Continuity in the GCCJune 23, 2020
Neil O’Keeffe, energy, utilities and resources lead partner at PwC Middle East, talks to The Energy Year about how GCC states are positioned amid the Covid-19 and oil price crises and how NOCs are pursuing cost optimisation in this period. PwC is a multinational consultancy and advisory firm that provides technology, management, financial consulting and auditing services to various industries.
How well have GCC states responded to the dual crisis?
Overall, there has been an impressive response from the GCC NOCs to ensure continuity of their operations and supply chains during the Covid-19 crisis. Furthermore, the GCC NOCs are also in a strong position to lead the recovery because their oil is some of the cheapest in the world, they have built spare production capacity and they are continuing to invest in new capacity. In contrast, global investment in exploration and new resources is at an all-time low and this will surely impact supply in the medium term and provide an opportunity for the GCC states to increase market share.
The depressed oil price is certainly going to put pressure on GCC governments’ budgets; however, the situation has highlighted the need to accelerate diversification, digitalisation, efficiency improvements and privatisation to better position each state’s economy to manage through future low oil price cycles and the energy transition.
In the short term, looking at where the NOCs will emerge from the current situation, you have to look at the supply-demand imbalance. The consensus seems to be building that the economic drag from Covid-19 is likely to continue to be felt over the next four to six quarters, suppressing demand. OPEC+ – and especially the KSA – has aggressively reduced supply to rebalance the market and stabilise the price, but the GCC states will need to carefully monitor the global supply situation as prices edge back up to ensure they’re not again ceding market share to producers with marginal costs.
What cost optimisation strategies are NOCs following during the crisis?
NOCs are now taking a far more commercial lens when looking at their upstream portfolios to make sure that they are exploiting and developing all resources to protect their leading cost positions. They are also re-energising programmes to make sure that their workforces are as efficient as possible through manpower optimisation, productivity improvements and upskilling.
We expect that they will also continue to accelerate implementation of technologies that really move the needle in terms of efficiency and insight for decision making. We are still in a world where those technologies are being implemented, and that requires investment. The level of capital available in the next 18 months will certainly not be the same as before Covid-19 and so return on investment will be a key factor when prioritising such projects.
Do you expect more restructuring among state-owned enterprises to raise additional cash?
We are already seeing significant sector restructuring and corporatisation of various assets across the region. For example, on the power and water side, Saudi Arabia is looking at unbundling electricity entities, privatising water generation and consolidating distribution, in an effort to attract investment and build out the sector. If you look at Abu Dhabi, they are transferring the utility operating companies to TAQA and Oman is also privatising and corporatising the sector. Such activity will likely continue at pace across multiple sectors and these changes have become more urgent as a result of the Covid-19 crisis.
Can this crisis serve as an opportunity for local companies and workforces to step up and gain more importance?
This has to be the objective. Covid-19 will certainly act as an accelerator for it too. GCC countries have been driving increased focus on local content for the last three to four years, but mostly to drive economic diversification and job creation. Covid-19 has also added security of supply to that mix as we’ve recently seen a breakdown of global supply chains.
But you can’t just flick a switch and from tomorrow have a local workforce capable of doing roles that they couldn’t do before. There has to be a careful and managed transition. Most of the NOCs are looking at their workforce very carefully and making some very hard decisions to reduce numbers – while obviously avoiding any impact on the health and safety aspect of their operations.
However, as they start to shed jobs, the NOCs will also be keen to avoid the consequential impact on the local economy of a smaller national oil and gas employer. So, we might see the NOCs try to solve both problems at once by outplacing employees released through efficiency gains to seed technical, functional and management capabilities in their supply base and so accelerate the local content agenda.
How will downstream investments evolve in the coming months in the UAE and GCC?
The prevailing logic has been that you invest in refining as a hedge against weak oil prices – as when crude prices fall, your refinery feedstock prices fall and refining margins improve. However, the dual crisis of low oil prices and Covid-19 largely immobilising the world’s population has meant that demand for downstream products – especially jet fuel and gasoline – has also plummeted.
The logical response to this is to move even further downstream into petrochemicals and polymer conversion to create another sink for your hydrocarbons that isn’t tied to fuel demand. This has the added benefit of reducing reliance on imports for these products and creating a more diversified domestic industrial landscape in terms of manufacturing and jobs. So, we see the GCC NOCs continuing to make investments further down the value chain in petrochemicals.
The other aspect to consider is the potential structural change that Covid-19 has made in demand for petroleum products – perhaps we will continue to work partially remotely and fly less in the post-Covid world. There’s a lot of uncertainty around the shape of the recovery of product demand, and so I think we’ll see a bit more caution from the GCC NOCs with respect to planned investments in new refining capacity.