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29 March 2024

Energy subsidy driver of high use

Published
By Vicky Kapur

Per capita energy consumption in the Middle East is among the highest in the world and is growing at a rapid pace, HSBC has said in a recent report, adding that low, subsidised end-user prices are the principal driver of high and growing regional energy consumption.

“The region uses over 3,800 barrels for each $1m in GDP, over twice the global average. Yet refining capacity and gas production have not kept pace, resulting in sharply higher energy imports,” HSBC said in its annual Global Energy Review report.

The bank added that despite being a global leader in energy production and export, the region’s energy consumption is high and it faces fuel shortages, which are driving record upstream gas and downstream oil investment activity in the Gulf region.

“We estimate Saudi energy subsidies at over $70bn in 2011 – more than $2,500 per capita. This includes heavily subsidised electricity tariffs, cheap natural gas feedstock for industrial use at $0.75 per million BTU, and retail prices for gasoline and diesel as low as 12 and 7 cents per litre, respectively – among the lowest globally,” HSBC said in the report.

“The Middle East holds nearly half the world’s oil and gas, and is traditionally viewed principally as a hydrocarbon exporter; however, the region is also an increasingly important end-user of energy,” the report noted. “Energy consumption has been growing rapidly for decades, increasing 5.6 per cent per annum since 1980, just slightly below the pace of growth in China,” it said.

“We estimate [regional] per-capita consumption at 25 barrels of oil equivalent (boe) in 2010, almost three times higher than in other non-OECD countries,” the bank said.

“Low, subsidised end-user prices are the principal driver of high and growing energy consumption,” the HSBC report said, adding that the bank believes that the recent “unrest in the MENA region means end-user energy prices are likely to remain low for the foreseeable future, especially in Saudi Arabia.”

With regional oil exporters benefiting from the high crude prices, HSBC reckons that “Middle Eastern oil demand will increase by 1.5MMbbl/d by 2015 and represent 43 per cent of the growth in world oil demand ex-emerging Asia.”

Natural gas shortage

High oil consumption growth reflects the fact that the region holds 54 per cent of world oil reserves. Yet, the Middle East is also home to 41 per cent of global gas reserves, according to the report. “Current reserves in the five principal economies in the region are equivalent to 90 years of production at current rates,” it said.

“Thus, the high and growing natural gas imports of UAE, Kuwait and Iran may come as a surprise,” it added. The UAE’s natural gas balance tipped in the year 2007, when the country became a net importer of natural gas from being a net exporter earlier, the report’s data showed. “Indeed, almost all countries in the region, the exception being Qatar, are struggling to meet buoyant domestic demand,” the bank said.

“UAE gas production is up only 1.3 per cent pa since 2005 [while] Kuwaiti production in 2010 was actually 5 per cent below 2005 levels,” it said.

The report expects the UAE and other gas giants in the region to increase their investment spending on gas exploration and recovery as the opportunity cost of using higher-priced crude oil or importing expensive gas is huge for their economies.

“In our view, it makes more sense to pursue non-associated gas production at a cost of $2-5 per million BTU than to import LNG (the UAE is paying about $11/MMBtu) or burn crude (current opportunity cost based on export netbacks is about $17/MMBtu).

“Significantly higher natural gas imports from Qatar through the Dolphin pipeline may be the preferred solution for the UAE and Oman, yet we believe that Qatar’s moratorium on North Field development effectively rules out this option for the next few years.

“With power demand growing at about 5-8 per cent per year, the cost of inaction is great indeed. For example, we estimate that for Saudi Arabia to meet incremental power sector feedstock requirements exclusively through crude oil to 2020 could require the burning of 4 billion barrels of crude with a market value of over $300bn.

“In the long run, lower export capacity may also potentially undermine Saudi Arabia's ability to meet higher external oil demand and exert leverage over oil prices,” the report said.

“We expect a sharp increase in spending on natural gas across the region and believe that this presents an opportunity for engineering and construction contractors with the right expertise. International oil companies may also find opportunities as partners with the national oil companies in gas projects,” it said.

“However, the withdrawals of two Western countries from the UAE Shah Gas project and a key gas project in Oman emphasise that signing up and retaining leading IOCs may require more attractive terms (such as higher regulated gas prices),” it added.

The bank concluded that gas, not oil, should be the focus for the Middle East – a region that faces power shortages and has to use crude for power generation. It highlighted Dana Gas as its stock pick for regional gas play, with an overweight rating to the company’s share.

“We value Dana using a sum-of-the-parts approach,” the bank said. While shares in Dana Gas are currently trading at Dh0.56 apiece, HSBC has a target price of Dh0.82 for the company’s shares. “We assume Brent oil at $110/bbl in 2011 and at $90/bbl in 2012 and 2013, and a $1 increase per year starting in 2014,” the report highlighted. “With our target price implying around a 44 per cent potential return, we have an Overweight rating for Dana Gas.”