Fuel for thought


  • Share via facebook
  • Tweet this
  • Bookmark and Share
The cost of fuel in the UAE is the highest among GCC countries, and is set for further increases.

The cost of fuel in the UAE is the highest among GCC countries, and is set for further increases.

“We estimate that through improved efficiency, while maintaining the same economic growth, the increase in energy demand can be cut in half,” said Khalid al-Falih. “This is a highly desirable goal because increasing domestic consumption of oil reduces the export availability.”

“Today, even when the price of oil is very high or very low, it doesn’t really change the price at which oil is sold to industry, so it will be sold at $10 even when the price is at $100,” notes Dourian at Platt’s.

“If they continue with subsidised prices or controlled prices in the Gulf, then they’re going to have less crude for export. We’re talking in a decade’s time, but it will still have an impact.”

Iran, meanwhile, has nowhere near that long before the impact of unsustainable fuel subsidies is felt. The Islamic Republic now claims that it is self-sufficient in refined products, but it has already paid a heavy price for the import of gasoline which was then subsidised by the government. In November 2009, an official admitted that Iran needed an additional $3.8bn to pay for gasoline imports just until March 2010.

“The government paid a huge cost on the international markets, and then had to effectively give it away for nothing,” says Ciszuk. According to the IEA, Iran is likely to reduce gasoline imports by 75% by 2015 as it expands refining capacity and tackles subsidies. Imports will shrink to 100,000 bpd in five years from 400,000 in 2009, the IEA said in a report in July.

Tehran has reduced the volume of gasoline offered at a discount to 15 gallons per vehicle per month in an effort to curb consumption, and it has also sunk $2.2bn into the refitting of seven gasoline production and refinery facilities, to increase the country’s gasoline production to 55 million litres per day, from the current 45 million litres. However, the cost of the refitting could pale in comparison to its long-term impact on the Iranian economy.

“Petrochemicals facilities are geared to taking rather light products as feedstocks, and Iran has switched some to take Natural Gas Liquids (NGLs) and condensate,” says Ciszuk. “However those feedstocks are still heavier than what they would have got from the top scheme of refinery products, so it will inevitably lead to significantly higher attrition rates on the facilities.”

Ciszuk warns that facilities which were not designed to deal with the heaviness of the feedstock, or the output, will be run down prematurely – and that could deal a major blow to the country’s vital petrochemicals industry.

“When they finally at some point emerge from this international isolation, they will emerge in the worst possible state because their oil and gas industry is starting to suffer, and they will have run down their petrochemicals industry,” he says.

“It doesn’t bode well and will make a recovery even more costly, time consuming and hard. Thanks to sanctions they are very much struggling to get hold of modern technologies and solutions, and they’re losing know-how also, with the brain drain problem.”

While the situation in the Gulf is not as urgent as in Iran, the two do have something in common: low gasoline prices are a politically contentious issue and regional governments appear to be desperate to avoid scrapping subsidies or price controls entirely. Just last month (November), Iran said it would continue to provide motorists with rationed gasoline for another month, again delaying a subsidy cut which, it was feared, would ignite street protests. The subsidy phase-out had been due to start in the second half of the Iranian year, which began on September 23.

“You look at Iran, which has been under so much pressure to do something about it, and they have still chosen to put off meddling with their subsidies,” says Ciszuk.

“In places like Saudi Arabia and the rest of the Gulf, where the situation is not as dire yet, it will be even harder to deal with. It is tough and I think they will try to postpone it [for] as long as they can.”

“What will probably happen in places like Saudi Arabia is that they will change the price structure, but it will not hit the consumer, and nor will it apply to ‘value added’ industries, which presumably applies to the petrochemicals industry,” suggests Dourian.

“They will find ways to rationalise the use of fuel, but not make it more expensive to consumers – it’s a pride issue as they are one of the biggest producers in the world.”

In the meantime, the Gulf states at least have the money to make significant initial investments in alternative energy sources. Saudi Arabia, the United Arab Emirates and Kuwait have all committed to significant outlays on nuclear power worth billions of dollars, which would guarantee them relatively cheap energy for the lifetime of the reactors – and which might just keep prices down at the pump.

Related:
Join the Discussion

Disclaimer:The view expressed here by our readers are not necessarily shared by Arabian Business, its employees, sponsors or its advertisers.

Please post responsibly. Commenter Rules

  • No comments yet, be the first!

Enter the words above: Enter the numbers you hear:

All comments are subject to approval before appearing

Further reading

Features & Analysis
Saudi Arabia, Kuwait shared zone tensions underlie oilfield closure

Saudi Arabia, Kuwait shared zone tensions underlie oilfield closure

Crude output from jointly-run offshore Khafji oilfield has been...

Petroleum producers shift attention from Middle East: Kemp

Petroleum producers shift attention from Middle East: Kemp

Following four decades of war, sanctions, nationalisation and...

1
Back in business

Back in business

Iran’s tankers are back on the oceans as sanctions on the Islamic...

Most Discussed