Wrapping Up Volume Seven of Our Economic Commentary
As with previous editions this compilation assembles into one single volume – the seventh of its kind – all issues of our ‘Economic Commentary’ published during 2012. This offers the opportunity to highlight key insights gained from our research activities. In addition, we expect the compilation to help take stock of progress to date and elicit new ideas and thoughts for the year ahead.
In the course of its progress the publication has benefited from valuable comments and feedback from many readers around the world. To them and to all those who have shown interest in one way or another, we would like to express our thanks and offer our best wishes for the festive season… [Details]
Economic Commentary Volume 7 No 12 – December 2012 : MENA Natural Gas Endowment Is Likely to Be Much Greater Than Commonly Assumed
Recent assessments of natural gas reserves and resources outside the Middle East and North Africa (MENA) have greatly expanded the world’s potential resource base. Already, large conventional discoveries offshore East Africa, together with unconventional gas developments in North America, have transformed the energy landscape and outlook. This build-up has somewhat turned into a hype-driven rush for business opportunities. Feeding the hype, prominent Middle Eastern companies have been reported as either seeking to export LNG from the US or contemplating moving some of their petrochemical investment there. Except Iran, which has managed in recent years to add large volumes to its huge reserves, there is a tendency to discount MENA natural gas prospects. This may stem from the current perception of scarcity in parts of the region. Indeed an increasing number of apparently well-endowed countries have been unable to balance their domestic natural gas market, shifting supply to oil products or filling the gap with imports, both at a very high opportunity cost.
Few studies have sought to shed light on this “MENA gas puzzle”. Unfortunately, they could not offer any deep insight into the region’s gas reserves and resources. Others have either ignored the issue or simply overlooked the most significant part of the region. The latter case is exemplified by current assessments of world shale basins – with or without resource estimate – which have tended to exclude the Middle East – and Russia for that matter. It is as if the source rocks of these omitted world’s richest hydrocarbon regions were not rich enough compared to those of North America, Western Europe, China, India, Australia, Brazil or even Argentina.
Our commentary seeks to contribute to filling that research gap. More specifically, it aims to offer an empirical analysis supporting the view that, notwithstanding the present critical supply situation, MENA natural gas endowment is likely to be much greater than commonly assumed. The analysis is in two parts. The first draws on BP Statistical Review of World Energy (BP) to evaluate the extent MENA natural gas reserves are being depleted and in what way the resulting supply pattern is evolving. The second builds on the latest assessment by the US Geological Survey (USGS) to ascertain MENA natural gas endowment. Because of the selective and limited data made available by USGS so far, the second part should be taken as research in progress.
Our findings confirm and extend our previous results showing that on aggregate MENA proved reserves are substantial and their combined dynamic life is a little beyond the traditional 30-year strategic planning horizon for E&D. However, reserve depletion in more than half our large sample of countries has critically neared – if not already reached – the point that warrants drastic actions to curb demand and support a supply response. The opportunities for the latter will be driven by a vast potential for reserve expansion. On a country-by-country basis the potential appears to be the greatest in Iran, Saudi Arabia and Qatar, followed by Iraq, the UAE and Algeria. Prospects also seem favorable in Egypt, Oman and Libya. As the opportunities available will be increased by unconventional gas, they will entail significant challenges. Confronting the region’s natural gas paradox – a paradox of scarcity amidst plenty – requires both a demand and supply response. As far as the supply side is concerned, MENA policy makers need to rethink critically their E&D policies and the corresponding economic incentives… [Details]
Economic Commentary Volume 7 No 11 – November 2012 : Strait of Hormuz: Alternate Oil Routes Not Enough
Our Economic Commentary for November explores the geopolitical importance of the Strait of Hormuz, Iran’s attempt to gain a strategic leverage point there and the extent the energy impact of a looming crisis can be alleviated. We contend that alternate oil routes are not enough and that the IEA would have to shoulder alone the burden of dealing with the aftermath…[Details]
Economic Commentary Volume 7 No 10 – October 2012 : MENA Energy Investment Outlook: Capturing the Full Scope and Scale of the Power Sector
Our Economic Commentary for October is released under the title “MENA Energy Investment Outlook: Capturing the Full Scope and Scale of the Power Sector”.
As usual during this period of the year, the commentary presents APICORP’s main findings of its rolling five-year review of energy investment in the Middle East and North Africa (MENA). While continuing to extend the oil and gas value chains to include the generation of electricity, we have managed for the first time to capture the full scope and scale of the power sector by adding capital requirements in transmission and distribution (T&D). Naturally, in order to maintain a coherent set of reviews past series have systematically been revised accordingly.
The immediate context of the 2013-17 review is the protracted socio-political turmoil in parts of the region and the negative perception it has created for investment. In the larger context, despite a weak global economy and declining oil demand, the review assumes that OPEC will be able to keep the value of its basket of crudes near its members’ output-weighted average fiscal-breakeven price of about $100/bbl. Investment climate permitting this should encourage the development of oil-based projects. For natural gas, while domestic-oriented projects are likely to go ahead no matter what, export-oriented projects face signiﬁcant market uncertainty. Not only have international gas prices greatly deviated from oil parity, but they have kept diverging between regional markets. Looking forward we assume that natural gas prices will evolve between $3-$5/MBtu in fully liberalized markets with abundant domestic supplies and $12-15/MBtu in markets relying on imports under traditional long-term contracts.
Against this background, this commentary is in three parts. Part One presents the review methodology. Part Two outlines the new trends that shape the outlook. Part Three extends the discussion to the major challenges facing investors ahead.
MENA total energy capital investment is expected to amount to $740bn for the five-year period 2013-17. Compared to past assessments, which have been consistently revised to fully reflect adjustments in the power sector, investment appears to be on the rise again. However, in a context clouded by sluggish global economic growth and protracted regional socio-political turmoil, capital requirements have mostly been driven by a catch-up effect and unrelenting escalating costs.
In this context, a little more than three quarters of energy capital investment are located in seven countries among the biggest holders of oil and gas reserves. Obviously, the geographical pattern has favored countries that have not faced the turmoil. On a sectoral level, adjustments in the rapidly expanding power sector have led to a more evenly distributed pattern between the three major value chains, i.e. oil, natural gas and power.
The review has also highlighted serious policy challenges. In addition to the deteriorating investment climate which forms the background of the review, three issues continue to confront investors: rising costs, scarcity of natural gas supply and funding limitations. Of the three, the latter is the most critical. Given the structure of capital investment stemming from the review, internal financing could only be secured if oil prices remain above OPEC’s fiscal break-even price, which we have estimated to be around $100/bbl. In contrast, external financing, which comes predominantly in the form of loans, is likely to be daunting in face of dwindling lending resources. Faced with more pressing social demands, MENA governments may not be able to bridge the funding gap. Going forward policy makers in the region should focus their commitment on improving the investment climate and restoring investors’ confidence. [Details]
Economic Commentary Volume 7 No 8/9 – August/September 2012 – ADDENDUM : Our Readers’ Contentions about “Fiscal Break Even Prices Revisited…”
Some of our readers have expressed contentions about “Fiscal Break-even Prices Revisited…” (our Economic Commentary dated August-September). Their arguments and our refutations have been published in the op-ed section of MEES dated 20 August as reproduced in this Addendum. People have a right to their opinion no matter how misguided. [Details]
Economic Commentary Volume 7 No 8/9 – August/September 2012 : Fiscal Break-even Prices Revisited: What More Could They Tell Us about OPEC Policy Intent?
Our Economic Commentary for August-September is released under the title “Fiscal Break-even Prices Revisited: What More Could They Tell Us about OPEC Policy Intent?”
Unarguably, oil producing countries’ fiscal positions are far from being a determinant of international prices. Yet energy economists – especially oil market analysts – are tempted to embrace the concept of a fiscal break-even price, realizing that it could provide a useful guide to price and production policies within the Organization of the Petroleum Exporting Countries (OPEC). In this context the concept is commonly defined as the oil price that balances government’s budget.
In light of significant budgetary changes in key OPEC member countries, in particular the expansion of spending programs in Saudi Arabia and the contraction of fiscal revenues in Iran, we have updated our previous findings. While focusing our efforts on improving the underlying modeling assumptions, as well as data collection and interpretation, we have kept to the methodological framework developed in the past. This consists of articulating short term and long term approaches to assess current fiscal positions and future fiscal sustainability.
In the first part of the analysis we have re-drafted the fiscal cost curve for OPEC member countries in an attempt to shed timely light on the likely individual and group policy behavior. On the one hand, it can be claimed that fiscal break-even prices are dependable predictors of price preferences within the group. On the other hand, member countries’ failure to develop a common policy may be attributed to their heterogeneous and, for some, uncertain fiscal positions. This is no matter how close to OPEC’s output-weighted average fiscal break-even price – currently in a range of $90-110 per barrel – the most influential member, Saudi Arabia, may be.
In the second part we have focused on an inter-temporal fiscal sustainability analysis, assuming OPEC – taken as a group – would be investing its surplus funds in financial assets. In doing so we have implicitly admitted that the bulk of budget spending are current expenditures that yield no long term returns. The consequence is that spending is implicitly kept low to enhance future financial returns. If we assume instead that government expenditures include a non-negligible investment component then spending upfront may be a better course of action. This is valid provided the returns from domestic social and physical investment are higher than those from financial investment abroad. Using oil and gas revenues today to diversify their economies and progressively shift their reliance away from hydrocarbons may enable OPEC member countries to secure a more viable and sustainable economic development. Whatever their resulting spending patterns might be, it would affect their fiscal break-even prices and hence their oil price preferences and production policy intents. The challenge that still remains is to translate these intents into a common and credible policy.[Details]
Economic Commentary Volume 7 No 7 – July 2012 : Global Trends in Renewable Energy Investment: A Review of the Frankfurt School-UNEP’s Report and Discussion of the MENA Case
Our Economic Commentary for July is released under the title “Global Trends in Renewable Energy Investment: A Review of the Frankfurt School-UNEP’s Report and Discussion of the MENA Case”
In June 2012, the Centre for Climate Change and Sustainable Energy Finance – a collaborating partnership between the United Nations Environment Program (UNEP) and the Frankfurt School of Finance and Management – released its annual Global Trends in Renewable Energy Investment. Successive editions of this report have provided an elaborate analysis of relevant trends and issues. This year’s report, which was released just ahead of the Rio+20 Summit, took advantage of the event to broaden exposure and amplify policy messages.
The present review has been undertaken to gain insight into investment and financing trends in global renewable power, as well as the challenges facing the industry. The review has been further extended to include a discussion of trends and policies within a lagging MENA region and to bring into focus issues overlooked or misunderstood. While the general premise of the argument that the economics of renewables can be improved by factoring in opportunity costs is evident, the determination of those costs in specific MENA cases is less obvious. Similarly, the idea that solar power can be fully deployed within MENA ignores the disincentives created by heavily subsidized electricity prices. These issues may after all be beyond the report’s scope; but surely, they are within the remit of MENA policy makers who have yet to reconcile them with their stated ambitious renewable energy goals.[Details]
Economic Commentary Volume 7 No 6 – June 2012 : Is the Anticipated Rise in Long-term Oil Price Inevitable?
Our Economic Commentary for June is released under the title “Is the Anticipated Rise in Long-term Oil Price Inevitable?”.
Recent research studies conducted by international policy-advisory institutions have raised the prospect that severely constrained supply growth could drive long term oil prices much higher than previously assumed. The International Energy Agency (IEA) for instance has found that, with lingering socio-political turmoil in the Middle East and North Africa (MENA), a shortfall in investment in the upstream sector could shift output to higher cost sources resulting in real oil price peaking to $150 per barrel within the next five years. Other institutions have reported similar trends even assuming that higher oil prices would spur further technological innovation that might improve supply. This is the case of the IMF whose research staff has empirically evaluated a model of the world oil market, which encompasses both the geological view (resource constraints determining future output and prices) and the technological view (higher prices encouraging technological solutions), to forecast a permanent doubling of real oil prices to $200 per barrel within 10 years.
To the extent that long term prices are set by perceptions about the price level required to motivate investment and bring long term demand and supply into balance, the above expectations should have been reflected in the shape of the forward oil price curve. However, at the time of writing, the back-end of the curve – the proxy for long term price – has remained stubbornly below $100 per barrel (Brent five-year forward and beyond). In this commentary we consider both the forward curve and the future supply curve, in order to gain the insight needed to explore whether or not the prospect of a large price swing to the upside is inevitable. [Details]
Economic Commentary Volume 7 No 4/5 – April/May 2012 : MENA Power Reassessed: Growth Potential, Investment and Challenges
Our Economic Commentary for April-May is released under the title “MENA Power Reassessed: Growth Potential, Investment and Challenges”.
Since the onset of the global financial crisis in 2007, energy investment growth in the Middle East and North Africa (MENA) has seriously contracted. As the ‘option to wait’ was becoming more valuable for some investors, we advocated the exclusion of enabling energy infrastructure such as power from any such option. Long-standing underinvestment in this sector has caused shortfalls in electricity supply and led to serious economic bottlenecks and social frustrations. Ongoing turmoil in parts of the region has somewhat vindicated our stance. Power may indeed emerge as a critical sector featuring prominently on top of governments’ policy agendas. Catching up large unmet potential demand needs massive investment, which cannot be achieved without addressing broader challenges.
This commentary discusses the growth potential of MENA power sector, the investment requirements and the challenges involved. Contrary to previous analyses, which focused on the generation link of the electricity value chain, investment is extended to the transmission and distribution (T&D) systems. The commentary is in three parts. The first provides a descriptive overview of the growth pattern and performance of MENA power generation. The second assesses the potential for capacity growth and the resulting capital investment in new power plants as well as in T&D for the five-year period 2013-17. The third discusses the major challenges associated with implementing policies and programs.
As a result of high population growth, fast expanding urban and industrial sectors, increasing needs for air conditioning, and heavily subsidized electricity tariffs, many countries within MENA have been struggling to meet fast-growing demand for electricity. With ongoing turmoil, catching up with unmet demand may be perceived as socially and politically more desirable. In the absence of active demand side management, this will entail capital investment of about $250bn for the period 2013-17, 59% of which in new generation capacity and the remaining 41% in T&D. Investment of this scale will face many challenges, prominent among which are fuel and funding. The first stems from the scarcity of natural gas in key countries in the region and the opportunity cost of generating electricity using high-value export oil products instead. The second results from the inadequacy of internal and external financing and the reluctance of many MENA governments to support cash-strapped public utilities, which are committed to continuing to invest should the private sector be not forthcoming. Both fuel and funding challenges involve significant policy dilemmas that need to be addressed quickly and effectively…[Details]
Economic Commentary Volume 7 No 3 – March 2012 : MENA Energy Investment in A Global Setting: Assessment and Implications for Policy and Long-term Planning
Our Economic Commentary for March reproduces a speech by APICORP’s Senior Consultant Ali Aissaoui at the 13th International Energy Forum (Kuwait, 12-14 March 2012). The Forum gathered high-level policy makers from 88 countries to give fresh momentum to the producer-consumer dialogue. The relevant session was moderated by HRH Prince Abdulaziz Bin Salman Bin Abdulaziz Al-Saud, Assistant Minister for Petroleum Affairs, Saudi Arabia, under the theme “Meeting Future Energy Demand: Planning and Investment for the Long-term”….[Details]
Economic Commentary Volume 7 No 2 – February 2012 : IEA’s World Energy Outlook: Review And Discussion Of MENA Deferred Investment Case
Our Economic Commentary for February is released under the title “IEA’s World Energy Outlook: Review And Discussion Of MENA Deferred Investment Case”.
A few months ago, in November 2011, the International Energy Agency (IEA) released its annual World Energy Outlook (WEO). This 660-page report provides analyses and insights into energy demand, production, trade and investment for the next 25 years. It further highlights the implications of a possible delay in upstream investment in the Middle East and North Africa (MENA), which is set to supply the bulk of the growth in global oil output to 2035, as well as a substantial amount of natural gas. In a way, this is a replication of a previous study conducted in the 2005 edition of the WEO. The difference is that today’s MENA context makes the underlying assumptions more likely to occur if not already occurring.
The implications of such a delay are serious enough to warrant a review and discussion of the IEA’s main findings that could help better inform the debate on policy and investment. This is done in three parts. The first explains how our review and discussion fit within the broader IEA framework analysis. The second highlights the prospects for energy demand and the necessary investments to ensure supply to the market. The third discusses the impact of a possible shortfall in MENA upstream investment, before offering the following concluding remarks.
In the WEO’s central scenario, required new oil and gas production from MENA to meet global demand to 2035 involves upstream investment of over $100bn per year. It is far from certain that such levels, which are comparatively higher that those resulting from our own review, will be forthcoming; neither in the medium term, as underscored in the Deferred Investment Case, nor in the longer term. In the medium term, which involves a bottom-up analysis, the listed causes for delay are all likely, when not already a reality in some parts of the region. However, the key assumption that upstream investment is reduced by the same amount in all MENA countries is arguable. This generalization, which is perhaps not required by the IEA’s WEM model, leads to an easier, but potentially misleading, interpretation of the results. The case of the core MENA producers and major contributors to global spare capacity should have been highlighted. As none of them has been affected by the region’s turmoil, this group should be able to pursue, unhindered, their planned investment programs.
In contrast to the medium term bottom-up approach, the long term surely involves a top-down process. Accordingly, the WEM model must have been led to treat MENA, or its core producers, as residual suppliers. This approach would seem analytically irrelevant as long as the IEA fails to integrate in its scenarios MENA producing countries’ own policy commitments and momentum. Otherwise, expectations of what the region should deliver would be vulnerable to the charge of being unrealistic…..[Details]
Economic Commentary Volume 7 No 1 – January 2012 : APICORP’s Review of MENA Energy Investment – Sustained Outlook despite Lingering Uncertainty
Our Economic Commentary for January is released under the title ‘APICORP’s Review of MENA Energy Investment: Sustained Outlook despite Lingering Uncertainty’.
2011 will likely be remembered as the year of unprecedented political upheavals, sovereign debt crises and economic stagnation, not to mention extreme natural events such as the tsunami that crippled the Fukushima Daiichi nuclear power complex. In the Middle East and North Africa (MENA), discontent over inequity, corruption and ill-governance has erupted suddenly, plunging many parts of the region into political turmoil. Equally unsettling have been the geopolitical tensions stemming from a further tightening of US and international sanctions over Iran’s nuclear program, which escalated in early 2012 to include the banning by the EU of vital petroleum trades. Adding to the uncertainty and anxiety, the eurozone debt troubles have re-emerged as a prominent source of risk for global economic and financial recovery.
Although these unfolding developments carry far-reaching implications for the region, they neither invalidate our framework analysis of energy investment nor the resulting outlook, as provided in September 2011. It is important, however, to review our findings against evolving macroeconomic indicators and energy and credit market trends. Indeed, to the extent that economic growth, energy prices and interest rates are key determinants of investment and financing, the review should help clarify the outlook. Accordingly, the commentary is in three parts: the first highlights the current state of the economy and markets; the second validates our main findings so far; the third provides a timely update of the deteriorating funding conditions.
Our conclusions now suggest that with stalled global recovery and ongoing regional political turmoil, MENA region continue to face the challenges of uncertain times. However, while lingering uncertainty hampers forecast, it does not significantly affect our assessment of energy investment for the five-year period 2012-16, which points to a sustained outlook. Driven by the oil downstream and the power sector the anticipated level of capital requirements of $525bn, even if still lower than potential investment, is the highest since the onset of the downturn caused by the global financial crisis. Nonetheless, investors and project sponsors are likely to endure many of the same problems. These include cost uncertainty, feedstock availability and fund accessibility, with the latter becoming most serious. Given the structure of capital requirement highlighted in the review, internal financing should not be a problem as long as the value of OPEC basket of crudes remains above $90/bbl. In contrast, external financing, which comes predominantly in the form of loans, is expected to remain relatively scarce in face of deteriorating loan supply and high cost of borrowing. Confronted with more pressing social demands, governments in the region may not be able to make up for funding shortfalls. Going forward, the best option should be for policy-makers to strive to keep private investment from losing further momentum…..[Details]