‘Managing gas portfolios on commercial basis is vital’

Raed 2019 04 29Strategy&, part of the PwC network, stated in a new report that GCC governments could generate US$10bn per year in additional GDP and foreign earnings or support the creation of 100,000 jobs by applying commercial principles to the management of their gas portfolios

For a long time, GCC countries have benefited from an abundance of cheap gas that exceeded their needs. However, demand for this finite resource is growing, meaning that GCC countries must begin to make tough decisions about how best to use it.

The report also finds that a modest increase in the gas price of just US$0.5 per million British thermal units (mmBtu) would add more than US$6bn per year to GCC government coffers.

The Strategy& Middle East report outlines vital areas where GCC countries must take action to capture the benefits and unlock significant value in the gas sector:

-Allocate gas to create socio-economic value. As the balance between supply and demand changes, GCC countries need to create more coherent, proactive strategies that allocate gas to end-use sectors based on their relative contribution to the socioeconomic goals of the country.

-Price gas to reflect its true value. A major problem for the GCC is that overall gas pricing in these countries is opaque and international standards keep prices artificially low. Growing demand for gas and increased fiscal pressure on governments are making the issue more urgent. Rather than considering gas operations as cost centres linked to oil production, GCC governments must treat them as separate, profit-generating entities with gas operations and wholesale gas prices reflecting the true value of gas.

One approach to do this is ‘cost-plus pricing’, which factors in all costs needed to deliver gas to an end-user, including supply and transportation costs, plus a government margin. Cost-plus pricing is usually applied to gas intended for domestic consumption. A second approach is ‘net-back pricing’, which indexes gas prices to end-product prices that use gas as a raw material

This approach ensures that governments accurately capture the value of gas instead of allowing a manufacturer to benefit from artificially low prices. Net-back pricing is commonly used for gas that is exported.

-Implement structural reforms. GCC governments must ensure that the right market structure and institutions are in place to support more strategic gas allocation and accurate pricing. For example, they could create a gas aggregation company to coordinate gas sales and purchase agreements. This would lead to greater transparency, higher government revenues and margins, and lower risk.

An independent regulator could also be created to ensure that gas companies operate fairly and provide equal access and treatment to all participants in the sector. The regulator could also advise policymakers, carry out due diligence on all market participants, resolve disputes, and increase energy efficiency.

Raed Kombargi, a partner with Strategy& Middle East, concluded, “To successfully manage their gas portfolios, GCC governments must develop a comprehensive strategy to allocate gas among end-users, and price it to reflect its true value. These measures represent a large step forward in managing national gas assets on commercial principles and would allow countries to start incorporating the benefits of fully competitive gas-hub pricing seen in developed markets. The country that moves first to embrace commercial principles will become the prime candidate to be the GCC gas hub of the future.”

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
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