‘Producer economies’ need to diversify, hedge against price volatility

Friday, 02 November 2018
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The International Energy Agency (IEA) has called on Saudi Arabia, Russia, Iraq, the UEA, Nigeria and Venezuela to step up efforts to diversify their economies to be able to cope with volatility of shale gas supply, and uncertainties over the pace of demand growth. In its Outlook for Producer Economies, the IEA assesses how the world’s six resource-dependent economies might fare until 2040 under a variety of price and policy scenarios. 

The volatility of hydrocarbon revenues, due to the rollercoaster in oil prices over the past 10 years, presents dilemmas for countries whose budgets depend on them, especially if their economies and finances are not resilient. Since 2014, the net income available from oil and gas has fallen by between 40% (in the case of Iraq) and 70% (in the case of Venezuela), with wide-ranging consequences for economic performance.

High oil prices slow down reforms

The rebound in oil prices to comparative highs are “a double-edged sword,” according to the IEA. Higher revenues provide the means to reform, but they can also appear to reduce its urgency. Higher energy prices, meanwhile, encourage production elsewhere while accelerating structural changes in demand, which affect the producers’ long-term markets.

In the face of higher energy prices, the UEA managed to cut its LNG import requirement over the past year by fast-tracking deployment of solar energy. “The gas price was around $1.10 per million British thermal units for some 15 years, but is now close to $3.00 per MMBtu,” the IEA noted.

Considering that many producing nations face strong pressure from youth unemployment, the Dr Fatih Birol, the IEA’s executive director says “fundamental changes to the development model of resource-rich countries look unavoidable.” More than 50% of the population living across the Middle East is under the age of 30; the proportion is more than 70% in Nigeria.” In many major producers, income from oil and gas will not be large enough to provide for these growing populations, even in scenarios where oil demand continues to grow to 2040 and prices remain relatively robust.

Different dilemmas in Russia compared with GCC

Looking at Russia, Qatar and Turkmenistan, revenue from LNG and pipeline gas “can provide a useful hedge against changes elsewhere” in the energy mix. “These producers face a range of dilemmas arising from a rapidly changing global gas market, but overall gas consumption is higher in 2040 than today in each scenario that we examine, including the sustainable development Scenario,” stated the IEA.

In contrast, domestic gas production is barely keeping up with demand growth in many nations in the Gulf Cooperation Council. In the GCC, gas consumption has been fueled in the past by associated gas, available essentially at zero cost as a by-product of oil production.

A surge in gas use and limited availability of associated gas now require that gas be sought and produced as a commodity in its own right, and often imported. Across the GCC; gas demand has risen two-and-a-half times since 2000, with around half of this growth coming from power generation. 

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