development > listening post

ALERT:

A HUMAN CAPITAL CATASTROPHE

26 > QATAR TODAY > APRIL 2014

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

ilda Mulock Houwer, Global Advisory Leader, Energy and Natural Resources at professional services rm 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 calamity. 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 eld, and encourages more Qataris to choose this dynamic sector as a career option. It is now unconventional 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 ll 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 nationals in the public sector. The International Monetary Fund has estimated that public spending in the GCC increased by 20% in 2011 from the previous year. It follows from this spending spree that the price of oil needed to balance budgets is at a historic 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 energy 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 Qatars 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 Energy Relationship", where is Qatar placed in this scenario? Houwer says that this will

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 HOUWER Global Advisory Leader, Energy and Natural Resources at KPMG QATAR TODAY > APRIL 2014 > 27

development > listening post

Government expenditure growth, 2011 (Contributions to total, percentage points, US$)
40% 35% 30%

13%

"For a period from 2014 to 2020, 90% of Qatars 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."

25% 20% 15% 10% 5% 0% -5% -10% -15%

6.5% 3% 4% 27% 19% 19% 19% 18% 12% 0.5% 22% 5%

-13%

Kuwait

Oman

Qatar

Saudi Arabia Capital expenditure

UAE

GCC

Current expenditure Bahrain

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

not affect the Qatar market much. Firstly, there will not be much change in the situation 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 developments and MOUs that will bring in more Asian players, with much less gas going to established markets. Middle East exporters will be increasingly dependent on markets to the east. By 2030, close to 60% of the worlds 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 changer in gas dynamics is the growth of unconventional oil and gas production, in North America in particular. Considering most global yet-to-nd oil reserves are located in the US, Russia and Canada areas that are more "open" to investment KPMGs report talks about expecting signicant investment there in the coming years. Wood Mackenzie indicates that more than half of the international oil companies longterm 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 really 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
28 > QATAR TODAY > APRIL 2014

Pacic region, while the gas from the Middle East will all be directed to Asia and the area around. Basically you will have two big markets: the Americas, which will serve the Pacic region, while the other half of the continent (basically Asia) will be served from the Middle East and Russia, she says. It doesnt 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 unconvinced that American shale gas will be any threat for the Middle East. She is also of the opinion that the supremacy 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 commodity, is inuenced 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 countries) to come up with a price that justies the countries supply stock. They (OPEC) have now reached a comfortable position in the range of $90 to $110 per barrel, so I dont think the USs unconventional hydrocarbon production will have an effect on the oil price, she says. While the shale gas discovery had an impact 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 effects 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 position, she says. The Qatar edge Moving on to GTL, there is a wide divergence of views about the monetary benets versus the huge production costs of this environment-friendlier gas, with Shell deciding 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 uncertainty 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 herself. Because the biggest raw material for GTL is gas, which the country has in abundance. From an economic point of view, the country has more gas than it needs. So it can export gas and it can also rene 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.

General and youth unemployment rates in select countries

30% 50% 45% 25%

45.3%
40%

24.4%

Unemployment rate

20%

35%

27.3% 25.0%
15%

25.9% 23.3% 20.7%

30% 25%

19.6%
10%

13.5%

17% 12.5% 12.1% 11.0% 6.3%

20% 15% 10% 5%

5%

4.2%
0%

3.4%

2.1%

0.6%
0%

Oman

Libya

Iran

Saudi Arabia

Iraq

UAE

Bahrain

Kuwait

Qatar

Unemployment rate

Youth unemployment rate

Source: United Nations, Department of Economic and Social Affairs

So that presents an opportunity for energy-intensive by-products. This will expand the economy by focusing and broadening 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 Qatars 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 moratorium There is currently a moratorium on new projects in Qatars massive North Field, while operators continue to examine ways of sustaining high levels of output over the longer term. The moratorium, initially scheduled to end in 2008, will run till at least 2015 after several extensions. Nevertheless, growth from other elds 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 sufficient income for the budgets and also saving for the future. Gas meets the countrys demands and also generates sufficient export 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 elds, outside the big North Field, she says. The future of oil and gas Houwer feels that the oil and gas trade will be balanced with proper market shifts with two distinct regions served by two producers, 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 commodity, 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 Qatars gas has already been committed 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 rmly. Will there be more investments in renewables, with their high investment costs? Yes, she answers, but it will depend on government subsidies.

Source: World Economic Outlook Database, 2013

QATAR TODAY > APRIL 2014 > 29

Youth unemployment rate