Balancing act: Officials chart a new path in an era of lower oil revenues

In mid-March 2016 Mohamed bin Saleh Al Sada, Qatar’s minister of energy and industry and also president of the Organisation of the Petroleum Exporting Countries (OPEC), announced that representatives of the world’s leading oil-exporting nations were planning a meeting in Doha. The summit included 15 countries, which together accounted for nearly three-quarters of global output. The announcement preceded the April 2016 gathering in Doha, when five of the world’s largest energy producers proposed capping output in an effort to rebalance global energy markets and stabilise oil prices.

In response to Al Sada’s announcement, the price of Brent crude jumped 4.1%, shoring up earlier gains to close above $40 per barrel, while US benchmark West Texas Intermediate rose 6%. The Qatar Stock Exchange (QSE) gained 135 points to top 10,400, easing the bourse’s overall 2016 losses to just 0.03%. Almost 65% of the QSE’s 44 listed stocks appreciated during daily trading, as investors reported improved sentiments in light of rising oil prices in prior weeks.

Wide Reach

In May 2016 the price of a barrel of Brent crude was up to $49. As this series of events demonstrates, Qatar’s influence on global energy and capital markets has come into sharp focus in the current climate. As the world’s largest exporter of liquefied natural gas (LNG), the fourth-largest dry natural gas producer, a leading player in the gas-to-liquids (GTL) segment, and a major exporter of petroleum, lease condensates and other related liquids to boot, Qatar is at the centre of a number of ongoing high-level discussions about oil prices and energy markets.

“These are tough times,” Abdalla S El Badri, OPEC’s secretary-general, noted in a speech in late January 2016. With Brent hovering around $40 per barrel at time of press – up from a 15-year low of less than $30 per barrel in January 2016 – the price was still down more than 65% from its June 2014 high of more than $115 per barrel. Like many of its energy-rich neighbours, Qatar relies largely on hydrocarbons revenues to support economic growth. While the government has worked to diversify away from the energy sector over the past decade, in 2014 gas, oil and related products accounted for some 49% of government revenues, according to the US Energy Information Administration (EIA).

“The decline in the oil and natural gas prices is threatening the economic viability of new developments, delaying projects and discouraging investment,” said Al Sada in November 2015. “There is a pressing need to exchange perspectives on the supply and demand drivers that are shaping the market, and talk about the measures – be it domestic policies or international cooperation initiatives – to correct the sentiment of the market so that global economies can develop in a sustainable manner.”

Investment & Expansion

The catalyst for the development of Qatar’s energy industry was the discovery of the North Gas Field (NGF) in 1971. Located mostly offshore to the north-east of Qatar, the field covers 6000 sq km at depths of 15-70 metres. The NGF has total proven reserves of over 900trn cu feet, making it the single largest concentration of non-associated natural gas in the world.

Due to technical, logistical and financial issues, development of the field did not get under way in earnest until the early 1990s. In 1997 Qatar’s first LNG export shipment arrived in Japan, marking the beginning of a long partnership between Qatar and rapidly growing East Asian energy importers. Qatar’s oil and GTL industries also grew rapidly in the 1990s and early 2000s, as a result of significant investment by state-owned energy firms like Qatar Petroleum and its subsidiary Qatargas, plus new production-sharing agreements and other cooperation arrangements.

Qatar’s turn to exporting gas, oil and associated liquids during this period both contributed to and coincided with rapidly expanding global demand for energy inputs in China, Japan, the EU, and other countries and regions around the world. Consequently, the price of Brent crude increased from around $20 per barrel in 1999 to $45 per barrel in late 2000, before surging to more than $80 per barrel by 2006 and topping out at more than $140 per barrel at the height of the global economic boom in 2008.

The international oil benchmark lost nearly $100 in value in the immediate aftermath of the 2007-08 international financial crisis, but quickly rebounded to more than $120 per barrel by 2011-12, according to the EIA. By June 2014, amid rising shale gas production in the US and depleting demand in China and other major global markets, the price had mediated somewhat, to $110-115 per barrel.

Over the ensuing 18 months the price of Brent fell, reaching $80 per barrel by November 2014, $60 by December 2014, $45 by early 2015 and $30 per barrel by January 2016, before bottoming out at $26.01 per barrel in mid-January. As of late March 2016 the price had recovered somewhat, reaching $39.91 on March 21, and as of late May 2016, the price was up to $48.87 per barrel. The causes of this decline are relatively straightforward. “This trough in the oil price cycle has been driven by a surge in supplies in the form of shale oil and relatively weak global demand growth leading to a severe glut,” said Al Sada in a late-2015 speech. “This has triggered a struggle for market share for the producers, [which is a] serious reason to look at the economies of production.”

Regional Impact

Energy market volatility since mid-2014 has had a major impact across the GCC, with governments working to cut expenditure and ramp up non-hydrocarbons revenues. Gulf economies, many of which have built up considerable fiscal reserves over the past two decades, are particularly well situated to wait out a short period of low energy prices. In 2015 and 2016 a handful of governments in the region – including Qatar’s – announced that they would run a budget deficit for the first time in more than 10 years, while still maintaining capital spending on key development projects. Oil and gas have been below Qatar’s breakeven price point for much of 2015, so the country will post a deficit in 2016, albeit a small one for the region. The central question in early 2016 is how this will impact public investment. The Ministry of Finance has announced that it does not plan to cut back on capital expenditure for now.

In the longer term, however, the impact of cheap oil remains unclear. In February 2016 the Vitol Group, a Switzerland-based energy trading company, announced that it expected oil prices to remain at around $50 per barrel until 2026. “We really do imagine a band, probably between $40 and $60 a barrel,” Ian Taylor, Vitol’s CEO, told Bloomberg Business. “I can see that band lasting for five to 10 years.” This forecast echoed a 2015 IMF report that anticipated a partial recovery in the oil price “because of the likely decline in investment and future capacity growth in the oil sector in response to lower oil prices.”

The IMF also noted that declining oil prices have impacted other markets as well, including metals and gas, the latter of which has particular relevance for Qatar. While most producers sell gas under multi-year contracts with long-term fixed prices, most of Qatar’s export contracts are indexed to oil prices. Consequently, since mid-2014 the nation has seen declining revenues from gas and oil exports alike.

Renewed Response

In response to this situation, Qatar has worked to enact policies designed to shift the country’s economy away from hydrocarbons revenues. This effort is not new. The government has been working to build up non-hydrocarbons and private sector economic activities for at least a decade. Similarly, with some $256bn under management, the state’s sovereign wealth fund, the Qatar Investment Authority, serves as a substantial fiscal buffer against declining government revenues. Indeed, according to IMF data from 2015 Qatar is one of the best-prepared nations in the GCC region for low oil-price growth.

More recently, however, the government has taken additional measures in this regard. As of early March 2016 the state was running a moderate budget deficit of $12.8bn – the smallest in the region, at around 0.7% of GDP, according to data from the Middle East Institute, a non-partisan US-based research organisation. This figure is expected to increase over the course of the year. To finance the shortfall, the state has worked to cut public expenditures.

While Qatar had comparatively low petrol subsidy rates before the current crisis began, in January 2016 Woqod, the state-owned fuel company, announced an additional 30% increase in pump prices, bringing the cost of a litre of unleaded fuel up to $0.36, with an additional increase due in July 2016. The government has also reduced electricity subsidies and raised rates for water and electricity. At the same time, the government has confirmed that it does not plan to make any cuts to its ambitious infrastructure plans, which entail projects worth $220bn until 2022.