Complex Made Simple

Professional planning needed in the face of oil crisis

The global energy sector has changed dramatically over the years. Roughly 20 years ago, oil was $12 per barrel and natural gas $60 per barrel. Today sees the exact inverse: oil is now $60 per barrel and natural gas is $12 per barrel.

The United States is converting import terminals to export terminals to compete with countries such as Qatar and is already supplying markets in the Gulf Arab states.

As part of its new energy roundtable series, the Arab Gulf States Institute in Washington (AGSIW) hosted a roundtable discussion with Majid Jafar, CEO of Crescent Petroleum, in conversation with Roger Diwan, Vice President of IHS Financial Services at IHS Markit.

Causes for success

Jafar identified a unique combination of factors that have brought success to the US, such as the trading prices of crude and gas, unrivaled pipeline infrastructure, and the depth of capital markets.

Additionally, Jafar stated that the US is the only country where the landowner owns mineral rights, including petroleum, whereas in the rest of the world, those are sovereign rights. Despite these unique circumstances, which cannot be exactly replicated by other countries, Jafar suggested that there are key lessons that the world can learn from the United States.

Germany – Flawed energy policy

One major lesson is that energy policies worldwide should be planned in a long-term, strategic, and professional manner. Jafar mentioned Germany’s local state elections that drove a flawed energy policy, switching from fossil fuels and nuclear power to renewable energy, which was coupled with heavy subsidies.

This change has become a disservice to both the German economy and environment, stunting economic recovery, and ironically increasing carbon emissions due to the importing of lignite coal from the United States to burn for power.

Through a political desire to move beyond fossil fuels, the implications of these energy policies were not fully considered. Jafar argued that energy policies should be taken as seriously as national defense policies, as consequences of failed energy policies can be grave.

US – Lowest energy costs in the OECD

With the shale revolution and the rise of natural gas, the United States has achieved the lowest carbon emissions and lowest energy costs in the OECD. Industries and petrochemical manufacturing are now moving back to the US, which is competitive with the Gulf.

Jafar stressed that natural gas must not be seen as the problem, as it is natural gas that has achieved cost and emissions savings for the US like nothing else.

UAE – Key to sustainability

The key to sustainability, according to Jafar, is for energy to be economically advantageous and good for the environment.

The United Arab Emirates can be taken as an example for long-term, strategic, and professional energy planning. It has developed new energy policies to 2050 that reflect the understanding that natural gas and renewables work well in unison, and that the two together will lead to an energy infrastructure that is cost effective as well as good for the environment.

Energy independence – The myth

Jafar next addressed the myth about energy independence in the United States. Outside influence is important to the US economy and its energy sector, as falling oil prices have led to huge job losses and stock market declines.

Becoming the biggest oil producer in the world means that the United States is more dependent on the energy sector.

Middle East – Challenges ahead

Jafar then turned to the Middle East and analysed the challenges that the region faces. One major problem in the region is that states have too big a role in oil and gas management and investment.

Additional issues include governments’ delayed payments to oil companies, security issues, contractual stability, and subsidies, all of which regional countries are trying to tackle. The state does need to play the regulatory role and ensure revenue maximisation, but regulatory regimes are not allowing enough investment from the private sector, Jafar commented.

In addition, contract models in the Middle East are driving US companies to options elsewhere that have a balance in risks and rewards.

Jafar concluded by reiterating that the key challenge is having an oil and gas company that is cost-effective, which will attract international investors. The US and Gulf energy sectors are very synergistic, as seen through recently increased collaboration between the two.

Jafar suggested that instead of focusing on OPEC as a cartel, focusing on demand that is driven by policy is more important in the medium to long-term. While the US private sector has driven innovation, the state’s ability to invest in manpower and infrastructure should not be underestimated.