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- Dubai 05:31 06:49 12:14 15:11 17:33 18:52
LET THE GOOD TIMES ROLL Oil prices have quadrupled, boosting Opec’s oil revenues to record levels (AFP)
Consumption of oil in Opec countries will grow 4.4 per cent to 370,000 barrels per day in 2008 – putting the group only behind China in terms of demand.
Gulf Co-operation Council (GCC) nations will make up more than 50 per cent of this 195,000bpd growth – with Saudi Arabia alone accounting for 105,000bpd, which will be due to increased power generation and petrochemical manufacturing, according a recent report released by investment firm Lehman Brothers.
The “petrodollar boom” has spurred Opec to diversify output to make economic growth less “petro-centric”.
This build-up – mostly concentrated in fixed-asset investment, infrastructure development, power generation and petrochemicals – is oil-intensive and takes advantage of abundant and often heavily subsidised local oil resources. As a result, excess oil demand has boomed and efficiency has waned.
“High oil demand in Opec nations continues to benefit from petrodollar-fuelled economic growth focused on oil-intensive sectors: infrastructure, power generations, water desalinisation and petrochemicals processing,” the report said.
Lehman Brothers pointed to the expanding population in the Middle East, especially in countries such us Kuwait, Qatar, Saudi Arabia and the UAE, as another significant driver of high energy demand among Opec nations.
“Added to this landscape of output expansion and diversification is a rapidly expanding population within the Middle East, especially in the GCC, where population growth has averaged 3.7 per cent annually versus the world average of 1.2 per cent,” the report said.
From 2002 to 2005 prices have quadrupled, boosting Opec’s oil revenues to record levels – an estimated $762 billion (Dh2.7 trillion) in 2008 from $658bn (Dh2.4trn) in 2007 – according to the Energy Information Administration (EIA).
Consequently, real GDP grew at a stellar five per cent annually from 2002 to 2006, double the historical rate.
The GCC countries grew at seven per cent annually on average. More importantly, oil revenues have financed internal non-oil expansion.
In 2006, investments outside the oil sector fed economic growth as Saudi non-oil sector real GDP growth outpaced the oil sector by a measure of 6.3 to 0.2 per cent. To enable the build-out of industry in Saudi Arabia, the government has plans to build six “economic cities”, which will require significant fixed-asset and infrastructure investment.
The six cities, to be spread strategically throughout the country, will concentrate on respective industries in order to take advantage of shared human capital, resources and infrastructure.
The Institute of International Finance projects Saudi Arabia will invest $100bn (Dh367bn) over the next 10 years, with the aim of furthering its economic pre-eminence in the region. The construction of these cities will not only be both capital- and labour-intensive but also energy-intensive.
The economies of the GCC may continue to chug along strongly despite emerging bearish economic trends in the Organisation for Economic Co-operation and Development. Non-oil export data from Saudi Arabia points to annual average growth of 20 per cent since 2002, but these goods contribute just a 10 per cent share of total exports. So even if the housing market in the West falls further, it should not dampen the Saudi economy or stoke a fall in Saudi demand for oil. Even if a slight fall in demand causes Saudi non-oil exports to fall, the surplus capacity will likely be absorbed domestically.
Even though much of oil demand growth in 2008 is expected from the “decoupled” emerging economies, oil exports are not expected to slow GDP growth.
With average annual growth of seven per cent since 2002 versus 2.5 per cent globally, the GCC power generation sector has been one of the main beneficiaries of the economic boom. A combination of climate, industrial expansion and a benign price regime contributes to a robust oil demand outlook for this sector. Various Arab groups say electricity demand will grow in the GCC at six to seven per cent through 2015, with some estimates putting the growth rate at 10 per cent.
Lehman Brothers estimates growth at six to seven per cent through 2010, much of it dependent on oil feedstocks. Currently, 65 per cent of Saudi power plants are gas-fired versus eight per cent that are oil-fired.
However, roughly 50 per cent of total power is generated from oil plants. Kuwait also uses oil intensively in its power generation.
In the GCC, the EIA estimates that oil’s share of power generation is roughly 34 per cent, while natural gas is roughly 58 per cent.
In future, natural gas should increasingly take share away from oil. In 2030, the EIA anticipates this trend to increase gas’s share by three per cent at a two per cent loss to oil, with other sources declining in share by one per cent.
The potential for natural gas to serve as a reliable feedstock for power generation relies on supply availability and investment in oil- versus gas-fired generation. Earlier this year, plants capable of using either oil or gas shifted to oil, which was interpreted by some as a signal for a shortage in the supply of gas. The Middle East has large proven gas reserves, but bringing supply on-line in a timely fashion has proven difficult. As a result, operators of plants that were originally to be gas-fired are considering switching them to oil-fired generation.
Kuwait’s Umm Niga and Sabriya gas fields, starting this month, offer some domestic relief. And in the long term, expectation of increased gas production of 2.8 bcf/d by 2012 in Saudi Arabia, and similar increases in other GCC countries should dictate feedstock decisions.
But short-term problems in obtaining gas will continue to underpin strong oil demand growth from power generation in the medium term. Petrochemical production should also drive demand. Saudi Oil Minister Ali Al Naimi has confirmed Riyadh’s commitment to petrochemicals.
Due to subsidised gas prices that range between $0.50 and $1.25 per mmbtu, the Middle East enjoys a cost advantage in producing gas products, such as ethylene.
Associated gas, which yields sizeable ethane, is being used at maximum capacity by ethylene producers. However, expansion will require ethane to be mixed with propane and naphtha, according to the Saudi national chemical company.
Major projects in the GCC
INFRASTRUCTURE. In the UAE, $20 billion (Dh73.4bn) investment is planned on 500km of roads, interchanges and beltways by 2020.
Moreover, the first phase of the Dubai Metro is set to be completed in 2009. The Abu Dhabi 2030 Structural Framework Masterplan proposes to link all the Emirates and the mainland to Abu Dhabi island via high-speed rail.
Construction is also under way to build the Jebel Ali airport. In Saudi Arabia, infrastructure is being upgraded to facilitate movement between cities. The Saudi Landbridge will open up the Jeddah port to Riyadh and the Eastern part of the country. Furthermore, the addition of two low-cost airlines is expected to liberalise air travel.
CITIES. In Saudi Arabia, the development of Dammam, Hail, Tabouk, Knowledge Economic City, King Abdullah Economic City and Jizan Economic City seek to allow the country to meet needs through the centralisation of industry.
WATER AND POWER. A power grid linking the GCC is under construction. In Saudi Arabia, four projects are expected to be ready by 2010, increasing power production by 7,000MW and water production by 600 million gallons daily.
PETROCHEMICALS.Petrochemical capacity, particularly ethylene cracking, is set to undergo large expansion.
Ethylene cracking projects of 1.5 million tonnes are being undertaken by Saudi Arabia and Qatar’s Qapco Ras Laffan.
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