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Comment: Middle East NOCs in transformation mode

by Guest on Nov 12, 2017

Jonty Rushforth, director  oil and shipping price group, S&P Global Platts.
Jonty Rushforth, director oil and shipping price group, S&P Global Platts.

The fortitude of Gulf national oil companies’ (NOCs) ongoing transformation into fully fledged international operators may be tested this year. But any suggestion that a rise in oil prices beyond the $40 per barrel range of late 2016 to today’s $50 per barrel range and higher would trigger NOCs’ retreat from their quest for global integration is premature. 

After half a century of letting international oil companies (IOCs) play the role of fixer, NOCs are now approaching the negotiating tables with more knowledge and independence than ever before. Their steps – sometimes leaps – into new territory mark their biggest overhaul since the days of nationalisation in the late 1970s. 

Their resolve in this is demonstrated by what they have faced so far. Gulf NOCs’ performance has remained on track against a backdrop of a ‘lower for longer’ oil price era since mid-2014, with bearish sentiment deepening when oil prices dipped to a 12-year low in January 2016. 

Alongside this is the shale oil and gas revolution in the US, corporate restructurings, shortened payrolls, and serious security issues in the wider Middle East.

There still remain some hurdles, however. US production continues to be a challenge, and Gulf NOCs also have to consider how the Vienna Agreement – the first OPEC-non-OPEC agreement to cut supply in 15 years – will fare in the remainder of the year. Plus, Eurasia Group expects 2017 to be the most politically volatile year since World War II. 

A glance at the calendar quickly reveals why. The surprise results of the US election saw US President Trump take his seat in the Oval Office in January this year, and the UK activated Article 50 in late March to move towards Brexit. What impact will President Trump’s ‘America First’ policies have on state-owned energy giant Saudi Aramco’s ability to flex its muscle as it gets ready to take control of the largest refinery in the US, the 600,000 barrels per day (bpd) Port Arthur facility? And will major liquefied natural gas (LNG) exporters in the Gulf region be able to protect their dominant role in the UK’s LNG import market amid competition from across the Atlantic and Russia? 

Political jockeying in China up to September’s election for the new Party of Congress could also have an impact on the Gulf NOCs’ playbook, as coveted Asian importers top their client list. The producers have made considerable efforts to protect their share of markets in the East, and any threat to the sustained health of those markets is a major risk for the newly commercial NOCs. Indeed, investors have been voicing concerns that the stars could align for a Beijing-centered banking crisis in the next few years. Guangzhou-based fund, ShoreVest Capital Partners, estimated in late March that China has around $3tn in distressed debt. Ratings agency, S&P Ratings, expects China’s high gross domestic product (GDP) to stave off a banking crisis this year, but emphasises that the outlook remains negative and unsustainable.

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