Upstream Investment in the Middle East: Challenges and Opportunities in a Lower Price Environment
This presentation, delivered at Chatham House, looks at the dynamics of investment in the Middle East’s oil and gas upstream sector following the recent fall in oil price. In contrast to most regions in the world that saw sharp cuts in capital expenditure, investment in the upstream oil and gas sector in the Middle East declined only marginally in nominal terms. Given the cost deflation in the supply chain this meant that activity was maintained and even increased in some countries as reflected in the sharp rise in the rig count, with key GCC producers still on track to achieve their ambitious plans to increase productive capacity (though delays to some projects are possible). But this is a tale of two regions: While GCC producers continue to invest and increase their productive capacity, Iraq has suffered from cuts in investment especially in much needed large infrastructure, adversely impacting oil output growth and plans to increase long-term productive capacity. In Iran, progress has been slow and despite the flurry of deals announced, these are still very preliminary and without foreign investment and technology, Iran’s upside potential from current production levels is rather limited. It is argued that IOCs’ strategies in the Middle East differ fundamentally, with few IOCs regarding chasing low cost Middle East barrels, and increasing their exposure to the region’s large reserve base, as a cornerstone of their strategy in a more uncertain world. The opening of Iran will offer opportunities for IOCs to increase their exposure to a large reserve base, but given the risks involved, such opportunities will be captured by only a few companies that have the patience and capability to manage these risks. The presentation concludes by arguing that during this downturn, the core GCC OPEC producers (Saudi Arabia, Kuwait, and the UAE) consolidated their position by continuing to invest in their upstream sector reflecting their long-term thinking and hence benefiting the most from an upturn in the market; the rest of OPEC and most of the non-OPEC producers will have to play catch up.