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How much more can KSA cut production

Date : 16/11/2017
Author:  Marmore MENA Intelligence

Saudi Arabia relies heavily on the oil revenue to support is fiscal expenditure and also support its ambitious economic growth plans. Due to this prominence, when the oil prices declined in 2014, Saudi Arabia’s initial stand was to increase market share by increasing the production thereby driving higher-cost US shale drillers out of the oil game.  However, this strategy did not pay off and two years later, the OPEC members including Saudi Arabia have agreed to reverse their stance and instead cut production.

Saudi Arabia plans to pump about 9.77mbpd in November, which would be its lowest output since January 2015. According to the Saudi energy ministry, the decrease in allocations for November includes a full 290,000-bpd reduction over and above the 486,000 bpd that Saudi Arabia pledged to cut as part of its commitment.

Table: Saudi Arabia Oil Supply (Jan-2015 to Sep-2017)

Source: Reuters, Marmore Research

Considering Saudi Arabia’s commitment to do whatever it takes to end the oil glut, it is pertinent to understand how far Saudi Arabia can actually go to cut its output. Some of the prominent factors that would influence Saudi Arabia’s production cuts are its market share, global demand for oil and most importantly Aramco’s valuation.

Market Share
One bright spot for Saudi Arabia as an outcome of its initial decision of not cutting the production, is that it gained market share by 1% over the last two years. However, with the OPEC proposal to freeze or cut production, the gain receded to some extent. Saudi Arabia’s exports declined from 7.4 mbpd during October-2016 to 6.7 mbpd during September-2017.

Considering that Saudi Arabia’s supply is still in excess compared to that at the end of 2014, it appears there is still some room to cut output albeit at the cost of losing market share by a few more basis points.

Table: Saudi Arabia Oil Supply

Source: Reuters, Marmore Research

Table: Saudi Arabia Production Cut Target and Compliance

Source: Reuters, Marmore Research

Global Demand
The oil price woe started with the shrinking gap between demand and supply and eventually leading to the current scenario of excess supply. Consumption was affected due to slowdown in the phase of growth in demand for oil globally and in particular China- the second largest oil buyer. This led to increased gap between supply and demand. The demand of crude is beyond the vicinity of control for the crude suppliers and hence they can only rely on the supply to influence the price. Excess supply at a lower price is not likely to result in increased consumption, though the oil importers might use this opportunity to stockpile crude. However, considering the long-term storage costs, the increase in the level of consumption is going to be limited unless real demand kicks in.

Source: Reuters, Marmore Research
Saudi which relies heavily on the oil revenue, is better off with higher oil price. Despite increased production levels, Saudi will not be able to push the required additional barrels of oil to compensate for the loss of revenue due to the lower oil price. For instance, Saudi would have to increase the exports volume by 1.5X @ USD 65 per barrel and 2X @ USD 50 per barrel to match export revenue of oil price @ USD 100 per barrel. Now that the gap between supply and demand appears to be diminishing, Saudi would it’s supply cut to further reduce this gap. However, Saudi will also ensure through its dominance in OPEC that all the members to contribute to plug this gap.
Aramco Valuation
 The significance of oil prices on the Aramco IPO cannot be emphasized enough. Higher price of oil would help the Aramco report stronger realized sales in the financial performance details that it must release ahead of the IPO. According to Sanford C. Bernstein estimates, Aramco would make a net profit of USD 13.3 a barrel on its upstream production with oil @ USD 50, on the contrary its profit would increase to USD 16.90 with oil @ USD 60. This suggested that a USD 10 swing in the oil price could effectively translate into hundreds of millions of dollars to Aramco’s IPO valuation. Considering the coveted USD 2 trillion valuation of Aramco that the Saudi Government is aiming towards, marginal receding of market share is relatively a smaller sacrifice.
 The Saudi Arabia-led OPEC initiative to control the oil prices have started to yield result with the global oil market improving and stabilizing. The oil price has recovered considerably and global oversupply has nearly halved since the beginning of the year. Saudi Arabia would aim to keep the oil prices around USD 60 per barrel by cutting production, for now as this would help Saudi Arabia maneuver its economy comfortably and at the same time not offer much incentive to US shale producers to increase output drastically.
 For Saudi Arabia it may appear that oil price recovery has come at a cost of giving up market share. However, it has two very strong reasons – reducing budget deficit and highest possible valuation for the Aramco, to stick to the cuts. Considering these priorities, historic production and market share levels of Saudi Arabia and global oil demand in the near future, it can be argued that Saudi Arabia production levels haven’t reach the maximum floor levels. We believe that Saudi Arabia wouldn’t hesitate to cut its production by another half a million barrels to achieve its target price.
This article is published in "Marmore Blog"

Tags:  Arabia, Economy, Oil, Saudi

 Current rating: 0 (3 ratings)

Saudi Aramco's India Investment -To where is the oil flowing to?

Date : 24/10/2017
Author:  Marmore MENA Intelligence

Saudi Aramco’s India investment is one part of its global strategy that encompasses expanding its downstream operations, oil trading and marketing and petrochemicals. This investment follows deals which took place earlier this year wherein it had signed contracts worth USD 13Bn with Pertamina and Petronas to ensure long-term oil supply to both countries. The former is an Indonesian state-owned oil company while the latter is Malaysia’s.  These tie-ups reflect Saudi Aramco ambitions to cement its ties with its Asian clients that goes deeper than just being a supplier of oil. It also comes at a time when US oil has reached Asian shores for the first time since the US lifted its restrictions on exports in late 2015. This sent shock waves across the already nervous top echelons of the traditional oil-supplying companies. From a strategic point of view, moving closer to its key customers would help Aramco cater to and customise the products that would better suit the local demand and also forecast future growth in the market with far greater accuracy.

Saudi Aramco is arguably one of the world’s largest Oil and Gas Company in terms of revenues and reserves that they control. To give an idea of its size, Aramco produces close to 10.3Mn barrels per day and its closest rival, the Russian state-owned Rosneft produces a third of that. Given their relative dominance in this space, it is surprising that only recently Saudi Aramco has opened its office in India and plans to invest in India’s downstream opportunities including refining, pipeline, marketing, and technology know-how. To put things into perspective, Saudi Arabia has been a key supplier of crude to India over the years. As of 2016, imports of crude oil from Saudi Arabia accounted 20% of the total crude imports in India followed by Iraq at 16% and Iran at 11%. Even the strong economic growth witnessed in India during the pre-2007 era was not enough to entice Aramco to open an office in India. Only in 2016 did it establish a skeletal presence in the country which is now being expanded.

South East Asian countries including the likes of India and China have hitherto been most lucrative markets for Middle East countries owing to their size and their geographical proximity. Together, these countries account for four of every 10 people in the world, combined making them one of the largest consumers of oil and natural gas. India’s oil demand, especially, is forecast to grow from 135,000 barrels a day in 2017 and 275,000 barrels a day in 2018, according to the International Energy Agency (IEA). IEA also estimates that India’s refining capacity would lag behind the demand making the country a priority for companies such as Aramco that is trying to expand its global reach and diversify its assets.

New suppliers rock the Asian boat
Asian buyers, owing to their higher dependence on crude from Middle East on an average pay more than their Western counterparts. An issue that has largely been under the radar except for occasional requests from Asian government and limited studies undertaken by some governments that put the Asian oil  premium at $1-$1.5 higher than their Western counterparts. In light of this, the emergence of new shale supplies from across the Atlantic has put “Asian Premium” issue in the limelight. In March 2017, India’s oil minister had asked OPEC to look at rationalizing the oil pricing for Asian buyers since they are the major consumers now, also a sign that is reflective of OPEC’s declining clout in fixing oil prices.

India was one of the latest nations to make a purchase from US after China and Japan. India’s first purchase of oil from the US has been on ex-ship basis (Delivered ex ship (DES) is a trade term requiring the seller to deliver goods to a buyer at an agreed) making their prices very competitive vis-à-vis Middle East. Trade data from Bloomberg shows that, there are 11 full-laden tankers that is expected to arrive Asia during November 2017 with more expected to tank up late October and early November (Reuters). This coupled with the increasing price differential for Middle Eastern oil have prompted India and other countries in the region to diversify their supply sources and look at the US as an alternative supplier. US exporters have happily obliged to such increased demand, it’s per day exports reached 1.98Mn barrels by late September and is expected to reach 2.2 Mn barrels in the coming weeks.
Two large –scale investments in Indonesia, Malaysia and potentially another one in India may probably point to Aramco’s efforts at mitigating these price concerns among key clients in key markets and to ensure that future commercial deals are not unduly endangered owing to the price premium.  Besides, these investments also open up opportunities for signing long-term oil supply contracts increasing the revenue visibility.

Aramco’s larger play
Saudi Aramco already has downstream operations in South Korea (majority equity interest in S-oil), the US (through takeover of erstwhile Motiva), Netherlands (joint venture with German LANXESS) and in China (Fujian Refining and Petrochemical Company). Aramco’s signing agreements with Malaysia and Indonesia will add two more locations to its downstream operations. During market downturns, such as the one taking place in the oil market now, upstream earnings suffer significantly more than downstream businesses do. Integrated companies on an average exhibit less earning volatility and high value addition through specialized product developments resulting in higher margins. Aramco’s talks with top India refiners for a stake in a refinery located on the West coast with an annual capacity of 60Mn tonnes fits very well into its downstream play.

Aramco also stated that its goal is to increase its global refining capacity to 8m-10m b/d and it has been scouting for investment opportunities across the globe. Inherent local demand and given Saudi Arabia’s position as a leading supplier of oil for India, Aramco’s talk with Hindustan Petroleum Corporation Ltd., Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. to invest in a West Coast Refinery could be a win-win for all the parties involved.

The project on the West coast is planned to be developed in two phases – the first phase would involve building a 40Mt plant with aromatic complex, naphtha cracker unit and a polymer complex while the second phase would be a 20Mt refinery. If the deal takes shape it would help Aramco to cement its position as an important player in the Indian market despite it being a late entrant to India.

Other long-term opportunities in India
Saudi Aramco can also benefit from India’s huge agricultural base contributing for 14% of India’s GDP; it is the second largest urea importer in the world. The total demand for urea is 32Mn tons out of which India managed to produce 24.5 Mn tons importing the rest. To reduce the dependence on foreign sources, the Government of India has been pushing to increase domestic production and improve fertilizer availability in the country. It has announced plans to revive some of its old fertilizer units as a well as upgrading the current ones. While the feedstock is currently expected to be sourced locally, the demand for food and productivity improvements (through use of fertilizers) could open up a long-term natural gas supply contracts for these plants which Aramco could capitalize on.

Besides that India’s appetite for specialised chemicals such as coatings, adhesives, sealants, elastomers etc. is rising with growth in the economy. Its elastomers market alone is worth USD 900Mn driven by the robust automobile demand.  Regulatory intervention by environmental agencies aimed at carbon emission reduction through an increase in fuel efficiency has also made major automotive OEMs in India to increasingly opt for plastics as a substitute to metals and alloys in automotive components.

Saudi Aramco’s IPO, when it arrives, would be a game changer for the global investment community going by the expected valuation. With this IPO being a centrepiece of the economic reform currently being undertaken, its entry into new and growing markets, and shedding its secrecy-bound image no doubt sends a very positive and welcoming message to potential investors.

This article is published in "Marmore Blog"


 Current rating: 0 (3 ratings)

GCC Air quality - Are government measures sufficient?

Date : 16/10/2017
Author:  Marmore MENA Intelligence


Quality of Air is a key focal area for nations worldwide since the lack of it poses serious threats to human health and bio diversity. The need to balance economic progression and environmental sustainability has finally come to the fore as more nations are now aware of the adverse effects of environmental degradation. With 4 out of the top 10 most polluted countries in the world hailing from the GCC, the gravity of this issue in the region can’t be overstated. Lack of sufficient measures and negligence in enforcing stricter norms have led to Qatar and Saudi Arabia finding the top two spots globally in terms of particulate pollution. The Oil and Gas industry, which has been a major contributor for the economic development of GCC countries has also been the major cause for degradation of their air quality. Considering the serious nature of the situation, we analyze what the GCC governments need to do to bring down pollution to permissible levels.

Air Quality – Cause for concern
 The extent of air pollution is higher than the global average in all GCC countries with Qatar and Saudi Arabia having alarming levels of PM2.5. As per a study by WHO, Saudi Arabia accounted for 4 among the top 50 cities having the highest average yearly air pollution with Riyadh and Jubail making it to the top 10. The situation is equally worse in terms of CO2 emissions as Qatar ranks 1st in the world in terms of CO2 emission per capita and contributes to 0.25% of the world’s total CO2 emissions while housing only 0.031% of the world’s population.
Oil drilling and rapid urbanization have been the primary causes for air pollution in the region and as the GCC economies are heavily dependent on income from oil, pollution control has remained a persistent challenge. Rapid infrastructure development over the last two decades have also aggravated the situation.


What can be done?
 Stricter emission norms and transparency in disclosure of industrial emissions must be encouraged by policy-makers for better pollution management. Rigorous implementation is as important as setting up a regulatory framework to make sure that the industries fall in line in accordance to the required standards. Also incentives have to be provided so that industries find it cost effective to comply with environmental standards.
 GCC countries are among the highest per capita consumers of water and electricity in the world. This increases the need for fuel and energy, subsequently affecting air quality. Hikes in tariff and reduction of subsidy along with creation of awareness regarding minimal energy consumption would go a long way to reduce the level of pollution.
Renewables and Electric Vehicles – The way to surge forward
 Use of renewables would be a step in the right direction. It will reduce the need for oil drilling and also help reduce emissions. The potential for solar power generation is high as GCC countries have the advantage of being geographically located in a region receiving regular sunlight with solar insolation levels (measure of solar radiation energy received on a given surface area in a given time) as high as 6.5 kWh/m² per day. Costs associated with renewable energy have also come down making it a cost effective alternative to fossil fuels. All GCC nations have incorporated the use of renewable energy in their long term visions and have been taking steps towards achieving their targets. However, the commitment needs to stay in the longer term backed by necessary investments.
The Auto industry worldwide is undergoing a major change with the emergence of commercial electric vehicles, a change which could bring about massive reduction in vehicular emissions in the long run if embraced. Dubai has been aggressively promoting the usage of EV (electric vehicles) by offering incentives to users. New EV buyers will be able to charge their vehicles for free until 2019 and use free designated green parking spots across Dubai.
Dubai has also been taking measures to promote the concept of green buildings (The concept of creating sustainable structures which have minimal negative impact on the environment) by giving permits to buildings only if they are compliant to required environmental standards. 1433 green building projects have been completed in Dubai since 2010 helping UAE reach 9th rank globally for green buildings outside the US according to a report from the GBC (Green Building Council).
Outlook – Still hazy as it stands
 Despite the current measures taken by the governments, air quality remains appalling with 100% of the GCC population living in areas exposed to particulate pollution higher than WHO guideline level. Such deterioration of the environment would lead to several health hazards thereby affecting the livability of the region. Although UAE has been in the forefront among GCC nations in the push towards a cleaner future, initiatives taken by its neighbors so far leave much to be desired. Most of all, the concept of sustainable development needs to be incorporated in every sector with a view towards causing minimum hazard to the environment. This can be achieved only if the regulatory authorities are proactive in their cause and efficient in their enforcement. Until then, the situation is unlikely to improve and is susceptible to further degradation.

This article is published in "Marmore Blog"




Tags:  Concerns, Environmental, GCC, Pollution, Renewables

 Current rating: 4 (3 ratings)

Is education still a good business in the GCC?

Date : 10/10/2017
Author:  Marmore MENA Intelligence

The education sector is known to be an anti-recession industry making it a major draw after the recent oil crisis. The GCC education sector offers USD 90 billion in infrastructure opportunities alone, based on government budgets on building schools, colleges and universities. Over the past decade, a growing market for education in GCC has attracted large numbers of foreign institutions in addition to regional players entering the market. This trend will likely continue given the regional growth in student enrolment in educational institutions, governmental privatization initiatives and increasing government education spending. A growing inclination toward private schools providing international curriculum also opens the door for a truck load of investment opportunities in the GCC education industry. GCC’s K-12 education market stood at USD 67 Bn of which the share of private schools accounted for USD 8.1 Bn (GFH).


Challenges faced by GCC education industry

 Despite the growing government spending on education by gulf countries averaging 15.8% of government expenditure in GCC, the quality of education remain below par to global standards. It is reflected in high level of unemployment among youths with an unemployment rate as high as 27% (World Economic Forum).
While Gulf governments may be eager to prioritize the hiring of nationals particularly in the private sector, a significant gap in skillsets and cultural and structural barriers continue to hinder women’s economic inclusion. Women in the Gulf are nearly invisible from workforce in some sectors. Unemployed young women holding higher education indicate an abundance of wealth in human capital that is not being utilized to its full potential. In Saudi Arabia, as much as 80 percent of female job-seekers hold university degrees (Oxford Gulf & Arabian Peninsula Forum). In Qatar even though 60% of graduates are women, they represent less than 37% of the workforce as of 2016.
The shortage of teachers in the region is also the second highest in the world as teaching profession is of less interest to the locals who prefer to work in highly paid public sector jobs. Although region has a lower pupil-teacher ratio of 17 compared to the world average, the countries face challenges in recruiting highly qualified teachers. Growing demand for teachers at international schools in the UAE of at least 14,000 over the next five years and in Saudi Arabia of 183,600 by 2030 will pose further problems. Low availability of highly qualified teacher also result in lower level of knowledge transfer to students, which is clearly visible in poor ranking for GCC countries in skill diversity of graduate category, a component of Competitive index measurement. Effectively addressing these challenges together with tapping into the growth opportunities discussed below highlights the attractiveness of education industry in the region.

Improving the quality of education and increasing institutions offering international curriculum
 The GCC governments have been trying to enhance the quality of education through a number of measures like establishing quality assurance authorities, setting up guidelines, and encouraging technology-driven education. The government’s commitment to improve the quality of higher education and closing the skill gap between graduates and industry, could open opportunities for more private and foreign universities to come up in GCC.
However, in the past four schools including Oxford English School were closed down by SEC in Qatar as they did not meet the education standards in line with the country's drive to ensure the best learning conditions and levels for students. In addition, few foreign higher education institutions in Qatar and Saudi also had to face a setback due to recruitment challenges and government control in fees structure.
 But growing enrollments ratio and government understanding the need of quality private institutions points to much more optimism. Subsequently domestic access to high-quality education will also contain the migration of citizens and expatriates seeking education abroad to an extent. Currently, educational projects worth over USD 50Bn are in different stages of development across GCC nations, with the Saudi Arabia on top of the leaderboard. King Faisal University in Saudi Arabia is the largest project with an estimated value of USD 14.7Bn followed by The Sabah Al-Salem University in Kuwait, worth USD 3.0Bn.The popularity of international schools in the GCC region is also on a rise due to the presence of a large number of expatriates coupled with the desire of the local residents to send their children to institutions offering high-quality education. In 2015, the UAE international schools have generated a revenue of USD 2.5 Bn annually, accounting for 7% of the global tuition fees (The National).
 Growing Youth population base and number of Enrollments
 The region is experiencing growing base of youth population with people in age group less than 15 years expected to reach 13.5Mn by 2020 representing 23% of the entire population while one third of the population will be below 25 years (United Nations Population Division). The above conditions have translated into enrollment growth across the GCC’s education sector, particularly in private enrolments which grew at CAGR of 7% from 2010 to 2015. In 2015, private schools accounted for as much as 70% and 57% of primary and secondary enrolments in UAE and Qatar respectively.

Increasing M&A deals and high margins a sign of huge growth potential

The growth prospects has already attracted significant interest in the education industry investment landscape as the number of announced private equity and M&A transactions has increased to 24 transactions in the period from 2014 to 2016.
Amanat Holdings has acquired a 16 percent stake in the UAE education provider Madaares in 2016, aiming to cash in on the booming sector. Dubai based Gems Education purchased stakes in four academic institutions during 2013-2014. One of the major cross-border deal was the acquisition of National Training Institute in Oman by Babcock International Group of the UK. GEMS Education that runs 88 schools in UAE and abroad, registered a profit of USD 131.5 Mn in 2016, more than doubling the profit from previous year.

 Going forward, the rising awareness among parents regarding the importance of quality pre-primary education is going to be the key driver of growth. Saudi Arabia aims to build 1,500 nurseries by 2020 and UAE aims to increase pre-primary gross enrollment ratio to 95% under its Vision 2021. The tertiary segment is another promising segment for which enrolments are forecasted to grow at a CAGR of 5% from 2015-20 to 2.47mn in 2020, with Qatar and UAE expected to grow the fastest at a CAGR of 9% each during the period (GFH). This will subsequently convert into rise in enrollment rates for higher education thus providing huge scope for both private and public institutions.

This article is published in "Marmore Blog"


Tags:  Business, Education, GCC

 Current rating: 0 (3 ratings)

Acquisition of Kuwait’s food and beverage players

Date : 28/09/2017
Author:  Abdulrazzaq Razooqi

Over the past couple of years, Kuwait food and beverage players have sparked the interest of both regional and international acquirers. Kuwait’s high per capita food consumption, strong purchasing power, and rising population worked to justify that interest. As such, regional and international players wanted to take part of this growing market. They could decide to either establish their own operations or acquire the operations of existing players with a strong market presence, solid customer base, and high brand recognition.

Back in 2014, Brazilian food conglomerate, BRF, decided to acquire a 75% stake in Al Yasra Food’s frozen food division. With a total transaction value amounting to US$160 million, BRF effectively had acquired one of its distributors, which it had recently replicated with Oman-based Al Khan Foodstuff. With this acquisition, BRF had taken control of the distribution of its products in Kuwait, while leveraging the strong platform and local knowledge Al Yasra had built over the years. While BRF’s acquisition of Al Yasra seemed to be large at the time, it was only a couple of years until Kuwait Food Company (Americana) stole its thunder by getting acquired for a total of US$3.26 billion. The news about Americana’s sale dates back to 2014, when bidders such as Savola, KKR, CVC Capital Partners, and others lined up to acquire Kuwait’s largest food and beverage conglomerate. However, it was not until UAE-based Adeptio Investments expressed its interest in acquiring the major shareholder’s stake, that the transaction began to materialize. Adeptio had in effect acquired a food and beverage behemoth with operations spanning manufacturing and food and beverage outlets across the Middle East and a market capitalization of US$3.5 billion. While BRF’s acquisition of Al Yasra’s frozen food division represented an extension of the former’s operations, Adeptio’s acquisition of Americana was different. Adeptio was in effect is an investment company, who believed in Americana’s strong name and presence in the region. Its acquisition demonstrates belief in the strong value Americana brings today and the tremendous potential it has in the future. The success of Al Yasra and Americana has worked to attract both regional and international players to Kuwait. It exemplifies the strong potential that lies within the Kuwaiti market and the very companies that fuel its continued growth. 

This article is published in Markaz Newsletter 'engage'

Tags:  acquisition, and, beverage, food

 Current rating: 0 (3 ratings)
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