x Abu Dhabi, UAEWednesday 26 July 2017

Gulf is choked by fuel subsidies

Gulf oil producers must lower fuel subsidies if they are to achieve long-term economic stability through industrial diversification, experts say.

Setting fuel prices at levels that stimulate investment in energy development while discouraging wasteful domestic consumption will be key to economic growth, experts say.
Setting fuel prices at levels that stimulate investment in energy development while discouraging wasteful domestic consumption will be key to economic growth, experts say.

Gulf oil producers must lower fuel subsidies if they are to achieve long-term economic stability through industrial diversification, experts say. Setting fuel prices at levels that stimulate investment in energy development while discouraging wasteful domestic consumption will be key, Leila Benali, the director of Middle East and Africa research at IHS Cambridge Energy Research Associates, told an Abu Dhabi conference on energy security yesterday.

"Subsidies can be self-destructive because they will lead to rapid and wasteful depletion of energy resources," she said. The day earlier, Ali al Aissaoui, the head of economics and research at Arab Petroleum Investments in Saudi Arabia, said GCC countries needed to "claw back the rent" from energy supplied to the domestic sector at below market cost. Otherwise, with crude prices at US$60 to $80 per barrel, government revenues would be insufficient to support Gulf economies.

He also advised GCC governments to extend taxation as they diversified their economies. The recent "dramatic" developments in the oil market that last year spurred crude to spike to $147 per barrel and later plunge below $35 have prompted Saudi Arabia and other GCC countries to announce price preferences "either in terms of a $75 per barrel fair price target, or in terms of a price range around that target", Mr Aissaoui said.

"Our preliminary finding is that while these price preferences should be sufficient to support worldwide energy investment requirements, they might fall short of achieving long-term fiscal sustainability for the GCC region as a whole." Ms Benali said gas should remain the region's principal fuel for power generation, as burning oil would be too expensive and coal use in the region faced "practical and reputational limitations", while the development of nuclear power and large-scale renewable energy would take many years.

Adding 60,000 megawatts (mw) of power generation capacity by 2020 to meet the region's projected electricity needs would require a one-third increase in gas supplies, she said. The GCC sits on roughly 1.5 quadrillion cubic feet of proved gas reserves, representing nearly 23 per cent of global reserves, but only accounts for about 8 per cent of worldwide production. Every country in the bloc except for Qatar is short of gas for power and industrial plants, with Saudi Arabia, Kuwait and the UAE regularly suffering power cuts during summer, when electricity demand in the region peaks.

The UAE and Kuwait both import gas to supplement domestic supplies. Saudi Arabia has been unable to develop a gas export stream, despite pumping more of the fuel last year than Qatar, the world's biggest producer of liquefied natural gas. Analysts have blamed the regional gas shortage on fuel subsidies, which they say have discouraged investment to develop gas supplies for the domestic market. International energy companies with the technical expertise needed to develop the GCC's challenging gas resources have mostly found the prices on offer to be insufficient to justify huge spending commitments.

As a result, several Gulf states have been burning oil for electricity while exploring other power generation alternatives. In the case of the UAE, that includes a serious commitment to a civilian nuclear power programme, which was officially launched this summer. "The UAE needs a diverse portfolio of energy in order to remain safe," Dr Anwar Gargash, the Minister of State for Foreign Affairs, said on Monday at the opening of the Abu Dhabi conference. "Nuclear energy is the best solution to provide for its needs. It will provide a high level of energy security for the UAE."

Dr Gargash projected that power demand in the Emirates would double by 2020 to 40,000mw. He said the UAE also remained committed to generating 7 per cent of its electricity from renewable resources by 2020 as it sought to reduce emissions of carbon dioxide, a greenhouse gas associated with global warming. @Email:tcarlisle@thenational.ae