Middle East reforms drive forward

Author: Tom Brown


The volatility in oil prices has been felt all over the world, but nowhere more so than in the Middle East. With the rising primacy of the US as an oil power weakening OPEC’s position as the global swing producer and Middle East governments forced to dip into cash reserves to offset the holes in balance sheets, the bumpy road of the last four years has provided the momentum to enact long-anticipated reforms.

“A lot of these diversification plans have been around in some form for a long time – the lower oil price has kicked them into gear and provided governments with the political capital to pursue reforms with more urgency,” said Karim El Assir, desk lead at KPMG corporate intelligence unit for Middle East and North Africa (MENA).

“Conversations about the post-oil futures of countries in the region have been happening for decades, but now the difference is there is an imperative for governments to take action,” he added.

The extent of the reforms under way in some cases is dramatic and could stand to reshape both the economies of countries such as Saudi Arabia and the relationship between government and citizens.

Citizens in many Gulf countries have benefited from generous government subsidies, stable, well-paid jobs and low or non-existent tax regimes, but the need to rebalance spending means that much of that largesse may be set to be scaled back or withdrawn entirely.

The shift stands to leave young populations facing rising taxes and reduced social support, needing to pay more to sustain lifestyles and potentially unable to compete for some of the jobs that are emerging.

“The labour market is undergoing an accelerated transformation,” said El Assir. “Countries in the GCC (Gulf Cooperation Council) have historically relied on expats to supplement their workforce, and there is an imperative now for these countries to accelerate training their local workforce with new skills to take on new jobs as they become available.”

The partial rollback of the government safety net in Saudi Arabia has also been a driver behind social reforms, with the first driving licenses issued to women this year and the opening of the first cinema the country has seen in 35 years.


Saudi Arabia issued driving licenses to women this year

The move to diversify is also being seen in the oil and gas sectors of many key Gulf economies, on the back of players such as ExxonMobil projecting a 45% increase in global chemicals demand over the next decade.

Mirroring the kind of big-ticket deals and investments increasingly pursued by oil majors in the petrochemicals sector as part of a bid to prepare for a future where oil demand begins to drop, several state oil firms are pursuing huge deals and international expansions.

Abu Dhabi National Oil Company (ADNOC) is investing $45bn in a new refinery and petrochemicals complex in the country, while Saudi Aramco has brokered two joint ventures at Petronas’ Refinery and Petrochemical Integrated Development (RAPID) complex worth billions, new investments at its Total SATORP joint venture refinery in Al Jubail and a potential stronger push into the feedstock-advantaged US Gulf coast.

This is without mentioning the planned $44bn complex Saudi Aramco is developing in India alongside various local partners, or Aramco’s long-anticipated initial public offering (IPO).


The Aramco IPO is probably not the most significant of the liberalisations the Saudi government is pursuing, but it is one of the most visible – an indication that the country is serious enough about reform to expose the crown jewel of its economy to the transparency requirements of international bourses.

The move to privatise, announced with little fanfare in the UK’s The Economist magazine by Crown Prince Muhammed bin Salman, was a shock to citizens in Saudi Arabia, where the oil firm is regarded as a public good to manage the wealth of the country.

But reticence over that level of exposure required, whether to list in New York or London or just to proceed with the domestic part of the flotation, have caused preparations to drag on, with no clear date to move forward.

It is seen by analysts as important to the international perception of Saudi Arabia’s reform efforts that the IPO move forward, but newly revealed discussions around the acquisition of a stake in SABIC from domestic sovereign wealth investor Public Investment Fund (PIF) could provide a different way forward.

The payment of a sizeable sum to PIF could provide additional revenues for reform plans, and ministers have already made noises in the international press about any deal potentially delaying the Aramco IPO.

As such, a successful purchase may provide domestic funding, diversify Aramco’s portfolio, and provide a reason for the IPO process to drag on that the investor community may accept.


Aside from investments and international expansion, there is also room for petrochemicals producers in the region to pursue more low-hanging fruit, such as improving the efficiency of operations and developing capacity for higher margin products.

“Historically, profit levels for Middle East petrochemical producers have been so high that producers have not taken the time to ask, ‘What opportunities do we have to increase our profits further?’” said consultant McKinsey in a report.

With feedstock price advantages declining, debottlenecking, cost-saving and efficiencies may be as important as new flagship projects for the industry. “The largest gains in return on invested capital (ROIC) tend to occur through manufacturing excellence efforts; in Europe and North America, gains of three to four percentage points are often achieved,” McKinsey added.

Increased focus on earlier initiatives that were allowed to lay fallow could also help to firm up competitiveness, such as a coherent policy framework to attract investors to develop Saudi Arabia’s gas sector.

“[Saudi Arabia’s] gas reserves, the world’s sixth largest, are relatively underdeveloped in comparison to its oil reserves. A programme known as the ‘Saudi Gas Initiative’ failed to attract significant investment from oil majors throughout the late 1990s and 2000s as a result of disagreements from developers over investment returns,” said KPMG’s El Assir.

“The government has renewed discussions recently with majors to invest in gas projects as it aims to significantly increase the amount of gas it uses domestically for activities such as water desalination and electricity generation, and free up crude oil for export,” he added.

Reform and diversification are taking hold in many key Middle Eastern economies, offering opportunities for local and international petrochemicals players.

However, the speed of reform and the number of fronts in which they are taking place mean that investors could easily be caught at a disadvantage, and caution is necessary, according to El Assir.

“The diversification and liberalisation of the economy opened up new opportunities for foreign investors, but the speed at which these programmes are being implemented also mean that it can sometimes be unpredictable to anticipate reforms and changes to the regulatory landscape,” he said.