26 > QATAR TODAY > APRIL 2014

development > listening post

ALERT: A HUMAN CAPITAL CATASTROPHE

QATAR TODAY > APRIL 2014 > 27

Hilda Mulock Houwer, Global Advisory Leader, Energy and Natural Resources at profes-sional services firm KPMG, is not short of subjects to debate or content to talk

about. Energy dynamics is of course her pet mission, but women's empowerment in the energy sector takes precedence. She laments the lack of women in the energy sector, especially in developing countries. She also warns us about a looming calami-ty. “A human capital catastrophe is going to hit the energy sector," she highlights, as “all experienced professionals in the oil and gas industry are either leaving the country or retiring from their jobs”.

This is why she stresses the importance of training more professionals, Qataris and others, in the energy field, and encourages more Qataris to choose this dynamic sector as a career option. “It is now unconven-tional versus conventional, so we need new skillsets, which are not necessarily there. The pipeline of oil and gas technicians and the level of skills required are not sufficient to fill the gap,” she says.

Asia is coming up, and there will be a huge middle-class that will come on board as spenders. Governments, shaken by the

strong tides of the Arab Spring throughout the region, have employed more young na-tionals in the public sector. The Interna-tional Monetary Fund has estimated that public spending in the GCC increased by 20% in 2011 from the previous year. It fol-lows from this spending spree that the price of oil needed to balance budgets is at a his-toric high and rising further. This economic strain impacts the national energy industry in two ways. First, the obvious remedy for the budget crunch is to pump more oil and gas, which can pose a technical challenge for national oil companies. Second, the en-ergy industry is called on to create more jobs for nationals and opportunities for the private sector.

Houwer talks to us about the changing dynamics of the energy sector and whether they will affect Qatar’s growing importance in the market as a supplier. Oil markets are changing, and this is having a profound effect on energy relationships.

Given the changing dynamics of the oil and gas industry, with the focus for the Gulf countries moving from the West to a stronger eastern interest, as detailed in the KPMG report "An Emerging Strategic En-ergy Relationship", where is Qatar placed in this scenario? Houwer says that this will

THE OIL AND GAS INDUSTRY, GLOBALLY, IS GOING TO FACE ITS TOUGHEST TIME EVER WITH A RARE KIND OF DROUGHT – THE DECLINE OF EXPERIENCED TECHNICAL MINDS. HILDA HOUWER MULLS THE HIGHS AND LOWS WITHIN THE INDUSTRY THAT KEEPS THE WHEELS TURNING FOR ANY COUNTRY.BY SINDHU NAIR

“ A human capital catastrophe is going to

hit the energy sector as experienced professionals in

the oil and gas industry are either leaving the country or

retiring from their jobs.”

HILDA MULOCK HOUWERGlobal Advisory Leader, Energy and Natural

Resources at KPMG

28 > QATAR TODAY > APRIL 2014

not affect the Qatar market much. “Firstly, there will not be much change in the sit-uation for Qatar as Asia has always been its more important market. Already more than 60% of the gas exports are allocated to Asia,” she says. She predicts smaller devel-opments and MOUs that will bring in more Asian players, with much less gas going to established markets.

Middle East exporters will be increas-ingly dependent on markets to the east. By 2030, close to 60% of the world’s oil trade will take place within the Asia region and between Asia and the Middle East.

While the eastern focus for Qatar never slows down, another putative game chang-er in gas dynamics is the growth of uncon-ventional oil and gas production, in North America in particular. Considering most global yet-to-find oil reserves are located in the US, Russia and Canada – areas that are more "open" to investment – KPMG’s report talks about expecting significant in-vestment there in the coming years. Wood Mackenzie indicates that more than half of the international oil companies’ long-term capital investments are going into deep water, shale/tight oil, shale gas and oil sands. While opportunities for investment will emerge in the Middle East (notably in Iraq, Libya and the United Arab Emirates), the terms in the Middle East have to be re-ally attractive to draw the Western majors away from the "open" potential elsewhere. Houwer feels that while shale gas is indeed a game changer, it will be used to feed the

Pacific region, while the gas from the Mid-dle East will all be directed to Asia and the area around. “Basically you will have two big markets: the Americas, which will serve the Pacific region, while the other half of the continent (basically Asia) will be served from the Middle East and Russia,” she says.

“It doesn’t make sense that American shale gas serves the Asian market, as the trade route is too complicated and long,” she argues. It all boils down to the question of whether the Middle East and Russia can serve the Asian market demand, she says. But for the medium term, Houwer is uncon-vinced that American shale gas will be any threat for the Middle East.

She is also of the opinion that the su-premacy of oil-producing Saudi Arabia will not be affected by the gas discovery in the US. “The Middle East is still the cheapest producer of oil,” she says.

The price of oil, a globally traded com-modity, is influenced by the supply and the factors that affect the supply, she argues.

The OPEC, already has a picture of the best price for oil and it is in the interest of OPEC (which includes a lot of GCC coun-tries) to come up with a price that justifies the countries’ supply stock. “They (OPEC) have now reached a comfortable position in the range of $90 to $110 per barrel, so I don’t think the US’s unconventional hydro-carbon production will have an effect on the oil price,” she says.

While the shale gas discovery had an im-pact on the shale revolution, it has not yet

had a perceptible price impact. In gas, we can safely say that with existing regional markets separated by high transport costs and differing market structures, the US production increase has suppressed prices in North America, but Houwer feels the ef-fects will not be felt globally for some time to come.

“There is no reason for the Middle East to be concerned, and Qatar is in a good posi-tion,” she says.

The Qatar edgeMoving on to GTL, there is a wide diver-gence of views about the monetary benefits versus the huge production costs of this en-vironment-friendlier gas, with Shell decid-ing to abandon its ambitious GTL project in Louisiana – a $20-billion undertaking to turn natural gas into liquid fuels – because of rising costs and the ever-present un-certainty in oil and gas pricing. Will Qatar Shell's Pearl GTL prove to be another white elephant?

“Why did Qatar decide to produce GTL?” asks Houwer, and answers the question her-self. “Because the biggest raw material for GTL is gas, which the country has in abun-dance. From an economic point of view, the country has more gas than it needs. So it can export gas and it can also refine it and ship the by-products, for which there is a big demand.

According to energy predictions, by 2030 the demand for energy-intensive products is going to go up dramatically.

development > listening post

Government expenditure growth, 2011(Contributions to total, percentage points, US$)

Bahrain

Current expenditure

Source: Country authorities, Bloomberg, IMF staff calculations (in "Economic Prospects and Policy Challenges for the GCC Countries", IMF, October 2012)

Capital expenditure

Kuwait Oman Qatar Saudi Arabia UAE GCC

40%

35%

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

19%

-13%

19%

3%

4%

5%

0.5%

6.5%

13%

19%18%

27%

12%

22%

"For a period from 2014 to 2020, 90% of Qatar’s LNG is committed. Qatar is taking gas from its own resources and making it more valuable, and hence all this is highly economical for the country."

QATAR TODAY > APRIL 2014 > 29

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30%

25%

20%

15%

10%

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50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

24.4%

19.6%

13.5%12.5% 12.1%

11.0%

4.2% 3.4% 2.1%

27.3%25.0% 25.9%

45.3%

6.3%

20.7%

23.3%

17%

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Libya Iran Bahrain KuwaitOman QatarSaudiArabia

UAEIraq

Unemployment rate Youth unemployment rate

General and youth unemployment rates in select countries

“So that presents an opportunity for en-ergy-intensive by-products. This will ex-pand the economy by focusing and broaden-ing the gas by-products. So Qatar is keeping an eye on the energy market and producing higher-value products,” she explains.

If you look at what Qatar is doing, she says, you will understand the dexterity of planning that is going into each of its actions.

“For a period from 2014 to 2020, 90% of Qatar’s LNG is committed. Qatar is taking gas from its own resources and making it more valuable, and hence all this is highly economical for the country," says Houwer.

Qatar has a unique position in its unique mix of natural resources, she goes on.

Firstly, Qatar has the third-biggest gas reserves in the world and the demand for gas will increase by 50% by 2035, and that makes the country unique. But not just that, says Houwer; if you take into account Iraq and Qatar, that geographical area has the biggest natural gas reservoir in the world.

“It cannot get more exceptional than that,” she states.

The moratoriumThere is currently a moratorium on new projects in Qatar’s massive North Field, while operators continue to examine ways of sustaining high levels of output over the longer term. The moratorium, initial-ly scheduled to end in 2008, will run till at least 2015 after several extensions. Nev-ertheless, growth from other fields and

new projects could result in overall output growth, though probably at low levels “If you look at the per capita savings of Qatar, it averages around $50,000 per person, amongst the highest in the world. This rate is coming down but it is still sufficient,” says Houwer. “I think they are generating suffi-cient income for the budgets and also sav-ing for the future. Gas meets the country’s demands and also generates sufficient ex-port revenue to be reinvested. So they are in a very safe position.” She also feels that the moratorium is a sustainable approach for future generations.

The way forward, according to Houwer, is for the existing operators to be smarter and improve efficiency. “The operators need to optimise production, and the moratorium also opens up the possibility of looking at smaller fields, outside the big North Field,” she says.

The future of oil and gasHouwer feels that the oil and gas trade will be balanced with proper market shifts with two distinct regions served by two produc-ers, the US and South America for the whole of the American continent and Russia and the Middle East serving the Asian region.

“It is interesting to see things open up. To see Mexico opening up its energy sector. I see a consolidation of the energy trade,” she says.

“Gas is not a global trading commod-ity, and gas prices will be determined more by regions. You will not see gas price

convergence in the short to medium term however Asian countries are collaborating more to have bulk purchases ahtat can have an impact on LNG prices.

So will that put pressure on Qatar and its export strategy? Houwer says that 90% of Qatar’s gas has already been commit-ted upto 2020. “Spot trading is then the only option, which obviously cannot be predicted,” she says.

Renewables will slowly gain prominence in the energy mix in developing countries and Europe, but it will be a slow climb. “It is government policy that drives the usage of renewables,” she says firmly.

Will there be more investments in re-newables, with their high investment costs? “Yes,” she answers, “but it will depend on government subsidies.”

Source: United Nations, Department of Economic and Social Affairs

Source:World Economic Outlook Database, 2013