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Country Budgets in Oil Price Rout are Unsettling Some Members

The oil and gas world is not expecting to receive any groundbreaking news from this Friday’s meeting of the Organization of Petroleum Exporting Countries (OPEC). But the likelihood of all 12 nations embracing the status quo is nil, and many people expect to see ample discord between the members of the cartel.

The oil price swoon affected the industry worldwide, hitting the wallets of companies in every facet of the industry. Countries primarily dependent on national oil companies for gross domestic product are under significant pressure as their revenues have been cut in half in abrupt fashion. The difference between North American operations and international ventures is reflected in the rig count. Since November 2014, active rigs in the United States and Canada have declined by more than 50%, while OPEC’s count has remained relatively steady.

In North America, the majority of companies have elected to apply the brakes on large-scale operations and focus on less capital-intensive projects. Some OPEC nations have no choice but to continue to drill in order to fund their economy. But how, exactly, do these countries stack up?

Deep Pockets

On a pure numbers scale, Saudi Arabia is losing the most revenue in the new commodity environment considering it accounts for roughly one-third of OPEC’s production. According to the Energy Information Administration, oil exports provided a whopping 89% of the kingdom’s revenue in 2014. Projections call for the OPEC leader to operate at a deficit of nearly $40 billion in 2015, which is roughly equal to India’s entire military budget.

Despite the shortfall, the Saudis hold a sovereign wealth fund of more than $730 billion – roughly 19 times greater than the anticipated deficit in 2015. Needless to say, the country was well positioned for a commodity downturn and surely influenced their decision to stick to their guns in the latest OPEC meeting.

The Saudis are not the only ones with deep sovereign wealth funds. Kuwait, Qatar and the United Arab Emirates also hold hundreds of billions sourced purely from their state-run oil and gas programs. The UAE, collectively, has the highest wealth fund in the world. It comes as no surprise that the countries are ramping up production in an attempt to gain a larger slice of market share. Volumes from Kuwait and the UAE reached 20-year highs in April, the Kuwaiti oil minister said OPEC will be “more unified” in the upcoming meeting.

Source: EnerCom Monthly, November 2014

Source: EnerCom Monthly, November 2014

Need to Reboot Production and Export Levels

Iran and Iraq volumes are both on the rise, and a poll from the PRIX index believes the pair will be the greatest contributors to the climbing export volumes. Iran’s oil ministers have been very optimistic about being able to quickly ramp up production when and if sanctions are lifted, and Iraq has improved upon its export volumes on a monthly basis since the November 2014 OPEC meeting. Iran’s hydrocarbon export revenues are half of what they were pre-sanction era in 2011, and the country has struggled to secure foreign investment due to the unstable political climate.

Source: EnerCom Monthly, November 2014

Source: EnerCom Monthly, November 2014

On the Ropes

Other members of the cartel do not enjoy the financial security of the Gulf Coast nations, and pleas from their government officials are apparent. Venezuela has been outspoken on boosting prices, mainly because the International Monetary Fund estimates the nation needs $120 per barrel in order to break even. Approximately 95% of the country’s export dollars are sourced from crude, and inflation has ballooned by 60%. Oil is also the nation’s only hard currency export, and the NOC already owes $21 billion on overseas bonds due at the end of 2016. Considering the owed amount is roughly equal to the estimated value of Venezuela’s reserves, a default appears almost certain.

Ecuador has been down that road before. OPEC’s smallest producing nation defaulted on $3.2 billion of foreign debt in 2008, the last time crude prices took a turn for the worse. A note from Jefferies LLC estimates the country could lose an additional $2.5 billion in oil revenue if prices remain flat. The ministry sold roughly $1.7 billion in debt in late 2014 to fund its near-term drilling program, but investment has been difficult to garner. It doesn’t help that the government has been involved in a testy legal dispute with Chevron regarding environmental allegations.

Nigeria depends on crude exports for 75% of its budget and has more to worry about than an oversupplied oil market. Production has declined every year since 2005 and is constantly at risk for disruptions due to theft and war. An estimated 10% of all Nigerian production was stolen by oil thieves when Brent prices were above $100 per barrel. Even then, Nigeria was running slim margins due to the high costs required to balance its state budget.

Algeria was enduring a whirlwind even before crude prices took a dive. The country’s primary grade is a light blend, the same generated from the shale boom in North America. As such, U.S. domestic production has drastically reduced the need for Algeria’s product – exports to the United States in 2013 was just 29 MBOPD, which is 93% less from 2007’s average of 443 MBOPD. That’s quite a hit for a country that depends on hydrocarbons for 30% of its GDP and 60% of its budget revenues, according to the EIA. The state spurred a five-year, $100 billion investment plan last year to increase output and lure foreign investment.

The timing for Angola is unfortunate, considering its currency recently sank to an all-time low and the price decline cut its export revenue by 12%. The country’s $24 billion in oil sales accounts for 97% of all export sales. Another market could exist for its 9.7 Tcf of natural gas reserves, but the lack of infrastructure is an issue. An LNG plant constructed in 2013 was closed due to various technical problems and is not expected to come back online until late 2015, at the earliest.

Source: EIA

Source: EIA

Libya’s war ravaged countryside has prevented exploration projects and disrupted production flows, even though its proved crude oil reserves are the ninth greatest in the world. Good news appears to be few and far between: the government is requesting foreign aid to prevent its oil fields from falling into the hands of the Islamic State, and a United Nations Special Envoy said the country is nearing “economic and financial collapse.” Reuters reports the divided nation has recorded only $5.5 billion in oil revenue to date in 2015. Estimates say at least $3.5 billion per month is needed, meaning Libya is already $12 billion below its intended goal. Its currency has depreciated by 35% against the dollar since January alone.

Despite reinforcing claims from OPEC delegates (“the market seems to be in good shape,” an official told Reuters), the 167th ordinary meeting will likely be one full of awkward encounters and frustrating pleas. The Wall Street Journal reports executives from oil supermajors like ExxonMobil (ticker: XOM) and Royal Dutch Shell (ticker: RDS.B) will also be making an appearance in Vienna, for good measure.

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