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Energy markets: US up, Middle East down

Thursday, the Atlantic Council hosted a talk on energy policy entitled “The Future of Energy Markets: The Other Middle East Revolution.” The event featured Majid Jafar, Chief Executive Officer of Crescent Petroleum as the key speaker. Richard Morningstar, Founding Director of the Global Energy Center at the Atlantic Council moderated the event.

Jafar recounted the changes in the energy markets in the past 15 years. In 2000, the price of oil was in the low teens and natural gas was $10. The US was an importing country, which meant it was building LNG terminals everywhere. The Middle East was relatively stable. More than a decade later, the price of natural gas has plummeted again, but the US has become an exporting country. The shale oil and gas boom has led the US to convert its LNG terminals for export. Equally if not more importantly, the Middle East has become very unstable.

US Private Sector

Jafar also emphasized the power of US private sector. He claimed the energy breakthrough was despite rather than because of government policy and lauded the US for its long-term strategic energy planning. The US has experienced a large drop in carbon emissions while seeing huge job creation in the oil and gas sector. In contrast, European countries, such as Germany, set ambitious targets like zero fossil fuels and made a mad dash for renewable energy sources. This move stifled the Germany economy and inflicted huge costs on Germany households and industries. Ironically, Germany is experiencing rising emissions and is having to import coal from the US.

Lessons Learned

The CEO shared three lessons he had learned from his experience in the energy industry:

1. Do not underestimate the power of the US private sector, especially in the energy industry. Huge innovation can drive many changes.
2. Never underestimate the ability of the Chinese public sector to complete their plans. The East-West pipeline is a classic reflection of the Chinese capability in completing large-scale projects.
3. Never underestimate the ability of the Middle East public sector to get things wrong.

Jafar added that the unique US ecosystem cannot be replicated elsewhere. It includes infrastructure, capital markets, energy trading hubs, many small companies and a system of mineral rights. However, other countries can learn to provide better access to finance, encourage competition and transparency, and expand their private sectors.

The Middle East

The Middle East contains half the world’s proven oil and gas resources but accounts for less than a 1/3 of global oil exports and less than a 1/6 of global gas exports. The region has experienced a declining market share due to numerous conflicts, years of Iran sanctions and poor policies. Energy subsidies in particular pose major problems. The region has lost $225 billion to subsidies, which do not even help the poor people who are supposed to be the beneficiaries. The good news is that the current low oil prices provide many countries the opportunity to reform subsidies, because the gap between the market price and subsidized price is small.

Egypt is a good example. It has committed to reforming energy subsidies, because they are unsustainable and divert money from important areas of investment that create jobs. Egypt’s spending has been divided between debt service, salaries and subsidies, which left the government with little to spend on investment, infrastructure and jobs.

Another problem with the region is the dominance of national oil companies, which hinder competition and positive performance. When an energy minister is also the chairman of the oil company, there is no difference between the regulator and the regulated, which hurts policymaking. Some countries, such as Kuwait, Iran and Saudi Arabia, have realized this and partnered with private investment companies. Jafar said he is not calling for complete privatization, merely a bigger role for the private sector in developing state assets.

Iraq

Jafar also detailed Iraq’s important role in the energy world. The failing state is responsible for 40% of global oil export growth despite failure to pass hydrocarbon legislation, a lack of internal consensus on energy policy and the ISIS presence. Iraq’s production is nevertheless at an all-time high, making it the second biggest producer in OPEC. If Iraq gets its act together, it could produce 6-12 million barrels of oil per day. Iraq may have larger oil reserves than Saudi Arabia—at least 300 undrilled structures lie in the Western desert.

The Kurdistan Regional Government (KRG) has done well in passing legislation, working with private companies and essentially getting the policy right. But it faces implementation challenges because the Baghdad government is unable to pay the KRG for its oil. In southern Iraq, the latest market methods have been used with transparent bidding rounds involving private companies. However, the decision to sign service contracts was a bad one, because it means southern Iraq has to pay private oil companies a fixed fee regardless of the price of oil. With the oil price collapse, southern Iraq can no longer afford to pay the companies and is discouraging investment. A new contract model is needed where companies receive a percentage of the government’s oil profits, as opposed to a fixed fee. More importantly, a stable security environment is needed to encourage continued investment.