The Fuse

The Hydrocarbon Pivot of Qatar and the United Arab Emirates 

by Andrea Alie | April 05, 2017

The oil price crash, precipitated by booming U.S. shale oil production and OPEC’s November 2014 decision to sustain high output, has stressed countries heavily dependent on oil export revenues and forced them to rethink current policymaking. The UAE and Qatar, which rely on the export revenues derived from oil sales to fund government programs and support economic development, are making efforts toward the twin goals of reducing expensive fuel subsidy programs and diversifying exports through larger natural gas volumes.

Heavy dependence on oil revenues

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Many oil-exporting countries are pivoting to economic diversification strategies and are making bigger bets on foreign investment and external partnerships. Nowhere are these trends more apparent than in the Gulf countries, where the UAE and Qatar have developed new national strategies to decrease their heavy dependence on hydrocarbon export revenues, which account for approximately 40 percent and 55 percent of their GDPs, respectively (some OPEC countries are even more dependent by this measure).

Major reserve holders and producers

Both countries are longstanding members of OPEC and as such are participating in the agreement to reduce blocwide oil production by 1.2 million barrels per day (mbd). Prior to the cut, the UAE was OPEC’s fourth largest producer, and it also holds the world’s seventh largest proven oil reserves in the world at 98 billion barrels. Qatar maintains a presence on the international stage as OPEC’s tenths largest producer and possesses the thirteenth largest oil reserves globally at 25 billion barrels.

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Oil production continues to rise

Qatar has consistently expanded its oil production levels since 2002, from 0.77 mbd to 1.9 mbd in 2015, growing even after the 2014 oil price crash.

The UAE’s vast reserves make oil production relatively inexpensive—the country is one of lowest cost producers in the world at $12.30 per barrel—allowing for high production capacities. The UAE’s oil production grew by nearly six percent to 3.9 mbd in 2015 year-over-year. As in Qatar, the UAE’s oil consumption has steadily increased since 1990, facilitated by large fuel subsidy programs. However, these subsidies are being phased out to stop the fast depletion of reserves and to curb rising consumption. Meanwhile, Qatar has consistently expanded its oil production levels since 2002, from 0.77 mbd to 1.9 mbd in 2015, growing even after the 2014 oil price crash. In the intervening period, domestic oil consumption experienced a six-and-a-half-fold increase. As in the UAE, large government subsidies and high revenues prior to 2014 allowed for Qatari consumption to rise unchecked. However, given the present price climate, this trend has since been targeted by government reforms, including the elimination of expensive fuel subsidies.

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Consumption higher than OECD average  

Consumption per capita is double the OECD average, highlighting the burden of high domestic fuel demand.

While OECD consumption per capita has remained steady, Qatar’s consumption is comparatively more volatile. It experienced a decline in oil consumption when market prices were steady, but increased when oil prices peaked at $121 per barrel in July 2008. The UAE is steadily working to decrease its oil consumption, which leveled off in 2012. Consumption per capita nevertheless remains double the OECD average, highlighting the burden of high domestic fuel demand, which has strained the finances of Qatar and the UAE during these times of low oil prices.

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Pivot toward gas production

Qatar is uniquely positioned among its regional counterparts as the world’s largest exporter of LNG.

Qatar is uniquely positioned among its regional counterparts as the world’s largest exporter of liquefied natural gas (LNG), holding reserves of 866 trillion cubic feet. Its easily accessible offshore gas reserves and current utilization of coastal energy infrastructure strategically positions the small peninsular country in the global LNG export market. Qatar has focused its expansion efforts on the LNG market, creating a network from the United Kingdom to Asia, diversifying its exposure to volatile oil prices. The UAE’s development of gas fields has until recently remained steady as it signed new production agreements with savvy industry producers in order to capitalize on existing technological know-how.

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Lifting the financial burden of subsidies    

In 2012, the UAE spent nearly $25 billion on gas, oil, and electricity subsidies while Qatar hovered around $6 billion. As part of their economic diversification strategy, the UAE had been decreasing subsidy spending even before the oil price crash in 2014 to lessen government losses. The 2016 subsidy numbers will be starkly different as Qatar and the UAE enacted legislation to remove the majority of their fuel subsidies by changing the pricing mechanism to reflect international fuel prices. However, prices still remain artificially low: In March 2017, the price of regular gasoline in Qatar was equivalent to $0.44 U.S. dollars, 30 percent more than the price in June 2016.  

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While subsidy removal is a positive step forward, more aggressive reforms are needed as oil prices have yet to rebound past $60 per barrel.

The 2014 oil price crash taught oil exporters such as Qatar and the UAE that reliance on high oil prices is not a sustainable model for economic growth. While subsidy removal is a positive step forward, more aggressive reforms are needed as oil prices have yet to rebound past $60 per barrel. The UAE will continue its diversification pursuit via the UAE Centennial 2071, a reform map which targets increasing oil field productivity and continuing its gas market expansion. Qatar, meanwhile, needs to aggressively grow its oil production capacity to regain lost market share in 2016, when it slid within OPEC to the tenth largest producer from eighth in 2015. To defend its LNG market share, Qatar is planning capacity expansion projects such as development of North Field, an offshore gas reserve, to prevent Australia from becoming the number one exporter in 2019.

 

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