The Gulf Exporter s Paradox: Should cheaper oil abroad mean more expensive energy at home? Glada Lahn, Senior Research Fellow, Energy, Environment & Resources Department 2015 International Energy Workshop, IRENA, Abu Dhabi, 3-5 June 2015
Dollars per barrel 120 Falling price = falling revenue Falling prices = exporting country budget crises Brent and WTI Crude Oil Spot Prices, in dollars per barrel, June 2014 - April 2015 100 80 60 Statoil and service companies cut 1000s of jobs in Norway Venezuela protests; President Maduro seeks finance from China and Qatar Opposition in Nigeria complain as govt draws down foreign reserves to meet spending 40 20 0 WTI Crude Oil Price Brent Crude Oil Price Russia rouble loses half its value against the dollar in 6 months, Central Bank raises interest rates by 17% Angola introduces austerity budget, President says fuel subsidy and infrastructure spending must be cut Iraq passes austerity budget, halts some IOC investment plans, introduces taxes on some goods Iran introduces austerity budget
Even the golden child The decline has been stronger and gone faster than we had expected [what] we re seeing is a reminder that we re in a cylical industry, and that we need to have a cost level in this industry that can sustain these types of cycle and let us be competitive over time CEO Statoil Norway
Volume What role oil and gas play in the economy over time matters Depletion-led development Transition phase Decline 7 6 5 4 3 2 1 0 2006 2011 2016 2021 2026 2031 2036 Extractives production Extractives export Extractives consumption
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Have exporters used windfall revenues to diversify their economies?
Using below-ground assets for above-ground growth Heavy industry Extraction Refining Transport Power & desal Water treatment City Agriculture Dair y Food industry Groundwater Gas Chatham House The Royal Institute Oil 8
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Cost of water versus price in Bahrain 500 450 400 350 300 250 200 150 100 50 0 Average price paid per cubic metre of water sold Average cost of supplying one cubic metre of water Ave. financial cost of water: 2012/13 $1.89/m3 Govt. absorbs 80%of cost Cost of gas to 2015: $2.25 mmbtu Water lost in distribution = 30% Chatham House The Royal Institute Source: Waleed Zubari for Chatham House (2014) 9
Million US dollars US$9.2 Mounting costs over time billion cost 15.9 Municipal water consumption, (million m3) Cumulative financial and treatment and reuse costs 14000 12000 10000 8000 6000 billion m 3 natural gas 78 million tonnes Co2 2013 2030 Based on Zubari 2014 Axis Title Chatham House The Royal Institute 4000 2000 0 +++ Damage to sea ecology 10
Why is the UAE having to import more and more gas? Exhibit 16: UAE Gas Production Injection and Cycling DOMESTIC MARKET Shrinkage Gas Export Commitments 2.5 (27%) 1.1 (12%) 3.8 (40%) UAE Gas Production (2013) 9.4 Billion Cubic Feet per Day (Bcfd) 0.6 (6%) 1.4 (15%) Losses: Fuel and Flare 2.5 (53%) 2.2 (47%) UAE Gas Demand 4.7 Billion Cubic Feet per Day (Bcfd) UAE gas Production that meets Domestic Demand Gas Import (Pipeline a/lng) Source: UAE Ministry of Energy in CPC/MoFA White Paper on Natural Gas Chatham House The Royal Institute 11
Prices of natural gas in the Gulf and global comparisons Price of gas in US$/mmBtu 16 14 12 10 8 6 Price rise for industry Planned price rise for industry (to 2021) Price falls since Sept 2014 Range of cost estimates for new gas in the GCC (tight & high sulphur) or additional pipeline imports from Qatar 4 2 0 Saudi Arabia UAE Qatar Iraq Oman Kuwait Bahrain Henry Hub spot (US) Chatham House The Royal Institute Imports of Qatari LNG to Kuwait* Russian pipeline gas average to Europe Asian market LNG 12
$US per barrel 120 100 ay: Qatar aises 80 diesel rice by 50% Price reform plans begin to be implemented in the GCC Falling price = falling revenue FEWA (UAE) raises electricity and water tariff for expats, commercial, industrial and govt. sectors UAE Federal National Council approves Green Growth Strategy for roll out Abu-Dhabi increases electricity and water tariffs. Bahrain increases industrial use gas prices 60 40 20 0 WTI Crude Oil Price Brent Crude Oil Price Sharjah increases electricity and water tariffs for commerce and industry Oman increases industrial use gas prices by 100%, Kuwait increases diesel 300% and kerosene prices (then reverses price increase on Feb1). Bahrain announces it will phase out power and water subsidies; help farmers to harness solar Dubai increases solar target from 5 to 15% by 2030
Consumer incentives for cutting wasteful use Qatar: $0 Kuwait: $20 Saudi Arabia: $60 Dubai expat: $180 Jordan: $660
Total Monthly Water Bill (USD) The potential for new business models: water 250 200 150 100 50 Monthly residential water bill for household of 6 people, 54.75m3/month (300litres/person/day) Sewage Access Charge Water Access Charge Sanitation Fee Water VAT Block 4 Block 3 0 Block 2 Chatham House The Royal Institute *Subsidised lifeline @ $0.027/m3 (Block 1) + cost reflective @$2.99 (Block 2) **Rate set for Casablanca 15 and includes VAT and
Cost-benefit case for investing in efficiency 1600 1400 1200 1000 800 600 Abu Dhabi national Abu Dhabi expatriate 400 200 0 Old savings New savings Chatham House The Royal Institute 16
What would be competitive today with different prices or shadow prices? KAPSARC study, 2014 Saudi Arabia: Capacity built in the power sector under price-deregulation scenario Chatham House The Royal Institute 17
Does energy have to get more expensive? There are options Per unit, the full costs and externalities should be made transparent Once this is clear, government can decide what it is worth investing today in order to save tomorrow Or pass on some or all of those costs to the consumers, using the savings to help offset bills or provide other benefits Shadow pricing is another option to help increase efficiency and create a more level playing field for RE The lower oil price signals an opportunity to rework economies away from depletion-led diversification Chatham House The Royal Institute 18
Thank you glahn@chathamhouse.org Chatham House The Royal Institute