Economic Commentary eBinder (Volume 5 – 2010) For our readers’ easy reference, Volume 5 of APICORP’s Economic Commentary has been e-bound in a 31-page booklet. The tenor of its appeal can be gauged from the following Excerpt Foreword by Mr. Ahmad Al-Nuaimi, APICORP’s CE&GM: “As with previous editions this annual compilation assembles into one single volume – the fifth of its kind – all issues of APICORP’s Economic Commentary published during 2010. The aim is to recapitulate key highlights drawn from our research activities. In addition, we expect the compilation to provide a concrete sense of our efforts that can help take stock of progress as we prepare for another challenging year. The launch issue of the Commentary (Issue No. Zero, dated December 2005), consisted of a modest one-page “commentary on oil price and interest rate movements” – the two key determinants of APICORP’s business environment and profitability. The Commentary has since expanded into a more comprehensive piece reflecting the increasing sophistication of our research work.”…[Details]
Economic Commentary Volume 5 No 12 – December 2010: MENA Natural Gas: A Paradox Of Scarcity Amidst Plenty Our Economic Commentary for December 2010), is published under the title “MENA Natural Gas: A Paradox Of Scarcity Amidst Plenty”.
One theme that stands out in a forthcoming book on Natural Gas in the Middle East and North Africa (MENA), by the Oxford Institute for Energy Studies, is “the rising concern about critical gas shortages in many countries in the region due to rapid growth of domestic consumption of natural gas and a muted and delayed gas supply response.” This main finding does underscore the apparent realities some of us have been pointing out in recent years. Indeed, although MENA region is endowed with substantial gas reserves, an increasing number of countries have been struggling with a dearth of supply. While the strategies to overcome identified constraints differ across countries, they all pose hard policy choices when it comes to reforming prices and subsidies and reining in excess demand growth. As progress will likely be slow and protracted, the book concludes that “a regional default model seems to be emerging based on increasing natural gas supplies through exploration and development (E&D).”
This conclusion begs two key questions. The first is how fast are MENA natural gas reserves depleting and in what way the resulting supply pattern is evolving. The second is whether the likely size of undiscovered resources is high enough to create sufficient opportunities for E&D.
In viewing a paradox of scarcity amidst plenty, our commentary offers valuable empirical insights into the potential of MENA natural gas endowment by taking a closer look at both reserves and resources. On aggregate, proved reserves are substantial and their dynamic life fairly long. However, acceleration of depletion appears to have reached a critical rate for more than half our large sample of countries. If production continues not to be replaced in Algeria, Bahrain and to a lesser extent Iraq, this could lead to a supply crunch, obviously sooner for Bahrain than later. Oman, Syria and Tunisia would face a similar prospect in the absence of imports via respectively the Dolphin Pipeline (Qatari gas to the UAE and Oman), the Arab Gas Pipeline (Egyptian gas to Jordan, Syria and Lebanon), and the transit pipelines to Europe (Algerian gas to Tunisia and Morocco en passant). Furthermore, the supply patterns of the UAE, Libya, Saudi Arabia and Kuwait have reached a tipping point that should trigger urgent actions to curb demand.
The extension of the analysis to undiscovered resources and inferences from assessed to non-assessed provinces has underscored a higher aggregate potential for reserve expansion than commonly assumed. On a country basis the resulting opportunities for E&D appear to be the greatest for Saudi Arabia and Iran, followed by Qatar, Iraq, the UAE, and Algeria. To a lesser extent, opportunities seem to be also present in Oman, Jordan, Libya, Yemen and Egypt. As these opportunities will be shifting towards unconventional gas, they will entail significantly higher costs of finding and development. Faced with structurally lower netback prices, MENA gas exporting countries have little choice but to raise domestic prices as part of a more conducive climate for investment and re-investment. Obviously, this is even more so the case for the non-gas-exporting countries. …[Details]
Economic Commentary Volume 5 No 10/11 – October/November 2010: MENA Energy Investment Outlook: Recovery Despite Uncertainty Our Economic Commentary (October/November 2010), is published concurrently by the Middle East Economic Survey under the title “MENA Energy Investment Outlook : Recovery Despite Uncertainty”.
In this commentary, we provide insight into the key trends and challenges facing energy investments in the Middle East and North Africa (MENA) for the five-year period 2011-15. The context of the review is that of a global demand for energy gradually recovering and of crude oil prices stabilizing within an adjusted anchor price range of $70-90/bbl. This has encouraged investors to bring back in line some of the oil-based projects they had previously shelved or postponed and to slate for development new ones. In the gas sector, however, export projects face a more challenging market in the wake of the US shale gas revolution. As world gas prices have come under tremendous pressure, the option to wait may have more value for project sponsors. Our assumption is that gas prices, which are greatly deviating from oil price-parity, will keep diverging between regional markets: $4-5/MBtu in fully liberalized, well supplied markets, to $8-10/MBtu in markets where oil-linked prices prevail.
Against this setting the rest of the commentary is in three main parts. Part 1 describes the review methodology. Part 2 presents an overview of key trends, highlighting investment prospects in the power generation sector, which has emerged as a key driver of growth. Part 3 extends the analysis to the challenges faced by investors and project sponsors.…[Details]
Economic Commentary Volume 5 No 9 – September 2010: Joint Report to the G20 on Energy Subsidies: A Critical Review Our Economic Commentary for September 2010, is published concurrently by the Middle East Economic Survey dated 30 August 2010 under the title “Joint Report to the G20 on Energy Subsidies: A Critical Review”.
The IEA, OECD, OPEC and World Bank joint report to the G20 provides an insightful analysis and practical suggestions for tackling energy subsidies. Based on seasoned professional expertise, the findings and recommendations have been presented in a clear, coherent and logical sequence of steps focused on defining, measuring, reforming and implementing. Yet, key recommendations are bound to be divisive and some of them, such as the “country-specific” approach, may carry the seeds of their own failure.
Not unexpectedly, evidence from information that leaked out of the G20 in Toronto suggests that finance and energy ministers have to overcome major hurdles in delivering on their implied commitment to develop “implementation strategies and timeframes.” How much progress can they make ahead of the Seoul summit depends on how their governments resolve the dilemma posed to them: integrating a multilaterally agreed initiative on energy subsidies into their public policy making without undermining the legitimacy of their political economy….[Details]
Economic Commentary Volume 5 No 8 – August 2010: Finding A Needle In the Dodd-Frank Haystack And Wondering What To Expect From It – Our Readers Warn Of The Unintended Consequences Of The ‘Disclosure Of Payments By Resource Extraction Issuers’Our Special Summer Economic Commentary is published under the title: Finding A Needle In the Dodd-Frank Haystack And Wondering What To Expect From It – Our Readers Warn Of The Unintended Consequences Of The ‘Disclosure Of Payments By Resource Extraction Issuers’.
Readers have proved themselves to be a trustworthy and valued source of analysis and inspiration. The overall impression from their remarks is that of disappointment with a transparency law that is redundant and unnecessary. It appears that in seeking to hold the legal and ethical high-ground, US legislators have unwittingly shot themselves in the foot. It is very likely indeed that US oil companies operating overseas will bear the brunt of the regulations put in motion. As for the resource-rich countries, we believe that persuading, rather than coercing, them to fully adhere to the legitimate international charters, conventions and standards in place can be more conducive to better governance.
PS For privacy purposes, the names of readers quoted in the commentary have been abbreviated to their initials. …[Details]
Economic Commentary Volume 5 No 6/7 – June/July 2010: Macondo and Global Oil Supplies and Prices Our Economic Commentary for June-July, is concurrently published by the Middle East Economic Survey (MEES dated 28 June) under the title: “Macondo and Global Oil Supplies and Prices”.
The massive oil spill at the Macondo well in the US Gulf of Mexico will certainly emerge as the worst and most costly environmental disaster of its kind. At the time of writing, on the ninth week of the spill, preoccupations were still centered on containment, mitigation, and compensation. Larger issues, including the long term social and economic ramifications, BP’s capacity to survive incalculable liabilities, and the broader implications for the petroleum industry, have still to be addressed. Meanwhile, concerns have been voiced about the impact of the incident on oil supplies and prices. In this commentary, we contend that neither the expected loss of supply from deep offshore nor a likely higher production cost will be of sufficient magnitude to affect near term oil prices beyond current market volatility. As a background, we start with a brief overview of the circumstances of the incident and the early policy responses….[Details]
Economic Commentary Volume 5 No 5 – May 2010: The Arab Energy Investment Outlook in a Changing Landscape – A Summary of APICORP Report to the 9th Arab Energy Conference (Doha, 9-12 May 2010) Our May Economic Commentary condenses the conference report’s findings and highlights the main challenges ahead. It further outlines key policy recommendations. The full report [vist our Special Reports section] examines the current state of both the credit market and the oil market and their effect on the Arab energy investment outlook. The report is in three parts: the first outlines the dimensions of the twin crises; the second assesses their macroeconomic impact; the third delves more deeply into their effects on the energy investment outlook. …[Details]
Economic Commentary Volume 5 No 4 – April 2010: On Being Fair, Beautiful and Nearly Perfect: A Reflection On The Ethics, Economics And Politics Of Oil Prices Our Economic Commentary for April, (attached), is concurrently published by MEES under the title: “On Being Fair, Beautiful and Nearly Perfect: A Reflection On The Ethics, Economics And Politics Of Oil Prices”.
The permeation of ethics into the discourse about oil prices may be interpreted as a symptom of failure of both markets and policy making based on conventional economics. In the context of efforts by behavioral economists to provide a solid intellectual foundation to ethical principles, the characterization of oil prices in terms of fairness may be interpreted as indicating genuine concern for their detrimental economic effects on both petroleum exporting counties and energy importing countries.
Fairness, however, is not about wealth redistribution. From the perspective of the petroleum producing countries, what matters to the sovereign is the petroleum rent, i.e. the portion of revenues, above factor costs and normal return, that should be captured through an appropriate fiscal regime. In this case, a fair price for oil should lie at the confluence of companies’ project viability and governments’ fiscal sustainability. As long as they have enough market power, the producing countries will try and influence the market to meet these expectations. Fairness would further dictate that no policy measure is taken without due regard to its impact on the most economically vulnerable energy-importing countries. …[Details]
Economic Commentary Volume 5 No 3 – March 2010 : To What Extent Has the Global Financial Crisis Reshaped Our Perception of the Energy Investment Climate in the Arab World? Our March Economic Commentary tentatively assesses the impact of the global financial crisis on the energy investment climate in the Arab world.
Using a perceptual mapping we provide a unique pre- and post-financial crisis snapshot of the energy investment climate of the fifteen Arab petroleum-producing countries. The changes captured in this way range from Saudi Arabia getting nearer to the “ideal point” benchmark, to a significant deterioration of the positioning of Sudan, Mauritania and Yemen. In between, the remaining countries are in three groups in contrasting situations: a) while maintaining their strong positions, Qatar, the UAE and Kuwait have moved apart from each other with Qatar widening its lead; b) both the clusters formed of Oman, Bahrain and Tunisia, and that formed of Libya, Algeria and Egypt (to which Syria could be added) are in neither a better nor a worse position; c) Iraq has made a positive transition: though still very far from the ideal point, its location on the map is getting much better.
Our approach is, however, not without limitations. First, no causal relationship could be assumed for the above changes of positions. Indeed, these changes cannot be solely attributed to policy responses, or lack of responses to the crisis. Conversely, the extent to which a number of issues highlighted by the crisis have affected our perceptual mapping remains imprecise. This is the case of the impact on country risk of generally shallow macro-economic measures, except for the few countries in the GCC that committed to a stimulus program. Within this region, it is also the case of the impact of the vulnerability of a highly leveraged domestic private sector on the enabling environment for business. A large section of this sector, which is dominated by family-owned conglomerates with poor governance and transparency record, has failed to address properly the rapid deterioration of its balance sheet. Such examples can also be extended to include the impact of long neglected challenges uncovered by Dubai’s debt troubles. To be sure, the lagging legal infrastructure and enforcement mechanisms, have had an impact on the enabling environment in the UAE. What ultimate impact that is going to have on other GCC countries and beyond remains to be determined. …[Details]
Economic Commentary Volume 5 No 1/2 – January/February 2010: APICORP’s Annual Review of the Arab Economic and Energy Investment Outlook – A Dim Light at the End of a Long Tunnel.
In reviewing the economic and energy investment outlook of the Arab world our Jan-Feb Economic Commentary concludes by pointing to a dim light at the end of a long tunnel. Although the credit and oil markets have stabilized, the speed at which redundant energy projects are likely to be brought back is still uncertain. The region’s investment recovery, will ultimately depend on the revival of global and domestic growth. Meanwhile, funding may not be fully restored yet. Not without lenders and investors being reasonably confident that severe delayed effects of the global financial crisis, of the sort experienced by Dubai, will continue to be contained should they happen again. …[Details]