By Andrew Torchia
Gulf governments are starting to react to concerns that a shale revolution in the US and elsewhere could put a dent in state revenues by lowering exports of their most precious natural resource
At an OPEC conference in Vienna in December, the oil minister of the United Arab Emirates was outspoken — unusually so for a top Gulf Arab official — about the threat to the cartel from rising US oil and gas production.
The US shale energy revolution is a “big issue”, Mohammed Bin Dhaen Al Hamli told the meeting of the Organisation of Petroleum Exporting Countries. OPEC, he said, should protect itself by making its oil more attractive to the world’s consumers.
OPEC decided in Vienna not to change its output policy, and since then most Gulf officials in public have stayed sanguine about the prospect of new technologies unlocking hundreds of billions of barrels of oil in the United States and elsewhere.
But Al Hamli’s remarks revealed growing concern about shale among Gulf policymakers and businessmen, which may eventually lead to a shift in economic strategy in the region.
Gulf Arab countries have ridden out the last few years of political and economic turbulence by using petrodollars to pay for large, continuous increases in state spending on social welfare and infrastructure projects.
The rise of shale energy, which could in the long term pull down oil prices and slow growth in demand for supplies from the Gulf, suggests the day is approaching when the region will no longer be able to afford that strategy.
Governments will therefore face growing pressure to create jobs in other sectors and stimulate non-oil parts of their economies. Efforts to move citizens into the private sector, and develop new industries to accommodate them, are likely to accelerate.
Business cooperation between Gulf Arab countries, in areas from financial markets to building a regional railway, may strengthen. Some economists already detect the beginnings of a policy shift.
Mark McFarland, chief investment strategist for the wealth management business of Emirates NBD, Dubai’s biggest bank, says that visiting Saudi Arabia to meet clients last month, he found the shale threat was causing a “rethink” about economic policy.
Among government officials and businessmen around the Gulf, “there is concern at the micro level: how are we going to replace our primary source of income?” he says.
Concern about the shale revolution — a catch-all term for obtaining oil and gas reserves with new technologies from unconventional deposits in the United States and around the world — has increased over the last several months.
Hamli’s remarks in Vienna followed an International Energy Agency report in November that predicted the United States would overtake Saudi Arabia and Russia as the world’s top oil producer by 2017. North America will be a net oil exporter by around 2030, with the United States becoming almost self-sufficient in energy by 2035, it said.
Gulf officials argue it is far too early to assume they will lose their strong position in global energy markets. Forecasts about shale depend on assumptions about technology, reserves and profitability that will take years or decades to play out.
Even if demand for oil and gas imports drops in the West, it may simply shift to the fast-growing economies of the East such as China and India.
“We are always talking about added capacity and supply, but the need for gas is increasing more than any other energy form,” Mohammed Saleh Al Sada, energy minister of Qatar, the world’s top liquefied natural gas exporter, says. “In the incremental increase through 2035, shale represents half. But the other half is still conventional.”
If unconventional oil and gas supplies soar, the Gulf will still have a cost advantage in competing with those supplies. Producing oil from US shale is estimated to cost around $50-75 a barrel; in the Gulf, production costs are often less than $20.
The Gulf’s room to use that advantage to stave off the shale threat is narrowing, however. Because of the sharp rise in its spending, private analysts now estimate Saudi Arabia’s government needs an oil price of $65-$85 to balance its budget, up about $20 over the last few years. So a sharp drop in the price could hit Riyadh’s finances even if it keeps market share.
Saudi oil minister Ali Al Naimi discussed the impact of rising shale oil production with OPEC’s secretary-general Abdullah Al Badri at a meeting in Riyadh in January, Saudi state media reported without giving details of the talks.
In another sign that the Saudis are taking shale seriously, state-owned Saudi Basic Industries Corp, the kingdom’s biggest petrochemical firm, said in November that it was considering whether to invest in the US shale gas boom.
“We have to participate in the shale gas business and we have to participate in other sources that can also be competitive,” says chief executive Mohamed Al Mady.
In some ways, Gulf Arab countries are better prepared to ride out any drop in the oil price than they were during their “lost decade” of the 1980s, when a sustained plunge in oil prices forced them into multi-year recessions.
With oil averaging well over $100 in the past couple of years, they have built up hundreds of billions of dollars of financial reserves, which they could use to maintain state spending for years even if their oil revenues shrank.
“The impact of shale could well be that the Gulf countries end up saving less, not that they spend less,” says Neil Shearing, chief emerging markets economist at Capital Economics in London. “And we’re probably talking about a process that would occur over decades, not years.”
Still, at the very least, shale means Gulf states can no longer assume global economic growth will keep boosting their revenues into the next decade. In the last few months, several countries have stepped up efforts to prepare for tougher times.
One focus is moving Gulf citizens into the private sector, to reduce the burden on state finances of employing them in the public sector or paying jobless benefits. Saudi Arabia launched a new tax to pressure firms into hiring Saudi citizens rather than cheaper foreign workers; the UAE said it was considering labour law changes to make private sector jobs more attractive.
Governments are also taking steps to diversify their economies away from oil. Saudi Arabia began liberalising its aviation sector, allowing new entrants; Oman announced new industrial projects such as a $400m steel plant, and established a state fund to back small-scale entrepreneurs.
Fresh talks were held between governments on a multi-billion-dollar railway system linking Gulf countries, which could be a big help in preparing the region for the shale threat by facilitating non-oil trade and new industries.
More radical reform may not be forthcoming unless the shale threat looms larger. Creating common capital markets in the Gulf could boost private investment by making it easier for money to flow around the region, but political rivalries may continue to block this.
A key step would be for governments to cut their near-total reliance on oil revenues by introducing income and sales taxes. But while a region-wide value-added tax has been discussed for years, authorities are reluctant to move ahead with the plan, which would likely be unpopular among their citizens.
Nevertheless, the shale revolution could eventually prompt a fresh look at these issues too.
“The effects of shale gas production in the US and its impact on the fortunes of Saudi Arabia’s petroleum industry have clearly started to concentrate minds,” Emirates NBD’s McFarland says.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
There is so much shale in Canada we do not have to look any more. In Saskatewan large deposit of tradition oil supplies are still been located. Off shore oil and gas, oh my it may well be more than 100 years of sales and supply to local and internationals markets. Canada's Great barrier deposit in Ontario private developers looking shale oil deposits have located massive gold deposit. Yes the worlds wealth is shifting and that's only our piece of it. Russia and China working hard to access there resources also.As my family in Saskatewan say do not for get the potash : )