New investment models needed to boost Mena oil and gas competitiveness

Private sector companies have a role to play in the region's energy sector

Analysts have noted that Opec's meeting on Friday could be its most politically fraught-ever. Stefan Wermuth/Bloomberg

As energy ministers and industry leaders gather in Vienna this week for the Opec International Seminar, the news headlines will likely focus on quotas, price bands and oil diplomacy.

But important conversations will also take place on the sidelines around the Middle East and global outlook for oil and gas investment and the sector’s long term contribution to a world concerned more than ever with sustainability.

There has been a worrying downturn in oil and gas capital investment in recent years, with total spending falling by 45 per cent since 2014 as oil prices declined. This trend, together with geopolitical concerns about Venezuela and Iran, has led to a sharp rise in oil prices again this year. And as Opec considers lifting production limits this week, the level of investment in the sector has become a central issue.

A key recent development has been the shale revolution in North America, which has had a profound impact on the global outlook for oil and gas. Fracking has debunked the myth of “peak oil” - the 1990’s meme that the world would run out of oil - and has led to US and Canadian oil production today reaching the level of Saudi Arabia and the UAE, respectively.

This rapid rise could not have occurred without the small and medium sized ‘independent’ producers who were willing to apply new technology and techniques - and take major risks - to produce oil from impermeable rock formations. The private sector has brought much needed investment and new thinking to the industry worldwide, and has served as an important partner for governments to ensure long term sustainability of oil and gas reserves.

In the Mena region, the private sector has played a smaller role in the oil and gas sector. Although services companies do support the industry, the sector over the past four decades has been dominated by the national oil companies with a limited role in some countries for a few large multinational oil majors.

As a region we are still not fulfilling our true potential in global energy competitiveness at a critical moment when other regions are competing for market share more than ever before. More than half the world’s proven oil and gas reserves are found in the Mena region, and we are blessed with the lowest average cost per barrel. But we still export only about one third of the world’s oil and only a sixth of its gas supplies. 

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At the same time, oil and gas investment in Mena has fallen behind. The Arab Petroleum Investment Corporation estimates the region needs at least $320 billion in investment over the next five years, while many governments face constrained budgets and competing demands from infrastructure, health and education. 

Our region needs new models that will create the right incentives for upstream investment in exploration in new areas, enhanced recovery from mature fields, and gas development, where the region continues to lag despite growing demand from the regional power and industrial sectors. All these are well suited to an enhanced role for private investment and project management.

The recent upstream bid round announced by Abu Dhabi National Oil Company, which broadens the private sector’s role in the oil and gas industry in the emirate, as well as the planned initial public offering of Saudi Aramco, are examples of important new developments to accelerate the progress in this area and also present good models for collaboration.

Further progress in tackling energy subsidies must proceed hand-in-hand with this process, since it will be difficult to attract enough investment in exploration and production if end-user prices for petrol or electricity remain below cost as they do in many countries in the region. That is not to say that energy subsidies should be abolished entirely, but they can be made more targeted to assist those most in need.

Our industry must also do a better job of explaining how responsible development and utilisation of oil and gas is a vital part of the solution as the world transitions towards a more sustainable economy. The switch from coal to cleaner burning gas-fired power generation has already had the fastest and greatest impact in lowering carbon emissions and could readily further reduce global CO2 emissions by a dramatic 15 per cent, with the Mena region, providing a major potential source of that additional gas.

When the UK transitioned from coal-fired power to gas-fed electricity supported by wind power, it cut its CO2 emissions to Victorian-era levels.  The US has also seen carbon emissions fall to the 1992 levels in the switch from coal to gas, thanks in large part to the shale gas revolution. And China and India have recently made the same commitment to reduce urban smog, which will hugely also benefit global emissions’ targets. This is critical since with all the excitement around electric vehicles today, if the electricity generation feeding them is not clean, the benefits for the environment will be local and limited. And global oil demand continues to grow, with petrochemicals, trucking, air transport and freight, and shipping all major growth markets as economies grow, especially in Asia.

Oil and gas development will thus play a vital role alongside renewables and other sources of energy going forward. The UAE's well-considered and far-sighted energy policy highlights this complementary nature with renewables, with natural gas and renewables each contributing 40 per cent to the national electricity mix in 2050. It is a powerful model for others to emulate.

As governments across the Mena look to attract more investment and to maximise their resources, private sector companies like Crescent Petroleum, now in our fifth decade as an oil and gas operator based in the UAE, look forward to making our positive contribution in this next important phase of the region’s energy industry development.

Majid Jafar is CEO of Crescent Petroleum, and Board Managing Director of Dana Gas.