Implementing commercial principles, reaping greater economic benefits
Dr. Raed Kombargi, Dr. Shihab Elborai, David Branson, Fabio Gungui
April 29, 2019
The countries of the Gulf Cooperation Council (GCC) have long benefited from cheap, abundant gas, but as demand grows, governments must take a more proactive and strategic approach to managing the gas sector. They can do so by applying commercial principles to the management of gas portfolios.
Specifically, governments must take action in three ways:
An initial approximation shows that a relatively modest increase in the gas price can generate up to US$6 billion in increased government revenue per year. The re-allocation of gas to different end-uses could boost the region’s GDP and foreign earnings by up to $10 billion per year, or support the creation of around 100,000 jobs.
The days of abundant cheap gas are over. GCC governments must start to make better decisions about how to manage a finite resource amid competing demands if they are to maximize socioeconomic value. Success requires a comprehensive strategy to allocate gas among end users, along with pricing gas to reflect its true value and allow the governments to reduce subsidies. To accomplish these two measures, governments must also reform the market structure to create dedicated gas aggregation and transportation companies, overseen by an independent regulator to promote efficiency across the sector.
Collectively, these measures represent a large step forward in managing national gas assets on commercial principles. Moreover, they allow countries to start incorporating the benefits of fully competitive gas-hub pricing seen in developed gas markets. Establishing a gas-trading hub is not an immediate priority for the GCC, but it is likely to happen as the market develops. The country that moves first to introduce commercial principles in managing gas resources today will become the prime candidate to build that kind of gas trading hub in the future.