Economic Commentary -Wrapping up Volume Eight, 2013.
The all-in-one binder of the issues of APICORP’s ‘Economic Commentary’ published during 2013 is now offered under the title “Wrapping up Volume Eight”.
The tenor and appeal of this 44-page volume can be gauged from the foreword by Mr. Ahmad Al-Nuaimi, APICORP’s CEO, restating the publication’s ambition, purpose and aspirations.
The compilation in one single volume offers an opportunity to highlight the key insights gained from our research activities. In addition, we expect the collection to provide a concrete sense of our efforts that can help take stock of progress as we prepare for another challenging year.
What began as a modest, one-page flier has since expanded into a more comprehensive piece reflecting the increasing sophistication of APICORP’s research work. In the course of its progress the publication has benefited from valuable comments and feedback from APICORP’s executive staff members and the wider readership around the world. The latter was made possible by the concurrent publication of several issues in the Middle East Economic Survey (MEES) which have given the Commentary broader reach and greater impact.
We express our thanks to all who have encouraged this endeavor and wish our readers a very happy festive season…. [Details]
Economic Commentary Volume 8 No 12, December 2013 – MENA Lingering Turmoil and its Effect on Energy Investment Climate: A Reassessment
Our Economic Commentary for December is published under the title “MENA Lingering Turmoil and its Effect on Energy Investment Climate: A Reassessment”. APICORP wishes to thank the peer international experts who took part in the Delphi survey updating the ‘enabling environment’ component of the investment climate.
Since the onset of the Arab uprisings three years ago parts of the Middle East and North Africa have continued to be in turmoil. As a result, the outlook for the region as a whole has remained clouded with many questions and almost no certitude. What the future holds for Tunisia, Egypt, Yemen, Libya and, in the shadow of Syria’s civil war, Lebanon, Jordan and Iraq? What about the countries which have managed to contain the turmoil so far? Will Algeria for instance be able to prevent a potentially fraught transition of power? To what further extent will Bahrain’s unresolved domestic political strains upset the relative stability of the GCC area? Could neighboring Iran be affected in turn by the outcome of the turmoil whether it is involved in it or not?
These hardly answerable questions and other associated uncertainties should not prevent us from reassessing the extent to which the turmoil witnessed so far has affected our perception of the energy investment climate in the region. As with previous similar studies, the analysis in this commentary is based on a perceptual mapping which we discuss in three parts. The first part introduces the methodological approach and its practical application to our case study. The second part examines how the turmoil has affected key country attributes and their ranking. The third part highlights from the current and pre-turmoil perceptual maps notable shifts and changes in country positioning.
Our conclusions read as follows:
Lingering political turmoil in parts of MENA has undermined the region as a whole, adversely affecting its investment attractiveness. Notwithstanding pervasive uncertainty, our ‘perceptual mapping’ has continued to provide a clearer picture of the consequent profound changes brought about to the energy investment climate. Except Saudi Arabia, which has retained its position in the prime quadrant and nearest to the ‘ideal point’, our reassessment has revealed significant shifts in country positioning. Overtaking its cluster’s lead in the second quadrant, the UAE has established some distance from both Qatar and Kuwait. The two remaining GCC countries, Oman and Bahrain, have managed to hold their positions in the third quadrant. Beyond the GCC, most countries have rearranged into new clusters. Tunisia has joined a group of lesser investment appeal formed of Morocco, Jordan and Lebanon. Iraq has slightly improved its position by crossing into the third quadrant and bonding with Egypt and Algeria. Despite significant assets the potential energy investment of this new cluster remains constrained by both high political uncertainty and poor business environment. Libya’s position has deteriorated most seriously, ending up in the least attractive quadrant as part of a cluster comprising Yemen, Sudan, Mauritania and now Syria. Finally, even though having moved into the prime quadrant, resilient Iran is still far from its energy-asset-class peer, Saudi Arabia, and therefore even farther from the ‘ideal point’ benchmark… [Details]
Economic Commentary Volume 8 No 11, November 2013 – Investment for Energy: Looking Beyond Conventional Determinants
Our Economic Commentary for November reproduces the narrative of a presentation made by Ali Aissaoui, Senior Consultant at APICORP, at the IIF 2013 MENA Regional Economic Forum (Dubai, 28-29 October) under the title ‘Investment for Energy: Looking Beyond Conventional Determinants’.
The relevant panel session addressed the theme of ‘Global Energy Outlook and its Implications for the Region’. Ali Aissaoui was asked to cover investment for energy. Despite his familiarity with the topic, he has found it most challenging to address. As the world of energy is moving fast at the confluence of new trends in technology, politics/policy and economics, familiarity is hardly enough to keep pace and maintain awareness of industry development and changes. In this context, he took a big-picture view of investment beyond conventional determinants and developed the topic along three broad lines:
- First, by identifying the major shifts taking place in the growth patterns of world energy;
- Second, by reviewing the investment needed to balance global supply and demand, before focusing on MENA role and expected contribution;
- Third, by addressing the key issues and challenges MENA investment will be facing
In concluding his assessment of the changing global energy landscape and its implications for MENA investment, Ali Aissaoui was of the opinion that amid major shifts in the patterns of global demand and supply, the region is expected to compete with emerging production from other sources and areas to provide the bulk of increment in oil supply and still a large amount of natural gas. This involves investment of some $160bn per year (in dollars of the year 2012). It is far from certain that such levels of investment will be forthcoming in the medium term. The causes for delay have become more serious as a result of a long-lasting deterioration of the investment climate in most parts of the region. At the same time, and as far as funding is concerned, two opposing forces in tension with one another will drive the availability and cost of internal financing. On the one hand, a relentless upward fiscal cost curve, on the other hand an anticipated downward pressure on oil prices… [Details]
Economic Commentary Volume 8 No 9/10, September/October 2013 – Modeling OPEC Fiscal Break-even Oil Prices: New Findings and Policy Insights
Our Economic Commentary for August-September is released under the title “Modeling OPEC Fiscal Break-even Oil Prices: New Findings and Policy Insights”.
In this commentary we revisit and refine our model for determining fiscal break-even oil prices, update previous findings in light of budgetary changes and move the discussion to the policy insights these findings provide when prices are expressed as a ‘fiscal cost curve’.
Despite significant simplifications, feeding the model with the appropriate data remains fairly challenging. Fiscal evidence is tied to the tracking of budget revisions found in supplementary and complementary budgets. They further depend on the degree of transparency of extra-budgetary transactions that prevailing institutional arrangements fail to capture entirely. Just as the difficulty with intermediary data stems from the need to develop full-cycle costs of production as well as calibrate estimates of petroleum royalty and tax rates.
With the exception of Kuwait, whose production cost has come down due to declining investment, 2013 estimates of fiscal break-even prices have increased for all countries, mostly however for Venezuela, Iran and Angola. Prices vary from $58 per barrel in Qatar to $144 per barrel in Iran, compared with $53 and $127 respectively in the 2012 estimates. In between, Saudi Arabia’s break-even price has increased from $94 per barrel in 2012 to $98 in 2013. Accordingly, OPEC output-weighted average has risen from $99 per barrel in 2012 to $105 in 2013.
Because it is a fixed cost, a fiscal breakeven price cannot be interpreted as a reservation price: no OPEC country would likely withhold production until its ‘preferred price’ is met, although there may be cases where a major producer could lower its production to bring OPEC output below the residual world demand in order to realize its own ‘preferred price’. More generally, however, policy behaviors and intents will differ among countries depending on the distribution of their fiscal break-even prices along the ‘fiscal cost curve’ and on either side of the current market price.
Insights into these policies are explored in the commentary… [Details]
Economic Commentary Volume 8 No 8, August 2013 – Algeria’s Energy Price Subsidies: Policy Conundrum and Political Dilemma
Our Economic Commentary for August is a reprint of an op-ed by Ali Aissaoui published in MEES dated 16 August 2013. The author is a policy-oriented energy economist. The opinions are his own and not of the institutions he is currently associated with, including APICORP…. [Details]
Economic Commentary Volume 8 No 7, July 2013 – Algeria’s Natural Gas Policy: Beware of the Egypt Syndrome!
Our Economic Commentary for July is published under the title “Algeria’s Natural Gas Policy: Beware of the Egypt Syndrome!”. APICORP wishes to thank the peer experts who took part in the Delphi survey that underpins the estimates of Algeria’s natural gas wellhead costs.
Concerns over depletion of natural gas reserves have begun to be felt in Algeria, with policy makers scrambling to address them. In this context, the February 2013 revision of the Algerian hydrocarbon law has introduced significant and most needed changes, two of which are particularly salient. The first offers new incentives to revive exploration and development and attract interest in unconventional gas. The second prioritizes the principle of ‘domestic market obligation’ and commits to remunerate Sonatrach’s foreign partners on an export-based opportunity cost, should their share of gas be requested. However, this potentially strong supply response, which comes on top of increased emphasis on the promotion of new and renewable energies, contrasts sharply with a relatively weak demand policy adjustment particularly for natural gas.
Our focus on gas is motivated by its dominant role in the energy balance of the Algerian economy. It currently represents 50% of primary energy production, fuels 98% of power and power/water generation and contributes 39% of the rest of energy consumption, as both an energy source and a feedstock for the petrochemical industry. It further represents, when including natural gas liquids (NGLs), 56% of hydrocarbon export volumes. So far domestic gas prices, which are regulated and strongly influenced by the country’s political economy, have been founded on the obsolete premise of trivial cost. They are passed through into very low – frozen for long periods of time – tariffs to the industry and gas and electricity utility customers. Over time, this policy has increased the risk of unsustainable consumption patterns, already manifest in the way domestic demand is strengthening to the detriment of exports.
This commentary provides evidence of a significant and unsettling shift in the supply and demand of natural gas in Algeria and draws attention to the urgent need to address domestic pricing and subsidy reforms. The first part provides a trend analysis and projection to highlight the shift in supply and demand and how a rapidly growing domestic gas market has become a much bigger factor in the gas balance. The second part discusses the current gas pricing rationale and exposes the extent of supply underpricing in the context of MENA. The third part shows the degree to which prices are divorced from the costs they are supposed to reflect.
Our overall findings suggest three main policy implications and recommendations:
The first is to avoid the ‘Egypt gas syndrome’. After a long period of denial, the Egyptian government suddenly woke up to the stark reality that production could no longer keep up with fast-growing demand fueled by massive and unaffordable subsidies. Surely, policy makers in Algeria realize that policy changes are slow and incremental while domestic demand growth is exponential and unrelenting. The snowball effect that is created eventually leads to adverse outcomes, not the least shrinking export volumes and lesser government budget. A demand response deserves as much attention and as much focus as the supply response highlighted in the introduction.
Following from this, the second implication is that domestic pricing must be tackled at both the design and implementation levels. Notwithstanding occasional assertions about the need to rationalize energy consumption, abnormally low – and below cost – domestic prices have continued to act as a disincentive to reining in fast growing demand. However, while dealing with gas prices is necessary as a matter of urgency, it is not sufficient. Building on that action, policy makers need to ensure that a broader framework is in place to tackle energy price and subsidy reforms in a coordinated and coherent manner.
To this end, the third implication is that the changing political economy and social contexts must be factored in. Reviving old frameworks such as the national ‘energy consumption pattern’ (ECP), which is regarded by some as still capable of providing a sound rationale for employing the energy resources available in the most economically and socially efficient manner, is not the best option. ECP was devised in the early 1980s, in a context of single political party rule, mild social climate, and centralized top-down policy-making. In today’s would-be participatory environment, policy makers need to inform public debate and shape a more holistic, consensual vision to guide and support a fundamental energy paradigm shift that would guarantee long-term security of supply and contribute to economic stability and sustainability … [Details]
Economic Commentary Volume 8 No 6, June 2013 – Saudi Arabia’s Economic Diversification: Progress in the Context of the GCC and Challenges
Our Economic Commentary for June is a SPECIAL EDITION on “Saudi Arabia’s Economic Diversification: Progress in the Context of the GCC and Challenges”.
This is a close adaptation of a chapter authored by Ali Aissaoui in Giacomo Luciani (Ed.), ‘Resources Blessed: Diversification and the Gulf Development Model”, Gerlach Press, 2012. APICORP wishes to thank the Gulf Research Center – the copyright holder – for granting permission to update the original piece and republish it under the same title… [Details]
Economic Commentary Volume 8 No 4/5, April/May 2013 – MENA Power Sector: Catching Up… But Far From There Yet
Our Economic Commentary for April-May is released under the title “MENA Power Sector: Catching Up… But Far From There Yet”.
Since the onset of the global financial crisis in 2007, lagging power sector investment has been a leitmotif of our economic commentaries on MENA energy issues. We have always contended that underinvestment in this sector, and the resulting shortfall in electricity supply, are likely to inhibit economic growth and exacerbate social frustrations. Ongoing turmoil in parts of the region has completely vindicated our concerns. Stable and reliable power supply has now emerged as a major policy goal in most countries.
Catching up fast growing demand needs massive investment, which cannot be fully realized without addressing significant issues. This argument is developed in three parts. The first provides an overview of the growth pattern and performance of MENA power generation. The second assesses the medium-term potential for capacity growth and the capital required for both new power generation and the associated transmission and distribution (T&D) systems. The third discusses the investment climate and the major constraints facing investors.
Our conclusions:
Fast-growing electricity demand and lagging supply have led to chronic power shortages across many MENA countries. In the current context bridging the widening demand-supply gap through increased supplies is perceived as politically and socially more desirable. Without active demand side management and serious cuts in subsidies, this will entail a capacity growth of 8.4% per year, which translates into a five-year increment of 140 GW above the 2013 level. Taking account of the associated investment in T&D, the capital required for the whole sector will be in the order of $283bn during the period 2014-18, 59% of which in new generation capacity.
This huge sectorial investment offers great opportunities but also raises major challenges. We have identified three issues in particular that should feature prominently on policy agendas. The first results from the perception, in the wake of the so-called ‘Arab Spring,’ of a deteriorating investment climate in most parts of the region. The second stems from the scarcity of natural gas in apparently well-endowed countries. The third follows from the inadequacy of internal and external financing. These issues cannot be resolved without supportive policies in the corresponding areas: first, by improving the investment climate and providing assurances critical to regaining private investment momentum; second, by providing the power generation sector with affordable fuel options; and third, fiscal space permitting, by increasing state budget funding of public utilities, which have become the investors of last resort. Otherwise, utilities will seldom catch up no matter how pressured they are … [Details]
Economic Commentary Volume 8 No 3, March 2013 – Between a Rock and a Hard Place: Egypt’s New Natural Gas Supply Policy
Our Economic Commentary for March is published under the title “Between a Rock and a Hard Place: Egypt’s New Natural Gas Supply Policy”.
The decision by the Egyptian government to commit to the long-term domestic supply of natural gas while allowing immediate imports of LNG and the rapid adjustment of domestic prices to reflect the cost of supply to the industry, signals a potentially significant shift in Egypt’s energy policy. The move has been decried by some as a sign of panic on the part of a government beset by economic and political pressures from many sides. Others have hailed it as the most effective way to address the incontrovertible fact that not only does natural gas production no longer meet domestic demand and export commitments, but the high cost of subsidizing energy products has also impacted the state budget to an extent that is no longer bearable.
Notwithstanding the success story of Egypt’s natural gas industry, it has been clear for some time that its production potential was unlikely to keep up with rapidly growing demand fed by massive subsidies. But Egypt is not an isolated case within MENA, and we have already pointed to countries that have developed a similar syndrome. Despite being well-endowed with natural gas, these countries have been struggling to supply their domestic markets, in some cases moving back to oil products to generate power (as in Saudi Arabia) or filling the gap with pipeline gas and/or LNG imports (as in the UAE, Oman and Kuwait). However, unlike these countries, Egypt cannot afford the associated economic and opportunity costs.
Our commentary examines in four parts the key aspects of Egypt’s new natural gas supply policy. Part one describes the policy and what makes it new. Part two highlights the novel upstream features designed to secure long-term domestic supply. Part three considers the LNG import scheme and its progress so far. Part four explains the move to adjust domestic prices. We conclude by providing a preliminary assessment of the policy as follows:
On the long-term supply side, the minimal interest shown by IOCs in the 2012 bidding round has compelled EGAS to extend it by three months until mid-February 2013. Judging from the deliberations of the second edition of the informal roundtable discussion on “The Future of Oil & Gas Agreements in Egypt” held just one month before the extended closing date of the bidding round, the “bold modifications” of the associated model production sharing agreement have fallen short of expectations. IOCs also seized on the opportunity to add to the usual litany of complaints the new impediments resulting from the polarization of decision making, now involving both ministerial technocrats and politically empowered presidential advisors. This notwithstanding, IOCs did acknowledge the potential of Egypt’s natural gas resources and reiterated their commitment to long-term development and relationships.
As far as LNG imports are concerned, EGAS has so far managed to expedite the steps needed to initiate the plan. However, further progress may prove more difficult to achieve, given the current business and political environment in Egypt, which does not lend itself to a swift process. As a result, completing the LNG import terminal to free domestic gas for power generation during the summer peak of 2013 looks extremely challenging. Normally, developing a floating storage and regasification unit (FSRU) from concept to commercial operation needs some 18 months. Securing medium to long term base-load LNG contracts at competitive prices to feed it could require an even longer lead time, unless the successful bidders are already involved in the business of producing and selling LNG.
Furthermore, there is little guarantee that industrial users will accept the government’s proposals and commit to a take-or-pay obligation at market prices of over $10/MBtu (when including freight, regasification costs and marketing margins). In the context of Egypt’s current natural gas market, shifting the supply problem to industrial users by requesting them to take charge of their own procurement could be seen as a flight from responsibility. The government should get involved further and more proactively in seeking affordable supply solutions such as using a price pooling mechanism to offset the inevitable high cost of imported LNG.
As far as domestic pricing is concerned, government policy appears, in the absence of transparency and informed public debate, piecemeal and inconsistent, particularly when taking into account the fact that pricing issues are not limited to natural gas. LPG, petroleum products and electricity, which are also in critical shortage, suffer similar price distortions. In this regard, gas-to-power pricing stands largely unaddressed. Without major increases in electricity tariffs, demand for power generation will not be significantly reduced and concurrently gas consumption will continue to rise unabated.
The government must have been – and if not, it should be – provided with a broader framework to reconcile the many objectives it seeks to achieve, including providing the upstream sector with adequate incentives for further exploration and development, supporting industry and power generation with affordable fuel options and alleviating the fiscal burden of subsidies, not to mention saving energy, preserving the environment and relieving poverty by redistributing national income. But pursuing all such objectives with pricing as the primary (and apparently only) tool would violate the rule that each policy objective needs at least one specific policy instrument. Otherwise policy makers should be realistic about their preferences and be ready to make compromises.
Herein lies the crux of the matter. In its attempt to correct energy market structure and distortions, the Egyptian government is caught between a rock and a hard place. On the one hand, it has come under increasing pressure to balance the need for energy prices to reflect the costs of supply against the social and economic impacts of price increases. On the other, multilateral lending agencies, prominent among them the IMF, have been pressing it for a genuine commitment to, and implementation of, reforms to reduce the country’s ever-increasing cost of subsidies. Steering the broader economic and energy policy agenda between these conflicting expectations is never going to be easy or fast … [Details]
Economic Commentary Volume 8 No 2, February 2013 – AIG Symposium : Thoughts on In Amenas
Our Economic Commentary for February is a reprint of an op-ed by Ali Aissaoui published in MEES dated 22 Feb 2013. The author is a policy-oriented energy economist. The opinions are his own and not of the institutions he is currently associated with, including APICORP… [Details]
Economic Commentary Volume 8 No 1, January 2013 – APICORP’s Review of MENA Energy Investment – Supporting the Transition
Our Economic Commentary for January 2013 is published under the title “APICORP’s Review of MENA Energy Investment – Supporting the Transition”.
The year 2012 was dominated by rapidly evolving events with far-reaching repercussions for the Middle East and North Africa (MENA). In the so-called ‘Arab Spring’ countries, where regime changes and political transformations have taken place, discontent has proved hard to quell. In Syria, a deepening civil war has created new threats to regional stability and security. While in Iran, tougher international sanctions over the country’s nuclear program – involving unilateral denial of access to financial and oil markets – have only exacerbated the uncertainties pervading the region. Adding to these uncertainties are the series of setbacks suffered by the global economy, which the region can hardly shelter itself from.
These unfolding developments have continued to dampen the investment climate and business sentiment. However, they have neither invalidated our framework analysis of energy investment nor the resulting medium term perspectives we provided in October 2012. This notwithstanding, it is important to evaluate such findings against evolving macro trends. To the extent that growth, interest rates and energy prices are key determinants of investment and financing, the first part of the commentary examines the economic outlook, conditions in the money markets as well as developments in the oil and natural gas markets. The second part discusses the scope and structure of MENA energy investment. The third part highlights major constraints and policy challenges and provides a timely update of funding conditions.
Our conclusions:
With weakened global recovery and ongoing regional turmoil, MENA continues to face the challenges of lingering uncertainties. Despite awareness of further downside risks ahead, we have validated our October 2012 review of energy investment. The review, which has been broadened in order to capture the full scope and scale of the power sector, puts total MENA energy capital investment at $740bn for the five-year period 2013-17. Compared to past assessments (systematically revised to reflect adjustments in the power sector), investment appears to be on the rise again. However, capital requirements have mostly been driven by unrelenting escalating costs and a catch-up effect. The latter has particularly been most evident in the power sector since responding to unmet electricity demand can now be considered as socially and politically more desirable.
Whatever the case, a little more than three quarters of energy capital investment are located in seven countries among MENA biggest holders of oil and gas reserves. Obviously, the geographical pattern has favored countries that have been relatively shielded from the turmoil. Otherwise, investments will most likely be back-ended.
The review has also highlighted serious constraints and 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 ethane and 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 at around $100/bbl. In contrast, external financing, which comes predominantly in the form of dollar-denominated syndicated 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. This is particularly the case of the so-called ‘Arab Spring’ countries, which can hardly do so without support during their likely protracted and difficult transition … [Details]
