Executive Summary
Bringing ambitious blueprints to life requires significant investor support and they need to be confident that operators can effectively manage and optimise CapEx and OpEx. Success is crucial to guarantee ongoing energy security in the Middle East. The tools to achieve this are available or can be cultivated, National Oil Companies must move quickly to integrate them.
There are many bright spots in the Middle East’s downstream market, despite intensifying pressure points (page 2: Drivers of uncertainty). The region’s abundant resources mean it will remain the world’s biggest oil producing region up to 2040, accounting for 36% of global liquids, according to BP Outlook. This geographic good fortune is accentuated by the region’s position at the heart of the world’s east-west trade routes. To the east, overall energy demand in Southeast Asia has grown by more than 80% since 2000, according to the International Energy Agency (IEA). To the west, more than 500mn people will be added to Africa’s urban population by 2040, much higher than the growth seen in China’s urban population in the two decades of its economic and energy boom. It appears to be a win-win for the Middle East.
The Middle East’s location on the doorstep of two major shipping lanes – the Strait of Hormuz and the Suez Canal – will also help broaden NOCs’ global footprint and influence. The Strait, for example, is the world’s most important oil transit bottleneck, with its daily flow accounting for 21% of global petroleum liquids consumption, according to the Energy Information Administration (EIA). Plus, NOCs’ downstream operators have one of the lowest cost feedstocks worldwide, multiple and extensive port infrastructure and strong government support. This provides a robust foundation for regional expansions and, compelled to improve security of supply security of supply, NOCs are continually upping their capacity upgrade plans (page 4: Growth points). To ensure downstream ambitions are achieved as affordably, efficiently and sustainably as possible a few holes still need plugging.
NOCs take the lead
After decades of international oil companies (IOCs) taking the lead, NOCs are stepping centre stage to spearhead the sizeable downstream projects in the Middle East. NOCs have also made significant headway in recent years to not only align their business models to those of IOCs, but also emerge as worthy competitors. NOCs’ most notable changes have been increased vertical integration and the growth of a regional petrochemical market. The fast-growing petrochemicals industry is a good business to be in. The global market size is projected to reach $958.8bn by 2025, expanding at a compound annual growth rate of 8.5% between 2019-2025, said Grand View Research. According to the IEA’s World Energy Outlook 2019, the main increases in oil product demand in 2018 came from gasoline and diesel. There were also sizeable contributions from ethane, liquefied petroleum gas (LPG) and naphtha as the use of oil as a petrochemical feedstock continues to grow in importance.
Another noteworthy trend is NOCs' expansions into other geographies, which is largely driven by CapEx, market demand and partnerships with other NOCs and IOCs. Such expansions raise the question of whether a NOC will focus on investing at home or abroad. A lucky few have the means to do both. Those keen to invest on home soil are supporting NOCs' role as national champions, boosting the national economy and job market. Those eyeing investments abroad typically do so in major demand centres, such as Asia, helping reaffirm the country’s geopolitical and economic alliances.
A greener future
Global momentum to decarbonise energy markets is accelerating, largely spurred by the Paris Agreement, the world's most comprehensive climate-related deal (page 8: Environment: Navigating pressure points). Most recently, for example, in January this year, ADNOC announced plans to lower its greenhouse gas emissions intensity by 25% by 2030 as it aspires to be a low-carbon intensive energy company. All NOC downstream operators are re-examining their crude oil offering through a greener prism, asking how it can be a feedstock for cleaner products and not necessarily just fuel? This evolution will also encompass creating sustainable plastic solutions and lightweight materials for transport, notably shipping, aviation and electric vehicles (EVs).
Looking ahead to the 2020s, NOCs must dramatically accelerate efforts to hit their downstream ambitions. The answers lie across integration, digitalisation, talent and environment, in a market littered with known unknowns, the holistic application of all four is the best route.