Economic Commentary -Wrapping up Volume Nine, 2014
For our readers’ easy reference, Volume 9 of APICORP’s Economic Commentary has been bounded in a 34-page e-booklet featuring all issues published during 2014.
This compilation in one single volume offers an opportunity to highlight key insights gained from our research activities. In the course of its progress the Commentary has benefited from valuable comments and feedback from readership around the world. This has been facilitated by the concurrent publication of several issues in the Middle East Economic Survey (MEES) which have given the Commentary broader reach and greater impact.
As we embark on Volume 10, we would like to express our thanks to the colleagues who have encouraged and supported this publication and wish you all a happy and successful New Year…. [Details]
Economic Commentary Volume 9 No 12, December 2014 – Arab Energy Investment Outlook – Opportunities, Constraints, Policies
Our Economic Commentary for December is released under the title “Arab Energy Investment Outlook – Opportunities, Constraints, Policies”.
This SPECIAL EDITION of the commentary is a reprint of the Executive Summary of APICORP’s Discussion Report to the 10th Arab Energy Conference (Abu Dhabi, 21-23 December 2014). The report’s findings and policy implications have been discussed with a high-level panel and the audience.
The report (as updated on 15 December) is posted on the conference website at:
www.oapecorg.org/Home/Activities/Seminars-and-Conferences/Arab-Energy-Conferences/Presentations …. [Details]
Economic Commentary Volume 9 No 11, November 2014 – Revisiting the Dynamics of the Forward Crude Oil Price Curve
Our Economic Commentary for November is published under the title “Revisiting the Dynamics of the Forward Crude Oil Price Curve”.
Speculations have been abounding that current downward trend in crude oil prices will drive high-cost production out of the market, and that they will further discourage frontier oil developments. However, in contrast to prompt prices, which have been trending down fast from their June’s peak, those at the back-end of the forward curve have rallied. While much attention, particularly in the trade press, has focused on prompt prices, our interest is in the dynamics of the forward curve. More precisely, we consider two corollary questions worth discussing from an investing perspective. Firstly, are long-run marginal costs of supply setting the back of the forward price curve? Secondly and relatedly, should prices at the back of the curve increase to stimulate investment in order to balance the market in the long run?
From our analysis we conclude that expectations of oil prices to achieve long-term supply and demand balance involve some element of cost expectation for the marginal source of supply. However, the view that prices at the back of the forward curve should increase to entice the necessary investment to balance the market is not immediately plausible. Despite (or because of) all the uncertainties, the likelihood, based not on empirical facts but on reasoned judgment, is that rising long-run marginal costs, and therefore long-dated prices, may not be inexorable…. [Details]
Economic Commentary Volume 9 No 10, October 2014 – OPEC in the Future: Will It Continue to Play a Pivotal Role?
Our Economic Commentary for October is published concurrently by MEES under the title “OPEC in the Future: Will It Continue to Play a Pivotal Role?”. The commentary is based on a presentation made by Ali Aissaoui, Senior Consultant at APICORP, at the IIF 2014 MENA Regional Economic Forum (Manama, 29-30 September). The views expressed are those of the author only.
Will OPEC continue to play a pivotal Role? One could say that future uncertainties will continue to hamper OPEC’s decision-making and policies. Despite these uncertainties, however, OPEC should take a coordinated long-term view of investment and production with the objective of maximizing the net present value of oil rent accruing to its members. Normally, the higher the price the more incentive there is to invest; but high prices may entail lower call on OPEC oil, leading in turn to lower prices. While the resulting cycles are likely to revive old dilemmas (and dramas), they will not prevent OPEC from continuing to play a pivotal role. However, that role could be undermined if policymakers fail to address new challenges, including: rationalizing domestic energy consumption and prices to maintain export potential; improving the investment climate and creating a more enabling environment for the oil industry; moving towards sustainable, non-oil-rent-dependent alternative sources of funding; and, within the internal context of OPEC, agreeing on new rules of leadership and collective action to ensure more effectiveness……. [Details]
Economic Commentary Volume 9 No 09, September 2014 – The Elusive Costs and Benefits of Saudization
Our Economic Commentary for September is published as a Special Issue under the title “The Elusive Costs and Benefits of Saudization”.
In early August, the Saudi Ministry of Labor (MoL) released its statistical report for 2013. More than just a collection of statistics, this 145-page document analyses the progress made in implementing Saudization – the nationalization of the workforce. However, what grabbed the media headlines was the report’s indication that the government will have to spend nearly $4 billion annually to implement its employment strategy. The strategy, which is the tool path for reforming the labor market and preparing the Saudi workforce for the competitive global economy, identifies three long-term objectives: achieving full employment; supporting a sustainable development of the national human resources; and promoting Saudi labor productivity.
As tentatively shown in this commentary, the above price-tag actually comes on top of a multitude of largely hidden costs, while the benefits ─ beyond those accruing to the targeted beneficiaries ─ remain mostly intangible. The commentary is in three parts. The first and second parts draw on MoL report to outline the current structure of the Saudi labor market, employment quota policies, and achievements so far. The third part looks beyond the report to try and gain a better understanding of the costs and benefits involved.
Our conclusions:
Regional turmoil has put tremendous pressure on governments to implement more effective strategies to cope with fast-growing unemployment. In this context, Saudi Arabia has proceeded resolutely with the most large-scale labor market reform to address low Saudi participation in the private corporate sector. Nitaqat ─ the quota program which embodies current policies ─ has been instrumental in significantly increasing employment. However, the effects of the program go far beyond its immediate benefits in terms of job openings and hiring. The cost burden to companies has yet to be fully acknowledged, while critical reviews have to ask whether the benefits of Saudization, as an enabler for inclusive and sustainable socio-economic development will outweigh its wider costs to productivity and growth. …… [Details]
Economic Commentary Volume 9 No 07/08, July/August 2014 – MENA Energy Investment Outlook: What We Should Really Worry About
Our Economic Commentary for July-August is published under the title “MENA Energy Investment Outlook: What We Should Really Worry About”.
In the June issue of the commentary, we reviewed the IEA’s 2014 special report: ‘World Energy Investment Outlook’. Our attention was specifically on the question regarding whether we can still count on the Middle East and North Africa (MENA) to deliver the investment needed to sustain reliable, long-term supply. In this issue we develop more fully our downcast arguments along the lines of the presentation we made for the preparatory consultative workshop that was meant to shape the IEA’s key findings and messages.
As producers, MENA largest holders of oil and natural gas resources have been struggling to adapt to unforeseen major shifts in global demand, supply and trade. As investors, they realize that they will continue to be subject to the uncertainties over trends in technology, policy and economics. However, because these uncertainties are long-term, intangible and inherently unpredictable, they can hardly feed into investment decision-making. Instead, investors tend to focus on more tangible, medium-term risks. Hence, our main arguments involve three such risk concerns: flagging investment climate, rising project costs, and a constrained funding outlook.
We conclude by summing up these arguments. First, lingering turmoil in parts of MENA threatens to have a long-lasting, negative effect on investment climate outside core GCC. In this context, we continue to take a pessimistic view on Iraq and Iran – the major potential sources of capacity growth. Second, there is a strong likelihood that the costs of large-scale energy projects will continue escalating above and beyond general inflation. Third, securing medium to long-term financing will remain a daunting challenge. In this final respect, without proper policy support, investors will find it extremely difficult to move towards sustainable, non-oil-price-dependent alternative sources…… [Details]
Economic Commentary Volume 9 No 06, June 2014 – IEA’s World Energy Investment Outlook: Can We Still Count on the Middle East?
Our Economic Commentary for June is published under the title “IEA’s World Energy Investment Outlook: Can We Still Count on the Middle East?”.
As part of its WEO series, the International Energy Agency (IEA) released early June 2014 a special report titled “World Energy Investment Outlook” (WEIO). This 190-page study constitutes the first comprehensive update since a similar outlook was originally published in 2003. With reference data on past trends and future projections at regional and global level, the study develops new insights into investment, investment risks, and financing for the various links in energy-supply chains. It further quantifies investment requirements for energy efficiency and extends its findings to explore funding the transition to a low-carbon energy system consistent with reaching climate stabilization goals. In this commentary we review the IEA study, focusing on broad trends and Middle East relevance, before offering some critical observations….. [Details]
Economic Commentary Volume 9 No 05, May 2014 – Economic Development, Diversification and the Role of the State
Our Economic Commentary for May is published under the title “Economic Development, Diversification and the Role of the State”.
In this commentary, Ali Aissaoui – Senior Consultant at APICORP – presents his take of a two-day conference he attended in Kuwait on “Economic Development, Diversification and the Role of the State” (Kuwait City, 30 April and 1st May 2014). The event was co-sponsored by the International Monetary Fund (IMF) and the Kuwaiti Ministry of Finance. As APICORP does not take any view on policy, the opinions expressed should be considered to be solely those of the author….. [Details]
Economic Commentary Volume 9 No 04, April 2014 – MENA Power Investment Outlook : Opportunities Patent; Challenges Less So
Our Economic Commentary for April is published under the title “MENA Power Investment Outlook : Opportunities Patent; Challenges Less So”.
Since the onset of the global financial crisis in 2007 lagging investment in MENA power has been a recurring leitmotif of our commentaries. We have been concerned that underinvestment in this vital sector and the resulting shortfall in electricity supply could impede economic growth and exacerbate social frustrations. These concerns, however overstated they might seem at first, have clearly been vindicated in the wake of the Arab uprisings. At present, catching up with fast growing demand has become a policy priority in many countries within the region.
While this creates tremendous investment opportunities, it also poses significant challenges. The former are straightforward and relatively easy to identify, whereas the latter require a more thorough analysis. In order to elaborate this point, this commentary proceeds in three parts. The first provides an update of the growth pattern and performance of MENA power generation. The second evaluates medium-term capacity expansion and the investment capital required. The third discusses some of the critical issues policymakers need to address for this investment to take place effectively.
Our conclusions:
To alleviate chronic power shortages MENA countries are striving to catch up and keep supply in pace with fast growing, heavily subsidized demand. In the absence of demand-side management (DSM) measures and serious pricing reforms, the resulting capacity expansion should proceed at a growth rate of 8.3% per year, leading to a capacity increment of 156 GW during the five-year period 2015-19. Factoring in the associated investment in T&D brings the total amount of capital required for MENA power sector to $316bn.
Investment of this magnitude offers great opportunities while posing major challenges. In this latter regard our findings highlight three critical issues. The first results from the perception, in the wake of the Arab uprisings, 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, while the third follows from the inadequacy of financing. These issues cannot be resolved without supportive policies in the corresponding areas: first, by improving the investment climate and the enabling environment for private investment; second, by providing the power generation sector with stable and affordable fuel options; and third, fiscal space permitting, by increasing state budget funding of public utilities, which have become the investors of last resort….. [Details]
Economic Commentary Volume 9 No 03, March 2014 – Financing MENA Energy Investment – Critical Issues and Challenges
Our Economic Commentary for March is published under the title “Financing MENA Energy Investment – Critical Issues and Challenges”.
APICORP’s review of MENA energy investment for the five-year period 2014-18 has estimated total capital requirements at about $765bn. Concurrently, the review has established that, among the major issues facing investors and policymakers in this respect, financing remains the most challenging. To explore this question further and provide new insight, this commentary discusses in three parts current trends and patterns in financing large-scale projects along the main links in the oil, gas, and power supply chains. The first part outlines the normative and conceptual underpinning of the approach. The second tests the aggregate leverage assumption in the context of a negative loan supply shock, while the third part discusses some of the resulting financing issues and challenges.
To this end, an aggregate capital structure of 33% debt and 67% equity has been normatively defined and assumed to be valid in the medium term. Although this level of leverage is higher than that empirically observed since the onset of the financial crisis, it can be justified by the prospect of internal financing tightening as a result of market oil prices declining durably below current OPEC’s fiscal break-even levels. It is also likely to be held in the wake of a revival of the regional syndicated loan market.????
In such a case the burden of financing would fall increasingly more on the debt market. To be sure, the steady growth of the bond and sukuk markets in the region has somewhat reduced constraints on debt supply and lessened sourcing efforts particularly in key GCC countries. However, in nearly all other countries, the supply of debt could fall short of demand if the region’s loan market does not fully recover and/or access to the bond/sukuk markets is not assured. The challenge will be even more daunting when considering anticipated higher future costs of debt. Hence, in the face of increasing aggregate capital requirements, funding availability, accessibility and affordability will hardly be achieved without a larger and sustainable fiscal space as well as deeper regional capital markets…. [Details]
Economic Commentary Volume 9 No 1/02, January/February 2014 – APICORP’s Review of MENA Energy Investment – An Uneven and Still Challenging Outlook
Our Economic Commentary for January-February is released under the title “APICORP’s Review of MENA Energy Investment – An Uneven and Still Challenging Outlook”.
Notwithstanding a slow global recovery, uncertain markets and continuing regional turmoil, MENA energy investment for the five-year period 2014-2018 is slightly higher than that of the previous review. The resultant cumulative capital requirement of $765bn is driven mostly by unrelenting escalating costs and a catch-up effect, with the latter particularly evident in the power sector. A little more than three-quarters of energy capital investment continues to be located in seven countries among the region’s biggest holders of oil and gas reserves. Clearly, the geographical pattern has favored countries that have been relatively shielded from the turmoil. In the others, investment is likely to be back-ended.
The review has also highlighted serious constraints and policy challenges. In addition to the deteriorating investment climate which forms the backdrop of our assessment, three issues continue to confront company-investors and policymakers: rising costs, scarcity of ethane and natural gas supply, and funding limitations. Of the three, the latter remains the most critical. Given the structure of capital investment stemming from the review, internal financing could tighten if oil prices decline durably below OPEC’s fiscal break-even price, which currently stands at $105/bbl. External financing, which comes predominantly in the form of dollar-denominated loans, will also be challenging as long as the region’s loan market has not fully recovered.????
In the face of 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 the enabling environment for business. Obviously, this is particularly the case of countries that have witnessed a wave of social and political unrest and, therefore, are in greatest need to attract back investors to the energy industry… [Details]
