In recent years, the Gulf has seen the growth of an array of key features of a world-class oil trading hub. It has become a major logistics hub, with pipelines, vast storage and several deep-water ports.
It is supported by growing financial centres and now the majority of banks, oil companies, multi-nationals, national oil companies (NOCs) and trading houses are represented there. The region is also in the midst of a refining construction boom, with more than a million barrels a day of capacity added in the last few years. There is plenty more to come.
Yet, the physical spot markets are still somewhat old-fashioned. In essence, they revolve around benchmarks based in other regions and are not supported by deep and localised derivative markets. Physical trades tend to be point-to-point, without chains of traders and position-taking – both key generators of liquidity. Plus, transparency around pricing and fundamentals data is sporadic.
There is a growing desire to see the market develop, as the domestic downstream markets in the region post some of the strongest growth figures of any in the world and the refining construction boom looks set to continue. The soaring regional demand for jet fuel, naphtha, diesel, gasoline and fuel oil are propelling discussions on the need to establish independent oil products benchmarks in the Gulf.
The ultimate drivers of high rates of energy consumption in the Gulf are government policies. In the early days of oil, policy focussed on national development. Energy resources were seen foremost as generators of export revenues, which were then invested to advance improvements in infrastructure and economies.
In 1973, oil consumption in Arabia was less than 1% of global demand. Forty years later, the Gulf States, with just 0.5% of the world’s population, consumed 5% of its oil. Primary energy consumption in the past decade has grown more than twice as fast as the world average of 2.5% per year. The Gulf’s 2001 consumption of 220mn tonnes of oil equivalent nearly doubled by 2010 and is expected to nearly double again by 2020.
Saudi Arabia’s significant influence
Saudi Arabia is by far the largest of the Gulf states by population, economy and energy reserves, has shot up the ranks of global oil consumers. By 2009, the Kingdom had surpassed Brazil and Germany to become the world’s No. 6 oil consumer, despite its comparatively small population, economy and industrial base. By 2014, Saudi Arabia and Russia – another major oil producing and exporting country – were consuming oil in nearly equal amounts: 3.185mn barrels per day (bpd) in Saudi Arabia and 3.196mn bpd in Russia. While Russia’s plentiful natural gas supply allows it to substitute for oil in the domestic economy, oil-based energy prices in Russia are also much higher. For example, a litre of gasoline sold for 86 cents in Russia in 2014, but 12 cents in Saudi.
Power generation growth in the GCC countries has been nothing short of dramatic, given that most of the region was un-electrified as recently as 1960. In Oman, large-scale electrification did not even unfold until well into the 1970s. Many residents can remember the difficult days before refrigeration and air conditioning. Residents of the richer states of Kuwait and the UAE now consume more electricity, on average, than residents in the US.
The growth of power generation averaged 10% per year since 1973, slipping to 7% per year between 2000 and 2010, which was slightly faster than the average GDP growth that decade of 6.5%. About 60% of power generated in the GCC countries flows from natural gas-fired plants, versus 40% for liquid fuels, such as crude oil, diesel and heavy fuel oil. Overall, about a third of all natural gas produced in the Gulf states is consumed in regional power generation. Gas demand is exacerbated by its use in producing desalinated water, which is often in co-generation plants that use waste heat to produce electricity.
In recent years, growth in electricity demand has outstripped domestic supply of gas in five of the six GCC states. The shortage leaves Gulf states facing higher marginal costs for new power generation and production of desalinated water. In the past, governments had to cope with the cost of building plants, while surplus feedstock was made available as a byproduct of oil.
Now, policymakers must contend with market-priced imported fuels, the expensive production of unconventional gas, or the opportunity cost of burning crude oil and other costly liquid fuels. Oil demand has risen across the GCC by an average of 9% per year since 1973, growing faster than GDP, on average. Aggregate oil consumption in the six GCC states was less than 500,000 bpd in 1973 and more than 4m bpd in 2014.
Before we wind up this Special Report on logistics and storage, it might be worth reading the last word…
