GCC urged to respond to shale oil

Gulf hydrocarbon exporters need to devise a long-term strategy to develop their economies away from volatile crude prices to ensure fixed income in response to the discovery of shale oil and gas in the US and other countries, an expert has said.

Mohammed Al Asumi, a former adviser at the Ministry of Planning and Dubai’s Executive Office, said the UAE and its partners in the six-nation Gulf Cooperation Council (GCC) have been working hard to diversify their economies and gradually move away from their dependence on oil as a primary source of both income and energy.

In recent years, they have achieved significant success in both areas, he said, adding that their efforts have been guided by dramatic new developments in energy markets which have created challenges for countries around the world, particularly oil exporters.

“It has hence become necessary for GCC oil producers to re-evaluate the historical relationship between oil and development in the region…these developments pose real challenges which can only be overcome by implementing long-term strategies which take all changes in the energy industry, at the local and global levels, into consideration and aim at defining approaches to be followed in order to minimize the negative aspects and maximize the positive ones,” he said in an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research.

“Apart from the possibility of depletion of oil and gas resources, recent developments in the energy industry raise many questions that require much research and analysis.” Asumi, who had also served as chief economist at the state-run Emirates Industrial Bank, said there has been a lot of talk about the production of shale oil and gas in the United States and several other countries, adding that such developments pose a real threat to the conventional oil and gas industry, in terms of both production and prices.

Although the impact of this development on oil prices is still limited, its effect on gas prices has been disastrous, he said.

He noted that the price of gas futures fell from $11 per thousand cubic feet five years ago to $3 at present, thereby causing severe damage to the world’s gas exporters.

As for oil, the limited reserves of shale oil discovered so far and the extraction costs, in the range of $50-$75 per barrel, is too high compared to less than $20 per barrel of oil in the Gulf region, Asumi said.

“This has limited competitiveness of shale oil and its effect on supplies in the global oil market. This high cost means that oil prices below $80 a barrel are unlikely, which is good news for oil exporting countries, including the GCC countries,” he said.

“They will be able to cover their development needs in the foreseeable future. It also negates forecasts that increased production of shale oil will lead to lower prices and create financial challenges for oil exporting countries.”

But he added that there is a possibility that technological innovation will result in reduced production and exploration costs in the future.

He said this would increase challenges faced by oil producers but noted that this possibility will take a long time to materialize, which means that shale oil is not expected to be an alternative to energy in the next few years, while the global demand for oil is expected to rise from 87 million bpd now to 105 million bpd in 2030.

“Naturally, the increased production of shale oil and gas will lead to a decline in US imports of oil and gas. Until 2011, the US was the largest importer of oil in the world. But as US oil imports fell to almost 6 million barrels per day in December 2012, it was replaced by China as the largest importer of oil,” he said.

“Another important factor is the expected increase in the production of some countries, such as Iraq and Libya. Iraq aims to double its production capacity by up to 6 million barrels per day by 2016, compared to 3 million barrels at the present, while Libyan production is expected to increase significantly in coming years — especially if the security situation stabilizes there.”

In addition, production capacities will increase in GCC countries themselves, and oil production is expected to rise in non-OPEC countries, such as Russia, Brazil and Venezuela, which have large production capacities, Asumi said.

“In any case, the GCC countries need to redraw their development strategies, taking all possibilities into account, and they should move at a faster pace in order to achieve economic diversification and find alternative sources of income, whether by developing non-oil sectors or imposing certain taxes — such as value-added tax (VAT) — to diversify the funding of their annual budgets,” he said.

“At the same time, they should restructure public spending and reduce pressure by allowing the private sector to play a bigger role in economic diversification and create jobs for citizens, which will reduce the burden on their budgets.”

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