The 2014-2016 Oil Price Fall: How Is It Different This Time?

The 2014-2016 Oil Price Fall: How is it Different this Time?

Bassam Fattouh Oxford Institute for Energy Studies

MARCH 24, 2016, KUWAIT PRESENTED AT THE GULF UNIVERSITY FOR SCIENCE AND TECHNOLOGY 2015 | December issue Fundamentals

Inventories

September OECD inventories were revised lower by 9.1 mb, which means September’s counter-seasonal builds are now at 5.1 mb instead of 13.8 mb as per preliminary data.

OECD stocks fell by 8.2 mb in October to 2,971 mb, although the difference to the five-year average ballooned to 260 mb as the draw was shallower than the 20.7 mb five-year average.

The draw was led by products, which fell by nearly 30 mb, offsetting a 21.6 mb build in crude, NGLs and other feedstocks. Distillate stocks fell by 13.2 mb while gasoline drew by 10.5 mb, but given the draw in distillates was less than the five-year average, the surplus to the five- year average widened to 43 mb, compared to a 33 mb deficit at the start of this year.

In fact, even at the end of April, OECD distillate stocks were 10.5 mb below seasonal averages, but since then, stocks built at the rate of 0.5 mb/d through to end-August. September and October saw draws, but as they were less than seasonal averages, the surplus to seasonal averages blew out.

The draw in October products stocks was largely concentrated in the US (gasoline: -10.7 mb, middle distillates: -12.3 mb), while product stocks in Europe fell by a meagre 0.3 mb, far weaker than the 11.4 mb five-year average draw, partly driven by low Rhine levels which curbed flows from the coast to the inland regions. OECD Pacific product stocks drew counter- seasonally by 5.4 mb.

Non-OECD products stocks fell sharply in October led by China, while commercial crude stocks were flat, with a draw in China offset by builds in India and Saudi Arabia.

Preliminary data show November OECD stocks drawing by 1.7 mb to 2,969 mb, led by a 1.6 mb draw in crude stocks. But this was much lower than the 11.6 mb draw (and 7.8 mb for crude) due to an unseasonal build in the US. Distillate stockbuilds were steeper than average, while gasoline’s builds were far weaker.

Non-OECD inventories rose in November with Chinese stocks rising by nearly 6 mb m/m, Supply-Demand Imbalance andalthough Rising Indian Stocks crude stocks did not build due to record refinery runs in November.

Fig 474: OECD overhang relative to 5yr avg., mb Fig 475: Total inventories relative to 5yr avg, mb EIA Estimates of Implied Stock Change, mb/d OECD overhang relative to 5yr avg., mb

North America 3 180 Crude 225 Europe Products 175 2.5 120 Asia-Pacific 125 2 60 75 1.5 25 0 1 (25) (60) 0.5 (75)

0 (125) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (120) 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 09 10 11 12 13 14 15 09 10 11 12 13 14 15 Since 2014, the oil market has been adding stocks every month with EIA/IEA expecting this to continue well in Crude Stocks well above the 5-year average, but unlike Sotheurce: beginning IEA, Energy of 2015, Aspects products stocks are at above the Source: IEA, Energy Aspects 2016; although the stock-build will slow down, it is 5-year average mainly due to increase in diesel stocks estimated to stay above 1 mb/d by end of 2016.

Source: EIA

Page 149

The Demand Side Global Demand Dynamics

Global Oil Consumption, y/y change, kb/d Global Petroleum Production Consumption, y/y change, kb/d

4000 1500

3000 1000

500 2000 0

1000 -500 -1000 0 -1500

-2000 -1000 -2500

-2000 -3000

-3000 Light dis=llates Middle dis=llates Fuel oil

1986 price fall was preceded by a decline in global consumption; in 2008 and 2009 global consumption fell Global oil consumption dynamics has been driven due to the global ﬁnancial crisis but recovered in 2010 mainly by middle distillates especially in the 2000s as the global economy followed a V-shape recovery Oil Demand Robust and Responds to Low Oil Prices

Global Oil Consumption, y/y change, kb/d Gasoline and Diesel Demand, y/y

2,500 1,200

1,000

2,000 800

600

400 1,500 200

-- 1,000 (200)

(400) 500 (600) Jul-14 Jul-15 Jan-14 Jan-15 Jun-14 Jun-15 Oct-14 Oct-15 Apr-14 Apr-15 Feb-14 Sep-14 Feb-15 Sep-15 Dec-14 Dec-15 Aug-14 Aug-15 Nov-14 Nov-15 Mar-14 Mar-15 May-14 May-15

-- 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 Gasoline Diesel

Oil demand has been stronger than initial expectations in 2015 driven in part by cheaper oil prices; latest data Gasoline and not distillates has shown the strongest suggest growth is slowing down, but for 2016, oil demand growth, especially in Asia growth is still expected to be above 1 mb/d

Source: EIA, Energy Aspects 22 Feb 2016 | Data review China oil data – Jan 2016

Fig 23: Actual jet demand, mb/d Fig 24: Jet growth, y/y change, mb/d

0.7 0.20

0.15 0.6 0.10

0.5 0.05

0.00 0.4 (0.05)

0.3 (0.10) 11 12 13 14 15 16 12 13 14 15 16 Sources of demand growth more varied and in the last two years was not

Source: China Customs, Energy Aspects about diesel Source: China Customs, Energy Aspects

Fig 25China’s: Gasoline diesel/gasoline vs. diesel demand, demand, mb/dmb/d Fig 26: Gasoline vs. diesel, y/y change, mb/d Oil Demand Growth 2015, y/y change, mb/d

4.0 0.50 0.8 Gasoline Diesel 0.45 0.6 3.5 0.40 0.35 0.4 3.0 0.30 0.25 0.2

2.5 0.20 0.0 0.15 2.0 Gasoline 0.10 (0.2) Diesel 0.05 1.5 0.00 (0.4) 11 12 13 14 15 16 US 12 Europe 13Middle East 14China India 15 Other Asia 16

China’s diesel exports have jumped to a record Source: China Customs, Energy Aspects Source:Sources China of demand Customs, growth Energy have Aspects become more varied level as demand growth for diesel slows down and with China being an important but not the only engine topping reﬁneries given licenses to import crude of oil demand growth Fig 27and: exportJet vs. products diesel , y/y change, mb/d Fig 28: Demand by product, y/y change, mb/d

Source: Energy Aspects, EIA Gasoline Diesel Jet 0.6 Jet Diesel 1.0 0.8 0.4 0.6

0.2 0.4

0.0 0.2 0.0 (0.2) (0.2)

(0.4) (0.4) 12 13 14 15 16 12 13 14 15 16

Source: China Customs, Energy Aspects Source: China Customs, Energy Aspects

Page 16

The Investment-Supply Response Cut in Capex in Response to Fall in Oil Price been Sharp

Global Capex estimates, $ billion

Region 2016E 2015E 2014A + / - %

United States 72.2 114.6 158.1 (42.3) (36.9%) US Independents Intn. 8.5 13.6 21.0 (5.1) (37.5%) Canada 22.4 30.1 36.8 (7.7) (25.5%) Mexico 14.5 18.0 24.6 (3.5) (19.4%) Asia Paciﬁc 78.7 96.2 116.9 (17.5) (18.2%) Majors International 77.3 95.7 107.5 (18.4) (19.3%) Russia/FSU 37.9 33.2 43.9 4.6 13.9% Latin America 35.7 47.8 53.2 (12.1) (25.3%) Europe 27.6 34.5 45.1 (6.9) (19.9%) Middle East 37.0 39.9 40.7 (2.9) (7.3%) Africa 16.5 20.1 23.0 (3.6) (17.8%) Other 8.0 10.7 10.4 (2.7) (25.0%) 0.0 0.0 0.0 International 0.3 0.4 0.5 (0.1) (15.7%)

Global Capex 436.4 554.4 681.1 (118.0) (21.3%)

Source: Energy Aspects Projects Sanctioned in the High Oil Price Environment Coming on line in 2016 and 2017

Non-OPEC Upstream Oil Projects Pipeline, kb/d, Non-OPEC Upstream Oil Projects 2016 (more than 25 kb/d) Pipeline, kb/d, 2017 (more than 25 kb/d)

500 800 450

400 700

350 600

300 500 250 400 200 300 150

100 200

50 100

0 0

More than 2 mb/d of new projects coming online in 2016 The pipeline of new projects starts slowing down in 2017 sanctioned during the period of $100 + environment but sill close to 2 million b/d

Source: Energy Aspects Supply is Inelastic in the Short Term with US Supply the Fastest to Respond

Key Areas of Growth in non-OPEC, y/y kb/d, US Crude Oil, y/y, kb/d 2015 1400

1000 1200 900 1000 800 800 700

600 600

500 400 400 200 300

200 0

100 -200 0 US Brazil Russia China UK Canada Norway -400 2014 2015 Q1 2015 Q2 2015 Q3 2015 Q4 October November December

In 2015, US remained main source of non-OPEC supply growth but areas of supply growth have become more Despite efﬁciency gains and cutting cost and increase in varied (shale, Canadian Oil sands, Brazil deep offshore, production from the GOM, y/y growth has been slowing Russia and China conventional) with different investment down with the EIA predicting sharp y/y declines in 2016 cycles

Source: Energy Aspects, IEA, MEES Box 4.4 ⊳ How quickly can oil supply respond to prices?

The bulk of global oil supply comes from a relatvely slow-moving but high-volume development cycle, with Saudi Arabia’s spare capacity – available to be brought into producton at shorter notce – ordinarily providing some fexibility to fne-tune supply. The lack of fexibility elsewhere is due to the tme required to bring new resources online, a process requiring both exploraton and development. The lead tme between exploraton actvity and a development programme can span decades. The development part of the process has a more rigid tmeline, but the lead tmes between fnal investment decision and frst producton – for most types of resources – span several years(1) at leastThe (Figure US Shale4.11). This Investment tme span is unlikely Cycle to contract much further; technology and streamlined sanctoning processes can reduce the amount of tme required, but these have to be set against the generally increasing level of feld complexity. Average lead times between ﬁnal investment decision and ﬁrst production for Figuredifferent 4.11 oil resource ⊳ Average types lead times between fnal investment decision and frst production for different oil resource types

6 Iran Years Qatar 5 Saudi Algeria Nigeria Arabia 4 Russia Venezuela Canada 3 Norway Brazil 2 China Iraq 1 United States

0 10 20 30 40 50 60 70 80 Reserves developed (billion barrels) Conventonal onshore Ofshore shallow water Extra-heavy oil Tight oil Ofshore deepwater and bitumen Notes: Analysis includes the top-twenty crude oil producers in 2014. Bubble size indicates the quantity of reserves developedThe investmentfrom 2000 to cycle 2014. for The US average shale leadis short times with for theIraq time are brought lag between down FIDby three and largeﬁrst rehabilitationproduction projectsa fraction in legacy of fields, that eachfor conventional of which was reported ﬁelds with one year between investment approval and the start of production. This is not a representative finding for greenfield developments in Iraq. Source: IEA Source: IEA analysis based on Rystad Energy AS.

Tight oil in the United States operates on a diferent tmeline. There is no exploraton process to speak of, and the locaton and broad characteristcs of the main plays are well known, even if the performance of wells within plays can vary dramatcally. And the tme from investment decision to actual producton is measured in months, rather than years: an average of eight months over the period 2005-2014, compared with a resource-weighted average of three years for other sources of oil.

170 World Energy Outlook 2015 | Global Energy Trends © OECD/IEA, 2015 © OECD/IEA, Jul 2015 | In Focus Deepwater: The Golden Triangle

Deepwater vs shale – who is the marginal barrel? The recognition that oil resources are probably never likely to be exhausted puts greater focus on future Many have questioned whether the substantial investments required for the development of productivity trends when assessing the long-term outlook for oil prices. The possible implications of the US shale revolution are particularly fascinating in this regard. deepwater projects are worthwhile, given the advent of tight oil. The development of these differing unconventional resources is driven by companies at the opposite ends of the The key point here is that the nature of fracking is far more akin to a standardised, repeated, manufacturing-like process, rather than the one-off, large-scale engineering projects that characterise spectrum. Deepwater projects are developed by IOC’s that have deep pockets and who invest many conventional oil projects. The same rigs are used to drill multiple wells using the same processes for the long term. On the other hand, tight oil producers are smaller in size and have more in similar locations. And, as with many repeated manufacturing processes, fracking is generating strong productivity gains. The strength of manufacturing productivity has led to a trend decline in the prices of limited funding, and so their outlook is shorter. In order to try and answer which makes more goods relative to services. A fascinating question raised by fracking – and its manufacturing-type sense, we attempt to model and compare pre-salt wells in Brazil (primarily because good characteristics – is whether it will have the same impact on the relative price of oil. A key issue here is whether these types of repeated, standardised processes can be applied outside of the US and to more quality data is available) to tight oil wells in the Bakken. Clearly, the comparison will be conventional types of production. Can the discipline of lean manufacturing be applied to conventional different if deepwater wells are chosen from less prolific areas such as the Gulf of Mexico or oil operations? West Africa, so the below comparison should be used as a guide. Revisiting Principle 2: Oil demand and supply curves are steep The limited responsiveness of conventional oil supply to price movements stems from the significant time lag between investment decisions and production. It can often take several years or more from Production profile the decision to invest in a particular field before it starts to produce oil, and once the oil is flowing, it will We start by considering the production profiles for pre-salt Brazil and the Bakken, which in often last for many years. many ways have been startlingly similar. Tight oil production from the Bakken commenced in Shale oil (and fracking) completely changes all that, in two important respects. First, the nature of the operation in which the same rigs and the same processes are used to drill many wells in similar locations 2007, averaging 20 thousand b/d across the year and, six-years later in 2013, output had risen means the time between a decision to drill a new well and oil being produced can be measured in weeks to 0.7 mb/d. Today, production stands at around 1.1 mb/d. Production from pre-salt wells rather than years. Second, the life of a shale oil well tends to be far shorter than that for a conventional well: its decline rate is far steeper. Figure 3 compares production data taken from a typical US shale mirrored this behaviour almost exactly, only shifted by two years as the first well came online well, in this case in the Bakken in North Dakota, with that from a Deepwater well in the Gulf of Mexico Very Different Proﬁles of Production and Decline Rates in September 2009. After six years, in March 2015, production averaged 0.7 mb/d. (GOM). Daily production from the shale well declined by around 75% in its first year of production – a really steep rate of decline. The corresponding rate of decline for the GOM well was far slower. Figure 3 Fig 3: Bakken vs. pre-salt oil output, mb/d Fig 4Bakken: Bakken vs.vs. prepre-salt-salt well well count count Sample Well Production Proﬁle (no of wells)

12,000 Bakken (LHS) Pre-salt (RHS) 50 12000 Bakken (LHS) Pre-salt (RHS) 50 Sample well production profile

Kboe/d Kboe/d 40 10000 40 10 0.6 Gulf of Mexico* 8,000 8000 0.5 30 30 8 Bakken Shale (right axis) 6000 0.4 6 20 20 0.3 4,000 4000 4 0.2 10 2000 10 2 0.1

0 0 0 0 0 0.0 0 1 2 3 4 5 6 7 05 07 09 11 13 15 05 07 09 11 13 15 Source: Wood Mackenzie Years *Subsalt Miocene

Note: Bakken month 1 is March 07, pre-salt is September 09 Bakken Source: and BDEP,pre-salt ANP, Brazil NDIC, achieved Energy Aspects similar production Source: BDEP, ANP, NDIC, Energy Aspects growth but the investment proﬁle and the number of These two characteristicsSo are the – shortdecline production rates lags which and high are decline much rates more – mean there is a far closer wells to achieve that growth fundamentally different correspondenceprominent between investment in the shale and production wells of shale oil. Investment decisions impact

Source: Energy Aspects, BP production far more quickly. And production levels fall off far more quickly unless investment in maintained. However, this is where the similarities end. To produce 0.7 mb/d in the Bakken, some five thousand wells were brought online, producing at an average rate of 140 b/d. In the pre-salt, The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members. 5 0.7 mb/d was produced from 47 wells at an average of 15 thousand b/d. In the Bakken, between December 2012 and March 2015, a further 4,500 wells were drilled to help production rise by what appears to be a peak of just under 1.2 mb/d.

Page 7

2015 | August North America Quarterly

Multiple Sources of Resilience

Monthly Well Completion in North Dakota Fig 154: Monthly well completions in North Dakota

250 Non-core counties Core counties WTI, $/bbl (RHS) 120

200 100 80 150 60 100 40

50 20

0 0 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15

Source: NDIC, Energy Aspects US shale has proven to be more resilient than originally But part of the improvement is also related to high- expected with efﬁciency improvements and lower costs of grading as rigs moved from non-core area to core services bringing down the the break-even cost areas with higher IP

Source: Energy Aspects, EIA Intra-county high-grading has also impacted average production rates, and its effect can be measured in the production rates of new wells completed in the same county over time. Improvements in extraction processes have also significantly increased initial production (IP) rates. One newly implemented technique is slickwater fracture stimulation, which began seeing widespread use by most major producers in Q2 15. Whiting had reported 20% gains in the initial, 30-day, 60-day, and 90-day production rates from new wells utilising this technology.

Production rates have increased sharply when oil prices were at their lows at the start of 2015, indicating a widespread retreat to the best acreage. For example, the weighted-average 60-day production rate for wells completed in McKenzie increased from 490 b/d in March 2014 to 771 b/d twelve months later, a 57% increase. It is important to reiterate that these wells are producing over the highest-yielding geology, which is only a fraction of the overall basin.

Fig 155: Production rates in McKenzie wells, b/d Fig 156: Declines rates - McKenzie wells, b/d IP rate 30-day rate 1,200 1,500 WLL CLR OAS EOG 60-day rate 90-day rate

1,000 1,200

800 900

600 600

400 300

200 0 Jan 13 Jan 14 Jan 15 Oct 14 Dec 14 Feb 15

Source: NDIC, Energy Aspects Source: NDIC, Energy Aspects

Page 84

Dynamics of non-OPEC Supply

Oil Production Growth, non-OPEC and FSU Oil Production Growth, Selected Countries y/y change, kbd y/y change, kbd

1000 2000 800

1500 600

1000 400

200 500

0 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 -200

-500 -400

-1000 -600

Norway UK Mexico Brazil -1500

Non-OPEC FSU

High cost producers such as the North Sea and Mexico Strong Non-OPEC supply growth preceding price fall in with long-term investment cycles led the way but 1986 but the dynamics within non-OPEC shifting production started slowing down and eventually turned negative in key supply centers Shocks from Credit Markets Can Impact Production

Cash ﬂow from operations not large enough to cover to Shale production has increased but activity mainly cover capex and the shortfall has been increasing over the ﬁnanced by debt which has risen sharply over the years years

Source: EIA (2) But non-OPEC is not only about US shale: High Cost Producers with Long-Term Investment Cycle

Petrobras Production Forecast, mb/d Canada Production Forecast, mb/d

Some of the key growth centers such as Brazil are And Canada’s oil production has been revised feeling the pinch. Brazil has already reduced its capex downward substantially as many projects get and revised downward its production target to 2.7 mb/d postponed or cancelled of liquid production by 2020

Source: Energy Aspects, Petrobras, Canadian Associa=on of Petroleum Producers 4 Mar 2016 | Data review Brazil oil data – Jan 2016

Fig 5: Brazilian field-by-field crude production, thousand b/d 2015/16 actuals y/y change 2014 2015 Nov Dec Jan YTD Nov Dec Jan YTD

Lula 171 327 381 442 405 405 205 208 127 127 Roncador 279 334 323 307 300 300 20 (25) (47) (47) Sapinhoá 88 182 186 172 206 206 60 24 63 63 Jubarte 160 191 201 198 173 173 21 11 (19) (19) Marlim 183 186 176 204 157 157 (12) 6 (43) (43) Marlim Sul 243 163 148 150 146 146 (59) (59) (38) (38) Marlim Leste 119 100 98 96 96 96 (17) (14) (13) (13) Peregrino 75 72 76 93 73 73 -- 19 3 3 Albacora Leste 52 59 70 67 65 65 13 11 7 7 Barracuda 88 78 73 68 61 61 16 (18) (19) (19) Others 368 327 276 366 257 257 (85) 10 (88) (88)

Total 1,826 2,021 2,008 2,163 1,939 1,939 162 173 (67) (67)

17 Mar 2016 | Data review Canada oil data – Jan 2016 Source: ANP, Energy Aspects

Production Canada and Brazil: Changing Dynamics

Fig 6: Production by product type, mb/d Fig 7: ProductionCanada Crude by product Oil Production, type, y/y y/y, chg. kb/d, m b/d BrazilFig 6: CamposCrude Oil vs. Production, Santos y/y change,y/y, kb/d mb/d Fig 7: y/y change, top producing fields, mb/d

Marlim Sul Roncador 3.0 0.6 0.5 Campos Santos 0.4 Oil sands Conventional Marlim Jubarte 2.7 Lula Marlim Leste 0.4 2.4 0.3 0.2 2.1 0.2 0.1 1.8 0.0 0.0 1.5 (0.1) (0.2) 1.2 Oil sands Conventional 0.9 (0.4) (0.3) (0.2) 10 11 12 13 14 15 16 10 11 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16

Source: Statistics Canada, Energy Aspects Source: Statistics Canada, Energy Aspects Source: ANP, Energy Aspects Source: ANP, Energy Aspects Brazilian production growth has been slowing down Canadian conventional production has been falling, but mainly due to the decline in the production in the Fig 8: Light / Heavy split, mb/d Figoffset 9: Lightby the /increase Heavy in split oil sands, y/y production change, mb/d Campos basin

2.3 Light Heavy Source: Energy Aspects0.6 Heavy Light

1.9 0.4

1.5 0.2

1.1 0.0

0.7 (0.2) 10 11 12 13 14 15 16 10 11 12 13 14 15 16 Page 3

Source: Statistics Canada, Energy Aspects Source: NEB, Energy Aspects

Fig 10: Canada rigs, y/y change Fig 11: Inventories, mb

300 130 2016 2015 5yr avg. 200 125 100 120 0 115 (100)

(200) 110

(300) 105 10 11 12 13 14 15 16 Jan Mar May Jul Sep Nov

Source: Baker Hughes, Energy Aspects Source: Statistics Canada, Energy Aspects

Page 4

Barclays | Iraq

exports. In the short term, Iraqi output is susceptible to the winter loading problems that have cut output by 300-500 kb/d in the past few years. Port facilities are still problematic because there are insufficient tug boats to drag the oil tankers. Storage has been added in Fao, Ratawi, and Tuba, totalling about 14 mb from 4 mb in January, according to the Iraq Oil Report. However, the loading facilities and the single-point mooring systems remain insufficient for the winter season, and they will be especially challenged at current production levels.

This increase is unlikely to be Given these constraints, we do not believe such rapid growth is sustainable in the sustained due to financial and medium term. Increased water reinjection needs, human capacity constraints, heightened infrastructural bottlenecks costs, capex cuts and logistical bottlenecks will constrain production and export gains during the next couple years, in our view. In recent months, IOCs have revised their volume targets lower in agreement with the Ministry of Oil by 4 mb/d over the next 10-15 years, Oil companies’ targets were reducing the production target from about 11 mb/d to about 7 mb/d, reflecting some of revised downwards by 4 mb/d these pressures (Figure 4). The fight against ISIS, which does not appear to be ending any time soon, has exacerbated the government’s inability to pay IOCs. This summer, protests have blocked access to work sites at Rumaila and West Qurna. Rumaila has had its output target for 2016 cut 150 kb/d due to capex being reduced from $3.5bn to $2.5bn. This We do not foresee oil means essentially flat output y/y next year. Net of declines, we expect oil production to production exceeding 4.5 increase by slightly more than 500 kb/d to 4.5 mb/d by 2020. This is 1.5 mb/d below the mb/d by 2020 Ministry of Oil’s target of 6 mb/d and slightly below IEA estimates of 800 kb/d of growth (Figure 5).

Fiscal adjustment prospects are highly uncertain The IMF predicates fiscal The expected improvement in Iraq’s fiscal position stated in the IMF RFI agreement and improvements on rising oil endorsed by the authorities hinges on two critical factors: the ramp up in oil export volumes exports and implementation of as of 2016; and continued fiscal adjustment leading to a surplus in 2019, according to the fiscal reforms IMF’s RFI document. As discussed above, we have major concerns about the country’s ability to increase its production beyond 4.5 mb/d by 2020 in the current security environment, while the IMF and the authorities project a more ambitious path to production reaching 5.5 mb/d by 2020 up from their estimates of 3.4 mb/d in 2015. Accordingly, we We think the IMF’s oil export expect a lower growth acceleration path beyond 2016 (Figure 6) predicated on slower oil path is over optimistic output/export expansion, and more constrained non-oil sector growth given planned cuts to investment spending, continued political and security threats and tighter bank liquidity.

(3) The ME-OPEC Investment Cycle FIGURE 4 FIGURE 5

Iraq Rig Count Production targets revised down by 4 mb/d… … leading to far less output by 2020 than originally hoped New Field Operator Was Finalized? mb/d Iraq Oil Production 100 Plateau 5.0 West Qurna-1 ExxonMobil 1.6 2.825 Yes 4.5 90 Zubair Eni 0.85 1.2 Yes 4.0 80 3.5 West Qurna-2 Lukoil 1.2 1.8 Yes 3.0 70 Rumaila BP 2.1 2.85 Yes (July ‘14) 2.5 60 Halfaya PetroChina 0.4 0.535 Yes (July ‘14) 2.0 decision delayed to 1.5 50 Majnoun Shell 1-1.2 1.8 2017 1.0 40 Gharaf Petronas unknown 0.23 No 0.5 Jul-13 Jul-14 Jul-15 Jan-14 Jan-15 Sep-13 Sep-14 Sep-15 Nov-13 Nov-14 Mar-14 Mar-15 May-15 May-14 Total *7.15-7.35 11.24 0.0 2010 2012 2014 2016 2018 2020 Rumaila Qurna 1 & 2 Zubair Other South KRG NOC Iraqi rig count has halved with government facing Under ﬁscal pressures, Iraqi government has been forced to revise downwards it production target negotiating with serious ﬁscal pressures Source: Iraq Oil Report, Reuters, Platts, Barclays Research Source: IEA (historical), Barclays Research (forecast) oil companies new plateaus Source: Barclays, Baker Hughes 10 September 2015 3 Key Questions

• Has the nature of the investment cycle in the oil sector changed?

• Has US shale taken the cyclicality element from the oil market?

• Does more varied investment cycles induce more or higher volatility in the price?

• Does it make the supply chain more resilient to decline in the oil price?

• Are cost curves still relevant in this new oil price environment?

• Where does the marginal barrel lie in the current oil market structure? 21 Mar 2016 In a rush Forward curves and trading ranges 21 Mar 2016 In a rush Fig 37: Brent forward curve, $/barrel Fig 38: Brent forward curve, $/barrel Forward curves and trading ranges 57 130 Fig 37: Brent forward curve, $/barrel Fig 38: Brent forward curve, $/barrel 52 110

57 130 47 90 52 110 42 70 47 Current 90 37 50 1 week ago 42 70 Current 1 year ago Current 32 1 month ago 30 2 years ago 3 years ago 37 50 1 week ago 4 years agoCurrent 5 years ago1 year ago 27 10 32 1 month ago 30 2 years ago 3 years ago 1 2 3 4 5 6 1 2 3 4 years5 ago 6 5 years ago 27 10

1 2 3 4 5 6 1 2 3 4 5 6 Source:Instability Datastream, Energy in Aspects Market Expectations Source: about Datastream Long-Term, Energy Aspects Oil Price?

Fig Source:39: WTI Datastream forward, curve,Energy Aspects $/barrel Fig 40: Source:WTI forward Datastream curve,, Energy $/ bAspectsarrel

Fig 39WTI: WTI forward forward curve, curve, $/barrel $/barrel FigWTI 40: WTI forward forward curve, curve, $/barrel $/barrel 54 115

50 54 115 50 90 46 90 46 42 42 65 38 65 38 34 Current 34 Current 40 40 Current Current 1 year ago1 year ago 1 week1 agoweek ago 30 30 2 years ago2 years ago3 years ago3 years ago 1 month1 month ago ago 4 years ago4 years ago5 years ago5 years ago 26 26 15 15 1 1 2 2 3 3 4 4 5 5 6 6 1 12 32 43 54 6 5 6

Source:Source: Datastream, Datastream, Energy Energy Aspects Aspects Source: DatastreamSource: Datastream, Energy Aspects, Energy Aspects Parallel movements in the price curve and Shape of the curve in contango reﬂecting the instability in market expectations; what does Fig 41:fact Brent that storagetrading over-ground range last is needed 14 days, $/barrel Fig 42: WTI trading range last 14 days, $/barrel Fig 41: Brent trading range last 14 days, $/barrel Fig 42: WTIthe trading back end range of the lastprice 14 curve days, reﬂect? $/barrel

Source: Energy Aspects 44 43 44 43 42 41 41 42 39 40 39 40 37 38 37 35 38 36 35 33

36 34 33 31 1 2 3 4 7 8 9 10 11 14 15 16 17 18 1 2 3 4 7 8 9 10 11 14 15 16 17 18 34 31 Source:1 Reuters2 3 4, Energy7 8 Aspects9 10 11 14 15 16 17 18 Source:1 2 Reuters3 4 7, Energy8 9 Aspects10 11 14 15 16 17 18

Source: Reuters, Energy Aspects Source: Reuters, Energy Aspects

Page 25

October 9, 2015 Top 420 Spotlight

a sizeable buffer of spare capacity. During the period from 1995 to 2002, the buffer stayed at a healthy 1.1 mn bpd to 2.4 mn bpd, or around 2.0%-3.0% of global production. However, 2002-2007 saw strong demand growth driven by emerging market strength, which necessitated production growth causing the buffer to shrink in the 2003-2007 time period to between 0.6 to 1.2 mn bpd or 0.8-1.6% of global production.

Given that tightness in the oil market, Aramco announced in 2007 a long-term plan to increase production capacity to 12 mn bpd. This started major field developments including Khurais, Khursaniyah, Shaybah, Manifa and Nuayyim.

Saudi Aramco reached its production capacity target of 12 mn bpd in 2009. The Investment and Surplus Capacity Question Exhibit 12: Saudi has consistently maintained spare production capacity over the years in order to act as a balancing force for the global crude markets • Large size of its reserve base, relative low cost of developing reserves and Saudi Arabia’s crude production, spare capacity and maximum sustainable production capacity stable investment environment, SA Saudi Arabia Surplus Production, mb/d can decide on how fast to develop its 14.0 reserves affecting future supplies and 12.0 size of spare capacity 10.0 • But spare capacity needed to control 8.0 the market on the upside and stabilize 6.0 expectations about a long-term price 4.0

• Willingness to be more pro-active in 2.0 rising market? capacity/production (mnbpd) 0.0 • Tools available to control the price on the upside? Spare capacity (mn bpd) Saudi crude production (mn bpd) Saudi max. sustainable production capacity (mn bpd)

Source: Saudi Aramco, IEA, Goldman Sachs Global Investment Research.

Source: GS

Above-ground decisions key: Investment levels more than geology to drive production outlook; Shale reduces value of spare capacity

With a reserve base of around 267 bn barrels and recent oil and NGL production of around 11.5 mn bpd, Saudi Arabia has a reserve life of about 64 years. Given such a large reserve life, Saudi Arabia is able grow production, if it chooses to, but more important, if it is willing to commit capital to it. There is room to grow production given its stated capacity of 12.0 mn bpd (excluding the Neutral Zone).

The Neutral Zone is the undivided portion of land between Kuwait and Saudi Arabia, where the two countries share production equally. Chevron manages production for the two countries in the Neutral Zone. Recently, production in the Neutral Zone has been halted, owing to a dispute between the two Gulf countries. Based on data provided by OPEC, Saudi Arabia’s interest in the Neutral Zone’s production and production capacity is estimated to be 250K bpd.

Plentiful short-cycle US shale resource reduces importance of retaining meaningful spare capacity The major shift in the oil market in recent years is the emergence of US shale oil as a second short-term supply response mechanism to complement OPEC spare capacity. With

Goldman Sachs Global Investment Research 9 OPEC Dynamics Saudi Arabia and the Role of the Swing Producer

Saudi Arabia Oil Production, mb/d Saudi Arabia production vs Quota (000 b/d)

14000

12000

10000

8000

6000

4000

2000

Saudi Arabia not willing to cut output unilaterally; shaped In 1998, SA reacted by increasing production by the mid 1980s events when its attempt to protect the and did cut output but only after agreement price resulted in loss of large volumes of production and with other OPEC and non-OPEC members has market share been reached; took long time to forge such an agreement Source: BP, OPEC 2015 | December issue Fundamentals

OPEC crude oil output

Fig 37: Saudi Arabian oil output, mb/d Fig 38: Iraqi oil output, mb/d

11 4.4

4.0

10 3.6

3.2

9 2.8

2.4

2015 | December issue Fundamentals 8 2.0 10 11 12 13 14 15 16 10 11 12 13 14 15 16 Bringing Back Iraq and Iran into the quota System Challenging OPEC crude oil output Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects

Iraq Oil Production, mb/d Fig 39: Iranian oil output, mb/d Fig 40: Kuwaiti oil output, mb/d Fig 37: Saudi Arabian oil output, mb/d Fig 38: Iraqi oil output, mb/d Iran Oil Production, mb/d

4.0 11 4.4 3.1

4.0 2.9

10 3.6 3.5 2.7 3.2 2.5 9 2.8 3.0 2.3 2.4

8 2.0 2.5 2.1 10 11 12 13 14 15 16 10 11 12 13 14 15 16 10 11 12 13 14 15 16 10 11 12 13 14 15 16

Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects

In 2015, Iraq, a low cost producer, has been the FigHow 41: muchUAE oil and output, how fast mb/d can Iran increase its Fig 42: Venezuelan oil output, mb/d Fig 39: Iranian oil output, mb/d Figmajor 40: Kuwaitisource of oilsupply output, growth mb/d adding more than export is a major source of uncertainty facing 650,000 b/d Saudi Arabia and the wider market 4.0 3.1 3.0 2.8 Source: Energy Aspects, MEES 2.8 2.9 2.6 3.5 2.7 2.6 2.4 2.5 2.4 3.0 2.2 2.3 2.2

2.5 2.1 2.0 2.0 10 11 12 13 14 15 16 10 11 12 13 14 15 16 10 11 12 13 14 15 16 10 11 12 13 14 15 16

Fig 41: UAE oil output, mb/d Fig 42: Venezuelan oil output, mb/d

3.0 2.8

2.8 2.6 Page 27 2.6 2.4 2.4

2.2 2.2

2.0 2.0 10 11 12 13 14 15 16 10 11 12 13 14 15 16

Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects Source: IEA, EIA, Reuters, Bloomberg, Platts, Energy Aspects

Page 27

i.) Saudi Arabia might be in game (1) and plays as if it is in game (1) ii.) Saudi Arabia might be in game (1) but plays as if it is in game (2) iii.) Saudi Arabia might be in game (2) but plays as if it is in game (1) iv.) Saudi Arabia might be in game (2) and plays as if it is in game (2) In order to show how the decision is made under uncertainty, we depict the tree diagram of the game in Figure 4. It is clear from the diagram that if Saudi Arabia is in game (1) (elastic shale oil supply) and plays the optimal strategy of game one (no change in the output) the payoff would be zero. However, if Saudi Arabia plays the optimal strategy of game (2) (cutting output assuming inelastic shale oil supply) while in fact it is in game (1), the Kingdom incurs the biggest loss which is -A (losing both market share and revenue). Similarly, if Saudi Arabia is in game (2) and plays as if it is in game (1), the Kingdom makes a moderate gain B. But if Saudi Arabia plays as it is in game (2) the payoff is highest which is A.

Taking all four different possibilities into account, we can calculate the expected payoff of playing optimal strategy of game (1) in presence of full uncertainty about the game as: Exp[P(game1)]= 0.5 (0) +0.5 (B) =0.5B. Likewise the expected payoff of playing the optimal strategy of game (2) under uncertainty is: Exp[P(game2)]=0.5(A) +0.5(-A) =0. As the expected payoff of playing the optimal strategy of game (1) is strictly higher than the expected payoff of playing the optimal strategy of game (2), it is always better for Saudi Arabia to assume that it is in game (1) as long as there is no their output without any possibility of substitution (-A is the highest level of loss that players make information available a priori. In other words, under uncertainty it is always safer for the Kingdom to when they lose both their market share and revenue).17 B is a modest gain players make from a assume that shale oil supply is elastic. As we saw in game (1) the optimal strategy under elastic shale successful production cut of other playersOptimum (-B is a moderate loss to due Strategy to a production cut in in oilFace is “no change of in output”. Uncertainty: This might be one of the reasons Saudi Arabia did not agree with a presence of falling market and possibility of substitution). C is the lowest gain players make from the production cut in OPEC meeting in November 2014. This situation exists until the oil market transmits successful production cut of its ownThe (-C is the lowest Elasticity loss due to production cut in presenceof ofthe a USnew informationShale regarding Supply the uncertainty to whichCurve the Kingdom can react and adjust its strategy falling market and substitution). accordingly. Table 2: Optimum strategy in the short run (falling market) Figure 4: Tree diagram of the whole game in presence of uncertainty induced by US shale oil

Elastic US supply (game 1) Inelastic US supply (game 2)

Other-OPEC Other-OPEC Other-OPEC Other-OPEC members cut members do members cut members do not output not change output change output output

SA cuts SA cuts output output C, B -C, -C -A, 0 A, A SA does SA does not not change change 0, -A 0, 0 output B, C 0, 0 output

Under uncertainty about US shale response, it is UnderAs seen complete from the table, when information shale oil supply curve about is highly inelasticshale (game response 2) there is a strictlyin a For better example, inoff hindsight, for Saudi the current Arabia downward to phase assume of the cycle that has revealedshale some interesting supply curve is elastic and not to cut production risingdominant price strategy environment, for the Kingdom. In the shortthere-term, is Saudi a Arabiasingle benefits and from efﬁcient an output cut features regarding US tight oil production worth highlighting: solution to the game (the losses are even larger if other OPEC members irrespective of the behavior of other players. There is also a dominant strategy for other suppliers: Thedon’t US tight cut oil industryand US is highly supply responsive proves to low oil pricesto be as reflectedelastic in the) sharp fall in the cutting output leaves them a level of gain higher than inaction, no matter what Saudi Arabia does. number of rigs and the large cuts in capital expenditure announced by the US shale producers; Therefore, under game (2), there is a single optimal strategy profile – Saudi Arabia should opt for an output cut with or without coordination from other members. But the relationship between the fall in the number of rigs and the fall in production is not linear and is affected by factors such as efficiency gains, the ability of shale producers to renegotiate In similar manner, when shale oil supply curve is highly elastic (game 1) there is a dominant strategy contracts with service providers, and high grading (i.e. shifting rigs into more productive areas or both for Saudi Arabia and other players. Saudi Arabia would be better off not changing its output, sweet spots). During the downturn, US shale producers have shown the ability to achieve strong irrespective of the behavior of other players. The same applies to other players. Thus, the game has a single optimal strategy: no player changes its output level because it loses both its market share and revenue. The Dynamics of the Revenue Maximization–Market Share Trade-Off: 14 Saudi Arabia’s Oil Policy in the 2014–2015 Price Fall The problem is at the time of decision there is no information available to the players regarding the elasticity of shale oil supply curve. Put another way, there is no way for the players, including Saudi Arabia, to find out which game they are in a priori. In fact, whether they are in game (1) or (2) will only be revealed after the players have implemented their strategy. If the players knew in advance which game they are in, then the problem would be simple. This is because each player can play their optimal strategy and, due to presence of a unique equilibrium under both games, an efficient outcome would be achieved. However, due to uncertainty the players are exposed to significant risk because four different possibilities exist:

17 This assumes that Saudi Arabia’s decision to cut output will have an immediate impact on price and hence on revenues. In practice, there may be lags between the time an announcement of a cut is made and the time the price responds to such news. This would depend on market conditions and whether market participants consider the announcement of a cut as credible signal or ‘cheap talk’. Furthermore, it is not always clear how the market will initially react to the announcement of an output cut (see for instance, Fattouh, 2008). This could add a further layer of uncertainty to the game. For simplicity, we assume that the output cut will be successful in raising the price.

The Dynamics of the Revenue Maximization–Market Share Trade-Off: 13 Saudi Arabia’s Oil Policy in the 2014–2015 Price Fall

Oil & Oil Products

17 Mar 2016 | Data review Middle East oil demand – Jan 2016

Middle Eastern oil demand rose y/y by 0.17 mb/d in January to 5.91 mb/d, despite Saudi Arabian demand being unchanged on the year, at 2.15 mb/d. Much of the growth stemmed from Iraq, where oil demand increased y/y for the eighth straight month, by 35 thousand b/d to 0.61 mb/d in January. Consumption also rose in the UAE, Kuwait, Oman, and Qatar, where demand rose by a collective 0.1 mb/d y/y. In Saudi Arabia, strong growth in transportation fuels (up by 0.10 mb/d collectively across gasoline, jet fuel and diesel, with gasoline demand particularly strong at 0.6 mb/d) was offset by weakness in fuel oil, which fell y/y by 91 thousand b/d, as cooler weather (CDDs lower y/y by 5%) resulted in lower power generation. Indeed, even direct crude burn rose by y/y by just 17 thousand b/d. Iranian demand was higher y/y by 26 thousand b/d (1.5%), the first increase in three months. Diesel demand totalled 0.56 mb/d, higher y/y by 23 thousand b/d (4%) while gasoline demand continues to surge, higher y/y by 76 thousand b/d (18%) to a record high, breaching 0.5 mb/d for the first time ever. Fuel oil demand, however, remains weak, as natural gas continues to make inroads into power generation. Consensus estimates peg 2016 Iranian GDP growth at roughly 5%, up from 2% in 2015, which should help oil demand rise y/y by at least 0.1 mb/d.

Refinery runs remained flat m/m at 7.26 mb/d in January, as increases in Saudi (up by 0.16 mb/d m/m to nearly 2.5 mb/d) were offset by lower runs in the UAE, Kuwait, and Oman. These included an unplanned outage at the Ruwais refinery in the UAE, as well as works at Orpic’s Sohar refinery in Oman.Pursue February a runs Market remained Share unchanged, Strategy though runs are set to fall below 7.0 mb/d in March as planned works at the Ruwais refinery will see it out of action for 45 days.

Fig 1Saudi: Saudi Arabia crude Oil exports, Exports, mb/d mb /d Fig 2: Saudi crude inventories, mb

8.2 340

7.8 320

7.4 300

7.0 280

6.6 260 2016 2015 2016 2015 2014 2012 2014 5 yr avg 6.2 240 Jan Mar May July Sep Nov Jan Mar May July Sep Nov

Source: JODI, Energy Aspects Source: JODI, Energy Aspects In the absence of agreement on cuts and the wide Saudi Arabia has succeeded in maintaining its share range of uncertainties, Saudi Arabia is seeking to in key markets in Asia in face of very tough maintain market share and to keep exports above 7 For questions or support, contact competition mb/d; in winter, exports could jump +44 20 3322 4100 | +1 (646) 606-2900 | +65 3158 9990 Source: Energy Aspects, EIA [email protected]

17 Mar 2016 | Data review Middle East oil demand – Jan 2016

Fig 21: Middle East refined products output, thousand b/d YoY Kero- YoY Gasoline YoY Ch. Diesel YoY Ch. Fuel oil Total YoY Ch. Ch. sene Ch.

2013 1,002 22 1,178 (15) 949 10 707 (20) 6,442 24 2014 986 (16) 1,244 65 943 (6) 734 27 6,290 (152) 2015 1,067 81 1,487 243 905 (39) 759 24 6,643 353

2015 to Jan 1,033 (16) 1,308 82 900 (254) 737 (3) 6,197 (420) 2016 to Jan 1,130 97 1,711 403 908 8 695 (42) 7,008 811

Q2 '15 1,041 82 1,428 217 947 (16) 767 34 6,679 356 Q3 '15 1,118 162 1,525 233 909 12 772 30 6,839 633 Q4 '15 1,109 75 1,669 371 847 (61) 734 19 6,740 587

Nov '15 1,055 63 1,555 295 816 (89) 794 127 6,522 499 Dec '15 1,130 82 1,802 487 922 15 648 (69) 7,048 877 Jan '16 1,130 97 1,711 403 908 8 695 (42) 7,008 811

Note: UAE numbers are EA estimates. Source: JODI, Energy Aspects Fig 22: Total refined products output, mb/d Fig 23: Fuel oil output, mb/d

7.4 2016 2015 5yr avg. 1.2 2016 2015 5yr avg.

7.0 1.1

6.6 1.0

6.2 0.9 2015 | September issue Middle East Quarterly 5.8 0.8 gasoline deficit has been pared to around 70 thousand b/d (see Fig 6) and will fall further in H2 5.4 0.7 15 now Yasref has reached full capacity. During the commissioning phase, many shipments Jan Mar May Jul Sep Nov Jan Marfrom theMay YasrefJul refinerySep stayedNov within the Middle East, partly because they could not meet more stringent quality standards. By June the refinery was producing diesel that reportedly Source: JODI, Energy AspectsCompetition in theSource: Products JODI, Energy Aspects Markets met European summer specifications and cargoes started to regularly head into that market. Fig 24Saudi: Diesel Diesel output Output,, mb/d mb/d Fig 25: Gasoline output, mb/d Saudi net diesel exports, mb/d

Fig 5: Saudi net diesel exports, mb/d Fig 6: Saudi net gasoline exports, mb/d 2.0 2016 2015 5yr avg. 1.2 2016 2015 5yr avg.

0.4 0.1 1.8 1.1 0.3

0.2 1.6 1.0 0.0 0.1

1.4 0.9 0.0 (0.1) (0.1) 1.2 0.8 (0.2)

1.0 0.7 (0.3) (0.2) Jan Mar May Jul Sep Nov Jan 09Mar May11 Jul Sep13 Nov 15 09 11 13 15

Source: JODI, Energy Aspects Source:SaudiNote: JODI Arabia’s , EnergyImports Aspectsexports-exports, of positive diesel = nethas exports increased in recent Note: Imports-exports, positive = net exports Saudi diesel output has been on the rise as most monthsSource: with JODI, the Energy country Aspects turning from net importer to a Source: JODI, Energy Aspects of the new reﬁneries are diesel biased net exporter of diesel in many months

Source: Energy Aspects, JODI UAE balances do not yet show a significant change given the Ruwais ramp up schedule and start-up problems, but once it hits full capacity we expect average UAE diesel exports to rise to around 85 thousand b/d, from an average of 15 thousand b/d in 2014, and gasoline exports to

exceed 90 thousand b/d from negligible levels in 2014. Meanwhile, although Iraq has lost Page 6 significant processing capacity y/y, demand has also been disrupted by the Islamic State advance. As a result, balances for most products are largely unchanged apart from fuel oil, where the closure of Baiji has reduced the country’s net surplus by around 70 thousand b/d y/y in H1 15.

Changing trade flows hurt Asia the most The largest impact of these changing trade flows is undoubtedly on Asian export refineries. Their export markets in the Middle East are shrinking, with Saudi Arabia and the UAE reducing their own imports and able to supply more of the needs of neighbouring countries. The new Middle Eastern plants are also better located to supply both Europe and the East African market, effectively closing the arbitrage window for Asian refineries to send products west into these markets. All of this is likely to hit Indian export refineries particularly hard, along with other Asian exporters such as South Korea and Japan.

Product exports also flow directly from the MENA region to Asia, and the new refining capacity is contributing to growth in these volumes. OPEC members in the Middle East and North Africa are sending a combined 2.71 mb/d of petroleum products in 2014 according to the OPEC Secretariat, up from 2.40 mb/d in 2011. At present the majority of this is dirty products, along with around 0.7 mb/d of naphtha and some jet fuel. Middle Eastern product exporters hope to boost the volumes of other clean products being sent into Asian markets.

Page 9

Different Thresholds of Pain 4. FISCAL ADJUSTMENT TO LOWER OIL PRICES IN MENA AND CCA OIL EXPORTERS

Box 4.2

Developing and Deepening Local Currency Figure 4.2.1 Debt Markets in the GCC Domestic Debt Issuance by Nonfinancial Corporations, 2014 The choice of how fscal defcits are fnanced could (Percent of GDP) provide an opportunity for CC countries to develop 20 their local debt markets, including sovereign issuance of long-term Islamic instruments. Developing deep and 16 liuid domestic debt markets can strengthen the resilience of these economies to adverse shocks, facilitate the 12 conduct of monetary policy by improving the monetary 8 transmission mechanism and the implementation of

Basel III liuidity norms, and help advance diversifcation 4 agendas by expanding the availability of long-term fnancing. An actively traded government bond market in 0 Italy Oman Qatar Spain the CC region could provide a base from which to price Bahrain Kuwait France Germany Switzerland local currency corporate bonds and help address maturity Saudi Arabia United States United Kingdom 2015 | December issue Middle East Quarterly mismatches that restrict long-term bank lending. United Arab Emirates The CC hascountries also been domestic tapping debt the markets local debt are atmarket an . By 2020,Sources: the National IMF projects authorities; the and ratio IMF staff of estimates.gross debt early stageto of GDP development will reach and 44% much from needs the lowto be level done of 1.5% in 2014. But this would still be a low ratio to advanceFiscalcompared the agendabuffers to (Figure many are western4.2.1). large The economies especially domestic and relative when to comparedthe Saudi debt tolevels previous at the start cycles of the corporate lastbond decade market before is almost oil prices nonexistent. began toIn riseuly dramaticallyFigure. 4.2.2 2015,Saudi Saudi Net Arabia, foreign for example, Assets, issuedBillion its of frst US$ sovereign GCCGCC Debt, Government % of GDP Domestic Debt Stocks, 2015 bondsFig 19 since: Saudi 2007 net to foreignlocal banks reserves, to fnance $ b itsn fscal Fig 20: Saudi debt/GDP ratio, IMF forecast, % Percent of GDP Billions of U.S. dollars 50 defcit,800 and Oman and uwait are planning a Sukuk 100 issuance. That said, the local currency debt issuance in Forecast 40 the CC countries has yet to translate into adeuate 80 700 secondary market liuidity, and only atar has made 6030 systematic progress in the development of its government securities market in recent years (Figure 4.2.2). 4020 600 Establishing a liuid and well-functioning market for 2010 long-term government and corporate debt reuires 500 0 proactive and coordinated efforts from government, 0 12 13 14 15 Bahrain00 Kuwait04 Oman08 Qatar12 Saudi16 United20 Arab central banks, other regulatory bodies, and market Arabia Emirates

participants.Source: SAMA, ey Energy steps Aspects and conditions include: Source: IMF, Energy Aspects GCC government debt as a % of GDP is one of Fiscal buffers are large in some countries such as Saudi Sources: National authorities; and IMF staff estimates. lowest in the world in countries like Kuwait and Arabia Initially but foreign concentrating assets have on fallen dev sharplyeloping in the the short ﬁrst end Note: Debt stock is composed of Treasury bills and government bonds; If prices stay low, the government will have toSaudi cut Arabia expenditure and hence the capacity to borrow is part of 2015 2015 data are last month available. of the yield curve by building a liuid Treasury large If the low oil price environment persists, the Saudi government will have little choice but to Source: SAMA, IMF bill marketadjust where its expenditure issuances outlays,are backed which by liuidityhave risen at a fast rate in the last decade. Between 2004 forecastingand 2014, with current a transparent expenditure price-clearing almost trebledmechanism.. Capital expenditure grew even faster, by almost Achievingten times a diversifed during this domestic period and. Buoyed foreign by institutionalhigh oil prices, investor Saudi baseArabia (including has increased pension, its spendinginsurance, and mutualon funds) capital that projects can shift to fnancial upgrade intermediation and build new from infrastructure. banks to capital The markets Saudi governmentby increasing hasthe demand for long-termembarked fnancial on an ambitiousassets. public investment programme—airport, metro, road and railway Creatinginfrastructure an effcient— institutionaland other projects infrastr (uctureincludinge.g. refining and petrochemical a credible rating plants) system, to trygood and corporate diversify governanceits economy. standards, As a transparency result, capital in expenditure reporting reuirements, had risen to and more the than adoption 33% of of total international expenditure accounting in 2014, from 13% in 2004. standardsto help foster market discipline. Fig Mak21: Saudie pricing current transparent expenditure, and improve $ b nmicrostructuressuch Fig 22: Saudi as effective capital trading expenditure, mechanisms, $ b nand custody and settlement systemsto enhance liuidity and effciency, while reducing trading costs and volatility. 250 120 Capital expenditure (LHS) 50% % of total (RHS) 100 Prepared200 by Prasad Ananthakrishnan. 40% 80 150 30% 60 77 100 20% 40

50 20 10%

0 0 0% 04 06 08 10 12 14 04 06 08 10 12 14

Source: Ministry of Finance, Energy Aspects Source: Ministry of Finance, Energy Aspects

Page 21

Cutting Energy Subsidies

In GCC countries (with exception of Kuwait) gasoline and diesel prices have been raised though these remain the cheapest in the region and in the world

Source: MEES Geopolitics and Oil Price Barclays | Middle East Geopolitics Weak States and Rise of Non-State Actors FIGURE 1 ISIS’s presence and activities in Iraq and Syria

Ain-Diwar Tawke • The fragmentation of state and the eclipse of its Turkey Qamishli Mushora Dahuk Fishkabur Ayn al-Arab Yarubiya Sufaye Dahuk formal institutions Jarablus Ras al-Ayn Ain Zalah Bab al-Salama Arbil Butma Mosul dam Azaz Gusair Harem Manbij Tal Abyad Alan – Inability of states to protect borders, control territory and Hasakah Sasan Salqin al-Bab Mosul Bab al-Hawa Ibrahim Qalan Demir Dagh Darkush Kuweiris ash-Shadadi Adayla resources Aleppo Taq Taq Airbase Jawan Arbil Jisr ash-Shughour Idlib ar-Raqqa Kurmala Najma Dome Avana Dome Miran Kasab Saraqib al-Qayara – Weakening of state’s formal institutions (Army, Judicial Ariha Maskana Kirkuk As Sulaymaniyah Ma’arat al-Nu’man Ninawa Kirkuk Latakia Chamchamal System, Parliament, etc….) Khan Sheikhoun Markadeh Sadid Qara Chauq Baba Dome Mahardeh Morek Deir ez-Zour Deir ez-Zour Jambur Hama – Questions about legitimacy of transitional governments Khor Mor Baiji Chia Surkh Iran Tartous al-Mayadin Chia Surkh (Egypt, Yemen, Iraq) Salah Tikrit Dabussiya Homs Qamarim Ajil Judaida Tal Kalakh ad Din Palmyra Injana Gilabat Jussiyeh West Tikrit Nau Duman Abu Kamal • The rise of the non-state actors Qaim Samarra Mansuriya Muqdadiyah Jaria Pika Aarsal Syria Khashim al-Ahrnar – Naft Khaneh Hizbollah (Lebanon), Houthis (Yemen), Hamas Lebanon Yabrud Baqubah Beirut Haditha Ar Ramadi Balad (Palestine), IS (Iraq), Libya Dawn (Libya) Jdaidet-Yabus Fallujah Diyala al-Tanf Damascus Baghdad – Established a ‘state’ within the state challenging formal Rutba Quneitra authorities Badra as-Suwayda Wasit Deraa Najaf Israel Al Anbar – Ability to dictate their own agendas Nassib Karbala Al Hillah Al Kut Jizzah Babil • Strong links to regional powers ISIS Control Zones Al-Qadisyyah Areas of Predominantly Kurdish Population Iraq Ad Diwaniyah • Control decisions to initiate and stop wars An Najaf Al Amarah Kurdish Autonomous Region Maysan • Dhi Qar Engage in wars outside borders Oil Field Samawa Jordan ISIS Attack Zones An Nasriyah • As power of central government weakens, new City/Town Assad Regime Controlled local powers will emerge ISIS Controlled Basra Rebels Controlled Basra – Local powers can’t be sidelined NF Controlled NF Stronghold – Adds new complexity for foreign players’ relationship Kurdish Controlled Saudi Arabia Al Muthanna Kuwait FAO with governments and local players Contested

Source: www.eia.gov, www.understandingwar.org. As of September 8-9, 2014. 17 September 2014 4 Nature of conﬂict and geopolitical risks have changed with new set of challenges for the oil industry Oil

29 Feb 2016 | Perspectives

Needle in a haystack

For all the talk of brimming crude stocks overflowing into floating storage, our balances show global crude stocks drew in January, by around 12 mb. While US crude stocks built by a large 15 mb, stocks drew heavily in OECD Asia. Even non-OECD crude stocks fell, led by China and Brazil.

Moreover, even crude being stored on water has been edging lower since peaking in late October 2015. On our estimates, ex-Iranian floating storage currently stands at no more than 35 mb. And of that, around 30 mb is sitting off the USGC due to run cuts, unplanned refinery outages, and Houston Ship Channel issues. Only 3-4 mb of the 30 mb is WTI, being floated as the WTI contango makes it economic to do so, and this may rise towards 10 mb.

In contrast, the Brent and Dubai curves do not pay to hold crude on water, and tankers holding crude off Singapore when the Dubai contango had widened in December and January have in fact been offloaded. Asian crude demand is extremely robust as India and China fill their SPRs.

Tankers appearing off the coast of China are not crude being floated, rather there is rising port congestion (waiting times at Qingdao have risen towards 15 days) given record imports into the country in February. Moreover, given the teapots’ propensity to buy distressed cargos, smaller vessels are being incentivised to hover around ports—this will be the new norm going forward.

Product stocks, on the other hand, have risen by more than crude stockdraws in January and 16 Mar 2016 | Data review OPEC oil data – Feb 2016 the market may be mistaking product tankers being floated off ARA as crude floating storage. Commercial crude stocks (ex SPR) may fall again in February and March givenUnplanned unplanned crude Outages OPEC on crudethe Rise oil output (cont’d) output outages (led by Iraq and Nigeria) have risen to their highest since June 2014, at 2.2 mb/d. Fig 13: Nigerian oil output, mb/d Fig 14: Angolan output, mb/d Fig 1: Ex-Iranian floating crude on VLCCs, mb Fig 2: UnplannedUnplanned upstream upstream outages, outages, mb/d mb /d Nigerian Oil Output, mb/d 2.5 2.0 80 4 Non-OPEC OPEC 2.3 60 3 1.8 2.1

2 40 1.9 1.6 1 20 1.7

1.5 1.4 0 0 13 14 15 16 10 11 12 13 14 15 16 10 11 12 13 14 15 16 09 10 11 12 13 14 15 16 Upstream outages have been on the rise in Source: IEA,Especially EIA, RTS, inBBG, fragile Platts, states Energy where Aspects Source: IEA, EIA, RTS, BBG, Platts, Energy Aspects Note: Does not include ships queueing due to congestion Note: recentDoes not months include led planned by countries upstream like maintenance Nigeria, dependency on oil revenues is very high Iraq and Libya Source: Energy Aspects Source: Energy Aspects Source: Energy Aspects, IEA Fig 15: Libyan oil output, mb/d Fig 16: Algerian oil output, mb/d

For questions or support, contact +44 20 3322 4100 | +1 (646) 606-2900 | +65 3158 9990 1.8 1.4 [email protected]

1.3 1.2

1.2

0.6 1.1

0.0 1.0 10 11 12 13 14 15 16 10 11 12 13 14 15 16

Source: IEA, EIA, RTS, BBG, Platts, Energy Aspects Source: IEA, EIA, RTS, BBG, Platts, Energy Aspects Fig 17: Qatari oil output, mb/d Fig 18: Indonesian oil output, mb/d

0.9 0.9

0.8 0.8

0.7 0.7

0.6 0.6 10 11 12 13 14 15 16 10 11 12 13 14 15 16

Source: IEA, EIA, RTS, BBG, Platts, Energy Aspects Note: Only IEA and EIA have released historic estimates Source: IEA, EIA, RTS, BBG, Platts, Energy Aspects

Page 4