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Mena governments must loosen grip on energy sector

Governments across Mena should loosen control of their energy sectors, allow private firms a greater share of the upstream and push development of vast natural gas deposits in a bid to diversify their economies and remain competitive, said one of the region’s rising energy stars

Badr Jafar, president of Sharjah-based Crescent Petroleum, a private energy firm, said the region had become too dependent on high oil prices and must begin fundamental reforms to cope with any downturn in global markets.

GDP growth between 2004 and 2011 had come on the back of the oil-price rise, he said. “But such a secular shift in the price of oil is unlikely to be repeated.” The region, he said, had become “a bit too used” to lofty crude prices – which could fall as global economic headwinds build up.

The biggest opportunities remain in natural gas, he said, and the region must develop its resource before a “window of opportunity closes”.

Although Mena holds some 42% of the world’s conventional reserves, its share of global production was just 20%, leaving it with 130 years worth of supplies – almost twice the world average.

The increasing abundance of gas around the world, combined with falling gas prices as oil indexation frays, mean that Mena governments must push gas development now to keep domestic gas-consuming industries competitive and foreign buyers on side.

The International Energy Agency estimates that Mena producers must invest $2.2 trillion over the next 25 years to meet its oil, gas and power infrastructure needs.

Unleashing the private sector on the region’s energy industry would help accomplish this, said Jafar, speaking to a national oil company conference in Dubai on 18 September.

While the state should retain its central role in regulating the energy sector, private firms could be charged with delivering in the upstream, he proposed. The competitive environment would help “sustain innovation and maximise efficiency,” he said, citing the example of rising shale-gas production in the US.

Private development of North America’s unconventional resources has given US consumers some of the world’s cheapest natural gas prices, underpinning a revival in its industrial base. No subsidies or regulated prices, but plain commercial forces, had done this, Jafar said.

“We must move quickly from doing what has always been done – pumping oil to sustain the economy by exports – to something new, a more diverse energy mix. The private sector, under competitive pressures, can provide this.”

Gulf producer countries have enjoyed mixed success in their efforts to involve private investors in the upstream. Saudi Arabia’s natural gas initiative initially drew great interest from international oil companies (IOCs) when it was launched more than a decade ago. But state company Saudi Aramco was a reluctant partner and the initiative has floundered.

In Qatar, however, the involvement of IOCs in developing the North Field has turned the country into the world’s largest liquefied natural gas exporter, supplying a quarter of the global total, in just 10 years. Qatar Petroleum, the state firm, has remained in charge of the programme.

Jafar said that liberalisation of the region’s gas sector, scrapping subsidies and promoting exports could breed similar public-private success elsewhere – and would allow gas to compete with other fuels, including oil, in the domestic market.

Energy market distortions – subsidies – suppress natural gas use at the supply and demand end of the value chain, he said. He cited Saudi Arabia, where substantial gas resources remained unattractive to investors because the gas must be sold to industrial buyers at under $1 per 1,000 cubic feet – a fraction of its price in the international market.

Across the region, Jafar said, subsidies cost Mena governments around $200bn a year in lost economic potential. “The scope for gains is huge.”

Greater gasification, through private development and the eradication of subsidised prices, would free up for export much oil now used in power generation. But it would also create a more competitive industrial base, allowing oil exporters to diversify away from their dependence on oil revenue.

Jafar has become a celebrity energy executive in the Gulf, and is seen as a rising force in the region’s sector. One of the World Economic Forum’s Young Global Leaders, he has promoted UN-backed good-governance initiatives in the Middle East and championed an array of arts projects in the region.

Crescent Petroleum is developing several projects in Sharjah and elsewhere in the Gulf, and a large gas development in Kurdistan, in northern Iraq.

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