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Abu Dhabi, UAETuesday 23 October 2018

New businesses spurring diversification for oil-producing states

For many countries diversification means expanding global reach and entering entirely new types of energy sectors

A Dhs50 billion investment project for Abu Dhabi will encourage business innovation, which is already on display in Masdar City.     
A Dhs50 billion investment project for Abu Dhabi will encourage business innovation, which is already on display in Masdar City.     

Diversification for oil-producing economies is crucially important and in the Arabian Gulf steps are being taken to facilitate the process.

In the UAE, that has most recently been underlined by Sunday's announcement by Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, that Abu Dhabi has approved a three-year, Dh50 billion budget for the Abu Dhabi Government Accelerators Program ‘Ghadan 21’. The move is part of an action plan to develop the future economy in a post-oil world to stimulate investment, create jobs and spur innovation.

In practice, what does diversification mean? For many countries it means expanding the reach of conventional energy investments, broadening their spread and entering entirely new types of energy.

Several oil-producing states invest in overseas hydrocarbons. Norway’s Equinor (formerly Statoil) and Malaysia’s Petronas have built up extensive portfolios through exploration, developing oil and gasfields across the world and applying cutting-edge technologies honed from their home bases. Abu Dhabi’s Mubadala owns Dolphin Energy, the main source of the UAE’s gas imports, oil production in Oman, a share in Egypt’s giant offshore Zohr gasfield, and its Pearl subsidiary in south-east Asia. Abu Dhabi National Energy Company (Taqa) operates in the Kurdish region of Iraq, the North Sea and Canada. This allows growth beyond domestic resources, and is intended to develop technological skills, market links and political relationships.

Leading national oil companies see refining and petrochemicals as a key way to enter fast-growing developing markets and safeguard future demand as petrochemical use is expected to grow even if oil use in transportation is reduced. Saudi Aramco led the way in the US, Japan and China, and more recently Abu Dhabi National Oil Company’s new strategy has focused on “downstream” investments, at home and in India. Norway has developed a world-leading oil services sector, particularly strong in offshore installations given the country’s maritime history, and a continuing source of export earnings.

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In new energies, most oil-producing countries are beginning to explore the benefit of increasingly cheap renewable energy, particularly solar power. In the UAE, Masdar and the Dubai Electricity and Water Authority are the leaders, achieving world-record low pricing for large-scale solar plants. Masdar has also invested in overseas projects, from Mauritania to the UK. Saudi Arabia has begun to move ahead with its own solar and wind power, while Oman is using solar heat on a large scale in its oil production. Dubai has ambitious plans for deploying electric and autonomous vehicles. Equinor has become a leader in off-shore wind power, using its marine expertise gained in North Sea oil and gas production. Such technologies reduce energy costs, improve energy security, save oil and gas for export, and cut greenhouse gas emissions and other pollutants. But most other oil producers are lagging behind in deploying renewables because of inertia, government regulation of energy prices, lack of interest from incumbents and outdated business models and mind-sets.

Domestic reform of the energy sector is also key. Low-priced energy has been used to build up industrial bases, including aluminium smelting, iron and steel, and fertilisers. Saudi Arabia, Kuwait, the UAE and Oman all have substantial basic industries. Others, such as Venezuela and Nigeria, have been cursed by white-elephant projects that, at huge cost, never produced a single tonne of steel. Even when successful, this policy is now reaching its limits, as further cheap energy is unavailable. Now the strategy is to build on the existing businesses to produce more value-added, speciality products that raise the level of technology and employment.

Energy subsidies are being reduced to curb wasteful consumption, with domestic fuel, electricity and water prices raised towards world market levels in most of the GCC countries. Other states, such as Nigeria, Venezuela, Iraq and Algeria, have struggled to persuade their populations of the benefits of reallocating subsidies to more productive uses, such as infrastructure or education.

Energy business models also have to be reformed to open up electricity and gas markets to investment and freer trade.

Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis