Money, money and some more ‘crude’ money

Published November 29, 2020
Despite weak markets, low oil prices, and dim future projections, stakeholders are striving to pluck the low hanging fruits. — AFP/File
Despite weak markets, low oil prices, and dim future projections, stakeholders are striving to pluck the low hanging fruits. — AFP/File

A new energy era is on the horizon. And a number of interconnected events seem to impact and mould this emerging era.

Confirming his commitment to climate change, the US President-elect Joe Biden has nominated, a person of the calibre and stature of former Secretary of State John Kerry, as the special presidential envoy on climate change.

The appointment of Kerry is significant. It reiterates the message that climate change is high on Biden’s priority list. The message is getting loud and clear, to stake holders.

Consequently, the rush to monetise the assets beneath the surface seems to gather momentum. Despite weak markets, low oil prices, and dim future projections, stakeholders are striving to pluck the low hanging fruits.

The United Arab Emirates has announced plans to increase its output capacity. The country’s top body for energy policy, Abu Dhabi’s Supreme Petro­leum Council has approved plans to invest $122 billion in the oil and gas sector over the next five years. As per Bloom­berg, the country plans to raise its daily capacity to 5 million barrels per day (bpd) by 2030 from about 4m bpd. This is despite the fact that due to the current output constraints, UAE’s production remains capped at roughly 2.6m bpd.

Besides, the Abu Dhabi National Oil Company (Adnoc) has recently announced the discovery of an additional 2 billion barrels at conventional fields. That brings the UAE’s total reserves of recoverable oil to 107bn barrels. Adnoc has also found an extra 22bn barrels of unconventional oil. This is though harder to extract and all of it may not be recoverable.

The decision by Abu Dhabi to boost spending could be a move to monetise its vast oil reserves before the expected peak in oil demand for a number of reasons, including the climate change movement taking a centre stage.

Elsewhere, Norway has also offered 136 blocks in the Arctic Barents Sea and the Norwegian Sea in its latest licensing round, opening the way for a major expansion of exploration in the Arctic.

And all this is happening in a rapidly changing and challenging energy environment. Most oil producers, especially in the Gulf Arab region, are faced with immense financial pressures. In a bid to bail them out of the financial quagmire they are in, they are now turning to debt markets. Bond issues in the region have already hit US$100bn, exceeding the previous record amount of bonds issued in 2019.

In order to meet the $75bn dividend pledge to shareholders, the world’s largest and most integrated oil company Saudi Aramco had to raise $8bn last week. The slump in crude prices has caused Aramco’s profit to fall by 45pc in the third quarter, and it has little funds to meet its dividend obligations.

This was the second time in two years, that Aramco had to tap the US-denominated bond market after last year’s $12bn bond issue in its first international issuance, for which it had received more than $100bn in orders.

Major oil producer Kuwait, one of the world’s wealthiest countries is also faced with a debt crisis. As per a report by AP, this fall, the rating agency Moody’s downgraded Kuwait for the first time in its history. Kuwait’s national bank said the country’s deficit could hit 40pc of its gross domestic product this year, the highest level since the financial devastation of the 1990 Iraqi invasion and the subsequent first Gulf War.

For the first time in history, oil revenues would not cover salaries and subsidies, which have swelled since 2006 and now eat up more than 70pc of the national Kuwaiti budget. At current oil prices and spending levels, the general reserve fund will dry up by December, Raghu Mandagolathur, research director at the Kuwait Financial Center was quoted by AP as saying.

Oman and Bahrain’s finances are on a more precarious footing than those of the larger oil producers. Still have also tapped bond markets this year.

Loading on debt currently looks like the only way out of the crisis. It provides the Middle Eastern oil producers, a way to plug the shortfall without further escalating the already tough austerity measures, which could be highly unpopular in the oil monarchies, and could have political consequences.

However, the debt binge will come to an end sooner or later. And the oil producers in the region do not seem prepared to face the reality.

Monetising the assets quickly may not be the silver bullet they all are looking for.

Published in Dawn, November 29th, 2020

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