MENA Supply: Robust performance amid tense geopolitical environments

DAMMAM, Saudi Arabia -- The Arab Petroleum Investments Corporation (APICORP), the multi-lateral development bank focused on the energy sector, published its latest research report, which focuses on the performance of the different countries in the MENA region’s oil supply, in the context of regional geopolitics. 

The report notes the effect of a number of geopolitical issues leading up to the second quarter of  2014, when crude supply began to overtake total demand resulting in an imbalance that reached 1.5 MMbpd in 2015. This imbalance continued well into 2016 and 2017 – though narrowing – resulted in record levels of stock build.

Following the Arab spring that began in December 2010, supply in several MENA countries was severely disrupted, and coupled with Iranian sanctions, led to substantial losses from the region that contributed to a rise in oil prices. In Syria and Yemen, exports dropped to zero, whilst in Libya, output fell from above 1.5 MMbpd in 2011 to as little as 220,000 bpd by mid-2014. But high prices inevitably led to strong supply response, mainly from the US. With a contraction in global demand growth, the market became out of balance, leading to a steep decline in oil prices that saw Brent dip below $30/bbl in January 2016.

The Organisation for Economic Co-operation and Development (OECD) commercial stocks increased from around 2.64 MMbpd in May 2014, to a peak of 3.11 MMbpd by July 2016. This caused prices to plunge and new measures to be implemented by OPEC to rebalance the market, while different oil-based economy countries from across the region looked to invest more heavily in energy sources to overcome the oversupply.

At the forefront of these investments are the UAE and Kuwait, with each of these countries announcing ambitious capacity targets for 2022, that could see them invest over $220bn in the energy sector. In November 2017, the UAE announced plans to invest $109bn in the sector until 2022. Kuwait also followed suit by announcing similar plans earlier this year to invest $112bn in the next five years to boost production in hope of increasing oil capacity from 3.2 MMbpd at the start of this year to around 4 MMbpd by 2020.

In other parts of the region, investors have been more cautious. In the case of Libya, the improving production profile is not backed by a strong historical trend, having had an inconsistent production profile due to regular production outages caused by different factors including civil unrest and geopolitical tensions. While different operations in the country were hit, net output has improved after restarting the 330,000 bpd Shahara fields, with further increases expected following its $450m acquisition of Marathon’s 16.3% stake in the 300,000 bpd Waha consortium.

The report also finds that Iraq managed to continue increasing production even whilst battling so-called Islamic State, while Iranian output recovered following the lifting of sanctions, and Libyan production returned to 1 MMbpd this year for the first time since 2013.

Earlier this year, Iraq announced a revised capacity target with the aim of reaching 6.5 MMbpd by 2022. In the first quarter of 2018, the country’s rig count reached 58, 17 higher than the same period last year and has been the main contributor to MENA’s overall rig count.

Iran has a unique set of challenges to overcome, following the U.S.’s decision to re-impose secondary sanctions. However, during the brief period when the sanctions were lifted, Iran managed to surprise by increasing output from 2.9 MMbpd in 2015 to 3.8 MMbpd today, surpassing pre-sanction levels of 3.6 MMbpd.

The report also finds that while the OPEC+ production cut agreement has indeed benefited the market by stabilizing it, the main concern has been outside MENA, particularly Venezuela and to a lesser extent Angola whose fields are maturing and nearing depletion. In Venezuela – now widely seen as the highest risk to the oil market - production has not recovered since the end of 2014 when it stood at 2.4 MMbpd and has shrunk to reach 1.4 MMbpd as recently as first-quarter 2018, with the downward trend expected to continue. Production in the country is at a 30-year low. With high debt, rising inflation and deteriorating equipment and labor shortages, Venezuela’s production could see further output losses by year-end.

Mustafa Ansari, senior economist, added, “The situation that the market has found itself in is an interesting one. It has become apparent that the market is increasingly affected by a broader range of factors, and that the U.S. shale industry cannot rebalance the market alone. As demand growth continues to outpace supply, we could see further stock withdrawals. And with OPEC spare capacity expected to decline, especially if production cuts are eased, then the market will have a small buffer within which it can cushion itself against supply disruptions, leading to price hikes and higher volatility.

Ghassan Al-Akwaa, energy sector specialist at APICORP, commented, “Our report shows that supply from OPEC increased by 3.85 MMbpd between the second-quarter 2014 and the end of 2016, with output only falling, following the OPEC+ agreement. This can mean only one thing: the oil industry is still thriving, and this is shown through different exporting countries – like Iraq and Iran –  bouncing back from their different set of challenges stronger than any other time.