x Abu Dhabi, UAEMonday 24 July 2017

Energy offers GCC rationale for real economic union

The idea of a closer Gulf federation suddenly returned to prominence this month. The prospects of immediate political union seem doubtful, but the energy sphere is a natural place to further economic integration, writes Robin Mills.

When the leaders of a regional grouping wanted to build economic cooperation as a road to greater political unity, they looked to energy and heavy industry as the key.

This is not the GCC in 2012, but the European Coal and Steel Community, the forerunner of today's European Union, first proposed in May 1950 by the visionary French foreign minister Robert Schuman.

The idea of a closer Gulf federation, raised by King Abdullah of Saudi Arabia last December, suddenly returned to prominence this month at the GCC leaders' meeting in Riyadh. But with only Bahrain enthusiastic and Qatar giving a probably tactical welcome, the prospects of immediate closer union seem doubtful. As with Europe, economics may be a better place to start - and petroleum is the Gulf's key resource, as coal was for Europe in the 1950s.

Economic links within the Gulf are surprisingly weak.

Even for the open UAE, just 5.6 per cent of its trade is with the other GCC states, less than with Iran. The Emirates imports almost as much from Somalia as it does from Kuwait. This is partly because of the GCC's rather similar economies, founded on exporting oil and capital, and importing food, manufactured goods and skilled labour.

Yet the energy sphere is a natural place to further economic integration - in three particular areas.

The first is the traditional oil sector. This is dominated by the behemoth national oil companies - Saudi Aramco, Abu Dhabi National Oil Company (Adnoc), Kuwait Petroleumand Qatar Petroleum. None of these operates in another GCC country. The region's private companies, such as Kuwait Energy and Sharjah's Dana Gas, are not present in other GCC countries either (indeed, Kuwait Energy does not even have assets in Kuwait).

With very similar geological and operational challenges, imagine the benefits if Adnoc and Saudi Aramco, or Petroleum Development Oman and Kuwait Petroleum, were to swap stakes in a field or refinery.

It might also persuade the laggards among the region's national oil companies to up their game to match the best. It is not impossible: Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, already produces oil and gas in Oman, Bahrain and Qatar.

The second is in gas and power. Five GCC countries are short of gas - one, Qatar, has an abundance. The Netherlands' giant Groningen field led to the gasification of Western Europe from the 1950s and, ironically, to the eclipse of coal.

This has not happened in the Gulf. Qatar exports gas to the UAE and modest amounts to Oman (via Mubadala's Dolphin pipeline), but Saudi opposition prevented extension of the pipeline network to neighbour Bahrain and to Kuwait.

Electricity cooperation has been more successful, with the establishment of the GCC grid. But this is still limited in capacity, and essentially provides emergency back-up power. A truly integrated electricity market, with regular trading, is a long way off.

The third area is future energy. The UAE, via its environmental vehicle Masdar, the emirate's civil nuclear programme, and Dubai's strategy of energy diversification, has taken the lead. Saudi Arabia and Kuwait have announced ambitious solar power plans, while Qatar has concentrated more on desalination and dry-land agriculture.

Yet all the GCC countries face similar climatic and policy challenges. Common issues include developing safe use of nuclear power, capitalising on the region's renewable-energy potential, and advancing carbon capture and storage to keep hydrocarbons environmentally acceptable.

As with the other EU forerunner, the atomic energy organisation Euratom (founded in 1957), joint programmes would be preferable to each state's reinventing the wheel.

As it did in Europe, economic cooperation offers a path to closer union that postpones thorny debates over sovereignty - and creates a self-sustaining dynamic for greater prosperity.

Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis and Capturing Carbon