By Tom Arnold and Alex Delmar-Morgan
With peak oil but a distant memory, what does crude below $50 a barrel mean for economies in the Gulf?
With peak oil but a distant memory, what does sub-$50 crude mean for Gulf economies?
Back in july, gulf finance ministers watched huge surpluses build on the back of $147-a-barrel oil, while oil producers and speculators pointed the finger at each other in a bid to deflect the indignation of heavy consumers including the US and Europe.
The extraordinary revenues prompted a swathe of infrastructure announcements, each one more ambitious than the next - Dubai's 1km-tall Nakheel Tower, Saudi's Kingdom Tower, and even a $20bn bridge linking the Arabian Peninsula with the Horn of Africa.
The oil price seemed on an unstoppable upward curve as demand grew from the emerging super-economies of China and India, while US motorists were as dependent as ever on their gas-guzzling automobiles.
The effect of the oil price slump will be felt across other sectors, and some Gulf nations may find it difficult to deliver infrastructure projects they have announced.
However, those highs have since reversed dramatically - and with US crude losing around two-thirds of its value to plummet to a three and a half-year low below $47 a barrel on Dec 2, Gulf states' ambitious infrastructure plans suddenly look a whole lot less certain.
The ‘break-even' points that some Gulf states have budgeted on are dangerously close, and with many analysts predicting prices will remain at a similar level going into 2009 - and the worldwide credit crunch directly impacting financing in the Gulf - the squeeze could lead to a raft of projects being put on hold, or even cancelled entirely.
"With falling oil prices, governments are going to have less surplus in their budgets, meaning projects are more and more going to have to start competing for finance," explains Ichkhan Chahbazian, senior analyst at PFC Energy International.
Calculations made by the International Monetary Fund (IMF) in October suggest that Oman and Bahrain will lurch into deficit if the average oil price falls below $77 and $75, respectively.
The report adds that if the average oil price drops below $49 next year, Saudi Arabia's budget will move into the red, while the UAE, Qatar and Kuwait would remain insulated even if oil were to drop below $30 a barrel. According to the figures, the UAE will not post an account deficit until oil reaches $23 a barrel.
"Many of the fiscal balances of Gulf countries depend on oil revenues and many of the economies are not diversified away from oil and still have large public sectors," says Harry Tchilinguirian, senior oil analyst at BNP Paribas in London. "The fall in prices will affect these economies in different ways depending on how dependent they are on oil."
As might be expected, energy industry projects have been among the first to feel the pinch. Last week, Qatar's oil minister Abdullah al-Attiyah said that if the oil price stays under $70 many energy projects to boost future capacity will be delayed. "My concern is that the oil price will go lower," Attiyah said at a petrochemical conference in Dubai. "And many projects will be delayed."
It also emerged last week that Saudi state oil company Aramco was reviewing contracts for some of its largest expansion projects, signed at the height of the commodities price boom, including the $1bn Damman oilfield expansion, which would have pumped an extra 75,000 barrels per day of crude and 100 million cu ft per day of gas.
It followed the announcement in November that Aramco was delaying bidding for the 400,000 bpd Yanbu refinery, to be built with partner ConocoPhillips, from the fourth quarter of 2008 to the second quarter of next year. In addition, Aramco has said it is renegotiating contracts for equipment at a 400,000 bpd refinery project at Jubail with France's Total.
"Oil industry costs have been going up hugely over the last few years and these projects have become very expensive," explains Robin Mills, author of The Myth of the Oil Crisis: Overcoming the Challenges of Depletion, Geopolitics, and Global Warming.
"Now that oil prices have fallen the Saudis thought rather than be locked into some very expensive contracts for the development of these things, let's call it off, and hope to renegotiate and get a cheaper price for the development."
The effect of the oil price slump will be felt across other sectors as well, and some Gulf nations may find it difficult to deliver infrastructure projects they have announced but not yet started to build."All large-scale projects like infrastructure projects, railway lines, power stations and industrial projects like petrochemical plants, alumina smelters and large real estate projects may be vulnerable as they need a lot of financing," warns Dr Eckart Woertz, programme manager economics at Gulf Research Centre.
Jose Paul, a consulting manager for the Middle East and North Africa at research group Frost & Sullivan, believes plans for both the 800km inter-emirate railway project in the UAE, and the GCC railway network designed to connect all six states, could be delayed by as much as a year.
"Some of the projects that are still to start off could be vulnerable from a lack of funds," he notes. "These include the 23km metro project in Bahrain and the 40km metro project in Amman, which was going to start in 2009, but may now be delayed."
The Middle East has been the most important driver of global oil demand behind Asia from 2000 to 2007, consuming an average of 1.5 million barrels a day.
In a research note published last month Citigroup predicted that if oil averages $50 a barrel next year, Kuwait would be the only country in the GCC to show a budget surplus, meaning the Gulf states would have to dip into their substantial overseas wealth to prop up their economies.
"The economic challenges facing the GCC are increasingly daunting," the Citigroup note said. "Until mid-2008 it was rising inflation, but this was quickly overshadowed by domestic liquidity shortages, which have been compounded by the global financial crisis. However, with oil prices almost a third of what they were in early July, this is probably the GCC's most testing time," the report continued.
"The real problem is the oil price trajectory. Using two scenarios for the average price in 2009 ($75 and $50 per barrel)... the massive surpluses generated by the GCC could shrink very rapidly."
"Gulf states have conservative budgets, but I wouldn't expect any GCC countries to have budgeted for oil less than $50 a barrel," says David Butter, regional director for the Middle East & North Africa at research group the Economist Intelligence Unit in London.
These countries rely on oil export revenues as the bulk of their budget revenue, and when oil prices fall below a certain level, revenue falls and some countries could fall into a budget deficit."
There are already signs that Kuwait is feeling the strain. Last week Kuwaiti daily Arab Times reported that the country's finance minister Mustafa al Shimali would slash the country's budget in 2009 and push forward spending on the private and public sector, speeding up investment on infrastructure projects like power and sewage plants. Some 95 percent of export revenues and over half of Kuwait's GDP currently derive from the hydrocarbon sector.
"Kuwait is relatively well off but its disadvantage is that in the past it has not invested a lot in its own economy," warns Woertz at the Gulf Research Centre. "It has less ongoing investment projects than the UAE, for example, and it is less diversified so it is really exposed."
In another report released last month, investment bank Morgan Stanley was more upbeat. Although it warned that a "deteriorating global economy, tighter credit markets and lower oil prices may lead to a slowdown in required government expenditure on infrastructure [in the] near term in the Middle East", it added that the region itself has been overlooked as a major consumer of oil, which will sustain demand.
According to the report, the Middle East has been the most important driver of global oil demand behind Asia from 2000 to 2007, consuming an average of 1.5 million barrels a day, compared to Asia's 4.3 million. In addition, the bank cites rising populations, and a growth in energy consumption (particularly electricity for desalination plants) together with booming vehicle sales which should help to keep Gulf countries' balance sheets in check.
As Western economies cut back on their demand for oil, it seems the Middle East will have to keep home fires burning if it is to generate the cash - and sustain the pace of development - with which it has become synonymous. Saudi Arabia
The largest economy in the Middle East, Saudi Arabia has not been immune from the side-affects of a slump in oil prices. With crude slipping below the $49-a-barrel threshold the IMF says would ensure the country's fiscal accounts break-even, Saudi is facing the possibility of a financial deficit next year, experts say.
The Saudi government has moved to reassure the public that its planned modernisation developments are on schedule despite the drop in oil prices and finance minister Ibrahim Al Assaf last week insisted project public spending in 2009 would be higher.
"During the last oil price downturn, Saudi Arabia built up debt which then took them a while to reduce," says Charles Seville, a sovereign analyst at credit ratings agency Fitch in London. "Now they have a much bigger cushion of assets than they've ever had to run down if prices went low and stayed really low. The government's balance sheet is stronger.
"They would like to be able to rely on investment from this income when oil runs out," he continues. "If oil stays where at $48 then they will run a deficit, there is no question, as spending will go up next year."
Saudi Arabia has some of the most ambitious projects in the region in the pipeline, such as the $120bn King Abdullah Economic City near the Red Sea port city of Jeddah, as it looks to shift its economy away from oil and create jobs for its citizens.
But if oil prices continue to hover around $50 next year its future development projects could be under threat. Last week state oil firm Aramco cancelled plans for a $1bn project to restart production from the Dammam oilfield due to the potentially high costs.
"In the short term there may be still some pressure from the deflationary side and demand pressures," says Dr Eckart Woertz, a programme manager in economics at the Gulf Research Centre.
However, in the mid term there is also the supply side and steep decline rates in the oilfields that need to be replaced by new capacity. That requires investment and these investments are not taking place at this oil price level."
Bahrain is one of the most vulnerable of the GCC nations to falling crude prices, according to IMF figures. In order to balance its budget, the smallest oil producer among the six Gulf Arab states requires a break-even oil price of $75, the second highest threshold in the GCC.
"The break even price is much higher and they will definitely cut spending," says Seville at Fitch. "They've submitted a draft budget for 2009 which hasn't been passed yet but suggests a sharp cut in investment spending of 40 percent."
Bahrain produces around 190,000 barrels a day, and the country's national budget for the next two years looks set to be more modest, with the government proposing to base its plans on an estimated crude price of $60 a barrel.
A 23km metro project spanning from Bahrain City to the capital Manama including the airport and port could be among the first major infrastructure schemes hit as the kingdom's fiscal accounts are squeezed by the twin pressures of the global economic crisis and low oil prices.
Jose Paul, a consulting manager for the Middle East and North Africa at consultants Frost & Sullivan, warns the metro project faces delays due to a lack of financing.
The UAE will continue to have a fiscal budget surplus until oil falls to $23 a barrel, the lowest threshold in the Gulf. However, there are signs that the world's fifth largest exporter of oil is revising its expansion plans due to lower oil prices and the rising cost of labour and raw materials.
The country now plans to raise its total crude capacity to 3.5 million bpd from 2.8 million bpd by 2017, five years later than previously planned. It currently produces 2.66 million bpd, according to the IEA.
Despite OPEC agreeing last month not to slash production of oil, the Abu Dhabi National Oil Company (ADNOC) has said it will increase crude oil supplies next month.
The UAE's economic growth is predicted to shrink to 6 percent next year, down from 7 percent this year according to the IMF.
"Their assets are large - both Kuwait and Abu Dhabi have very strong public finances, and have been running large surpluses. They have large cushions of external assets worth up to 200 percent of GDP, and break even oil prices are low, so those are the ones we are least worried about," says Seville at Fitch. Kuwait
The government of Kuwait has been among the first of the GCC states to publicly admit it is scaling down growth plans in the light of declining oil prices. With over half of Kuwait's GDP and 95 percent of its export revenue coming from the hydrocarbon sector, the country's revenue surplus has plummeted as crude prices have crashed down through the $50 level.
Despite the IMF saying oil prices needed to remain at $33 a barrel in order to balance the country's budget, Kuwaiti finance minister Mustafa Al Shimali has announced he is revising down the record $69bn budget for 2008-09, approved by parliament in June.
He has insisted next year's reduced fiscal expenditures will not affect the planned allocation to the Future Generation Fund, a part of the Kuwait Investment Authority specialising in foreign investments.
According to the IMF, Qatar's fiscsal budget will break even when oil drops to $24, suggesting the country is well insulated against further price drops. And it is the only GCC economy which will not see less growth next year, according to estimates made in October by the organisation.
It is predicted the economy will grow by 21.4 percent in 2009, up from the 2008 projection of 16.8 percent. Qatar has 2.2 percent of the world's oil reserves and although it is a relatively small OPEC producer, pumping out 860,000 barrels a day (bpd), its economy is bolstered by its gas reserves.
The tiny Arab state, a third of the size of Belgium, has the third largest supply of gas reserves in the world (900 trillion cu ft) after Russia and Iran, forecast to last 200 years. By 2010, the country will become the largest supplier of liquefied natural gas.
Its economy, though, is still heavily reliant on oil and gas with $90bn out of a total of a $133bn over the next six years to be spent on the energy sector.
"The country's natural gas reserves acts as a safety valve against oil prices, so it's a real growth story," says David Butter, regional director for the Middle East & North Africa at research group the Economist Intelligence Unit in London.
Last month Qatar's state news agency (QNA) quoted the country's oil minister Abdullah al-Attiyah as saying slowing investments in high-cost oil projects due to lower oil price could contribute to a long-term shortage in supply when demand picks up.
Attiyah said 2009 would be a testing period for the oil market as recession fears weigh on demand.
Oman is the most exposed Gulf country, according to the IMF, with a forecast budget deficit when oil drops below $77. It is the smallest oil-producing GCC country at 750,000 bpd, according to the Paris-based International Energy Agency (IEA).
The IMF predicts its economy will contract substantially in 2009 by 1.4 percent to 6 percent, down from projected GDP growth of 7.4 percent this year.
Oman's total crude oil exports stood at 161.7 million barrels (mb) during the first nine months of 2008, up from 167.2mb in the same period last year, a 3.6 percent decline, according to figures published last month by Oman's Ministry of National Economy. Total production of oil was 205.5mb, compared with 193.4mb, a 6.5 percent rise, the Ministry said.
There are no signs yet the country is delaying infrastructure projects. Two weeks ago Occidental Petroleum and Abu Dhabi investment firm Mubadala Development signed an exploration and production agreement allowing the parties to develop four existing gas fields and look for new discoveries in a newly formed contract area in Northern Oman. Total capital investment in the area is expected to be about $500m over the next four years.
2005 oil was at about $47 a barrel - then Iran and America started sabre rattling and the price went up to $80 - but there was no real reduction in output internationally. Venezuela started their trick - so called panic promoted by oil companies pushed the price up to figures that were out of control but those who were selling thought it was great, no one noticed any lack of fuel at the pumps only the vast increase in commodity and fuel prices. Then BANG and the greedy cry we need oil to be at $80 dollars where the realistic price should be between 56 and $58 -