The Middle East is changing skin. The economic conditions of the past are gradually changing physiognomy, with the hydrocarbons sector no longer able to support the entire economy of the region due to the current crude oil levels. His Highness Shaikh Mohammad Bin Khalifa Bin Ahmed al-Khalifa, Bahrain’s Minister of Petroleum, is also strongly aware of this, as he portrays the global energy scenario with great caution, analyzing its balance, which is now, more than ever, characterized by great uncertainty.
His Highness, the world seems drawn towards an energy transition that will also see more and more alternative energy sources alongside fossil fuels. How do you evaluate and what kind of prediction could you do with respect to these prospects?
If you look at the global oil industry, the global consumption is close to 100 million barrels a day, the globe consumes roughly 100 million barrels a day. And despite the economic slowdown, there’s still growth; growth of 1.6% in terms of oil consumption purely and oil as the major energy source. If you look at the oil production industry, if you do nothing, it doesn’t stay flat. Unlike in the refineries, you know that your capacity is 100,000 barrels sometimes. When you have producing wells, there is a natural decline. The average is not less than 5% decline annually. So, if you don’t invest, at the end of each year, your production would decline at least of 5%. So, if we take the current – let’s assume it’s a simple 100 million, it’s a bit less than that but say 100 million barrels per day – if you lose 5% of 100 million by not investing, you’re losing 5 million barrels a day, every year. But not only that, you also have a demand increase of 1.5%. 1.5% of 100 million is 1.5 million barrels a day; so, you need to find 5 + 1.5, 6.5 million barrels a day, every year, just to cater for the increasing demand. The problem of the decline, and that’s a continuous challenge. Now the current issue with price was really brought about by the shale industry, by Saudi Arabia, by OPEC. It was the shale that surprised everyone, where America in a very short time managed to produce 4 million barrels of oil. But since then, and since the crash of the oil price investment has gone. So you have a serious issue with that, and you need to find alternatives to help you with the growth. Not only do you have a growth challenge, you also have a supply reduction challenge. And there aren’t a lot of discoveries. And ENI has been one of the most successful but they have been discovering gas, not oil. So oil is still very much a scarce resource. Although shale is opening up opportunities, it is yet unknown really how big that opportunity is. And we’ve now seen with the cutback in investments, and America already may be losing up to a million barrels in production, that it cannot sustain itself at the very low oil price. So all of these challenges of course are facing us, it’s not an easy situation. And the low oil price is making it even worse. Because people are cutting back on investments, which means that the problem is going to become even larger in the future.
Global energy balances are gradually changing, as you told us before. The US has almost reached energy independence, Europe seeks new sources of supply. China's energy demand is stable and it is mostly non-OECD countries, such as India, which will drive the market in the coming years, it seems to be. Which role will play the Middle East, and in particular your country, in this scenario?
Well, the Middle East is the center of the hydrocarbon energy, it is also now going to be the center of refined products. Saudi Arabia has invested heavily in mega refineries, Bahrain has one of the oldest and a very large refinery, so we are going to be a net exporter of energy in the hydrocarbon space. Of course you have gas coming out of copper with LNG, everybody else is exporting crude, refined products and petrochemicals. So the Middle East region is going to be the center of that market. I think destination into Asia has been the growth market.As I told you, the issue with oil is: yes, even if you have a reduction in demand growth, you have a supply issue, because if oil prices are low, investments stop going in, your supply goes down, it does not stay constant. And replacing some of that lost production is also a growth prospect. That’s where the industries are different, the upstream production. We also have to face the decline in productions. So I don’t know if that answers your question?
In this scenario, in your opinion, which role will have the gas in the process of this kind of transition towards the more sustainable energy model?
Gas is the preferred fuel for electricity, whether it will find itself more and more in transport is yet to be seen. I mean there are countries, Egypt, Pakistan, who all have introduced CNG for cities, and it’s a fact that Dubai is now experimenting with it, but still it’s not a transport fuel, it is more an electricity fuel. The challenge with gas is delivery. You need expensive infrastructure. And I think with time you will have more ports that can import LNG. The problem with LNG of course is that the cost of transport is two thirds of the price of the commodity. So spending your money on delivery more than the actual commodity – that’s the challenge with gas, but it’s still the best for electricity.
The OPEC meeting in Algiers resulted in a basic agreement for the reduction in crude oil production so as to encourage a price recovery. Which hopes, as it were, do you have in respect of this agreement?
Bahrain is a small producer, we are not a member of OPEC. I think Saudi Arabia’s policy was clear, they are not the reason if you have an oversupply in the market, that oversupply really came from shale. I think if you look at how shale came about, it really came after 2008 when there was the financial crisis in the US. They went into quantitative easing, they printed a lot of money. As I was listening to one of the large banks in the US saying, a lot of that money actually went into the shale business, so it drove the over-production in oil. Gave you the supply glut. Now OPEC is trying to calm the market by saying we have a supply freeze. The challenge currently is that Iran doesn’t want to play the freeze game, they say we want to have an exemption. And Saudi Arabia is saying not anymore, I cannot be the only player holding the stick. Everybody has to contribute. And I think that’s a very clear position so a fair one. But Iran so far has been asking for an exemption. OK, today there is news of maybe some kind of a meeting. If the Iranians agree to a freeze. Then I think it is more a psychological impact to the market, the concept of a cartel was not what OPEC was about. OPEC was not really set up to play the markets. I think the market should be left, should be allowed to define what the oil price is. We are hopeful for Algeria.
Coming to your country, which way does nowadays in the economic mix of your country the hydrocarbon sector compare to other sectors of, economic sectors, like drilling or finance business and services.
The economy of hydrocarbon is 20% plus, minus [inaudible]. Bahrain has diversified away from oil but the government relies still heavily on oil revenues. So in the oil sector we not only produce oil, we have indigenous gas that feeds other industries like aluminum, we have one of the largest aluminum smelters, Alba. That is the company that consumes the gas that we produce in the hydrocarbon sector. We have fertilizer plants, methanol plants, we have oil production, refining, logistics, retail, and we are trying to grow the business as a bit more gas plants, etc. All of that contributes to around the oil side of things in the economy of about 20%.