March 2011     Issue #73

Middle East Oil and Gas Outlook: Will Gas Market overtake the oil market?

Given the recent turmoil in the Middle East one must ask the following questions firstly, what is the short term and long term future of Middle East hydrocarbon resources and secondly, how will the recent revolutions and rumours of further revolutions in the region affect the forecasts and outlook for oil and gas in the region?

Since the Jasmine Revolution which resulted in the overthrow of the Tunisian government, we have also seen President Mubarak thrown out of government in Egypt, and violent protests spreading across the Middle East and North Africa. In particular, the protests taking place in Libya and Bahrain have caused widespread concerns within the oil market that these revolutions could yet reach major oil producing state Saudi Arabia; such as scenario would have a major impact on world oil supply with significant and far reaching consequences for the world’s economies.

The violent protests in Libya have seen major firms ENI, Repsol-YPF suspend production in Libya, whilst BP has commenced the evacuation of staff from the state. Libyan oil production accounts for 2.3 percent of world output, and whilst this has some effect on world supply the more significant factor is the fear of the violence in Libya spreading across the region.  This news combined with the potentially strategic importance of the revolution in Bahrain, and its potential domino affect on Iran and Saudi Arabia, has been responsible for driving up the price of oil to the $110 mark for the first time since Sept 2008.

The Bahrain violence is seen to be particularly concerning for the oil market and could have significant repercussions to the situation within Saudi Arabia. Analysts fear another oil price shock, and with global demand and consumption of oil moving fast, the threat of decreased production from the Middle East region is a major concern.  The significance of Bahrain to Middle East stability must not be underestimated. Risk group Exclusive Analysis state that there is significant probability that the present Bahrain government will be overthrown and replaced by a new government aligned with Iran which would be an alarming development for Middle East stability.

The prospect of Bahrain’s Shi’ite Muslim dominant population’s movement spreading across the Gulf and acting as a framework for revolt within the Shi’ite minority population within Saudi Arabia is another risk to market stability. With low level clashes having already taken place between Saudi security and Shi’ite protesters, the threat of revolt within Saudi Arabia is real and should not be under estimated. King Abdullah certainly appears to be taking this potential threat seriously, by offering 18 million lower and middle income populates unemployment benefits and affordable housing, promising to spend a up to $400 billion by the end of 2014. Suggesting that he is attempting to buy the support of the domestic public. Additionally, this action from the Saudi leadership also suggests that it is not just the Shia population they fear but also the young unemployed.  Which was a segment of the population fundamental to the revolts in Tunisia and Egypt.

The threat of Saudi Arabia and Iran being consumed by further revolutions, combined with the shutting down of production within Algeria and Libya has led Nomura analysts to forecast potential for the oil price to reach as high as $220 a barrel. Nomura state the closure of production from both Libya and Algeria would decrease world supply to 2.9m b/d and diminish OPEC spare capacity to 2.1m b/d, comparable with the levels observed within the Gulf War and worse than those during the 2008 oil price boom which saw prices hit $147. Furthermore, some analysts believe that the current situation may be worse than it appears; citing the somewhat unreliable Wikileaks documents which suggest that Saudi Arabia may have overstated their resource pool by 40 percent, and thus the power of the Saudi’s to drive prices down for sustained periods of time is in doubt. 

The current revolutions within the Middle East have followed recent forecasts from BP which suggests that the world will again be forced to depend on OPEC oil. Indeed, BP’s forecasts propose that within the next 20 years OPEC will become as powerful as it was during the 1970s, a decade of oil shocks and shortages that the oil cartel was responsible for. This proposal is exemplified by the predicted growth of OPEC’s share in global production from 40 percent to 46 percent over the period covered (20 years). Indeed 75 percent of total growth over the next twenty years is due to come from OPEC nations, Kuwait, Iran, Angola, Libya, Saudi Arabia, Iraq and Nigeria. With oil producing nations advocating and legislating joint venture style investment approaches with the states national oil firms maintaining the presiding share, thus suggesting we could be due to observe a shift of power from oil companies back to the producing states whom are attempting to establish the power again following their imperially tarnished past.  

These forecasts may prove problematic for the west, with concerns over the stability of several of the governments in place within the region. The threat of OPEC becoming a powerful force again has not come at a good time for the western oil consuming states. Furthermore, the notion that the oil producing nation’s governments becoming more implicit in the commercial process through state run oil firms may complicate the process if the west continues to want to purchase politically correct oil. Therefore if fundamentalist Islamic governments replace those overthrown then relations between western consumers and oil producing states could be further strained.

These forecasts combined with the recent spread of violence and instability within the Middle East may force the hand of the west to positively promote alternative exploration projects and fuel resources. Also the consequences of the revolts within the Middle East could have long-lasting effects on exploration and investment in the region. In particular the large IOCs may be less willing to commit large amounts of money to a region which has instability built into the regional system. Thus IOCs may choose to invest its money and resources into energy projects elsewhere in the world, or seek alternative fuel solutions. Alternative fuel resources such as unconventional gas and oil may now come to prominence with the price high enough to meet high extraction costs, whilst LNG projects in more stable political environments such as Australia may expereince an increase in production and sales. Furthermore, as BP forecasts, natural gas is one of the key growth areas and thus recent activities are likely to encourage further growth in this sector and push a more gas orientated energy market.

Written and researched by Tim Madden




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