The Gulf region can squeeze more value from its oil industry

While hydrocarbons will remain the bedrock of the economy, argues Robin Mills, who believes they can no longer be the driver of growth in the Gulf.

epa02373541 (FILE) A file photo dated 08 March 2009 of a general view of an oil refinery in the waters of the Northern Arabian Gulf close to the port town of Umm Quasar in Basra, southern Iraq on 08 March 2009. Iraq has around 143 billion barrels of crude oil reserves, about 24 per cent more than previous estimates, the Iraqi Minister of Oil said on 04 October 2010. The reserves are mostly located in 66 oil fields in southern Iraq, Oil Minister Hussein al-Shahristani announced. This estimate places Iraq as the holder of the worldës fourth largest crude oil reserves, behind Saudi Arabia, Venezuela, and Canada. Previous estimates made in the 1990s placed oil reserves at 119 billion barrels.  EPA/HAIDER AL-ASSADEE *** Local Caption ***  02373541.jpg
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The latest instalment of the Dubai Debates, held last Wednesday, posed the question, "What comes after oil and gas in the Gulf?"

My answer: a lot more oil and gas.

But, although hydrocarbons will remain the bedrock of the economy, they can no longer be the driver of growth.

More importantly, as currently used, they cannot sustain the society that people in the Gulf want and deserve.

The economic conclusion comes from simple arithmetic. The Gulf, including Iran and Iraq, will remain the heartland of global oil exports. The area contains half of global conventional oil reserves, with reserve lives approaching a century. There is also major potential for new discoveries and extracting more from old fields. The "post-oil" era in the Gulf will not arrive because it runs out of oil.

The economic boom over the past decade in the Gulf was driven primarily by soaring prices. GCC oil production has actually fallen since 2005. Only Qatar has increased its gas exports. For a number of reasons - Opec's market management, competition from new oil suppliers, falling demand in developed countries, and policy errors in some states - the only Gulf country likely to expand oil production significantly over the next decade is Iraq.

Just as trees do not grow to the sky, so oil prices will not increase relentlessly forever. And with global oil consumption growing perhaps 1 per cent per year, there simply is not room for Gulf countries to expand production much faster.

Compare this to economic growth in the GCC which often ran at 7 per cent per year during the past decade. Yet the average unemployment rate among UAE nationals rose from 9 per cent in 2000 to 14 per cent in 2009, with youth unemployment at a worrying 30 per cent.

The simple fact is, profitable as oil, gas and associated energy-intensive industries such as petrochemicals and aluminium are, their core operations simply do not employ many people.

Economic diversification is essential, and some Gulf states have made significant strides in that direction over the past decade. This diversification will be most effective when it builds on existing strengths. The Gulf can use its energy assets much more creatively, as a force for broader economic growth.

The world's energy trading hubs are New York, London, Singapore and Tokyo. The many large and small companies that develop new petroleum technologies, or conceive of new places to find oil and gas, cluster in a few cities - Houston in the US, Calgary in Canada, Aberdeen in Scotland, Perth in Australia and Stavanger in Norway.

Norway, one of Europe's poorest countries when oil was discovered in 1969, and then without any experience in the oil industry, is now regularly assessed as the best place to live in the world.

Although its hydrocarbon resources are modest compared to the Gulf's, its national oil company, Statoil, is now a world leader in offshore operations and is present around the world, from Brazil, Angola and the US to Iraq, China and beyond

Even more impressively, Norway has created a very successful industry supplying oil technology, partly building on a long tradition of shipping. Companies such as Aker in engineering, Det Norske Veritas in quality control and Petroleum Geoservices in exploration will be a sustainable source of export earnings even as Norway's own production declines.

The Gulf should be developing and commercialising more of its own energy solutions. Dhahran, Dubai and Doha should strive to join the ranks of global oil technology capitals.

To achieve that, the education system needs to produce more scientists, geologists and engineers. Up to half the current oil industry workforce could retire within the next decade. Gulf citizens should be ready to enter these high-quality, high-paid jobs, supported by centres such as the Petroleum Institute in Abu Dhabi, with more than 1,000 undergraduates, and the King Fahd University of Petroleum and Minerals in Saudi Arabia.

But graduates must be given challenging roles, with the prospect of rapid advancement for those who perform well. The usually conservative national oil and electricity companies need to take a chance on these young people, and on locally developed technology and services. The energy sector, including oil and gas production, should be much more open to local private enterprises.

These skills do not only apply to petroleum. They can be applied to future energy sources, such as solar and nuclear power, both gaining in prominence in the region. Gulf countries should not be content to just buy solar panels from China.

There is not a simple dichotomy between the oil-funded status quo and a hasty scramble to the "post-oil era". If the Gulf keeps relying on petroleum in the old way, it will not find the solutions it needs to deliver economic growth and create plentiful, rewarding, exciting jobs.

Yet Gulf countries will find it hard to be competitive in totally unfamiliar industries. More creative, expansive use of the energy sector is one way of bridging this gap.

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