Further volatility ahead for oil and gas industry

02 January 2017

The Middle East is expected to defy a global trend for lower spending on hydrocarbons projects by maintaining its investments to sustain production levels and boost gas output

The oil and gas sector started 2016 with Brent crude close to 12-year lows as the price sank to below $30 a barrel in January. By December, some confidence had returned to the market as prices hit 17-month highs on the back of Opec and non-Opec producers agreeing to cut production to balance the market.

Analysts have largely raised their 2017 forecasts on the back of the cuts, due to take effect from January, with prices expected to average $50-60 a barrel, compared with the estimated $45 average for 2016.

Although the oil market is expected to improve, especially in the first half of 2017, it is not clear how effective production cuts will be or whether countries will comply. The projects market is still operating in a very different environment from the first half of 2014, when oil producers had been enjoying four years of prices at more than $100 a barrel.

Supply glut

The Paris-based International Energy Agency (IEA) warned in November that the supply glut is likely to pull global upstream investments back in 2017, which could stoke further volatility in the crude markets in the coming years.

IEA executive director Fatih Birol said that “this is the first time in the history of oil that investments are declining three years in a row”, referring to the expected drop in 2017.

The Middle East and North Africa (Mena) hydrocarbons projects market has also experienced a downturn in 2016 and, as of the end of November, new contract awards were at an eight-year low.

 Selected projects awarded in 2016

Selected projects awarded in 2016

Selected projects awarded in 2016

Just over $29bn of engineering, procurement and construction (EPC) contracts were awarded on oil, gas and chemicals projects in the first 11 months of 2016 in the Mena region (excluding Iran and Turkey), according to MEED Projects.

This is just over half the $59.4bn-worth of contracts awarded in 2014 and a significant fall from the $47.1bn of contracts awarded in the sector in 2015. It is likely to be the lowest-spending year since 2008, when $27.6bn of contracts were signed.

Although this represents a significant fall in activity in the EPC market, the values in 2014 and 2015 were unusually high due to the sheer size of Kuwait’s two refinery megaprojects awarded in each respective year.

As a consequence, the value of projects awarded in Kuwait dropped from nearly $20bn in 2015 to just $4.6bn in the first 11 months of 2016 – the difference accounting for the majority of the overall drop in regional spending.

Biggest market

Saudi Arabia reclaimed its place as the biggest market for contractors in 2016 with $8.7bn awarded in the first 11 months, ahead of Egypt ($4.8bn) and Kuwait ($4.6bn). The UAE, which has historically been one of the highest spenders, saw contract values drop to just $2.1bn in the first 11 months of 2016, compared with $3.9bn in 2015.

Total spending for 2017 is difficult to forecast and could rise or fall depending on the timeline of a few key projects with large budgets. Two refinery megaprojects are expected to be awarded in 2017: the greenfield Duqm refinery in Oman and the Sitra refinery modernisation programme in Bahrain. Bid submissions on the latter, which is divided into at least seven packages, were due at the end of 2016.

 Selected projects to be awarded in 2017

Selected projects to be awarded in 2017

Selected projects to be awarded in 2017

A project owned by International Petroleum Development Company to build a new refinery in Fujairah, in the UAE, has now been long delayed at the bidding phase and it is unclear whether the project still has a set timeline.

In terms of upstream projects, Saudi Aramco is expected to continue to award large contracts under its Long Term Agreement programme to develop offshore projects. Major awards in 2016 included work on the Hasbah and Safaniyah fields.

Kuwait has several sizeable upstream projects in the pipeline, including Gathering Centre 32 at the Burgan field and the Gathering Centre 24 upgrade.

Robust spending

UK-based oil and gas consultancy Wood MacKenzie expects investment in upstream projects in the Mena region to remain buoyant despite the continued low oil prices. Worldwide, the number of final investment decisions on major upstream projects has dropped from a range of 20-40 before 2014 to just seven in both 2015 and 2016 respectively.

“Spending in this region is on the whole generally robust. Sustaining the level of production we are seeing in some of these countries takes a lot of investment,” says Jessica Brewer, Wood MacKenzie’s principal analyst for the Middle East.

“Some NOCs [national oil companies] are getting more per dollar for the costs they are paying, but the activity is staying so robust that we are only seeing a tiny dip.”

Brewer also notes that the number of jack-up rigs in operation has dropped worldwide, but has remained high in the Middle East.

One area where Mena countries continue to invest is in gas production for domestic use. Major oil-exporting countries such as Saudi Arabia, Iran, the UAE and Kuwait have all struggled to keep pace with surging gas demand over the past decade, with the latter two countries investing in assets to import liquefied natural gas (LNG).

The CEO of UK-based oil major BP was in Oman in November to sign off a project to expand Khazzan – the region’s largest tight gas development – by 50 per cent. The two phases are equal to 40 per cent of the sultanate’s gas capacity and should meet domestic demand for many years as well as allowing Oman to boost LNG exports.

Sour gas

Meanwhile, Al-Hosn Gas, a joint venture of Abu Dhabi National Oil Company and US-based Occidental Petroleum, says it plans to expand the Shah gas project – the largest sour gas development undertaken in the region – by 50 per cent. Al-Hosn Gas started production at the Shah onshore gas field in Abu Dhabi in 2015, after completing a $10bn project. The operation currently has the capacity to process 1 billion cubic feet a day (cf/d) of sour gas.

A landmark agreement in post-sanctions Iran saw French energy group Total and China National Petroleum Corporation sign a heads of agreement (HoA) in early November with National Iranian Oil Company (NIOC) to develop phase 11 of the South Pars offshore gas field. Both companies had previously worked on phase 11, but pulled out in 2008 and 2012 respectively. The phase 11 scheme on the world’s largest gas field will have the capacity to produce 1.8 billion cf/d and will be developed in two phases. The first, with an estimated total cost of about $2bn, will consist of 30 wells and two well-head platforms connected to existing onshore treatment facilities by two subsea pipelines.

According to the HoA, NIOC and the two international firms will conduct exclusive negotiations to finalise a 20-year contract under the terms of the recently approved Iran Petroleum Contract model. The HoA represents the first detailed agreement between NIOC and a major international oil company since nuclear-related sanctions against Iran were lifted in January 2016.

Elsewhere, Saudi Arabia is planning to add more phases to its shale gas programme in the north of the country and further expand its production of non-associated gas from fields in the Gulf.

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