Gulf Countries Scramble To Generate More Power As Consumption Surges

The new oil paradigm and what it means for GCC’s power generation sector.



Gulf states have enjoyed remarkable economic growth since the start of the century. GCC economies have grown five-fold to reach $1.6 trillion over the past 15 years, while the population has risen nearly 80 per cent due to rapid domestic population expansion and influx of expatriates.

The remarkable growth has made huge demands on infrastructure, from roads to rail, healthcare services to education, with virtually every segment of the supporting industries being stretched to their limits.

But nowhere is the need to expand been more acutely felt than in the power sector. Rolling blackouts in parts of the Gulf suggest that even the some of the richest countries in the world are not immune to a power crisis.

But it is also a huge investment and growth opportunity. The Arab Petroleum Investment Corporation estimates that Gulf states will require as much as $316 billion by 2020 to meet its growing power needs.

To date, the Gulf’s power sector has leveraged its strength as a fossil fuel producer to source cheap and plentiful power for the domestic economy. But that is an expensive and increasingly unsustainable strategy.

Crude oil is seen as an inefficient energy source for power generation and most economies have moved away from oil and focused on natural gas, hydro, nuclear or renewables to generate electricity.

But countries like Saudi Arabia still depend on crude oil for power – and that’s a trend that’s likely to continue in the absence of alternatives.

Oil-fired generation is forecast to gain 27 per cent over 2013-19 on the back of insufficiently growing gas production and the very low efficiency of Saudi power plants, according to the International Energy Agency.

Saudi Arabia is the world’s 12th largest consumer of energy, accounting for 9 quadrillion British thermal units – of which 60 per cent was sourced from petroleum and the rest from natural gas. The country now consumes three million barrels per day of crude oil domestically – roughly a third of its production.

If the country can switch to renewable or natural gas, those three million bpd can generate as much as $180 million per day at today’s spot Brent prices.

But power generators do not have sufficient domestic gas supplies to displace oil with gas, and liquefied natural gas imports are expensive.

The key is for Saudi Arabia and other Gulf states to monetise its natural gas reserves to displace crude oil for domestic power consumption.

The irony is that Saudi Arabia sits on the fifth largest natural gas reserves in the world, but it has not been able to leverage that strength.

“Rapid reserve development is necessary for Saudi Arabia’s plans to fuel the growth of the petrochemical sector, as well as for power generation and for water desalination,” according to the US Department of Energy.

“All current and future gas supplies (except NGLs) reportedly remain earmarked for domestic use, in part to minimize the use of crude oil for power generation. However, natural gas production remains limited, as soaring costs of production, exploration, processing, and distribution of natural gas have squeezed supply.”

While nuclear power and renewable energy is set to become a part of Saudi Arabia’s energy mix, they will continue to play a marginal role at least over the next twenty years.

the RiGht eneRGy Mix

The UAE is likely to be more successful in diversifying its energy sources within the next decade, with the development of a nuclear power plant and increasing focus on renewable energy.

However, natural gas will play a crucial role in fuelling the country’s power sector.

UAE is home to the seventh largest reserves of natural gas in the world, but it still imports the commodity from neighbouring Qatar.

Power generation in the UAE is set to rise by more than 1.5 GW in 2017, equivalent to powering around 150,000 homes, according to The State of Energy Report in the UAE 2015, published by the Dubai Carbon Centre of Excellence and the United Nations.

The report reveals that the country’s power demand grew 37 per cent from 2008 to 2012, and is set to grow by 9 per cent annually over the next few years as a number of megaprojects are built.

The UAE is looking to develop its sour gas resources, which are technically difficult to process, with projects such as the Shah Gas Development, a joint venture between Abu Dhabi National Oil Company (Adnoc) and Occidental Petroleum under way. The project will add five million cubic feet per day.

“The United Arab Emirates plans to boost domestic natural gas production over the next several years to help meet growing internal demand,” the US Department of Energy says.

“Much of the growth could come from the country’s large sour (high sulfur) gas deposits.”

The UAE’s electricity is primarily sourced from gas-fed thermal generation, and the authorities are looking to integrate the seven Emirates’ disparate natural gas distribution networks to alleviate some of the peak-demand shortfalls experienced in the past.

In addition, the country has also announced an ambitious plan to generate 25 per cent of its total power generation by clean energy projects by 2020.
Meanwhile, Kuwait has suffered the worst power shortages in the Gulf, with rolling blackouts during the summer, as the power sector has not been able to keep up with rising demand.

Kuwaiti authorities are eyeing 9,000 MW in additional new capacity by 2020 to meet demand. In the interim, the country has signed a $15 billion deal with major international natural gas players to supply liquefied natural gas to meet its energy requirements and power its refineries.

weanInG off subsIdIes

While the Gulf region is committing billions to beef up its power sector, it must play close attention to the ballooning energy subsidies that are a huge financial burden on the governments’ resources and are hurting the economies in a myriad ways.

Gulf citizens enjoy some of the lowest priced electricity. In Kuwait, electricity costs just 0.7 cents per kilowatt-hour (kwh), while in Saudi Arabia it costs 1.3 cents, compared to 8 to 17 cents in the United States.

While the region is unlikely to completely remove subsidies, there is an acknowledgement that these subsidies are a burden on the governments, lead to huge waste and are unsustainable.

The World Bank calls these subsidies “corrosive” and estimates that they cost Gulf governments $160 billion a year.

“The level of energy subsidies in most of [the oil exporting] countries is higher than in developing MENA. While they have been running fiscal surpluses, the high levels of subsidies and public sector wage bill mean that the price of oil at which their budgets are balanced is quite high,” the bank said in its recent report.

Energy subsidies are also crowding out investments in renewable energy, damaging precious water resources, causing pollution and traffic jams, according to the bank.

“Energy subsidies are an extremely inefficient way of transferring oil revenues to the public,” the World Bank said.

The men who maTTer

Many Gulf governments realise the unsustainability of energy subsidies and officials from the UAE, Saudi Arabia, Oman and Kuwait have discussed reducing energy subsidies, as low oil prices force authorities to find savings.

It is unclear how quickly these measures can be put in place, and it is likely that any change to the well- entrenched subsidy programme would be slow. An IMF official said late last year that Abu Dhabi is considering cutting energy subsidies.

“We discussed it here at the policy level, particularly with the Abu Dhabi government, which indicated they are now looking at ways to streamline their subsidy policies and put in place something different, something better targeted,” Harald Finger, the IMF’s head of mission for the UAE told reporters.

“This is particularly the case of the electricity and water subsidies. It is probably too early to know exactly what is their plan, but the broad direction in which it is headed is the right one,” he noted.

Gulf states can find a lot of common ground in developing the power sector. Most notably, the countries have collaborated in developing a join Gulf power grid, to develop the region’s electricity network but also help unify the six countries.

The grid has already led to savings of $3 billion in investments, in addition to a savings of $330 million of operating costs and fuel, according to the Gulf Cooperation Council Interconnection Authority.

“During its next stage the GCC Interconnection intends on increasing the use of spare capacity in the interconnection to engage in energy trade based on the economic fundamentals, save the GCC states high fuel costs used to generate energy, and rationing production and operating costs in the GCC networks leading to savings in operating costs based on the exchange, import of the least expensive power,” the authority says in a report.

“This alone will lead to savings in production costs thus; reducing the operation of high cost and low efficient generating units.”

Gulf states will have to move on multiple fronts to address their rising electricity needs. Apart from raising awareness of energy efficiencies and developing legislation that encourages the use of energy-friendly products, the region will also have to develop a sound framework to slowly reduce energy subsidies.

Of course, none of this will take away from the huge investments needed to power the economy and future projects, cities and developments.