Qatar Diversification
1
Opinion December 25, 2015 Economic Insights Where Market Insights and Local Knowledge Drive the Bottom Line www.eieadvisory.com Does Qatar, currently and predominantly a hydrocarbons exporting focused economy, languish in its development path as it expands the nominal value of its energy subsidies? Qatar has set out to move beyond hydrocarbons and diversify its economy, however this goal is hampered by continuing generous subsidies that encourage the expansion of energy-intensive industries. The country is choosing to preserve such distorting incentives over the medium term, which is seen as politically expedient. As a result, existing and new foreign commercial partners will continue to be attracted to invest in energy-intensive projects with world-class margins. Meanwhile, the government has not yet chosen to pursue an efficacious non-oil development strategy. Collectively, this points to Qatar languishing in its chosen development path in the immediate future. Any modification to energy (and water) subsidies is seen as particularly sensitive across the GCC – and particularly in Qatar, which has a comparatively small population and bountiful hydrocarbon resources. This is because the provision of inexpensive (or free) water and electricity is seen as part of the social contract. A lowering of subsidies, even if only to industrial or expatriate customers, is likely to be perceived as a step in the wrong direction by most local stakeholders. Despite the fact that Qatar’s National Development Strategy 2011- 2016 explicitly targeted the rationalization of utility pricing, no observable concrete steps have been made in that regard and none are foreseen in the immediate future. Foreign joint venture partners, who have traditionally been involved in upstream investments, are now investing alongside Qatar Petroleum, Industries Qatar and others in the country’s various manufacturing projects - such as the QAPCO expansion, Al Sejeel Petrochemical Project and Al-Karaana Petrochemical Complex in Ras Laffan. (Please visit eieadvisory.com to see more on upcoming and planned projects through EIEA’s Petrochemical Intelligence Service). The projects are seeking to add value to extracted hydrocarbons domestically before being exported to markets where higher end user prices exist. Such partners continue to be attracted by: 1. The economics of projects supported by comparatively low feedstock/energy prices on offer; 2. The infrastructure being erected that facilitates exports to higher paying customers abroad; 3. An established and attractive operating environment in the hydrocarbons space/existing partners. In contrast to the inviting business environment on offer in the oil/gas and extended hydrocarbons space, Qatar’s non-oil space is far less predictable and well explored by foreign firms. In addition to capricious rules and regulations, variable operating costs are notoriously high – all on a peninsula with a small domestic market and only one direct land link to a neighboring country with continually long Customs delays at the border. Furthermore, without a vigorous and pointed private sector development strategy in place, the Qatari authorities are indirectly extending the status quo, which features little competition and a business landscape dominated by entrenched players. In the absence of a grand strategy composed of targeted initiatives to increase opportunities for non- hydrocarbon based businesses, the country is effectively losing steam in its broader goals. As a whole, Qatar’s actions and inactions in various endeavors has encouraged the expansion of energy- intensive industries at the expense of its diversification agenda – and the running costs to the state in the shape of energy subsidies continues to rise. Nevertheless, Qatar’s policy makers have a unique opportunity before them in the shape of a reinvigorated National Development Strategy 2017-2022 to correct course and encourage substantial diversification and entrepreneurship that goes beyond oil and gas. That said Qatar is making a concerted effort to add increasingly more value to its hydrocarbons by producing ever more complex chemicals and products – a topic covered by EIEA in detail across its services.
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Transcript of Qatar Diversification
Opinion December 25, 2015
Economic Insights
Where Market Insights and Local Knowledge Drive the Bottom Line www.eieadvisory.com
Does Qatar, currently and predominantly a hydrocarbons exporting focused economy, languish in its development path as it expands the nominal value of its energy subsidies?
Qatar has set out to move beyond hydrocarbons and diversify its economy, however this goal is hampered by continuing generous subsidies that encourage the expansion of energy-intensive industries. The country is choosing to preserve such distorting incentives over the medium term, which is seen as politically expedient. As a result, existing and new foreign commercial partners will continue to be attracted to invest in energy-intensive projects with world-class margins. Meanwhile, the government has not yet chosen to pursue an efficacious non-oil development strategy. Collectively, this points to Qatar languishing in its chosen development path in the immediate future.
Any modification to energy (and water) subsidies is seen as particularly sensitive across the GCC – and particularly in Qatar, which has a comparatively small population and bountiful hydrocarbon resources. This is because the provision of inexpensive (or free) water and electricity is seen as part of the social contract. A lowering of subsidies, even if only to industrial or expatriate customers, is likely to be perceived as a step in the wrong direction by most local stakeholders. Despite the fact that Qatar’s National Development Strategy 2011-2016 explicitly targeted the rationalization of utility pricing, no observable concrete steps have been made in that regard and none are foreseen in the immediate future.
Foreign joint venture partners, who have traditionally been involved in upstream investments, are now investing alongside Qatar Petroleum, Industries Qatar and others in the country’s various manufacturing projects - such as the QAPCO expansion, Al Sejeel Petrochemical Project and Al-Karaana Petrochemical Complex in Ras Laffan. (Please visit eieadvisory.com to see more on upcoming and planned projects through EIEA’s Petrochemical Intelligence Service). The projects are seeking to add value to extracted hydrocarbons domestically before being exported to markets where higher end user prices exist. Such partners continue to be attracted by:
1. The economics of projects supported by comparatively low feedstock/energy prices on offer; 2. The infrastructure being erected that facilitates exports to higher paying customers abroad; 3. An established and attractive operating environment in the hydrocarbons space/existing partners.
In contrast to the inviting business environment on offer in the oil/gas and extended hydrocarbons space, Qatar’s non-oil space is far less predictable and well explored by foreign firms. In addition to capricious rules and regulations, variable operating costs are notoriously high – all on a peninsula with a small domestic market and only one direct land link to a neighboring country with continually long Customs delays at the border. Furthermore, without a vigorous and pointed private sector development strategy in place, the Qatari authorities are indirectly extending the status quo, which features little competition and a business landscape dominated by entrenched players. In the absence of a grand strategy composed of targeted initiatives to increase opportunities for non-hydrocarbon based businesses, the country is effectively losing steam in its broader goals.
As a whole, Qatar’s actions and inactions in various endeavors has encouraged the expansion of energy-intensive industries at the expense of its diversification agenda – and the running costs to the state in the shape of energy subsidies continues to rise. Nevertheless, Qatar’s policy makers have a unique opportunity before them in the shape of a reinvigorated National Development Strategy 2017-2022 to correct course and encourage substantial diversification and entrepreneurship that goes beyond oil and gas. That said Qatar is making a concerted effort to add increasingly more value to its hydrocarbons by producing ever more complex chemicals and products – a topic covered by EIEA in detail across its services.
