Outdated Addiction - Weaning the Middle East off Oil Dependency

EMERGING MARKETS

BY AMY MCLELLAN

OUTDATED ADDICTION Weaning the Middle East Off Oil Dependency

An expanded refining industry in the Middle East will require a huge amount of power generation.

Agility

The 2014 oil price collapse was a timely reminder for the oil dependent economies of the Middle East of what could happen when the age of oil comes to an end.

A protracted price slump saw budget deficits balloon, debt escalate and austerity measures bite. Analysts have subsequently said that it is increasingly clear that for these petrodollar economies, it is not just diversification that is required but whole-scale structural transformation in order to build resilient modern economies and support jobs and living standards.

According to the World Bank, infrastructure needs in the region are estimated to be US$100 billion annually, with a focus on electricity generation, transportation, water and sanitation, and information and communication technologies. These needs won’t be met unless economies can be weaned off an addiction to subsidy and state control. There’s a ticking clock on this reform process. Growing international pressure, supported by fast-paced technological advance, aims to curb the world’s appetite for fossil fuels in order to avert catastrophic global warming later this century.

THE DIVERSIFICATION PATH

It’s clear that some in the region are taking the diversification agenda seriously. But this doesn’t mean turning off the oil tap; instead, the focus is on adding value so that every barrel not only generates more income, but also builds skills and knowhow and spawns new industries and commercial opportunities. A huge expansion of the refining sector is underway, both in the development of existing facilities and the construction of greenfield sites.

“This is an industry that we expect to gain a lot of traction,” said Mohammad Jaber, chief operating officer of Agility Abu Dhabi and regional director for project logistics Middle East. “Many of these

Mohammad Jaber, Agility Abu Dhabi

projects are now coming to the bidding stage, suggesting we will soon see a shiftfrom selling crude oil to value-added products.”

Indeed, Jaber reported that the outlook for new projects is very strong, with bidding for new refinery projects in Bahrain, Saudi Arabia and Oman opening in the next three to six months — all of which exceed US$20 billion in capex — along with bidding on logistics contracts for huge new offshore and petrochemical projects.

“This will create new local industry within countries in the Gulf Cooperation Council, or GCC, which will help to boost and diversify their economies,” he said.

An expanded refining industry will require a huge amount of power generation, and a range of energy sources, from fossil fuels to renewable energy and nuclear, are being developed to feed into the grid.

“As all of these projects will require large amounts of construction, in the next four years, we expect that Middle East/Africa, Iraq and, particularly, the GCC region will need high volumes of project cargo and other shipping and freight forwarding in order to obtain the necessary materials,” Jaber explained.

These projects are being developed in synergy with new industrial zones – and the roll-out of new, investor-friendly business packages – along with the development of allied infrastructure, from the construction of commercial buildings to airports and healthcare.

“All of these will fuel local economies and require excellent logistics in order to run smoothly and source the relevant materials,” Jaber said.

FRONTRUNNERS ALREADY SEE BENEFITS

Of course, the Middle East isn’t one homogenous area. Some countries are making better progress than others, with the UAE and Saudi Arabia leading the charge, not only making huge investments in clean energy, tech and infrastructure, but also reforming their regulatory regimes, VAT and immigration policies to support investment and diversification.

Oman, Kuwait and Bahrain are also making solid progress. Oman, for example, has established special economic zones, privatized management and strengthened academic and professional training, and is focusing on manufacturing, chemicals, mining, logistics and tourism to strengthen its economy. Progress to date is encouraging, with the World Bank noting that oil’s contribution to Oman’s GDP dropped from 46 percent in 2011 to 20 percent in 2015, while employment and labor force participation increased steadily over the same period.

For those in the logistics and project cargo industries, the emergence of new sectors presents an opportunity for those with the right skill set.

“All of the new projects being developed in the region, and the numerous products that they will produce, are going to stimulate high demand for local logistics and project cargo companies,” Jaber said. “It won’t be possible to succeed with this increased volume and turnover by using the old style of logistics. To scale up effectively, logistics providers will need to start using digitalization, automation and robotics to be able to meet demand. They will also need to be able to adapt to the changing business environment by being agile and using this to increase productivity.”

Agility, for example, has invested in a new fleet of vehicles in Abu Dhabi, with the lower-emission 2019 models automating many driver functions, especially those related to quality, health, safety and the environment, and addressing the need for double-trailer transportation.

“This extra capacity allows us to deal with high volumes of freight efficiently and to support shippers and end users by offering better value for money,” Jaber noted.

IN-COUNTRY PRESENCE

Scott Wilcox, CEO of Dubai-based Sicuro Group — which this summer was appointed the exclusive operations partner of the Oil Operations Center in Basra, southern Iraq — also sees huge opportunities across the region, from the redevelopment of the southern oilfields of Iraq to emerging mining industry in Afghanistan and the impact of China’s ambitious Belt and Road Initiative. Capturing those opportunities, however, requires an in-country presence.

“You have to be present,” Wilcox stressed. “Trying to do this from far away is impossible. You need to be there to understand the nuances of working in the region and manage expectations on timelines, and have the right systems in place.”

This is particularly the case when it comes to the import and onward transit of goods.

“There’s an ever-changing landscape of sanctions and import/ export restrictions that has to be navigated, and you can often do so by juggling rules for as many as three or four jurisdictions on just one shipment,” he explained. “Even goods that may be commercially benign can be sensitive if they could be repurposed by the end user, and that applies to common equipment such as GPS, walkie-talkies, personal protective equipment and even pipes used in oil and gas fields. These restrictions can impact time for delivery or add expensive constraints, such as stipulations that they must be directly moved by air rather than road, and these are not always well understood outside the region.”

Seasoned operators like Sicuro Group, Wilcox said, act as a bridge, helping ensure the smooth and timely transit of goods.

“Experience matters,” he said. “To be successful here, you need knowledge of the region, cultural awareness and emotional intelligence,” he said.

Wilcox pointed out that the Middle East is a very diverse region, made up not only of countries with different cultures and languages, but also very cosmopolitan populations.

“India is a major trading partner and has a huge influence, so when you’re working here, you will be dealing with people from the Indian subcontinent along with South Africans, Brits and people from all over the world,” he said.

Shipping companies, however, continue to face the headwind of a glut of tonnage. Denis Bandura, managing director of Dubai-based BBC Chartering Mideast, a multipurpose carrier in the region, welcomed the diversification push, including the growth of a local steel industry as well as construction. However, he said it’s still not enough to soak up an oversupply of tonnage in the region or stimulate newbuild activity.

Even so, he’s cautiously optimistic about the future.

“I hope the outlook for 2019 and 2020 will be further growth and diversification in the region, but there’s so much volatility, it’s difficult to make predictions. Who would have thought that Iran would be closed again?” Bandura said.

DERAILING DIVERSIFICATION?

The renewed U.S. sanctions on Iran lifted oil prices to four-year highs – on Oct. 3 Benchmark West Texas Intermediate peaked at US$76.41 per barrel before dropping to US$62.83 on Nov. 5 when the sanctions were re-imposed. Could fluctuating prices undermine the impetus for economic reform?

Sicuro’s Wilcox thought that oil revenues will continue to aid the diversification effort. “It’s the price of oil that’s going to pay for this,” he said. “It will be reinvested into sustainable diversification projects.”

Agility’s Jaber pointed out that in-country value requirements mean diversification is here for the long term. “This has fueled growth for local factories and fabricators, allowing them to upgrade their technology and expand their business,” he said. “In Saudi Arabia, Oman and the UAE, this competitiveness means that products are beginning to be exported to other countries and even other continents.”

Instead, Jaber saw the potential brakes on the push to diversify as being geopolitical instability, the VAT learning curve and the region’s energy costs until such time as renewable projects and nuclear power begin to make an impact on the market. Given the investment and structural reforms already underway in the region, however, it looks like the push to diversify the region’s petrol-dependent economies could be slowed but will prove increasingly hard to derail. BB

Freelance journalist Amy McLellan has been reporting on the upstream oil and gas and maritime industries for 20 years.