Middle East remains cornerstone of oil and gas trade

30 October 2013

While the US’ shale revolution is reducing its imports from the Middle East, the region is compensating for the loss by shifting its focus to Asia and the trade of refined products

There are substantive changes under way in the ebb and flow of global hydrocarbons trade, suggesting the much-hyped unconventional boom in the US is irrevocably reshaping the world’s energy system.

For Middle Eastern oil and gas exporters, the immediate outlook is indistinct. While the US’ pitch for energy independence presents a challenge by weakening prices and potentially eroding the region’s market share, the latest trade figures do not reveal a decisive reduction in Middle East exports.

The Middle East’s share of global oil trade is still the highest of any region, at 35.6 per cent in 2012

Although exports from Iran and Libya to their respective Asian and European buyers have declined substantially in the past two years, the overall market share of the Middle East and North Africa (Mena) region’s oil and gas supply remains firm. Saudi Arabia’s ability to compensate for these declines means little has changed in the overall supply picture.

Maintaining lead

The Middle East’s share of global oil trade is still the highest of any region, at 35.6 per cent in 2012, although exports tapered off last year, according to the UK-based BP’s Statistical Review 2013. Last year, exports of 19.7 million barrels a day (b/d) represented a 0.3 per cent decline on the previous year, and were below the peak levels seen in 2005-06, when exports topped 20.2 million b/d.

The bigger changes are in the US, where exports grew 7.3 per cent to 2.7 million b/d. North America now accounts for 10 per cent of globally exported crude. Though North Africa’s exports grew by 33.6 per cent last year, this was down to the outage of Libyan production for most of 2011, due to the civil war in the country. Overall, the region’s exports are not increasing, nor are they declining substantially.

With the US’ net oil imports falling by 930,000 b/d in 2012, 36 per cent below their 2005 peak, shale resources are exerting pressure on Middle Eastern marketing strategies. The US is now challenging Saudi Arabia as the world’s largest oil producer. According to US-based consultancy Pira, total liquids produced by the US, including crude, condensates, natural gas liquids and biofuels, should average 12.1 million b/d in 2013.

America’s output, which includes natural gas liquids and biofuels, has swelled 3.2 million b/d since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia’s output in 1970-74, notes Pira.

It is therefore little surprise that China, with its growing energy requirements and reliance on oil imports, has displaced the US as the world’s largest crude importer. Saudi Arabia has traditionally been a core exporter to the US market, pricing its barrels so that buyers had an incentive to keep the kingdom as a supply source, and has seen Western-bound trade suffer as a consequence. However, it has not materially affected the overall volumes of exported crude.

Rather, the kingdom has been able to switch its export routes eastwards, compensating for the reduction in US demand. The Gulf country is the largest supplier to China, accounting for one-fifth of the Asian country’s oil imports, almost 1.1 million b/d in 2012 (and 1.1 million b/d in the first eight months of 2013).

Asia’s thirst is not just confined to Saudi oil. The Middle East accounted for 41 per cent of China’s 7.1 million b/d of imports last year. The rise in Saudi exports has mirrored the decline in Chinese imports of Iranian crude, due to international sanctions, which fell from 555,000 b/d in 2011 to 402,000 b/d in the January-April 2013 period. 

In contrast, there was a decline in US imports of Middle Eastern oil in 2012, down to almost 2.2 million b/d. In 2011, America imported 2.5 million b/d, which made up a quarter of all its oil imports.

Significant oil suppliers

Despite the significant impact of the shale oil revolution, the world still counts on a small clutch of Gulf producers for its supply of crude. Saudi Arabia, the UAE, Kuwait and others remain the cornerstone of the global oil trade. In August 2013, the three large Gulf producers met 17.1 per cent of global demand, very close to their historical peak.

The reason for this is simple. An increasing share of Middle Eastern oil is heading to the fast-growing Asian markets, making it unlikely that declining US imports will alter the importance of its crude in world markets.

Net oil imports in the Asia-Pacific region will rise to more than 25 million b/d in 2035, close to the current output in the Middle East, as energy demand growth outpaces the rest of the world, forecasts the Philippines-based Asian Development Bank. 

The International Energy Agency projects that the US’ oil imports from the Middle East will fall to 100,000 b/d, just 3 per cent of total oil imports, in 2035, as a result of increasing domestic production and decreasing demand.  China’s oil imports from the Middle East are projected to grow to 6.7 million b/d in 2035, representing 54 per cent of total oil imports.

One unknown factor is the impact of Iraq, which is expected to supply the globe with increasing numbers of barrels in the coming years. The country’s current export profile is reflective of the Middle East’s growing Asian bias. Of its 2.5 million-b/d exports, 60 per cent goes to Asia, 20 per cent to the North American market, and the remainder to Europe. 

Refined hydrocarbon roducts

With leading Mena producers such as Saudi Arabia investing in expanding refining capacity, there is likely to be a growing shift towards product trade in future. State-owned Saudi Aramco is building three 400,000-b/d export-oriented refineries, one wholly-owned and the others in partnership with France’s Total and China’s Sinopec, with the first set to open in 2014. These plants will help to establish the region’s dominance of refined products, which is more profitable than crude trade.

The Middle East’s natural gas flows are also affected by the US’ energy independence. Both the US and Gulf gas exporters such as Qatar are targeting Asian markets. But if US liquefied natural gas (LNG) exports become more significant, they could also challenge Mena players in Europe, including Algeria and Egypt.

So far, the region’s major gas exporters have not been greatly affected by the rise of US shale gas. Last year, Qatar’s total gas exports grew 4.7 per cent and total LNG exports hit 105.4 billion cubic meters (bcm), with 66.5 bcm of this targeted at Asia-Pacific buyers.

Europe accounted for 31.1 bcm of Qatar’s LNG. On the other hand, Algeria’s LNG exports remain heavily weighted towards Europe; in 2012, just 0.9 bcm of the North African country’s LNG cargoes headed for Asia, the remaining 14.4 bcm being sold to Europe.

In terms of piped gas, Algeria, which is connected to the European gas system via a pipeline network, is the largest regional exporter; 32.8 bcm of its pipeline gas exports headed to Europe (Italy and Spain) in 2012. Only 2 bcm went to other African countries. Qatar’s pipeline gas is exported intra-regionally, heading to the UAE; 17.3 bcm was exported last year via the Dolphin pipeline.

US energy challenge

The next few years will prove challenging for the larger producers of Mena hydrocarbons. Few can predict whether the emergence of an oil and gas exporting US will seriously challenge the long-term dominance of the Middle East as a supply source to the world. So far, it appears not.

But bubbling away are seismic shifts in the direction of crude, products and natural gas exports, which are refocusing the region’s attentions eastwards. With Saudi Arabia for one clearly unhappy at the drift of US policy in the region, there could be political ramifications from this shift in trade.

Key fact

The US’ oil imports from the Middle East will fall to 100,000 barrels a day by 2035

Source: International Energy Agency

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