according to the International Energy Agency, with the oil majors accounting for around 15% of the total. But with the oil majors announcing cuts in capital expenditures of between 25% and 30% in response to the current crisis, the burden will fall on the national oil companies, which will have to pick up the slack while ensuring they satisfy the fiscal needs of their respective governments that are, in most instances, the only shareholder.

But the national oil companies have also been tightening their belts. Saudi Aramco, the world’s largest and most profitable oil producer, which is majority-owned by the state, has had to slash its budget by 25%. In normal circumstances the private sector would pick up the slack, but this is less likely now. The private sector, which has a relatively small share of the Gulf economies,  has been weakened by the crisis and will need state support to recover. According to Apicorp, the private sector’s share in energy projects, which had risen to 22% in its 2019 outlook, has dipped to 19%. One sector in which private investors may find an opening is electricity. Several countries are encouraging public-private partnerships as they abandon traditional business practices because the energy mix has become more diversified, and renewable energy penetration has grown. The national oil companies are also divesting midstream assets as a means of generating revenue.

Apicorp projects energy investments will total $800 billion in the four years to 2024 with significant continued investments by Saudi Arabia, the United Arab Emirates, Iraq, Iran, and Egypt in oil, gas, power generation, and petrochemical plants. Saudi Arabia alone is investing $40 billion each in gas and power projects, and the UAE is allocating more than $40 billion for capacity maximization projects. Iraq had slated $30 billion for reconstruction, gas, and petrochemical projects, but it is far from certain that it will proceed given its excessive reliance on oil export revenue. Many of these projects were approved before the crisis, and timelines may be pushed back should a second wave of the virus unfold later in the year. During previous financial and energy crises, oil companies were able to negotiate lower costs with service providers. This time around, the industry is operating on thin margins, and there is little fat to shed.

According to Apicorp’s report: “2020 is expected to be more challenging than previous downturns. The impact is already deeper and longer lasting.” This refers to the oil price collapse in 2015 and 2016, when investments were cut by 25% for two consecutive years. “The long-term nature of the triple crisis and the profound restructuring in oil and gas will hit energy investments longer, sowing the seeds of supply crunches and price volatility, hence a W-shaped recovery for MENA.”

When presenting the report via webinar, Leila Benali, Apicorp’s chief economist, said that energy companies in 2020 were much leaner and relatively cost efficient, so they have limited room to maneuver in terms of short-term budget cuts. The push for additional efficiency gains of 10% to 30% in oil and gas and particularly in oil field services, will come at a price of additional closures, bankruptcies, and higher decommissioning costs.

This will open the door to more integration in the region, asset sales, mergers, and acquisitions. Downstream assets have emerged as a potential source of income for the region’s oil companies. The Abu Dhabi National Oil Company has secured an investment of $20.7 billion in its gas pipeline network by an international consortium as it continues with a divestment policy it had initiated before the crisis.

While much of the investment decline is likely to affect the oil sector, gas and petrochemical projects are moving forward, according to Apicorp. It explains that the fall in oil investments is due to the completion of several capacity expansion projects in 2019. According to the report, planned investment in the gas value chain is projected to increase by 13% to $28 billion compared with the previous forecast. This is partly accounted for by the massive Jafura unconventional gas investment by Saudi Aramco, the Hail and Ghasha gas fields in the UAE, and the expansion of gas production capacity in Qatar, Oman, and Egypt.

As the world has yet to emerge from the coronavirus pandemic, all of the projections from think tanks and energy analysts may have to be revised. Investments are not likely to pick up at least for a year or two as funds are redirected toward health care, infrastructure enhancements, digital technologies, and the resilience of global value chains rather than in expanding oil production capacity. The growing clamor for green and clean economic recovery packages and a faster transition to an environmentally sustainable energy system will also affect the outcome.

While all energy sources are needed to meet the demands of a growing, more urban global population, oil and gas will still account for a significant share of the energy mix for decades to come. Gulf Arab oil producers are aware of the need to reduce their carbon footprint in order to survive and are adopting technologies that will capture carbon dioxide emissions from oil and gas production to stay relevant while investing in clean energy vectors like hydrogen and renewable energy sources like solar and wind. Even so, a protracted slump in upstream oil and gas investment may result in the undesirable return of price volatility and market imbalance.

The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.