Oil and gas in the capitals
Private generation will reduce Gulf oil exports As my colleague and I approached the huge, newly built, marble-clad building, it appeared to be empty: no cars in the parking lot, the lights off, no signs of life. It was one of the hundreds of apartment towers and office buildings that have recently popped up in the booming suburbs of Dubai, such as Sharjah and Ajman. Like many of them, it does not have access to the electrical grid. Some will not have power for several years. Something else was intriguing about this 200-apartment building. While at first glance it appeared to be empty and lack power, a well-known local bank occupied the ground floor, complete with electric signs and a well-lit interior. If the building did not have access to electricity, how did the bank get it? The answer was at the back of the building, where two huge generators stood. Several barrels of oil sat next to them. One of the generators was running. The other was a backup. Surprisingly, the fancy apartments above the bank were ready for occupancy. I called the number posted on the main door of the building. The “watchman” answered in an Indian accent: “Yes, all apartments for rent.” I asked him about the availability of electricity. He said that the owner had bought new generators that would be installed soon. The building would run on private generation until the government provided power, probably in two years. This is just one story among many. Many real estate developers in Ajman and Sharjah will go bankrupt if they do not use private generation. They have borrowed hundreds of millions of dollars from local banks to build these towers. They can make monthly payments only if they have paying tenants. No power, no tenants, no money, no payments. In fact, some banks have already written off hundreds of millions of dollars in the first quarter of this year as landlords have defaulted on their loans for lack of electricity. Even if the bank forecloses on the building, what it can do with it? It cannot sell it. It cannot rent it. Private generation is the only solution. Private generation has expanded to industrial and commercial establishments. Some city-states in the Gulf region have large and growing industrial areas that depend entirely on private generation. As operations in Dubai proper become more expensive, companies reduce their costs by expanding into nearby cities. As Dubai grows, operations in neighboring cities also grow. In Saudi Arabia, private generation will increase rapidly in the next three years. Regional electric companies and the Civilian Defense Administration have ordered large establishments, including hotels, to buy private generators to power their operations, including at peak times. Also, the Ministry of Water and Electricity asked the Education Ministry to cut the school year by two weeks. If the Education Ministry refuses, it might have to buy private generators for its schools in the coming years. Private generation requires crude oil and petroleum products. Market analysts did not predict this demand. Policy makers have not taken it into their calculations. Any way you look at it, the growth in demand for private generation will reduce net oil exports and increase oil prices. The worst is yet to come. Some cities in the Gulf will experience power shortages, brownouts and blackouts during the summer months in the next few years. There are two main reasons for the power shortages. First, investment in power generation and infrastructure has not even kept up with “expected” growth in demand. Nothing can be done at this stage to meet the “unexpected” growth of recent years. In some cities, the increase in demand for power has more than doubled to 15 percent from 7 percent annually. Second, the demand for water also increases during summer. Desalination plants are under pressure to produce more water and thus have less power to divert to the grid. Power shortages will also reduce oil exports. National oil companies will divert oil during peak demand to power plants. The use of crude oil in power plants has been on the rise since 2005. Some countries will be forced to divert natural gas from reinjection in the oil fields to power plants. In the long run, such actions will hamper enhanced recovery programs, increase costs and reduce production. The power shortages will open the door to a massive increase in private power generation. Since private generation depends on fuel oil, diesel and crude oil, it will create an additional, unexpected demand for these products. Thus, oil exports will decrease, even if oil production increases. The situation could get worse if some governments force their national oil companies, which generate their own power, to divert power to the general grid above their excess capacity. Such a scenario would adversely affect the operations of the oil companies. Even without power shortages, some countries in the Gulf region have already decided to use crude oil in power generation. Though the Middle East has over a third of the world’s gas reserves, mostly in Iran and Qatar, production and imports can’t keep up with the region’s rampant demand, and Qatar has a moratorium on new investment. It is quite common to hear Saudi businessmen talk about gas shortages amid rumors of double allocation, in which the same gas is assigned to more than one customer. Last month, a UAE official estimated that country’s current shortfall at more than 1 Bcfd. These countries are finding that gas is much more valuable as an industrial feedstock or exported as LNG than to burn in power plants, making subsidized heavy oil competitive for electric generation. Since power consumption is booming, the use of crude oil will increase over time, at the expense of excess capacity and exports. There are no short-term solutions. Producing and piping enough of the gas reserves to supply power would take massive spending and several years to build the necessary infrastructure. The world will have to endure high oil prices for a while. The only long-term solution is nuclear power. The US and its allies must accept that if they want a steady flow of oil and gas into world markets, they must allow Arab countries to build nuclear power plants. Otherwise, even the LNG industry could well disappear within the next 20 years or so. .
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