CRE Break-Even Prices and Revenue Needs

Country Risk Evolution (CRE)

Research & Advisory

Break-Even Oil Prices: The Risks of an

Extended Price War for Opec-Plus

Summary

Contact Details:
March 11, 2020 Monica Enfield (Houston)
(202) 421-4674
menfield@energyintel.com

Copyright © 2020 Energy Intelligence Group 1

CRE Break-Even Prices and Revenue Needs

Extended Price War Would Wreak Havoc on Opec States

Executive Summary

External Break-Even Prices:

▪ A revenue crash this year will separate the weak from the strong, but Opec and Non-Opec Producers
none of the Opec-plus states are immune to a price war. Energy 2019e 2020e 2021e
Intelligence has adjusted our external break-even oil prices, and the
Algeria 105.2 95.5 109.5
average for 2020 is $63 per barrel.
Angola 63.1 64.7 61.2
▪ Generally Russia and the Mideast Gulf states can weather lower oil prices Eq. Guinea 76.1 76.2 72.2
for a year or more, since they still have ample savings and room to
Gabon 64.4 66.8 63.8
borrow. But current prices are clearly not sustainable for their budgets or
for social stability. High fiscal break-evens indicate this strain. Iran 88.5 83.3 83.0

Iraq 70.0 59.6 57.0

▪ Saudi Arabia can cover its deficits by draining foreign exchange reserves
Kazakhstan 68.8 63.5 64.7
and by borrowing. But at current price levels, it would burn its currency
reserves at an ever-faster rate as revenues fall and growth slows, raising Kuwait 51.5 52.9 48.8

concerns from investors and potentially risking capital flight. Nigeria 66.3 68.1 63.4

▪ Compared with the Gulf states, Russia is more resilient to lower oil Oman 82.8 84.4 84.6

prices, thanks to a flexible exchange rate as well as large currency Qatar 52.2 55.2 53.8

reserves. Russia 41.0 42.0 38.7

▪ If Saudi Arabia, Russia and others with spare capacity open the taps in Saudi Arabia 53.6 62.7 61.7

the coming months, their external break-evens will drop as volumes grow. UAE 29.2 37.1 36.1

But countries without spare capacity are at greater risk. Venezuela 36.1 26.7 27.9

▪ If prices remain below $40/bbl, countries including Algeria, Iran, Oman, Average, $/bbl 63.26 62.59 61.77

Iraq and Angola are all at risk of balance of payments or debt crises. Source: Energy Intelligence Research & Advisory

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CRE Break-Even Prices and Revenue Needs

Average Break-Even of $63/bbl for the Major Producers

Prices at this level will force countries to run down reserves, issue debt and cut spending

▪ At current price levels, all of the Opec-plus states are in trouble. They are starting this downturn in a weakened position
after five years of relatively low prices.
▪ As opposed to fiscal break-evens that measure the oil price needed to balance the budget, the external break-even is the oil price
each country needs to pay for imports and balance its external accounts. External break-evens help to assess the risk of a balance of
payments crisis and other vulnerabilities.
▪ Economic fortunes vary widely within Opec-plus. Iran’s economy is already in tatters, Algeria is heading toward crisis, and Oman, Iraq
and Angola are highly exposed. Most of the Gulf states and Russia are in the clear for now, although the risks are rising for all.

Period of Plenty Brief Downturn and Strong Recovery Crisis Rebound Relapse?

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020e 2021e
Algeria 35.5 55.7 61.3 61.3 79.9 90.4 108.0 116.0 98.7 87.0 91.6 104.0 105.2 95.5 109.5
Angola 54.5 86.2 74.4 67.8 89.1 88.9 95.4 106.0 69.4 51.6 55.3 58.9 63.1 64.7 61.2
Equatorial Guinea 56.6 85.5 74.2 110.3 123.6 114.6 114.9 108.6 76.1 62.4 64.7 83.2 76.1 76.2 72.2
Gabon 53.2 57.2 55.4 55.1 60.8 75.5 93.0 81.4 62.6 62.0 63.9 77.8 64.4 66.8 63.8
Iran 38.6 74.9 51.7 58.7 48.7 79.8 63.6 78.4 50.4 27.9 32.9 51.0 88.5 83.3 83.0
Iraq 77.9 73.8 80.3 76.6 86.3 99.9 106.5 92.7 61.7 54.2 51.7 60.5 70.0 59.6 57.0
Kazakhstan 91.7 84.4 69.4 77.4 93.5 108.2 106.1 88.1 63.3 59.1 63.0 71.4 68.8 63.5 64.7
Kuwait 22.2 27.9 23.8 31.2 38.1 30.8 35.6 42.5 47.8 48.6 43.8 48.1 51.5 52.9 48.8
Nigeria 37.1 58.5 42.9 64.6 99.4 91.2 84.2 98.1 72.1 39.2 38.5 62.9 66.3 68.1 63.4
Oman 63.7 78.9 63.6 63.3 82.1 86.5 92.5 85.3 86.1 81.6 89.3 84.3 82.8 84.4 84.6
Qatar 52.5 58.5 52.6 50.7 54.8 48.2 49.9 50.4 39.8 51.2 47.8 52.3 52.2 55.2 53.8
Russia 50.6 65.9 45.9 59.2 81.9 90.3 99.6 81.7 33.1 36.4 45.2 42.1 41.0 42.0 38.7
Saudi Arabia 40.4 52.2 53.3 53.2 56.8 57.2 62.8 73.2 71.2 51.0 50.7 49.1 53.6 62.7 61.7
UAE 51.0 72.0 51.5 64.6 63.0 33.7 31.4 42.6 34.8 30.8 27.9 34.0 29.2 37.1 36.1
Venezuela 58.7 63.2 61.3 72.6 90.0 108.7 102.9 92.4 74.1 49.1 39.7 54.5 36.1 26.7 27.9
Average, $/bbl 52.28 66.32 57.45 64.44 76.54 80.26 83.10 82.49 62.75 52.81 53.74 62.28 63.26 62.59 61.77
Source: Energy Intelligence Research & Advisory, based on IMF, Opec data, BP Statistical Review, Oil Market Intelligence.
Notes: The external break-even oil price is calculated by measuring each country’s current account balance, the value of its hydrocarbon export earnings, and its non-oil current account balance.
Dividing the non-oil current account balance by the value of net oil exports yields a per barrel value needed to balance the country’s external accounts.
Libya is not included in the chart above, but its break-even prices have fluctuated significantly since 2011, peaking at $209/bbl in 2014 and standing at $75/bbl in 2020.

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CRE Break-Even Prices and Revenue Needs

Break-Even Prices: Deficit Spending Raises Risks

No easy options

▪ Even with Brent prices closer to $60/bbl, several Opec-plus Fiscal and External Break-even Prices, 2020 ($/bbl)
states were in bad shape. Prices below $50/bbl for several 120
Iran: $194/bbl
quarters would wreak havoc on these economies, with External break-evens, Energy Intelligence estimate ($/bbl)
100 109.0 Fiscal break-evens, IMF estimate, Oct. 2019 ($/bbl)
several at risk of economic crisis.
▪ In the Mideast Gulf, fiscal break-even prices have been rising in 80 87.6 83.6
recent years, not only in Saudi Arabia but in the United Arab 60 70.0
60.3 57.8
Emirates and Kuwait. Since the Gulf Cooperation Council 40
54.7
45.7
(GCC) countries have currency pegs, exchange rate adjustment
20
(e.g. devaluation) is not an option when oil revenues suddenly
decline. Governments have to either slash budgets or embrace 0
deficit spending, and both options carry risks.
▪ Several years of austerity measures following the oil price
decline helped to restore stability. The Mideast Gulf states also Source: Energy Intelligence, IMF
raised non-oil revenue through value-added taxes and cut some
subsidies. But as the Opec-plus deal helped to stabilize prices End-Year Foreign Exchange Reserves ($ billion)
and restore their economic health, spending picked up again.
2014 2016 2017 2018 2019e 2020e
▪ As the revenue impact worsens this year, governments may Algeria 172.0 112.9 96.1 78.6 56.6 35.0
again have to take a hard look at cutting social programs and Iran 127.3 104.2 105.7 101.1 85.5 68.8
subsidies, which raises political risks (see Appendix). These Iraq 65.7 45.5 49.4 64.7 61.0 54.0
economies hinge on state investment, so cutbacks have a major Kazakhstan 28.9 29.7 31.0 30.9 28.3 29.6
impact on GDP growth. On the other hand, perpetual budget Kuwait* 35.4 31.2 33.5 37.3 39.0 40.3
deficits and growing debt will worry investors. If they continue Oman 16.3 20.3 16.1 17.4 16.4 14.8
over the medium term, capital flight becomes a real risk. Qatar* 46.4 31.7 14.9 30.5 47.5 45.1
▪ Plenty of Opec-plus states still have ample reserves (see table), Russia 386.2 379.8 432.1 466.9 549.8 494.8
but a deeper price decline likely means that Saudi Arabia, Saudi Arabia** 745.0 533.6 493.8 494.1 499.8 439.8
Russia, Algeria and others will draw them down substantially UAE* 70.9 85.4 95.4 99.5 113.4 120.7
throughout the year. Source: central banks, IMF, Energy Intelligence estimates
*Does not include sovereign wealth fund holdings **Gross foreign assets

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CRE Break-Even Prices and Revenue Needs

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