Hooked On Hydrocarbons: How

Susceptible Are Gulf Sovereigns To

Concentration Risk?
Primary Credit Analyst:
Trevor Cullinan, Dubai (971) 4372-7113; trevor.cullinan@standardandpoors.com
Secondary Contact:
Remy Carasse, Dubai +971 (0) 4372 7154; remy.carasse@standardandpoors.com
Table Of Contents
Some Countries Are More Susceptible Than Others To Falling Oil Prices
Hydrocarbon Dependence Is On The Increase
Economic Diversification Could Support Credit Quality In The Future
Related Criteria And Research
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 1
1338906 | 302218800
Hooked On Hydrocarbons: How Susceptible Are
Gulf Sovereigns To Concentration Risk?
The Gulf countries' significant oil and gas reserves are a key strength of their sovereign credit ratings. Yet, the
concentration of their economies on the hydrocarbon sector could potentially become a significant vulnerability, in
Standard & Poor's Ratings Services view. The high income that the oil and gas sector generates, results in general
government surpluses, low government financing needs, and net external asset positions for most Gulf Cooperation
Council (GCC) countries--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).
Yet, an economy's concentration on one sector, especially one that is subject to significant cyclicality of prices or
volumes, can be a negative rating factor if sovereigns don't have substantial financial buffers against a cyclical
downturn. A diversified economy is more likely to be able to withstand a downturn in any one sector. As a result,
policymaking would likely be more effective, economic growth more sustainable, and government and external
balances and monetary policy more stable. Diversification would also likely reduce the risk of a significant depletion of
existing financial buffers in the event of a sharp decline in prices or volumes.
Overview
Gulf sovereigns' high and increasing dependence on hydrocarbon revenues is a key vulnerability of their
economies and their ratings, in our view.
In particular, government budgets have become more susceptible to a sharp drop in oil prices.
Our study shows that Bahrain and Oman are the GCC countries most vulnerable to a sharp and sustained
decline in the hydrocarbons market, while Qatar and the United Arab Emirates are the least vulnerable.
On average, hydrocarbon revenues constitute 46% of nominal GDP and three-quarters of total exports of the six GCC
countries. This strong dependence on hydrocarbon revenues appears to be increasing. This is partly a result of high oil
prices feeding through to the national accounts data, but also, in our view, because these countries have made only
marginal progress in diversifying their economies away from hydrocarbons. A sharp and sustained fall in the oil price,
to which the majority of liquid natural gas price contracts are also linked, or in hydrocarbon export volumes would
significantly dent their economic and financial indicators.
Nevertheless, some GCC countries appear more vulnerable than others to a drop in oil prices, according to our
analysis of certain economic, external, and fiscal risk indicators. Based on these measures, as well as the sustainability
of their current hydrocarbon production levels, we calculate that Bahrain and Oman would be highly vulnerable to a
sharp decline in the hydrocarbons market, while Qatar and UAE would be the least vulnerable among the GCC
countries.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 2
1338906 | 302218800
Some Countries Are More Susceptible Than Others To Falling Oil Prices
To determine the GCC sovereigns' relative dependency on their oil and gas sectors based on the most recently
available data, we have used indicators of sovereign economic, external, and fiscal risk:
As a measure of economic risk, we've assessed and compared the contribution of the hydrocarbon sector to
nominal GDP to indicate the level of diversification in the economy.
To measure external risk, we've examined these countries' share of hydrocarbon exports in total exports to provide
an indication of how much of the external foreign currency that flows into the economy is reliant on the
hydrocarbon sector.
In calculating fiscal risk, we've taken the International Monetary Fund's (IMF's) estimate of the GCC sovereigns'
fiscal breakeven oil price--the oil price at which they can achieve a balanced budget given their level of expenditure.
A government that has more prudently managed its expenditure to take account of the volatile nature of
hydrocarbons as a revenue source would have a low fiscal breakeven oil price.
We also take into account a so-called sustainability factor: how much time a sovereign has available to it before its
hydrocarbon revenues are significantly diminished, absent any further oil and gas discoveries or changes to current
production levels. We estimate the number of years at which proven reserves would be depleted if production were to
continue at current levels. This allows us to gauge the urgency of economic diversification or a change in government
policy to maintain the existing social contract.
Based on each of these four variables, we have ranked the six GCC sovereigns on a scale of one to six, one being the
weakest. We then took a simple average of the four rankings to indicate the overall vulnerability of each sovereign to
the hydrocarbon sector (see table 1).
Our analysis defines hydrocarbons as both oil and gas. We have converted production of gas into barrels of oil
equivalent (boe) where necessary to estimate overall reserves and production. We acknowledge that this analysis does
not take into account potential upcoming changes in oil and gas reserves, production, non-oil GDP growth, or fiscal
policy. We used a single source--the 2014 BP Statistical Review of World Energy--for data on hydrocarbon production
and proven reserves in order to provide some consistency of measurement. In addition, we note that measures,
particularly with regard to reserves, can vary depending on the data source.
Table 1
Gulf Sovereigns Ranked By Hydrocarbon Vulnerability (1 = Most Vulnerable)
Ranking Sovereign
Sovereign credit
ratings*
Hydrocarbon
component of
nominal GDP (%)
Hydrocarbon
component of total
exports (%)
Fiscal
breakeven oil
price (US$ per
barrel)
Years of
hydrocarbon
production at
current levels
(years)
1 Bahrain BBB/Stable/A-2 26.2 73.1 126.9 11
1 Oman A/Stable/A-1 49.7 66.1 89.4 21
3 Saudi Arabia AA-/Positive/A-1+ 45.1 85.7 84.3 66
3 Kuwait AA/Stable/A-1+ 62.6 94.3 52.0 91
5 Qatar AA/Stable/A-1+ 54.4 91.7 59.4 106
6 United Arab
Emirates
N.R. 38.9 31.1 81.3 81
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 3
1338906 | 302218800
Hooked On Hydrocarbons: How Susceptible Are Gulf Sovereigns To Concentration Risk?
Table 1
Gulf Sovereigns Ranked By Hydrocarbon Vulnerability (1 = Most Vulnerable) (cont.)
*As of June 30, 2014. 2012 for nominal GDP. Not rated: within the UAE, Standard & Poor's rates Abu Dhabi (AA/Stable/A-1+), Ras Al
Khaimah (A/Negative/A-1), Sharjah (A/Stable/A-1). Data sources: S&P estimates, National sources, BP Statistical Review of World Energy 2014,
IMF. Data is for 2013, unless otherwise stated.
Bahrain: Highly vulnerable
We assess Bahrain as highly vulnerable to a fall in hydrocarbon prices or production. Based on 2013 data, the oil price
already needs to be about $18 higher than the current oil price for the sovereign to achieve a balanced budget. Bahrain
is an outlier in the GCC in this respect. Mitigating its dependency, Bahrain has the lowest share of hydrocarbons in
GDP among its neighbors, and is therefore the most diversified economy in the region. Financial and government
services, as well as manufacturing (mainly aluminum) also provide substantial contributions to its economy. However,
in terms of our sustainability indicators, Bahrain also has the least amount of time to further diversify away from the
hydrocarbon sector in order to provide other avenues of support, particularly for its external and fiscal positions in the
event of a downturn in this market.
Oman: Highly vulnerable
Similar to Bahrain, the relatively low lifespan of Oman's current hydrocarbon production also increases the sovereign's
overall vulnerability, in our view. Nevertheless, through utilizing enhanced oil recovery technologies and large
upstream investments, Oman has been able to sustain its oil reserve level at 5.5 billion barrels.
Oman also has the second-highest breakeven oil price among the GCC sovereigns, although this is still an order of
magnitude lower than that of Bahrain. The fiscal breakeven oil price is close to Saudi Arabia's, and the hydrocarbon
sector also represents slightly less than half of GDP. However, Oman's exports are less dependent on hydrocarbons
than most other GCC sovereigns, although the dependence remains material. While hydrocarbon exports make up
66% of total exports, Oman has 17% of its exports classified as other, with 12% re-exports and 5% services exports.
The government's eighth five-year development plan (2011-2015) aims to continue to push for diversification by
focusing on the development of tourism, industry, and the agriculture and fisheries sector. That said, the pace and
scope of diversification in Oman remains largely linked to the performance of the hydrocarbon sector; the
government's public expenditure programs are closely correlated with hydrocarbon revenues. Moreover, competing
demands for Omani gas in both domestic and external markets may lead to shortfalls in the domestic market. We note
that earlier this year Oman signed a deal for Iran to supply it with natural gas.
Kuwait: Vulnerable
Kuwait appears the most dependent GCC country on hydrocarbon resources in terms of its dominance in GDP and
exports. Economic diversification in Kuwait is weak relative to its neighbors. However, although hydrocarbon revenues
account for about 80% of total government revenues, Kuwait's fiscal breakeven oil price is the lowest in the region.
This would indicate that to some extent the Kuwaiti government has restrained expenditure in relation to the growth in
hydrocarbon revenues. In terms of sustainability, Kuwait also has more years of hydrocarbon production at current
levels than any other GCC sovereign apart from Qatar.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 4
1338906 | 302218800
Hooked On Hydrocarbons: How Susceptible Are Gulf Sovereigns To Concentration Risk?
Saudi Arabia: Vulnerable
Although the hydrocarbon sector accounts for slightly less than half of Saudi Arabia's GDP, the kingdom is still heavily
reliant on hydrocarbon resources both in terms of exports and the fiscal breakeven oil price. The narrow, albeit
expanding, economic base, reliance on government expenditure to fuel non-oil sector growth, and high dependence of
foreign exchange receipts on oil revenues remain significant. Saudi Arabia has by far the largest population in the GCC
at about 30 million, which is about three times that of the second-largest country by population, the UAE. As a result, a
portion of Saudi Arabia's non-oil sector has developed without government support in order to meet the retail and
housing needs of its population. However, given Saudi Arabia's sizable population despite having the largest
hydrocarbons output and reserves of the GCC countries, its relative position in per capita terms is significantly
reduced. Meanwhile, in terms of years of hydrocarbon production remaining at current levels, Saudi Arabia ranks third
behind Qatar and Kuwait.
Qatar: Lower vulnerability
Hydrocarbons account for more than half of Qatar's nominal GDP and 90% of export revenues. Concentration risk
related to the economy's reliance on hydrocarbon resources remains high. However, we expect Qatar to maintain
production at currently high levels for the longest period of time of all the GCC countries. At the same time, Qatar's
fiscal breakeven oil price is low and close to that of Kuwait.
United Arab Emirates: Lower vulnerability
The UAE is ahead of the pack, but in our opinion remains dependent on hydrocarbon revenues. The economy appears
the most diversified in the GCC. In our view, Abu Dhabi is still heavily oil-dependent, with hydrocarbons as a
proportion of nominal GDP and government revenues reaching 55% and 65%, respectively (excluding dividends from
Abu Dhabi National Oil Company [ADNOC] brings the later ratio to 90%). However, the other six emirates of the
federation have a significantly smaller hydrocarbon endowment and have developed other industries as a result. Dubai
has become a services hub for the region, while Sharjah has a strong manufacturing base, and Ras Al Khaimah
produces significant amounts of construction materials such as ceramics, cement, and glass. The UAE as a whole
ranks fourth in terms of its hydrocarbon production lifespan. Nevertheless, the UAE's fiscal breakeven oil price is
relatively high at above $80 per barrel, indicating that to some extent government expenditure growth has been
keeping pace with rising hydrocarbon-fueled government revenues.
Hydrocarbon Dependence Is On The Increase
If we examine the evolution of the three variables we used as indicators of hydrocarbon dependency, the picture
shows a general increase in dependency across the GCC (see chart 1). However, high oil prices, which have almost
tripled over the past decade (see chart 2), partly explain this trend and have in our view supported the GCC
economies, and at the same time enabled them to postpone diversification.
The UAE and Oman have made the greatest progress in reducing the hydrocarbon component of their exports. The
concentration of the UAE's hydrocarbon exports as a percentage of total exports has declined by almost 15 percentage
points since 2001, mainly owing to re-exports and the services exports of Dubai. Oman reduced its export dependence
by almost 10 percentage points between 2001 and 2013, to stand at 66% of total exports in 2013.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 5
1338906 | 302218800
Hooked On Hydrocarbons: How Susceptible Are Gulf Sovereigns To Concentration Risk?
Chart 1
A proportion of what classifies as the non-oil sector according to generally accepted statistical methods in many of the
GCC economies does not in our opinion constitute true diversification away from the hydrocarbons sector. It is to a
significant extent downstream activity, such as the production of petrochemicals and is directly related to the
hydrocarbons sector through the provision of competitively priced oil and gas feedstocks by the national oil
companies. The GCC governments are using their competitive advantage in the development of these downstream
industries. However, as their hydrocarbon reserves are depleted it is possible that these industries may not prove to be
sustainable. The supply of feedstocks could become less abundant, absent further discoveries of new oil and gas fields
and any substantive development of new technologies such as shale. Furthermore, the opportunity cost of providing
feedstocks to the downstream industries rather than, for example, making them available for export, will rise.
Governments' current and capital spending, fueled by hydrocarbon revenues, can also represent a significant part of
non-oil growth, resulting in an overestimation of the rate of diversification, in our view.
Fiscal breakeven oil prices have also increased across the GCC, indicating the still high fiscal vulnerability of the GCC
economies to a decline in oil prices. For instance, in 2008, breakeven prices of all GCC sovereigns were below the
market price for Brent oil. In 2009, when Brent crude oil prices dropped substantially to slightly above an annual
average of $61 per barrel, only Kuwait and Qatar's breakeven oil price remained below the market price for Brent (see
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 6
1338906 | 302218800
Hooked On Hydrocarbons: How Susceptible Are Gulf Sovereigns To Concentration Risk?
chart 2).
Chart 2
Economic Diversification Could Support Credit Quality In The Future
The GCC member states' material hydrocarbon endowments relative to the size of their populations provide a
significant support to their sovereign ratings while oil prices are high. However, at the same time we view their
dependence on the oil and gas sector as a key vulnerability, particularly absent the accumulation of significant financial
buffers, should there be a sharp and sustained decline in the oil price or in hydrocarbon export volumes. Furthermore,
their dependence on hydrocarbon revenues appears to be increasing. In this regard, particularly for economies that are
unable to sustain hydrocarbon production at current levels over the longer term, we would view economic
diversification as supportive of their sovereign ratings.
Related Criteria And Research
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 7
1338906 | 302218800
Hooked On Hydrocarbons: How Susceptible Are Gulf Sovereigns To Concentration Risk?
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers,
May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
Related Research
Global Oil & Gas: Emerging Market Players Are Pushing Themselves Into The Limelight, June 16, 2014
Standard & Poor's Revises Its Crude Oil And Natural Gas Price Assumptions, June 3, 2014
Game Changer: How Shale Is Transforming Global Energy--And Affecting Industries And Ratings, Jan. 7, 2014
Sovereign Defaults and Rating Transition Data, 2012 Update, March 29, 2013
S&P's Rating Actions are determined by Ratings Committee. This commentary has not been determined by Ratings Committee. The opinions
expressed in this article do not represent a change to or affirmation of Ratings Services' opinion of the creditworthiness of any entity/entities
(named or inferred) or the likely direction of ratings.
Additional Contact:
SovereignEurope; SovereignEurope@standardandpoors.com
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 8
1338906 | 302218800
Hooked On Hydrocarbons: How Susceptible Are Gulf Sovereigns To Concentration Risk?
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P
reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com
(subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information
about our ratings fees is available at www.standardandpoors.com/usratingsfees.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective
activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established
policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain
regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P
Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any
damage alleged to have been suffered on account thereof.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and
not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,
hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to
update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment
and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does
not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be
reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part
thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval
system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be
used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or
agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not
responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for
the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING
WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no
event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential
damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by
negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Copyright 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2014 9
1338906 | 302218800