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Oil price a key challenge in 2015

Analysts predict oil prices to rebound in the second quarter of next year, but this will impact investment

Gulf News

Abu Dhabi: Oil price stabilisation is going to be one of the major challenges facing the oil and gas industry in 2015 as the oil price continues to decline due to high production and weak global demand. The price has dropped by more than 45 per cent since June this year.

Analysts have said the drop in oil prices will push Gulf countries to come to an agreement to reduce output sooner or later. “In 2015, we will see the oil price beginning to stabilise and barring any major economic disruption to the global economy or of the East Asian nations, gradually creep upward again,” said Justin Dargin, Global Energy Expert at the University of Oxford.

For most Middle East and North Africa (Mena), the break even price needed to maintain economic solvency has nearly tripled over the past decade due to demographic increases and a surge in infrastructure investment, he said. “As a result, many of the Gulf countries simply will not be able to bear an oil price decline as they were able to with the previous ones.”

He, however, was of the opinion that shale oil production from the US as well as Iraqi and Iranian production will exert continued downward pressure. “We will likely see Iran emerge from its isolation and rejoin the international community. And with that, oil majors will reinvest in Iran which will have a positive impact on its production.”

Mark V Stys, chief investment officer at investment advisory firm WS Wealth Management, expects the global trade to remain flat in the first half of 2015. “This will have a negative impact on capital spending and deficits for countries that depend on oil export for revenue,” he said.

The economies of the Arab Gulf oil producers and also Iran’s and Russia’s, which amount to around 6 per cent of the global GDP (gross domestic product), could be hurt by the low oil prices. Investments in the Arab region are likely to decrease. Saudi Arabia’s investment is projected to fall to $127 billion (Dh466 billion) in the coming years.

Iran, Bahrain and Oman are likely to experience budgetary difficulties as oil income gets reduced. Social unrest in some countries is also not ruled out.

Mamdouh G Salameh, an oil economist and a consultant to the World Bank in Washington, said one of the main challenges confronting the global oil and gas industry would be the curtailment of investment.

He said that seven major oil companies in the world need a price of $125 to $135 a barrel to balance their books. “As a result of declining oil prices, the oil majors have already started to sell some of their production assets and to reduce their future investments which will translate in two years time into a smaller share in the global oil production. This will be reflected in steeper oil prices in the future,” he explained.

If oil prices continue at $60 a barrel for a year, Saudi Arabia will lose an estimated $100 billion to $150 billion, Salameh said. He added that the Organisation of the Petroleum Exporting Countries (Opec) should call an “emergency meeting” soon to agree to cut production to defend the oil price.

In 2015, there could be comprehensive subsidy reforms across Mena. Many countries such as Egypt, Kuwait, Jordan and the UAE undertook some steps to reform the subsidisation framework this year. It is likely to accelerate in 2015. “Most of the energy-rich Mena countries have come to the realisation that energy subsidisation is no longer viable due to budgetary strains, demand increases and the fact that it mitigates investment in new gasfields,” Dargin said.

Investments in shale gas reservoirs are predicted to go up next year both in the Arab world and China. The US is likely to witness an increase in the cost of production due to regulatory framework. There is a likelihood of joint ventures between Gulf energy companies and domestic US shale gas producers as Gulf countries attempt to acquire shale gas technology and perhaps begin to import North American shale gas to their countries to offset rising domestic gas demand.

There might be mergers and acquisitions in the oil and gasfield in the coming year. Halliburton, for instance, recently bought Baker Hughes for about $35 billion in cash and stock, creating an oilfield services giant.

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