Impact of the oil industry crisis on the GCC and potential responses - Deloitte
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Impact of the oil industry crisis on the GCC and potential responses
Deloitte | Impact of the oil industry crisis on the GCC and potential responses
The oil industry is facing its gravest Figure 1: The oil market dual crisis1
crisis in 100 years, leading to a
steep decline in fiscal revenues for Production or consumption Price
(Million BoE) (USD/BoE)
many countries in the GCC. With the
110 80
global economic downturn signaling
lasting reduced oil prices, we look
at whether some countries in the
region, particularly Saudi Arabia, 60
would benefit from re-calibrating 100
their visions by prioritizing the most
resilient transformation programs to
40
stimulate their future economies.
-18%
90
The dual crisis engendered by the conflict
over price between Saudi Arabia and 20
Russia and the COVID-19 pandemic have
prompted a global, sector-wide downturn
in the Oil and Gas (O&G) industry that 80 0
has left the oil-dependent economies 2018 2019 2020 2021 2022
vulnerable in terms of fiscal revenue.
Demand for oil has fallen by over 18
Total world production Total world consumption (prediction)
percent since the beginning of the year,
Total world production (prediction) Price (actual, based on OPEC basket)
leading to a steep decline of more than 70
Total world consumption Price (prediction)
percent in the price of oil.
Figure 2: Zoom-out on the oil market price historical trends1
While OPEC+ has reduced oil production
Price
by almost 10 percent, the markets were (USD/BoE) Arab spring
not reassured. Oil price hit its lowest levels 120
in 17 years, leading to the gravest industry Global financial crises
OPEC+ spat
crisis in 100 years. Matters were made Iran-Iraq & COVID-19
worse when the storage units onshore and 100
war begins
offshore were approaching full capacity2,
Depression
adding more pressure on the oil market. 80 dampens Arab oil Iraq invades
Due to less onshore storage space, the demand embargo Kuwait
oil tankers were stranded along coasts
60
globally, and the WTI US crude posted Asian
financial
its first ever negative oil price, at an
crises
unimaginable negative US$38 a barrel, 40
on 20 April 2020.
20
American
shale boom
0
1920 1940 1960 1980 2000 2020
U.S. domestic crude oil first purchase price
02Deloitte | Impact of the oil industry crisis on the GCC and potential responses
With macroeconomic predictions Figure 3: GDP annual percent change3
signaling a deep global recession, the
Real GDP growth
pressure on GCC economies due to
(Annual % change)
the current low oil prices is unlikely
15
to fade.
The outlook in the O&G industry continues
to be driven by the radical stay-at-home
and social distancing measures adopted by
10
governments globally to tackle the highly
contagious COVID-19 virus, drastically
affecting oil demand and the larger global 5
economy. The global economy is expected
to shrink by more than 3 percent in 2020,
making this the worst economic downturn
since the Great Depression. The Middle 0
East economies are highly correlated with 1980 1985 1990 1995 2000 2005 2010 2015 2020
global macroeconomic trends and the
region’s GDP is also expected to fall on par
with the global average. -5 Middle East (region) World
The oil-rich countries of the region are Figure 4: Focus on GDP predicted annual percent change in the GCC1
not immune either, and while the Saudi
Arabian economy is expected to perform
slightly better than the world average with
an estimated shrinkage of 2.3 percent, the
UAE is expected to perform slightly worse,
with an estimated shrinkage in GDP of 3.5
percent.
The global economy is
expected to shrink by
more than 3 percent
in 2020, making this
the worst economic
downturn since the Great
6% or more 3% – 6% 0 – 3% -3% – 0 Less than -3%
Depression.
03Deloitte | Impact of the oil industry crisis on the GCC and potential responses
Both national and Figure 5: NOCs and IOCs 2020 CAPEX change4
international oil
Eni -24%
companies are under
unprecedented pressure Equinor -27%
and are unlikely to meet Petrobras -36%
the expectations of their BP -23%
IOCs
stakeholders. Total -14%
Oil companies, both national (NOCs) and Chevron -20%
international (IOCs), are experiencing major
revenue losses of around 40 percent. Their Shell -20%
revenues are expected to decline from
ExxonMobil -32%
US$2.47 trillion last year to US$1.47 trillion
this year against a backdrop of crippling
demand. Faced with unprecedented Saudi
-19%
Aramco (KSA)
pressure, NOCs and IOCs have cut back on
both capital and operating expenditures by KPC (Kuwait) -25%
NOCs
more than 20 percent. As a result, some oil
companies have also resorted to reduce or ADNOC (UAE) -30%
postpone payment of dividends.
PDO (Oman) -26%
These cuts will likely have lasting 0 10 20 30 40
implications, not only within the industry,
Spending
but also without. Lasting negative (Billion US$)
Pre-cuts Post-cuts
consequences within the industry include
the impact on long-term production levels
from active production fields as well as Figure 6: Oil majors dividends’ change3 (2019 vs. 2020)
mitigating future potential discoveries,
progression of pipeline projects, supply
Eni
chain and distribution models, innovation
and digital transformations that lead, Equinor
ultimately, to cost optimization. Beyond the
oil companies’ solidity, stakeholders are Petrobras
also negatively affected, as is the workforce
and adjacent services and ecosystems BP
related to the industry.
Total
Chevron
Shell
ExxonMobil
0.0 0.5 1.0 1.5
Dividends
(US$ per share)
Pre-cuts Post-cuts
04Deloitte | Impact of the oil industry crisis on the GCC and potential responses
While oil revenues account for more than Figure 7: Oil contribution to the fiscal budget for the GCC5 (2018)
50 percent of GCC fiscal revenues—with
the exception of the UAE, where oil Oil contribution (% of fiscal budget)
accounts for about 35 percent of the fiscal
budget—the impact of the current crisis
will spread across the entire GCC.
KSA Kuwait UAE
Although 2020 GDP growth forecasts
have been revised downwards from their
pre-COVID outlook, fiscal budgets, highly
dependent on the price of oil, continue to
be based on a price that seems far from
US$787 bn US$141 bn US$414 bn GDP
a longer-term reality. As can be seen in
Figure 8, the Break-Even Price (BEP), or the
minimum price per barrel needed to meet
Oman Qatar Bahrain
expected spending needs while balancing
budgets, is far from the projected reality all
across the GCC.
US$79 bn US$191 bn US$38 bn GDP
The impact is spread across the entire
GCC. Saudi Arabia accounts for almost Oil revenue Non-oil revenue
half the total oil revenue loss, estimated
at around US$120 billion in 20206. As a
Figure 8: Respective fiscal break-even oil price for the GCC5
result of the direct link between oil prices,
government budgets and economic 120
activity, the budgets of GCC countries,
Fiscal breakeven oil price
100
particularly KSA, will be critically strained
(US$ per barrel)
owing to massive losses in annual oil 80
revenue.
60
Although 2020 GDP
40
growth forecasts have 20
been revised downwards 0
from their pre-COVID
outlook, fiscal budgets, Bahrain Oman KSA UAE Qatar Kuwait
highly dependent on the 2016 2017 2018 2019 2020E Current Brent spot price
price of oil, continue to
be based on a price that Figure 9: Estimated annual oil revenue losses in the GCC countries for 20207, in US$ billions per year
seems far from a longer- 5.00%
GDP growth rate 2020f
term reality.
(Annual %)
0.00%
KSA Kuwait
Oman
UAE
Bahrain Qatar
-5.00%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Government income from oil
(As % of GDP)
100 Size of oil revenue losses 2020E GDP growth 2020F pre-COVID
40
10 (in US$ billions)
05
5Deloitte | Impact of the oil industry crisis on the GCC and potential responses
Impact on long-term development Figure 10: Saudi Arabia Vision 2030 themes and targets
plans
Amid this challenging reality, GCC countries Vision 2030 builds upon
have embarked on ambitious development three key themes...
programs aimed at diversifying their
economies: UAE vision 2021, Kuwait vision
2035, Oman vision 2040, Qatar national A thriving A vibrant An ambitious
economy society nation
vision 2030, and Bahrain economic vision
2039.
Of these, Saudi Arabia has undertaken, by To raise the share of non-oil exports
far, the most ambitious, if costly, journey 1 in non-oil GDP from 16% to 50%
of economic diversification under the
umbrella of Vision 2030. Aimed at growing
and diversifying the Kingdom’s economy
To move from current position
and reducing oil dependency, the plan 2 as the 19th largest economy in the
aims at creating employment opportunities world to the top 15
and long-term prosperity for Saudi citizens.
Key targets reflect the need to create and
further enable a business environment to To increase FDI
transform the Kingdom into an investment 3 from 3.8% to the international level
of 5.7% of GDP
powerhouse with the ability to unlock
promising economic sectors, enable
job growth through small and medium
enterprises (SME) and micro-enterprises, The first option is to continue with the A final option is to scale back the vision
and attract investment. plan based on the premise that while the acknowledging that the global impact of
crisis has affected the Saudi economy in the crisis is so significant as to warrant a
In line with other GCC countries, KSA has the short term, economic recovery will review of future plans, scaling back the
established the Public Investment Fund as be relatively quick and the Kingdom’s transformations that create the least value
its central financial engine for economic cash position remains strong enough to and maximizing those that do deliver value
diversification, by unlocking investment, maintain the pace of execution. affordably.
innovation and technology, and strategic
economic relationships. Despite these Another option is to accelerate the process Building resilience
efforts, Saudi Arabia may continue to face of change, the crisis having revealed a In order to properly assess these various
significant economic challenges that need certain vulnerability to oil prices requiring options, and respond with resilience, it
to be considered. fast adoption and forcing immediate fiscal pays to develop a concrete understanding
policy imperatives. of the different dimensions to future-
Continue, accelerate, slow down or proof the economy and society. We have
scale back? A third option is to slow down the journey. identified four key dimensions with key
While one choice is to continue with the This option is based on the notion questions per dimension to be considered:
Vision 2030 execution as planned, it may that the crisis has affected KSA’s fiscal
be worth evaluating other options. By stability, prompting it to tread carefully The first dimension focuses on crafting the
assessing different perceptions of the while focusing on value preservation and strategic direction of the transformation by
future, we have identified four potential contingency planning by prioritizing critical responding to tough questions such as:
scenarios. transformations that fit the new reality. • What is the winning aspiration for the
transformation programs?
06Deloitte | Impact of the oil industry crisis on the GCC and potential responses
• How to develop and leverage future • How to cut back on spending and In prioritizing
competitive advantage? increase the efficiency of public
• How is needed to strengthen positioning spending? transformation programs
in future markets? • How to rationalize available government that are resilient,
spending?
The second dimension focuses on • How to bridge infrastructure investment strategically sound, and
understanding the fiscal future position gaps to fuel transformation programs? that create value, the
by drawing a picture around the following • How will energy transition affect fiscal
questions: sustainability? direct enablers of the plan
• What is the current revenue strategy? that include champion
• What are the big ticket expense items In counterbalance to these pressures,
and cost optimization plan? there are key considerations that guide a industries and public or
• How to achieve fiscal sustainability? transformation program. These include: private investment, give
• When to implement the program and
The third dimension focuses on navigating how to measure success. way to more indirect
the required Investment and policy • How to target investment sources from long-term enablers that
enablers by responding to questions future markets.
such as: • How to implement a financially are more concerned
• What is the investment plan and sustainable social welfare model. with infrastructure and
supporting value proposition? • How to harness and maximize local
• How to support private sector economic potential—citizens and economic capabilities
development and drive PPPs? businesses. and fostering the right
• Which structural reforms, policies and • How to ensure coordination and
regulations are needed for intervention? collaboration among stakeholders. fiscal and investment
environment to accelerate
The fourth dimension focuses on laying out Re-calibration
the future blueprint for Governance and In the particular case of Saudi Arabia, a the vision.
Socio-Economic Effects by responding to re-calibration of the Vision 2030 plan and
questions such as: a prioritization of certain programs may be
• What are the governance challenges in necessary to align the vision of today with
managing the transition? the economy of tomorrow.
• How to build social consensus to drive
implementation? Figure 11 shows the key drivers necessary
• How to ensure proper monitoring and for the alignment of Vision 2030 today to
evaluation? help realize future ambitions. In prioritizing
transformation programs that are resilient,
Managing trade-offs strategically sound, and that create value,
The options outlined above cannot be the direct enablers of the plan that include
considered in isolation. In evaluating the champion industries and public or private
different scenarios available there are investment, give way to more indirect long-
trade-offs that can be managed between term enablers that are more concerned
future ambitions and current pressures. with infrastructure and economic
Current pressures faced by countries in capabilities and fostering the right fiscal
the GCC include: and investment environment to accelerate
• How to protect critical revenue streams? the vision.
07Deloitte | Impact of the oil industry crisis on the GCC and potential responses
Figure 11: Saudi Arabia Vision 2030 themes and targets
How can the Saudi Arabia of today align and adapt to Vision 2030...
Vision 2030
Direct What are the Vision champion What public and private investment is
enablers “industries and sectors”? required?
Key drivers
Are our selected Does our selected Are selected
Transformation
transformation programs transformation programs transformation
programs
strategically sound? create value? programs resilient?
Indirect What infrastructure and economic What is the scope of fiscal and investment
enablers capabilities will enable the environment reforms to accelerate our
transformation? vision?
...to become the Saudi Arabia of tomorrow
In the immediate term (coming weeks to 6 projects that do not generate the highest In choosing the strategic
months), we anticipate that Saudi Arabia, immediate returns, and attracting and
in developing its response based on the retaining investors for supporting the direction and its
selected options available to it, will largely Kingdom’s longer-term ambitions. underlying measures
focus on value preservation in anticipation
of the potential scale and duration of For longer-term success (5-10 years), we to address the longer-
the crisis. We also anticipate that Saudi anticipate that Saudi Arabia will identify term crisis, the leaders
Arabia will define a set of tactical response robust yet flexible measures in line with
measures that include safeguarding critical value creation that will provide the base in Saudi Arabia have the
value generation, identifying short-term for a prosperous future. To determine opportunity to not only
prioritization in discretionary spending and these measures, the Saudi government
re-assuring beneficiaries and investors. may consider how to determine the vision tackle today’s challenges,
champion “industries and sectors”, identify but also preempt and
In the medium term (2- years), we new skills and capabilities that will be
anticipate that the emphasis of the required to enable the Kingdom workforce address future ones by
government will be on value maximization, to realize future ambitions, and assess undertaking the right
in particular through maximizing revenue measures for creating impact in the local
generation from existing sources (such as labor market, supply chain and innovation. approach today.
oil), sanctioning or delaying transformation
08Deloitte | Impact of the oil industry crisis on the GCC and potential responses
Figure 12: Proposed guiding areas of focus for measures to address the immediate and beyond dimensions
Immediate term Medium term Long term
Value preservation Value maximization Value creation
• How to safeguard critical value • How do we maximize revenue • What are the vision champion
generation? generation from existing “industries and sectors” for the
• How to identify short-term sources? future?
prioritization in discretionary • Which transformation projects • What new skills and capabilities
spending? should be sanctioned/delayed? will enable our workforce to
• How to re-assure beneficiaries • How do we attract and retain realize future ambitions?
and investors? investors for supporting the • What will the focus be on for
vision programs? creating impact in the local
labor market, supply chain and
innovation?
Tough choices only tackle today’s challenges, but also Endnotes
In the face of these multiple crises affecting preempt and address future ones by
1. Financial Times
businesses and governments globally, undertaking the right approach today. Our 2. Energy Information Administration
there are no easy solutions. Governments recommendation would be to not focus 3. IMF
and leadership worldwide are being faced solely on the current business space, 4. R
euters and homepages for respective companies
5. M
inistry of Finance for respective countries
with the most difficult choices, each subject but also use the momentum of the crisis
6. M
onitor Deloitte analysis
to multi-dimensional challenges and risk. as a catalyst for further accelerating the 7. World Bank
The manner in which leadership responds development of its transformation platform
in the next few months will be critical to thrive in the future.
in maintaining, as well as boosting trust
among all stakeholders involved. At the by Bart Cornelissen, Partner, Monitor
same time, any response will shape the Deloitte Middle East and Energy, Resources
foundation for future relationships, both & Industrials Leader, Neal Beevers,
in the internal and external ecosystem of Government & Public Sector Partner,
any country. Monitor Deloitte Middle East, Shargil
Ahmed, Government & Public Sector
In choosing the strategic direction and Director, Monitor Deloitte Middle East and
its underlying measures to address the Yousef Iskandarani, Energy, Resources
longer-term crisis, the leaders in GCC & Industrials Manager, Monitor Deloitte
countries have the opportunity to not Middle East
09This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte & Touche (M.E.) LLP (“DME”) is the affiliate for the territories of the Middle East and Cyprus of Deloitte NSE LLP (“NSE”), a UK limited liability partnership and member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). Deloitte refers to one or more of DTTL, its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms are legally separate and independent entities. DTTL, NSE and DME do not provide services to clients. Please see www.deloitte. com/about to learn more. Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our network of member firms in more than 150 countries and territories, serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 300,000 people make an impact that matters at www.deloitte.com. DME would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. DME accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. DME is a leading professional services firm established in the Middle East region with uninterrupted presence since 1926. DME’s presence in the Middle East region is established through its affiliated independent legal entities, which are licensed to operate and to provide services under the applicable laws and regulations of the relevant country. DME’s affiliates and related entities cannot oblige each other and/or DME, and when providing services, each affiliate and related entity engages directly and independently with its own clients and shall only be liable for its own acts or omissions and not those of any other affiliate. DME provides audit and assurance, consulting, financial advisory, risk advisory and tax, services through 26 offices in 14 countries with more than 5,000 partners, directors and staff. Monitor Deloitte is the strategy service line of Deloitte’s consulting practice across different licensed member firms globally and in the Middle East. From strategy through execution, Monitor Deloitte helps deliver improved performance by increasing growth and de-risking strategic choices through our strategy professionals who employ cutting-edge approaches embedded with deep industry expertise, working with leaders to resolve critical choices, and drive enterprise value. © 2020 Deloitte & Touche (M.E.) LLP. All rights reserved.
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