Could Middle East conflict break energy supply chains? With Matthew Fitzsimmons

[0:00 – 4:00] As we tape this at around 1,400 GMT on Monday, March 16th, the war in the Middle East is now entering its third week. Here at Rystad Energy, our thoughts remain with our colleagues, our clients, and everyone in the region who is directly impacted by the conflict. This is Let's Talk Energy, your go-to podcast for smart energy insights. I'm Noah Brener. As the energy impacts of the Middle East war continue to grow and spread globally, we're focusing today on how the oil field services and equipment sector is coping with the conflict. Ongoing military strikes and the de facto closure of the Strait of Hormuz not only cut supplies of oil and natural gas traveling out of the region, but also disrupt the flow of goods and services needed to keep the oil and gas industry working. At the same time, energy infrastructure — which had been largely spared from major damage in the early days of the conflict — is increasingly being targeted by air strikes on both sides. The situation not only threatens current and future production in the region, but could also push up prices and potentially dent capacity around the world. So, what is the current status of key energy infrastructure within the Middle East? What is the outlook for bringing back idled production capacity or damaged facilities when the conflict resolves? Where do we see the biggest pinch points in the supply chain, and where will those shortages create the most acute impacts? And finally, what does this all mean for the time and costs needed to maintain global supplies of oil, natural gas, and other fuels? To help us parse through these questions and more, I'm joined today from Oslo by Matthew Fitzimmons, who heads Rystad Energy's cost and prices research. Matt, welcome to the program. Thank you, Noah. Excited to be here. I've been listening to the good work you guys have been doing on the pod and excited to get my chance this afternoon. Noah: Let's talk energy. I want to start with just the state of activity — what's happening, what do we know, and how is it impacting the services and equipment industry? We know that Qatar has shut down its offshore rigs, but others are continuing to work. What can you tell us about the status of operations in the region? Which countries and projects are keeping your attention right now? Matt: It's definitely been a time of flux, and things may have changed further by the time folks are listening to this. As of right now, things are looking okay from a yard fabrication perspective, but with the field shutdowns and some of the recent attacks, there is quite a bit of volatility expected this year. We expect 2026 drilling activity in the region to be down 15 to 20%, which will have a ripple effect on drillers and all other service providers within the region. We also believe there is $110 billion of capex — expected between this year and 2028 out of Saudi Arabia, UAE, and Qatar — that is now at risk for delays or outright deferrals. To put that in perspective, there is $300 billion of total regional investment during that period, which represents 25% of global upstream capex. So you're looking at a significant amount of work globally that was expected within the region, and roughly one-third of that is at risk because of the current attacks and the proximity to the Strait of Hormuz. The specific projects I would highlight: the North Field expansion and North Field compression out of QatarEnergy — with Technip and Chiyoda on the east expansion, and Technip and McDermott on the west and south — are among the most exposed. For ADNOC, it's the Hail and Ghasha sour gas developments, as well as Ruwais LNG, and multiple Zakum expansion phases that are also at risk. Aramco has the Marjan and Zuluf offshore incremental expansions and upgrades, which are also worth monitoring. Kuwait and Iraq, with TotalEnergies assets, are also worth watching. [4:00 – 8:00] Matt (cont.): Bottom line — if the strait is closed for a prolonged period, 2027 FIDs would be materially impacted. You're looking at regional FIDs going from $35 billion this year down to $10 billion in 2027 due to a prolonged closure. A lot is yet to be determined, but there is a significant amount of project work at risk from these recent events. Noah: Some companies are shutting down as a precaution for safety due to the air strikes across the region. But there's also a potential shortage of equipment and materials — with Hormuz closed, that affects not just what goes out but also what comes in. Do companies have the equipment and materials they need to maintain operations if it is safe to do so? Matt: The region imported over $70 billion worth of metals and equipment last year. China accounted for one-third of all those imports, with steel being the largest volume. High-volume flows of common-grade materials — things used in structural pipe rack modules — would be impacted first, with more specialty grades being affected afterwards as they carry higher priority. Rotating equipment is also one to watch; the region has significant imports coming from both Europe and Asia to facilitate project work, and we would expect those to be impacted as well. One thing that also bears watching is offshore construction work. While equipment and materials flowing into the region will be significantly constrained, there are also major offshore installation campaigns that won't be able to take place. Eleven percent of the global offshore construction fleet currently sits within the region and will potentially not be working for the foreseeable future — and definitely not able to transit in or out. Globally, while that sounds very material, there shouldn't be a significant impact to other regions, because most of those vessels are on long-term contracts and wouldn't have been leaving the region regardless of the conflict. So they're going to have to sit tight and wait. Safety is clearly the top priority, but the second bottleneck is the other equipment and material they need. If you're looking to install pipe and it might be safe to do so, but you've run out of stockpiles because pipe hasn't been able to transit to location, you're still going to be in a standby situation. These are interconnected issues — with China accounting for one-third of all imports and steel being the most prevalent, if pipe isn't flowing into the region, stockpiles go down, and even if it's deemed safe for offshore construction vessels to work, if you don't have the material to install, you're not working. [8:00 – 12:00] Noah: Is it possible to quantify the impact to future production capacity at this point? Or is it really a matter of thinking — if this was due at a certain time, just add a year to it? Matt: The projects that are closer to their startup date are seeing day-to-day slip, if not more. But projects that are further out still have the ability to compress schedules and absorb some of the float that had been built in. That doesn't mean every issue can be alleviated, but when there's more time between now and startup, there's more opportunity to optimize and find workarounds. Clearly, the closer you are to startup, the more of a day-to-day slip this becomes — and potentially worse, depending on how work sequencing stacks up. It is very highly dependent on where you are in the project lifecycle. Noah: I want to talk about what this means for the companies. From the outside, it seems like this could be a good setup for oil field services earnings — there's going to be a need for their services for restart, and they may have more leverage with their customers. But when we look at share price performance, we've actually seen those prices deflate quite a bit. After Venezuela and the Maduro situation, we saw these share prices rise quite rapidly as the market perceived an opportunity. Why the differing reaction to the Middle East war? It seems counterintuitive. Matt: It seems counterintuitive, but when you look into it, it actually makes a lot of sense. Pre-conflict production within the region was 26.6 million barrels per day. After removing domestic demand of around 8.4 million barrels per day, you're looking at 18.2 million barrels of potential lost exports — which is massive. There are pipeline bypass opportunities that could bring another 8.8 million barrels to market, but there's still a 9.4 million barrel required shut-in that would need oil field services to help bring to market. That said, if you go back to the expectation that 25% of drilling activity could be removed from the region this year, a lot of those major OFS players have high exposure there. When you look at the high uncertainty of those future cash flows, markets are pricing in the risk that that revenue simply won't be there — and because of that, you're seeing the likes of SLB, Halliburton, and others come down significantly. [12:00 – 16:00] Matt (cont.): The caveat to that is we have seen some OFS players increase recently. Proact is up 17% month-on-month, and Patterson-UTI is up 30% month-on-month — as of before start of trading this morning, so take those as notional numbers. The US-centric OFS companies are increasing because the market is saying there's a higher certainty of cash flows coming from US shale activity picking up to help fill the missing barrels. If you're looking at 8 to 9 million barrels per day that need to be added, US shale will have a role to play. The companies centered around that are seeing their cash flows priced accordingly. Noah: It's really interesting, because executives of US onshore operators have been quite cautious about increasing activity — talking about discipline, returning capital to shareholders, and limited inventory. But investors seem to be pricing in some potential upside regardless. I want to talk about the people aspect of all of this. I was taken aback doing research for this — you put a figure of something like 20 million expats working in the energy sector in the Middle East. How are we thinking about the labor impact here? Matt: Labor is always something important to dive into — looking at availability, demographics, sourcing, and who is literally doing the work. There are over 20 million expat workers in Saudi Arabia, Qatar, Kuwait, UAE, Oman, and Iraq. In Qatar and the UAE specifically, 80% of the trade workforce is expat. Saudi Arabia is between 50 to 60% expat for a like-for-like workforce. With so many expat workers, you then have to think about what happens with all of the travel restrictions and commercial airlines no longer flying to the region. In Qatar specifically, 25 to 30% of expat trade workers are from India, and the Indian embassy in Doha has urged those nationals to follow Qatari authorities' guidance — which is to stay in safe locations and not travel unless it's a case of extreme necessity. So the question then becomes: if we're not supposed to be moving around, what happens with the work that still has to get done — the restarts, the project work? [16:00 – 20:00] Noah: You mentioned potential project delays. Often visas and the right to work are tied to those projects. Is there a concern that labor disruption could lead to prolonged delays, as we've seen in the region in the past? Matt: With most of those visas being tied to actual work contracts and campaigns, when projects are delayed or deferred, there is a very real question at the individual level — what happens to my visa, am I allowed to stay in the country? Qatar's Ministry of the Interior has already extended all entry visas that expired or were about to expire for one month. With 25 to 30% of their expat workforce being Indian nationals, those workers whose visas would have expired this month are able to continue, and the authorities have said they will reassess the situation. It remains very fluid. Look at the North Field expansion project — the east startup being delayed until at least 2027. You're in mechanical completion and commissioning activities, charging towards startup, and as work activities complete, people come off their contracts. The catch-22 of a successful startup is that a lot of people get demobilized and start looking for other project work. So you have many workers whose visas will be expiring before the rescheduled startup, and the question is where do they go and are they allowed to stay in the country. Qatar has been ahead of this by extending visas, and you'd expect them to continue managing it — they are well-versed in this problem. But having personally worked on projects through construction, mechanical completion, and into startup, you see that question on everybody's mind — whether you're in the engineering office or out in the field turning bolts. It's something that has to be proactively managed, the messaging has to be handled carefully from a project management perspective, and it's worth monitoring carefully as it materializes. [20:00 – 24:00] Noah: What are some of the region's major exports — other than oil and gas — that are severely constrained by the de facto closure of the strait? Any that might not immediately come to mind for an operator? Matt: One that bears watching and might not be the first thing to hit an operator's radar is drilling fluids. If you think about all the barrels we're going to need to bring to market and the US-centric OFS companies that are already being priced accordingly, to do that there are certain materials and consumables required — and drilling fluids are a good example. They're typically not procured directly by tier-one contractors; they're sourced by vendors down the supply chain. And there are significant underlying chemicals used as ingredients in drilling fluids that come from the Middle East — things like polypropylene, methanol, potassium chloride, ethylene glycol, white Portland cement, and anhydrous ammonia, as six examples. Saudi Arabia is a significant exporter of all of those. To non-GCC countries, Saudi Arabia is the largest global exporter of polypropylene at 19% of global supply, the second largest for methanol at 14%, the largest for ethylene glycol at 23%, and the second largest for white Portland cement at 11%. You're talking number one or number two for a lot of these underlying ingredients used in drilling fluids, and the longer this conflict continues, the more significant that impact becomes. Stockpiles will go down, and where the underlying vendor is sourcing those chemicals can really affect whether you can drill a well as designed. Noah: And does that necessarily lead to price inflation if we're expecting an activity response outside the Middle East? Even somewhere like the US that isn't necessarily dependent on some of these materials? [24:00 – 28:00] Matt: You will see inflation, but it's going to be dependent on what you're sourcing. To stay on the theme of drilling fluids and use an analogy — if you're going to the store to buy ingredients for a pizza and the jarred sauce that has oregano in it is unavailable because of a shortage, you have two options. You can redesign the pizza with what's available, or you can go to a different store and try to find it. And if you find it, you're more inclined to buy a lot of it — panic buying — because you want to make sure you don't run into that problem again. On a drilling basis, the same dynamic applies with drilling fluids — it's redesign versus finding other providers and buying in bulk. If you're going to buy that way, there's going to be inflation because you're willing to pay a higher premium, and now you're competing with others who normally go to the same supplier. Supply-demand becomes imbalanced and prices start to rise. Apply that thought process to other industries and you see similar dynamics play out. So it's not just the impact of higher oil prices or additional shipping costs at the macro level. At the micro, industry-specific level, you'll start to see that kind of over-buying behavior to build up stockpiles that had been absent. That's where inflation materializes for those specific commodities. Overall, zooming out — in our simulations for a four-month conflict scenario, you're looking at increased manufacturing costs of roughly 2 to 3% for most mechanical, civil, and structural bulk materials, with equipment prices seeing somewhat less of an impact. But in all cases, you're seeing increased supplier costs throughout this year and until we get back to the baseline that was expected for manufacturing. Micro decisions will drive inflation from a buying perspective, and even after a four-month conflict that ends over the summer, the ripple effects will continue to be felt through year end. [28:00 – 32:00] Noah: You mentioned fabrication yard capacity earlier. The yards in the region are working globally — it's another form of energy export from the region. How significant is that capacity, and where are we looking at potential impacts to projects outside the region? Matt: To start with, ADNOC and Saudi Aramco are sending business continuity messages to all their service providers. Despite the current conflict, and in some instances even after being hit, they have not paused onshore fabrication from EPCs or yards. We're still seeing work continue, service providers in the office, and progress being made. Of the 15 major yards in the region, five are in what I would call geographically exposed areas — near US bases or US assets — which makes them more exposed than others. We have seen some brief pausing of work, like at the McDermott and Lamprell yard, which is very close to a major port used significantly by the US Navy. When that port was hit, McDermott stopped work — but they have since resumed. EPCs are back in the office, on the yards and on sites, and are working. While we're hearing from boots on the ground that drones have been sighted nearby in some industrial areas, it appears these yards are not being targeted directly. An attack on a fabrication yard wouldn't have the same impact on oil price or leverage over other administrations as a strike on downstream processing capacity or other oil infrastructure. So there is also a sentiment that these yards carry less exposure than other asset types, and we are seeing work continue on a business-as-usual basis, as much as that's possible under these circumstances. Noah: I want to touch on local content strategies. All of these countries have pushed to build up local capacity, services, and materials. Have those initiatives been paying dividends through this conflict? Could things have looked different if this happened five or ten years ago? Matt: We've definitely seen a push toward more local content, especially in management decision-making. There's been a lot more localization of that — both on the operator side and the tier-one side, from Aramco and ADNOC to Halliburton and SLB. There's been a large push, particularly out of Saudi Arabia and Saudi Aramco, with the In-Kingdom Total Value Added program requiring international suppliers to commit to in-country manufacturing, training, and services. That has had significant benefits to the region. Similarly, ADNOC has a comparable framework using in-country value initiatives that combine direct global access with local content development. [32:00 – 36:00] Matt (cont.): Some of these efforts, along with direct sourcing initiatives, are having meaningful impacts on developing local execution presence. For example, ADNOC's Hail and Ghasha project — through direct sourcing and removing agent markups — is expected to save around $700 million in capex from a $14 billion project. These initiatives have tangible dollar values attached to them. That said, we are still predominantly expat-labor-centric. It's not to say that expats have gone away — we're moving in the right direction, but the external materials and goods — the steel, the equipment — still come from other regions. The benefits have been great, and you'd expect that trend to continue. Noah: Obviously it's impossible to predict the amount of physical damage facilities could face, or how long some may remain shut in. But what are companies doing right now? What should they be doing to position themselves to come back online when the time comes? Matt: Companies in the oil and gas business are in the risk management business. Building contingency plans and evaluating different scenarios is base 101 — though normally you wouldn't be planning for a conflict of this magnitude. The skill set is there, though. Right now you'd expect to see significant work on logistics and spares management. In most control rooms at these facilities, you have P&IDs — piping and instrumentation diagrams — which are essentially the map of the facility, showing where hydrocarbons are flowing. From those, you can identify all the equipment on site, the types of piping, the spares required, and the consumables needed both during a shut-in and for ramping back up. You'd expect companies to be checking and re-checking those spares inventories right now, and making sure they have the right quality documentation — because having worked at production facilities, that's not as easy as it sounds. [36:00 – 40:00] Matt (cont.): Topping up consumables needed to restart facilities that have been shut in is going to be really important. You're talking weeks — in some cases multiple weeks — to restart, and having lubricants and other consumables on hand will be critical to accelerating that process and avoiding panic situations. One other thought: looking at this with a glass-half-full perspective, this could be a similar moment for local content development as COVID was for digital adoption. COVID accelerated the shift toward tools like Microsoft Teams and Zoom by forcing a mass re-education across industries. Similarly, with so many expat workers returning to home locations or working remotely, local management and local expertise are being leaned on at site. Could this be a COVID-type moment for local management in the region — accelerating the great work we've already seen from Saudi Aramco, ADNOC, SLB, Halliburton, and others in building local content and local management buy-in? That's the glass-half-full view, but it's a real possibility. Noah: Obviously difficult to find positives in a situation like this, but no crisis goes to waste in terms of longer-term learnings that end up transforming parts of the industry. Matt, thank you so much. We're coming up on time — is there anything we've missed, or any parting thoughts? Matt: This conflict isn't the only challenge the industry is facing from a supply chain perspective. There are a lot of projects still competing with data centers for turbines and struggling to find them. There are subsea tieback projects looking for capacity that can't find it and are working out how to bring down marginal economics to move forward. There are onshore projects competing with local data centers that have deeper pockets and are putting schedule above all else — throwing money to pull electricians over to their work sites. It's important not to lose sight of those other issues. In our base case, we're looking at a two-month conflict until resolution, with a four-month scenario being low to medium probability. But many of those other supply chain issues are going to be faced by operators and suppliers together over the next several years. They still require attention and planning to navigate successfully. Noah: That's a really good point. There were challenges in this market the day before this conflict started, and many of them will still be there the day after it hopefully ends. Matt, thank you very much for the conversation. I really appreciate your insights into what I think is a really underappreciated part of the energy business. Matt: Thanks Noah. Looking forward to the next time. [40:00 – End] Recap: The war in the Middle East is disrupting drilling plans and threatening the physical security of energy installations, but most shutdowns thus far have been precautionary, and many operations have been able to continue despite the conflict. The most critical shortages for oil field operations within the Middle East include steel products imported from China, but also expatriate workers who may have difficulty traveling in and out of the region. Besides the oil and gas needed by global markets, the Middle East is also an exporter of underappreciated commodities needed to keep energy development going globally — including things like drilling fluid chemicals and capacity in the region's fabrication yards. Thanks for listening to Let's Talk Energy. This podcast is a production of Rystad Energy, produced by Lara Rodriguez-Skow and Ba Oak. Check out the show notes for further analysis on the topics discussed today, and connect with us on social media — we're Rystad Energy on all major platforms. Please leave us a review, hit subscribe, and leave us a like. You can also keep up to date on our website. If you'd like to comment on today's episode or suggest a future one, email us directly at podcast@rystadenergy.com. 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