Oil prices and national fiscal balances: Is time for radical changes?
For many years international and integrated oil companies (IOCs) were the largest fish in the sea. They had access to resources, capital, and technology while also having the commercial and marketing networks to secure offtake for their oil. But what are they left with now? Technology, commercial capabilities and some of them access to capital.
A wave of nationalization that started in Mexico and Venezuela in the 1930-1940s and then moved on to the Middle East in the 1960-1970s brought the resources into the hands of the national oil companies (NOCs). Technology and marketing skills were also transferred after the many years of IOC-NOC collaboration.
Someone would think that with huge oil quantities on the ground and the technological capabilities like those of IOCs, NOCs are in the best position to weather the COVID storm and the storms to come.
And that would be true if NOCs were acting solely as corporations which by the nature of their existence they cannot do. NOCs must successfully manager their nations’ oil wealth and ensure adequate contribution to their government’s finances.
Even if NOCs were the most efficient companies in the world (some of them are indeed), the oil price required for their governments to breakeven is far above the current ~40$ - Saudi Arabia breakeven price of $82, Oman of $92 and UAE of 67$ for 2019 according to IMF.
As much as oil exporting nations promote diversification away from oil, they are still quite far from being oil independent or at least less dependent to oil price swings. Reports from Kuwait indicate that the government would need to raise debt in order to be able to meet its payment obligations this month, while in Saudi Arabia the government tripled the VAT tax from 5% to 15%.
UAE on the other hand even prior to the COVID crisis has had a different approach to strengthen its finances. Through ADNOC, the national oil champion of Abu Dhabi, they have managed to attract over $20 billion in foreign direct investment (FDI) in less than 3 years. By selling and leasing part of its upstream, downstream, pipeline and even real estate assets, ADNOC has made UAE the top country in the Middle East in FDIs in 2019 and is likely to retain its position in 2020.
By attracting different investor profiles depending on the part of its oil & gas value chain, ADNOC has reduced the exposure and the capital required to develop its nations resources but also formed significant JVs to expand their areas of operations (Trading JV with Eni and OMV).
What options do other countries have to ease their fiscal balance pressure?
For Kuwait and Saudi Arabia, it would seem hard to introduce any foreign company back into their upstream business. After all, sovereignty of natural resources is how the nationalization wave started in the region in the first place.
But what about other assets that do not involve ownership of oil & gas? Pipelines seem to be an attractive candidate for FDIs in both countries and in the wider region. They provide stable returns almost as a fixed income investment and are usually well perceived by sovereign wealth funds, pension funds and other institutional investors.
Refining doesn’t seem too attractive as overall performance in the region has not been great and even new projects like Kuwait’s Al-Zhour refinery have experience cost overruns, while in Saudi Arabia it is already a segment with significant international participation.
Kuwait’s international E&P arm, KUFPEC, is also underperforming with a portfolio scattered in every corner of the world. Australian LNG, offshore Norway and shale gas in Canada are some proper examples of portfolio dispersion. Maybe the disposal of KUFPEC would be a reasonable approach for Kuwait as it could generate significant cash for the country’s budget.
In Oman, upstream gas production - that is currently owned solely by the government - would probably be “up for grabs” soon as the country’s finances are in very bad shape. Oman’s gas production is significant, and it is likely that oil majors would be keen in acquiring stakes there.
This article does not mean to lobby for international participation in the oil concessions of the Middle East but to assess the options that these countries have to ease the burden of government spending versus government earnings. Producing and selling high quantities of oil is not enough anymore in a world that is transitioning in every aspect, and NOCs need strategies to overcome their nations fiscal burdens. And they need them soon!
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