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Background Briefing: Energy Giants In Transition

The energy producers adapt to the changed market

June saw developments in four leading MENA (Middle East and North Africa) oil and gas exporters that will have an outsized impact on the market’s rebalancing. But in almost every case, the oil industries in these countries have defied predictions, and our analysis here points to no significant change in production in these countries through 2016, even as Iraq’s output goes into decline. In Saudi Arabia, Prince Mohammed Bin Salman said in April that if needed, the Kingdom of Saudi Arabia (KSA) could flood the market with an additional million barrels of production. At the time, RBC Capital Markets said the Kingdom “would give no ground” on freezing production.

And yet, two months later it emerged that the KSA was indeed backing down, ending a surge in production that saw 81 US oil and gas companies go bankrupt since January 2015, as Saudi revenue losses hit $600 million a day. The Saudi retreat was in part driven by rival producers not giving ground, with surviving US shale firms upping production, and virtually every major producer prolonging the stand-off with increased output.

Likewise, predictions that Iran was going to continue its flood of extra crude rang hollow in June. While Iran’s output did indeed rise until Summer from 2.93mbpd in January to 3.6mbpd in May, output seems to have halted there, with exports slipping 20% in the first three weeks of June, although this was partly due to a drop in imports from main European buyers Spain and Italy. Nonetheless, many analysts also point to the need for more foreign investment: worrying for Oil Minister Zaganeh if there are further delays in the long awaited Integrated Petroleum Contract.

In Libya, the merger of the two NOCs, one officially recognized by buyers in Tripoli, the other controlled by the second government in Tobruk, led to speculation that the new arrangement could unlock hundreds of thousands of barrels in exports. But this is contingent on a number of developments, including the ability of the NOC to hold meetings in Benghazi and the creation of a non-political state run oil protection force.

Finally, in Algeria, Africa’s third biggest oil producer, a continued story of worsening reserves: Production ratios at the giant fields of Hassi Messaoud, Ourhoud, and Hassi Berkine and an oil production decline of 2.8% last year was met with positive news in mid-June. Sonatrech announced that oil and gas production was rising, but we believe that even a 5% increase, (Sonatrech’s target this year) will be extremely difficult to sustain following lacklustre IOC interest in the last four bidding rounds, which will constrain investment required to fully exploit declining reservoirs and requirements to develop tight oil. To reverse this problem, Algeria’s new minister of oil is in direct talks with IOCs about new contracts.

Added to probable output declines in Iraq, the near term trend for these four energy giants is stabilization of output, decline, or at best modest increases through 2016.

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