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Wed 24 Sep 2008 01:18 PM

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What credit crunch?

It seems the global credit crunch has had little impact on the rampant development of the Middle East's upstream sector.

With project costs, salary demands and housing expenses continuing their upward march right across the Gulf, it seems the global credit crunch has had little impact on the rampant development of the Middle East’s upstream sector.

However, with global markets in turmoil, it is anybody’s guess as to where the market will be in six months time, and with September’s rollercoaster slide and gain of oil on the spot market, the question of what impact a much lower price will have on planned projects has crept back into discussions again.

If credit becomes harder to find, new projects in the region may have to be put on-hold, or cancelled altogether.

After several months above a $100 a barrel, upgrades, refits and brand new projects have been given the green light across the region and the industry is working close to capacity to bring new production capability on stream.

The impact of what would happen if the price plummeted hasn’t garnered much attention of late, but Abbas Naki, the Secretary General of Organisation of Arab Petroleum Exporting Countries, has warned that Middle East oil producers will shelve projects to boost output if crude prices drop below $80 a barrel, a threshold fully four times greater than 2002’s average of $20 a barrel. If the $80 benchmark is crossed, investments and developments in the oil sector across most of the Gulf would decrease drastically he said.

Oil prices did drop below $100 a barrel in September, and touched $89 a barrel before recovering as investors flocked to commodities following the disintegration Wall Street institutions.

OPEC is already taking action to bolster the market price, which should see the majority of projects pushed through. "The weakening economic situation has been reflected in a slowdown in world oil demand growth," OPEC said in its September report.

The cartel reiterated it would adhere strictly to production targets, effectively removing around half a million bpd from world markets, and thus hopefully keeping the oil price around its target level of $100.

"In light of the downside risks to the outlook, the OPEC conference stated its readiness to respond swiftly to any developments that might place oil market stability at risk," the report said.

For the time being construction and progress on major projects will continue, but the effects of a financial market meltdown will eventually reverberate around the Gulf, it’s now just a question of when, not if.

Daniel Canty is the editor of Oil & Gas Middle East.

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