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An outlook on gas in the GCC

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GCC governments must apply commercial principles to the management of their gas portfolios to drive GDP growth and create employment, says Strategy&.

editor's pickThursday 02, May 2019

Gulf Cooperation Council (GCC) governments could generate $10 billion yearly in additional GDP and foreign earnings or support the creation of 100,000 jobs by applying commercial principles to the management of their gas portfolios, according to Strategy& Middle East.

Countries of the region have long benefited from an abundance of cheap gas that exceeded their needs, however, demand for this finite resource is growing as result governments must start making hard decisions about how best to use it. In a recent report, Strategy& Middle East stated that a modest increase in the gas price of just $0.5 per million.

British thermal units (mmBtu) would add more than $6 billion per year to GCC government coffers. David Branson, the Executive Advisor with Strategy& Middle East, said, “The days of abundant cheap gas in the GCC are over, governments now need to take a more strategic approach to manage the gas sector so that they use their gas resources more efficiently.”

A recent research by Strategy& Middle East outlined three key areas where GCC countries must act to capture the benefits and unlock significant value in the gas sector. GCC governments should allocate gas to create socio-economic value as the balance between supply and demand shifts.

Strategy& urged GCC countries to create more coherent and proactive strategies that allocate gas to enduse sectors based on their relative contribution to each country’s socio-economic targets. Additionally, governments can economically benefit from providing gas to the industry as feedstock for petrochemicals such as fertilisers, methanol and fuel for energy-intensive industries.

Dr. Raed Kombargi, Partner with Strategy& Middle East, said, “The country that moves first to embrace commercial principles will become the prime candidate to be the GCC gas hub of the future.”

Currently, Qatar’s gas market is dominated by exports, Saudi Arabia allocates most of its gas to the industry while the UAE’s gas is more evenly distributed across all four end-uses with a higher share going to gas-fired power generation plants and to maximise oil production.

However, using gas to ensure a cheap and reliable source of power in the country can lead to a larger payoff because it supports economic diversification and the development of the services sector”, added Dr. Shihab Elborai, Partner with Strategy& Middle East.

Gulf countries should also price gas to reflect its true value. Strategy& said that a significant problem for the GCC governments is that overall gas pricing is opaque, and prices remain artificially low by international standards.

Similarly, the increasing demand for gas and increased fiscal pressure on governments are making pricing issues more urgent. Rather than consider gas operations as cost centres linked to oil production, GCC governments are urged to treat gas centres as separate, profit generating entities, with operations and wholesale prices that reflect the true value of gas.

According to the report, one approach to do this is ‘cost-plus pricing’, which factors in all costs needed to deliver gas to an end-user, including supply and transportation costs and a government margin. The cost-plus pricing model is applied to gas destined for domestic consumption.

Additionally, another approach is ‘net-back pricing’, which indexes gas prices to the price of the end-products that use gas as a raw material. The ‘net-back pricing’ approach ensures that governments accurately capture the value of gas rather than allowing a manufacturer to benefit from artificially low prices. Net-back pricing is commonly used for gas that is exported.

Gulf countries should take a more strategic approach to manage the gas sector so that they use their gas resources more efficiently, added Branson. GCC governments should also implement structural reforms to ensure that the right market structure and institutions are in place to support more strategic gas allocation and accurate pricing.

Strategy& underlined that Gulf governments can establish a gas aggregation institution to coordinate gas sales and purchase agreements which will lead to greater transparency, higher government revenue and margins as well as lower risk.

Similarly, an independent regulator could also be created to ensure that gas companies operate fairly and provide equal access and treatment to all sector participants. The regulator could also advise policymakers, conduct due diligence on all market participants as well as resolve disputes and increase energy efficiency.

GCC governments must develop a comprehensive strategy to allocate gas among end-users and price it to reflect its true value, the country that moves first to embrace commercial principles will become the prime candidate to be the GCC gas hub of the future, said Kombargi.

Governments in the Gulf must start to implement economic principles that culminate in economic diversification, creation of employment among other economic benefits. To accomplish the implementation of economic measures, governments must reform the market structure to create dedicated gas aggregation and transportation companies which are supervised by an independent regulator to promote efficiency across the gas sector.

TAGS : LNG

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