with Paul Navratil, Head of Middle East Energy and Utilities practice , PricewaterhouseCoopers – UAE
Mr Navratil, how would you describe the strategic importance of the UAE to PriceWaterhouseCoopers’ (PwC) regional operations?
Overall, the UAE is the second largest economy in the Middle East and perhaps the most diverse once you consider its contributors to the GDP. That said, the local market is a significantly strategic for PwC, as well as most professional services firms for that matter.
Diving into the oil and gas industry, the country is unique in its structure entering into strong partnerships on the back of production sharing agreements and JV’s with international partners, and will most likely continue to do so. Hence, the resulting market dynamics are very different from that can be found in Saudi Arabia or Kuwait, for instance.
Because of this structure, the UAE boasts a true melting pot of IOC’s, NOC’s and service providers that come together in a different fashion than they do elsewhere in the Gulf region. As a professional services provider and advisor, this dynamic is very interesting and brings in a whole new set of different perspectives inside our energy clients.
As the local industry matures, is there a greater focus on generating value from the business side of things as opposed to the operational side?
Value is still understood in a variety of ways. From the Ministry of Finance who looks to the oil industry as the biggest contributor to its budget to operations who value production targets to the “head office” who looks to ‘Emiratization’, or nationalization, of the workforce. Managing the relationships between stakeholder perspectives is increasingly challenging.
The industry is the biggest part of the economy, the biggest contributor to the national budgets usually the largest (non public sector) employer and creator of local talent, and the largest vehicle to promote and further diversify local content in the supply chain or the associated industry. Sometimes we see these forces compete with each other and sometimes complement each other, depending on the point of view taken, How value is generated continues to be interpreted differently.
In the past, it could be said that technology and capital investments were the keys to success in the UAE’s licensing deals. How has this dynamic changed in light of the upcoming concession renewals?
Technology remains key factor for the UAE. Indeed, national oil companies have come a long way in developing their capabilities and the technologies they employ. There are in fact some NOC’s today that have technology centers that can compete with the IOC’s. In a mutually beneficial way, many, if not all, NOC’s depend to some extent on technologies stemming from the IOC’s. Ultimately, these mutually beneficial relationships allow NOC’s to tap into innovations and new technologies from the ICO’s and service companies.
From my perspective, I believe technology is still at the top of the agenda because as the Middle East matures, we are not finding and developing the “easy” hydrocarbons anymore. The “next generation” of reserves are deeper, more challenging and require more treatment due to foreign element contamination. Needless to say, all these challenges require technology.
For instance, Abu Dhabi boasts the world’s fourth largest gas reserves in the world; yet the Emirate is gas short and imports its gas from Qatar, among others. Why? Given the sour, or sulphur-rich, characteristics of Abu Dhabi’s gas reserves, gas is that new frontier for the Emirate. Evidently, the Emirate needs the foreign partners to tap into its gas reserves since it has not fully developed its own technology to access that, nor should it “got it alone” and capability.
In complement to technology, I believe another critical factor is the people knowhow and experience. Effectively, you cannot have one without the other and this helps you apply the technology in the best way. For instance, when we are talking about very deep and challenging reservoirs, there is simply a shortage of people with requisite experience.
As the world’s oil majors are scrambling to get a piece of the biggest oil deal ever offered by the UAE in 2014, the general feeling is that there is a shift in the oil industry towards the Asian companies to secure a piece of the pie. To what would you attribute this shift from Abu Dhabi’s long standing partners in the west to the east in Asia?
There has undoubtedly been a strongly growing presence of Korean, Chinese and Japanese in the UAE recently. However, it is worth noting that they bring very different things to the table. On the construction side, it is certainly very difficult to compete with them in terms of costs. However when it boils down to building up infrastructure, some would argue that price is not the only factor that should be taken into consideration. This is certainly the viewpoint that the locally established Western EPC’s are taking.
Nonetheless, it is still too early to say who the favorite is. For instance, looking at the Chinese national oil companies, it presents a very different dynamic because it is largely an NOC to NOC discussion. In this instance, the financial expectations of such discussions differ fundamentally from those between an IOC and NOC. Although it is yet to be proven, I have to say that it looks like the Asian NOC’s are bringing a very different dialogue as compared with the IOC’s.
As of today, it is unknown guess how the concession agreements will play out and who is awarded the contracts. Concurrently, however, it is interesting to ask if the Asian NOC’s have gained all the experience and technology for the challenging new fields. So we could expect to see a duality where we have more standard infrastructure and development projects that go one way, while the more technologically challenging and capability demanding projects go another way.
Shale oil and gas is already causing big waves in the global industry. What impact do you foresee these developments having on the UAE’s oil and gas industry? What strategies can the country adopt to mitigate these?
It is way too early to tell. Admittedly, there is huge potential in shale, but there is also huge potential in solar or other energy sources.
PwC has recently published a study on shale and it projects that it could be a game changer of significance; but where? For instance, in Europe, it’s most likely not going to happen on a whole scale given the environmental concerns of shale and the population densities of the continent. Similarly, it is difficult to expect shale extraction to develop in the wide scale in the Middle East simply because of the huge requirements of water needed; a rare commodity in the region. In addition to this, shale extraction is still very costly and is yet to be economically stable.
A likely future scenario for me is that it continuous its path on North America making the US energy self-sufficient. However, the overall demand growth is stemming from the southern hemisphere. In the northern hemisphere, the oil companies should, and mostly have, written off prospects of increasing demand. Until China displaces its energy needs with domestic shale, there is nothing rocking the boat in a big way.
Broadly speaking, I believe shale is not very well understood by many in terms of what it is and what it takes to develop it. It’s comparable to the oil sands in Canada where you need a minimum of $85 oil price to be able to economically develop oil sands. As current market oil prices hover around that figure, this creates a lot of uncertainty in those projects. If the price dips below this figure, they must shut down operations and the cost of continuously starting, shutting and restarting these operations is prohibitive.
Shale must first become accessible and commercialized on a large scale, for us to consider its fullest potential and impact. For me, there are far too many ‘if’s’ and it is too hard to tell at this point.
The UAE has been making significant investments in the alternative energy sources in order to satisfy its grown energy demands and control the country’s high carbon emissions. As the saying goes, Rome wasn’t built in a day – what challenges do you think lie ahead for the UAE green energy plans over the medium and long term?
When one is the highest emitter per capita, the highest user of energy and water per capita, it must do something. That is the case of the UAE and they know that and are starting to really recognize to that.
In part this value has not been understood because energy comes at such a highly subsidized price.
As a ruler of a country, one would want to make energy available to your people in a very economical and affordable way. Certainly in this climate, you need energy and you need large quantities of water. As such, the straight comparison of per capita usage is a little biased. But still, looking at how water and energy is used, society must learn to be better. The cost of energy inefficiency to the economy is huge, both in terms of the cost of subsidies as well as the value of the hydrocarbons used to generate the electricity and desalinate the water.
In due course, you need to understand what can be done with subsidies and the subsidization levels while simultaneously “re-educating” society and developing non-hydrocarbon based sources of energy. Primarily, that is going to be nuclear, solar and a much more efficient manner of producing potable water.
In conclusion, what are your ambitions for PwC’s local energy, utilities and mining services over the foreseeable future?
Our vision and ambition is quite clear; to be the premier advisor and the trusted advisor on all of these subjects. We advise at the governmental level, the corporate level and at the operating company level.
To be the trusted advisor, not only do we need to bring in good ideas, but we need to do so with a dose of practicality and honesty. That for me is the big challenge in the Middle East and to tackle issues and problems upfront. From a topside energy perspective, we are at a very delicate point, in terms of what we do with the energy once we have produced/extracted it. This normally brings us back to the issue of energy efficiency and how the different perspectives of where value is or should be created come together and considers the wider picture as opposed to an individual value perspective.
That is what we aim to do. If we are able to play a role in creating that dialogue, we have succeeded. That is my personal ambition and the ambition I share with the PwC Energy team. Where I think we differentiate ourselves is that we understand the grassroots issue, or ‘how to implement’, while also being able to take that back up to ‘how do we create value’ and link the two since they are seldom linked.