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