Cyril Widdershoven: Arab governments should put in place more attractive investment laws and regulations

The economies of the Middle Eastern countries are currently suffering from a sharp drop in oil prices, for example Saudi Arabia, while Turkey and several other countries of the region are suffering from political instability. What are the economic prospects for these countries and what are the ways out of this situation? We talked about it with Dr. Cyril Widdershoven who is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle East and energy sectors in the Netherlands, the United Kingdom, and the United States.

The Saudi Authorities declared that they intend to reduce its oil production by another 350 thousand bpd in October. In your opinion, will this measure significantly affect the Global Oil Market?

– First of all, I think that Saudis were saying that they will reduce to 350 thousand barrels because they are currently producing 9.8-9.9 million barrels and that they intend to reduce it by another 350 thousand barrels. Well, will this be effective? At this moment, I think the effect of taking out extra oil is not needed and will not have an additional positive effect on the market. The reason is that global overproduction of oil and gas is almost equal to demand, so prices will be stable, or they will even go up in the coming period. The expectation is that before the end of 2017 you can see a price rise between $55 and $60 per barrel. Now, the only issue is that we have the hurricanes in the US. Will they have an effect? Yes, in principle they will have an effect on oil and gas production, as they have blocked part of it, but on the other hand they also will have an effect on US oil demand because local industries were closed down. The closure of local industries, combined with lower demand of consumers in the area, will force oil and oil product demand in the GOM and Florida down for the upcoming months. However, analysts will need to assess in how far demand for oil has gone down substantially, while looking at the supply of oil and petroleum products. If this is almost equal, oil prices will still go up because as the market starts to realize that supply and demand are reaching parity. Looking at the global situation, something else happens in Iraq (Kurdistan), Iran, Nigeria, Venezuela, Russia or Azerbaijan the prices will go up. If OPEC and Saudis want to push up the prices they only will have to keep production and exports at current levels. For OPEC, and Saudi Arabia-Russia the waiting game will have its intended effect at last. To have a real impact on the market, they should try to get an agreement not only on crude oil exports, but also on petroleum product exports. If they say that they are not exporting more gasoline and diesel from OPEC regions, you will see that the oil shortage in the US and Europe go up extremely quick.

The situation in the Middle East and Africa has been volatile, perhaps, since or even before the start of the “Arab Spring”. It has scared off many foreign investors. In particular, investors either leave, or take a wait-and- see approach in large and pivotal countries of the region, such as Egypt and Turkey. In your opinion, what should MENA countries’ authorities do to regain the trust of former investors and attract new ones?

– Instability in the region is much less than we think. If you look at the instability in Egypt, KSA, UAE and Turkey, in reality almost nothing happens on the streets, however, we all read on the news and see on TV the terroristic attacks, explosions and uprisings. So, international investors most of the time do not to relate to reality and base their assessments on presumptions and media coverage. The reality in these countries, even in Qatar, at present is reasonably quiet. The main exceptions on the rule are still Iraq, Libya and Syria. Their security situation is almost beyond repair, as internal strife, civil and religious wars and proxy wars are being fought on a daily basis. A potential main upcoming issue is the Kurdish independence vote, which based on the ongoing developments in the region, the standpoint taken by main regional actors (Iran, Turkey and Iraq), which could result in an implosion of the already very weak state systems in the area. Sunni-Shi’a confrontations or an all-out military confrontation, involving US-Russia and maybe even Israel, could be the result.

Another main issue is that the majority of Arab countries, and Iran, have still too strict investment laws and regulations in place. At present, doing business in these countries still means you need to have an agent to deal in the local markets. To quell this main constraint, Arab governments should put in place more attractive investment laws and regulations, look at Saudi Arabia’s Vision 2030 objectives, or the liberalization of the economy in Turkey and Egypt. These developments will for sure attract the necessary investments and FDI in non-oil related sectors. Regulations, such as private ownership, possible full foreign ownership, or liberalized import laws, could support the latter too. If it is related to oil and gas investments Egypt, KSA, Turkey, as well as Azerbaijan, have liberalized its oil and gas sectors so that the investors, local and international, can own more operations.

Also, they need to support the possibilities to export oil and gas volumes. At present, look at Egypt, a good amount of the volumes that you produce must be sold in Egypt, at the price of the local market, which is way below the international prices. So, if you force investors in these countries to sell oil at local prices, operators will have an issue. Investors will say that the risk of investing is higher, especially when looking at their ROI.  To support mainstream multibillion investments in oil and gas, or energy-water, the need to gain a steady stream of high level revenues is needed to support the latter. By selling to the global markets, your investments will be recuperated quicker, leaving less risk.

At the same time, investors and operators will be wary of political systems under pressure. Political turmoil, with possible regime changes or civil wars, are seen as major risk factors to take into consideration during your investment decision making process. Arab Spring, Syria’s meltdown, the confrontation between the Saudi-led Alliance and Iran (and Qatar), or the rise of extremism, are all factors to be taken into account. Egypt’s ongoing battle with the Muslim Brotherhood and Daesh in the Sinai, the instability in Libya, and financial stress, are seen as negative for Egypt. Turkey’s ongoing conflict between Erdogan’s AKParty government and “Gulen movement” is also scaring investors. A possible break with Europe (or NATO), combined with its growing cooperation with Russia and Iran, is currently seen as a major constraint or total risk. Erdogan’s views on the Gulen issue also could affect your operations in Turkey without warning. Turkish JVs or clients can be taken out of business when linked to Gulen. If you don’t know if your operations are being closed, no investments will be made.

While in KSA, you see the opposite. Saudi Arabia was always closed, you couldn’t own any asset, company or investment there. Now, Saudi Crown Prince Mohammed Bin Salman’s Vision 2030 has changed the situation dramatically. Since several months, you can own your own company in KSA. This has become even very easy. Looking at the political-economic situation, the Kingdom is reasonably quiet, not like in Egypt with terroristic attacks in Cairo, or Turkey where you have Erdogan, Gulen and the PKK. An investor always wants to have one thing, a quiet and stable economic-political situation to work in, like Germany or the Netherlands, with no real crisis or attacks. Other countries like Turkey, KSA, Algeria, UAE, Russia, and Egypt attract by their natural resources or regional position, but there are risks. For example, investing in Russia is still considered to be a big risk, the main reason why investors are very cautious while doing business up there. As long as you have the risk that there will be changes in leadership, constraints are going to be there. There will always be investments in oil and gas, however, as profits are higher than in other sectors of economy. In KSA you produce one barrel for $8, UAE $8-15, so the margin is very high, whatever the market price is, and you can always sell your oil.

Returning to Saudi Arabia, the Crown Prince of Saudi Arabia Mohammed bin Salman promised to take the economy of the Kingdom out of its oil dependency. Even a large-scale and ambitious plan, Saudi Vision 2030, has been drafted. In your opinion, will Saudis be able to implement it?

– Well, the answer is yes. Will they be able to do it before 2030? The answer is no. The reason to say yes is that they need to do it, because oil in the end will end, maybe it is in 2050 or 2080, nobody knows. The Kingdom however has oil reserves up until 2150, as new reserves are still found. However, oil and gas production does not bring the level of revenues as it did before. Saudi Arabia needs the coming decades a very hefty investment, as 60% of Saudis are younger than 18. So, in the next 10 years they will need to put in place 6 million additional jobs. Now, Saudis can do two things, to throw out the foreigners, which they do, as pressure is being put on workers from India, Pakistan, Malaysia, and Bangladesh, to leave. However, like in Europe, nobody wants to do their own dirty jobs, Saudis are not going to stay outside in 50 degrees and build houses. Now, they need to set up jobs for 6 million Saudis. This needs an investment from 2 to 4 trillion US dollars. First of all, they will continue to produce oil and gas in high volumes, while monetizing it also via investments in petrochemicals. Secondly, they will invest more and more in non-oil and gas related sectors like Hi-tech, Fintech, Chemicals, Tourism, IT, schooling and agriculture. Will this be feasible to get 6 million additional jobs? That is the question. Will they get 2-3 million extra jobs? Yes. 6 million will be very hard to reach. Will they be paid as high as they are paid right now? Never ever. Young and highly educated Saudis will need to understand that the world has changed, they will need to work first and then think about their salary rather than getting a salary and then contemplating to work.

The other issue is that there is a need to educate them in fields that are feasible, you do not need to have 6 million graduates that know Quran and Islam. No, you need to have 6 million Saudi students graduating engineering, I.T, high technology, medicine, politics, as well as history, because if you are not the main oil producer anymore, your position in the world will change. They acknowledged it themselves already by stating that it going to take 5-8 years longer to implement the needed changes. The last weeks the Saudi government has stated that the first phase of Vision 2030, the National Transformation Program (NTP), will get several more years to reach maturity.

The other thing is that it will depend on the success of the Aramco IPO. If that IPO becomes a success, every person with money will want to go to Saudi Arabia. But, it is not the time to go there. If Saudi Aramco IPO becomes a success, I think it will be the leverage that Saudis will gain will be 2 to 6 trillion dollars. Everybody will want to have a piece of cake and Saudis will use these investments in the end to diversify and strengthen their local economy and enhance their reach on global markets. They already own a lot, they are the biggest investors of Facebook, Twitter, Uber and etc. Saudi’s sovereign wealth fund Public Investment Fund (PIF) will be the main recipient of the Aramco IPO, but also of the already planned 100 IPOs to follow. The power position of the Kingdom will not anymore be founded on being the world’s largest oil exporter, but also being linked to national and international investment schemes. The time of being an oil rentier state is over, they are entering the 21st Century in full force.


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