After Oil: Money, Food and Polymers – New Business Activities for the Middle East

I wrote this article for the Al Jarida newspaper and it was published on Saturday 7 February 2015.

This article took a full page as I was developing an argument for Kuwait and other oil rich countries after demand for crude oil declines. It is published here: Al Jarida Article 7 Feb 2015 (Go to page 12)

Al Jarida Page 12, 7 Feb 2015

After Oil: Money, Food and Polymers – New Business Activities for the Middle East

Fourteen years ago the former Minister of Oil for Saudi Arabia, Sheikh Ahmed Zaki Yamani said that by 2030 oil would remain in the ground because people would not want it. One oil rich country, Iran, is discussing their future budgets without oil. I have written previously about how dramatic falls in energy creation from solar radiation is now a direct competitor to burning fossil fuel. So what can economies that are heavily reliant on oil revenues such as Kuwait do in a post oil world? This is what I will discuss in today’s article.

Based on experience, for a change to take place in any market there must be three major forces that come together at the same time. These three forces are: Economic, Social and Technical. If a market or industry sector has these forces in play, then it will change. Let us look at the oil market and see if these forces are present.

Economically? Yes. Falling prices have made many oil reserves uneconomic. Falling prices of other energy sources drives consumers towards them.

Socially? Yes. Climate change issues are affecting the entire world and reducing carbon dioxide production is now a topic of common discussion. The United Nations Framework Convention on Climate Change (UNFCCC) and the Intergovernmental Panel on Climate Change (IPCC) are both very vocal in the need to curb carbon dioxide emissions immediately. Not next year, but now. Today. Yesterday if they could do it.

Technically? Also yes. Energy can be produced as efficiently from the sun and the wind as it can from fossil fuels (coal, oil and gas).

So it seems the forces are aligned. Hence the market will move. Then the question remains, what does this mean for countries that are heavily reliant upon fossil fuels, especially crude oil, for their state revenues? Something needs to change. Business will have to divest and reinvest in order to create new revenue streams.

There is a catch however, a complex economic catch. In countries where oil revenues provide a lot of state revenues, oil production is also very cheap. For example in Russia, oil production cost is around $15 per barrel. It’s about $10 per barrel in Iran and less than $5 per barrel in Saudi Arabia, Iraq and Kuwait. New revenue streams however will come with higher operating costs, high retooling costs (more capital investment) and high human capital retraining costs. Margins will be less. Hence there must be significant increases in revenue by these lower margin activities to cover the revenues lost by a fall in oil demand. It will be difficult.

So with that groundwork laid, I boldly predict that for oil rich states such as Kuwait that once oil demand declines there are three areas that can replace oil revenues. These are:

1. Finance, equity and debt investments, investment yields 2. High value polymer production, taking it beyond low value petrochemicals 3. Aquaculture for high efficiency protein production

These income streams can either occur through private ownership, in which case taxation regimes would be required to provide state revenues. Or the ventures would be state owned and continue to operate much like the oil and gas sector operates now. The later would be a tall order. The economic efficiencies necessary in these new industries will not allow traditional work ethics common with the high margin, easy to produce revenues from crude oil. Therefore state governments will get smaller. The private sector will grow, if it can. Private sector needs three factors in it’s favour to thrive: 1) great infrastructure – transport, communications, access to liquidity; 2) excellent legal systems; 3) low taxes. This is something Dubai has been developing and they appear to be doing well.

Let’s go through each one of these three new revenue options in turn, using Kuwait as an example and the benchmark of $50b – Kuwait’s gross income with crude oil price at $45 per barrel.

1) Finance, Equity and Debt Investments, Investment Yields

Sovereign wealth funds of the Middle East are in an ideal position to expand their operations to replace falling oil revenues. Since 1953, the Kuwait sovereign investment fund has accumulated an estimated $550b in assets. Therefore, quite simply, a 10% yield on investment would replace all present revenues from crude oil.

But can you get such a high yield on so much capital? You can. You can even get more.

Berkshire Hathaway, the very well known investment group established by Warren Buffet in the 1960’s, holds net assets of $484b. Their net revenues have averaged 20% per year for the past 50 years.

This demonstrates that high yields are achievable.

Employing 330,000 people, Berkshire Hathaway presents a viable model for Kuwait moving forward after oil. Raising the level of investment knowledge therefore is an important skill to develop amongst Kuwaitis. The management of such investment could be achieved by creating 100 investment groups each allocated $5b. Each group would be set the target to achieve 20% or more net annual revenues. It would be survival of the fittest. Consolidation, knowledge transfer and then further expansion would increase the performance of the funds and the skills of the investment management teams.

From first hand experience, investment yields greater than 50% are possible when carefully selected and expertly executed.

So the management of money is a viable solution to entirely replace revenues from falling oil demand.

2) High Value Polymer Production, Taking It Beyond Low Value Petrochemicals

Here is a perspective of the use of crude oil in today’s world:

Oil Consumption Breakdown

From Renewable Energy World

The chart shows that 44% of crude oil is consumed as gasoline, 21% as diesel, and 9% as jet fuel. That means that 74% of crude oil is burnt every day, never to return, non-renewable.

Notice that only 2.7% of all production is consumed in the polymer industry – petrochemicals. This is an industry that takes a product with a market value of $0.30 per kg (crude oil), and then, with complex chemical and mechanical processes, produces products that sell for $1, 5, even $17 per kg. This industry is is the petrochemical industry, producing plastics and polymers.

Value adding to crude oil is a straightforward way to increase revenues once you have installed the necessary equipment and have the required numbers of trained personnel.

I have put together the table below to show different polymers with their prices, their world market share and how much of Kuwait’s revenue this would represent.

For example polycarbonate, a transparent, highly impact resistance plastic common in the automotive industry, sells for about $5 per kg.

PTFE, a high tech fluorocarbon polymer sells for about $17.5 per kg.

But the demand for both of these polymers is low compared to crude oil volumes. Even if Kuwait was producing all of the worlds requirements for these two high value polymers, it would not provide any where near the replacement revenue for the State.

Polymer

World Production (million tonnes per year)

Bulk Market Price

($ per kg)

World Market Value

($ billion per year)

% of World Crude Market Value

Profit at 20% Margin

% of Kuwait Income ($45b)

Polyethylene

80

1.7

136

10%

27

60%

Polypropylene

60

1.5

90

7%

18

40%

PVC

43

2.5

108

8%

22

48%

Polyester (PET)

28

2.2

62

5%

12

27%

Polyurethanes

12

2.5

30

2%

6

13%

Acrylonitrile-Butadiene-Styrene (ABS)

7.3

2.5

18

1%

4

8%

Polycarbonate

3.7

5

19

1%

4

8%

PTFE (Teflon)

0.2

17.5

3.5

0.3%

1

2%

Crude Oil (Kuwait)

150

0.30

45

3%

Crude Oil (World)

4,025

0.33

1,328

100%

Prices and quantities are from various years eg 2012, 2013, and 2014 and are indicative only for the purposes of general trends and forecasting for this article. Further details analysis would be necessary to undertake investment level decisions.

When considering what products the petrochemical industry should focus on, the table highlights that advanced polymers are high value but are not high volume. It also highlights the large scale of investment needed to produce a viable revenue source from advanced polymers. Also there is no one single polymer that would replace crude revenues. Instead a mix would be required, determined by market demand, capital expenditure, and feedstock availability.

Let’s consider two countries in the region, Saudi Arabia and Iraq. Saudi Arabia presently produces 75% of all Petrochemicals in the Middle East (and 10% worldwide). In 2013 Saudi petrochemical production was 86.4 million tonnes and the total value was $66.9b. Note that this equates to only $0.77 per kg, so it’s not in high value polymers, but in mid value intermediate polymer feedstock. In Iraq, Shell has just signed a $11b deal with the Iraqi government to build the Basra Nibras complex (operating by 2021). This is a petrochemical facility with a modest 1.8 million tonne per year capacity. Also, it is not making high value polymers, only intermediary polymer feedstock. Further capital investment is required to do higher value adding.

For an exercise, let’s assumed that the profit margin for a basket of high value polymers is 20% and that that basket sells for $2.5 per kg. This includes all capital investment, operations, maintenance and replacement allowance for the equipment (depreciation). Therefore the net profit will be $0.50 per kg. Thus, with 1,000,000 barrels per day of oil (123 million tonnes per year) converted into a high value polymer would yield $26b in net profits per year, or about half of Kuwait state requirements.

So this is possible, though with considerable capital investment and the time to establish it.

3) Aquaculture for High Efficiency Protein Production

What else can these countries do when oil is no longer wanted for burning? Well, it will still remain a low cost source of energy, and that means that other industries can be supported with it. One such industry is aquaculture, the most efficient form of protein conversion of any animal husbandry practice, as the table below highlights:

Feed Conversion Ratios

Animal

Kilograms of Animal Feed to Produce 1 Kg of Animal Meat

Beef

20

Sheep

4

Chicken

2

Fish

1.4

Shrimp

1.1

This is food for thought for oil rich nations with abundance of sunshine, water, and hence cheap energy. Growing fish and shrimp for hungry expanding world markets is a possible viable investment path, especially as the forecasts of collapsing wild fish and shrimp stocks come more frequently into the news.

One of the fastest growing food industries due to it’s high feed conversion ratio is shrimp farming. Iran has increased shrimp production to 8,000 tonnes per year in only about 15 years, and Saudi Arabia is producing about 25,000 tonnes of shrimp per year over a similar time frame.

There are plans for a 9,000 tonne per annum shrimp farm in Iran which will double production from that country and put it on level with Saudi Arabia.

Aquaculture

WorldFishCentre.org

However, growing shrimp is not a replacement for crude oil sales. It’s a supplement.

Here’s why.

The market price for shrimp is around $5 per kg and they cost about $2 per kg to produce. Hence the net margin is $3 per kg.

To produce $1b net profit per year requires 300,000 tonnes of shrimp.

Note that world shrimp production is about 4 million tonnes per year.

About 40,000 Ha is required to produce this much shrimp (if growing white tail vannamei).

The Kuwait land area is 1.782m Ha, so 2.2% of Kuwait’s total area would have to be converted to shrimp ponds.

Incidentally this much land would also produce about 100 GW of electricity if photovoltaic cells where installed. This is the same amount that both China and India are committing to install by the early 2020’s.

So the volume of resources required is large whilst the net return is comparatively low, despite the fact that it is healthy and expanding.

So, there you have it. A stool with three legs provides the greatest stability:

1. Finance 2. Polymers 3. Food

Perhaps fishing and textiles will again be the mainstay for the region in years to come as it was before oil.

Author Deck Mr. Jeremiah Josey is an Australian who has been living in the Middle East for 7 years. Knowledgeable in the energy markets, he is the Chairman and Director of Oil & Gas of Swiss based Meci Group, a business and investment consultancy operating across the Middle East, Central Asia and Russia.

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The End of Oil? Oil Pricing for 2015 and the Rise of Solar Energy

I wrote this article for the Al Jarida newspaper and it was published on Saturday 24 January 2015.

It’s a further development of my previous blog on how technology is changing the way the energy market operates and how the oil price may never rise again.

It is published here:

Al Jarida Article 24 Jan 2015 (Go to Page 16)

Al Jarida

The End of Oil? Oil Pricing for 2015 and the Rise of Solar Energy

For oil prices, it’s a possible flat line in my opinion. Sideways. In fact with recent dramatic changes in the cost of energy we may be witnessing the end of oil. If oil stays low for long enough it may never rise again.

Said in June 2000, by Sheikh Zaki Yamani, former Oil Minister of Saudi Arabia (1962–86), “Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the Oil Age will come to an end not because we have a lack of oil.”

How so? I hear you ask. How have we reached the end of our modern “Stone Age”?

I say yes. Let’s have a look at why.

Economically, world energy has hit and passed a price equilibrium point between two competing mediums: fossil fuels, and solar energy. This means that how we do busy will change. And it will change rapidly now. For instance, mobile phones took out the land line market in a matter of years once mobile phones became cheap and available enough to do so. They were the better option technically and economically.

Energy from fossil fuels has historically been cheap and this enabled the great economic boom of the past 100 years: a population explosion from 1.7 billion people in 1900 to over 7 billion now, and GDP from $2.7 trillion (adjusted) to over $75 Trillion in roughly the same time period (per capita moving from $1,600 adj. to $10,000). The Green revolution (food production). The Technology revolution (computer development). The Connectivity Revolution (mobile phone & internet) and now the Knowledge revolution (P2P and social networking). All fuelled by cheap energy. And now this low cost energy has engineered it’s own replacement: Solar energy.

Looking closely at Illustration 1 below we see these low fossil energy prices. We also see the rise in crude oil prices to between $10 and $20 per mmbtu that caused the oil shocks of the 1970s. Renewable energy, particularly wind and solar, attempted to rise in this time, but their high technology cost was so great that when oil prices dropped again in the mid 1980’s so did interest in alternative means of keeping us warm, cooking our food and illuminating our homes. Just keep burning fossil fuels was the acceptable, economic solution. That is until now. Solar technology costs have plummeted, especially in the last 6 years, coming from an astronomical $220/mmbtu to now being at the same level as Brent crude and LNG at around $15 per mmbtu. And it’s still falling.

Solar Price Falling

As far as economics go, fossil fuel prices are going the wrong way (up) and solar pricing is going the right way (down).

So what is really happening with the tumbling price of oil? Is Saudi Arabia attempting to displace US supply by shutting down high priced tight oil investments? Are there moves afoot to destabilise the Middle Eastern power base by cutting revenues of Iran for their support of the Syrian regime and other related matters? Are there plans to destroy the asset side of the Russian balance sheet and topple their eastern European hegemony?

Yes, it may be all, or some of these things. For now.

But these are still small compared to the impending impact of economics and the immutable power of the sun. I don’t think that solar prices are having any direct effect on oil demand right now, but I believe that very soon they will. We may find that the price of oil does not rise again, or if it does, not for very long before demand falls for the final time. Remember that more than 40% of crude oil consumption is by passenger vehicles and that’s an important fact when considering the low cost of generating power from the sun.

Led by their wallets, consumers will migrate towards solutions that are supported by lower cost energy and they will seek them out as manufactures support their demands. So it’s just a matter of availability of options. And what is the option for reducing energy costs: locally generated electricity for domestic consumption and electric vehicles or EVs for transport. EVs are 90 percent cheaper to fuel and maintain than gasoline cars (Rocky Mountain Institute).

Those options appear to ready now. Today, EVs can be purchased from many of the major vehicle manufactures from around the world. For instance BMW, Chevrolet, Citroen, Fiat, Ford, General Motors, Honda, Kia, Mahindra, Mercedes Benz, Mitsubishi, Nissan, Renault and Tesla to name a few. In fact BMW are expected to phase out internal combustion engines within 10 years (Baron Funds, September 14, 2014). So that means within the very close and near future, almost half of the demand for crude oil will evaporate. The Sheik’s prediction will come true. And about the image of electric cars, in 2013 the fully electric Tesla Model S won the Car of the Year (Motor Trend) for all car types, not just EVs, and was quoted as being the best car ever tested. Ever!

What continues to drive down the cost of solar energy is mega solar projects and continued large scale PV installations. For example the Indian government has made its intentions clear to have 100 GW of installed generating capacity by 2022 and China are planning 100 GW by 2020. That’s the equivalent of 200 nuclear power stations. And pricing will be around $0.06 per kWh – on a par when levelled with present energy costs (nuclear, coal & LNG).

Is the fall in oil price here to stay. Perhaps not just yet. It depends the uptake of EVs, and that is a matter of their availability. But soon low oil prices will be here to stay.

Our choice in this energy shift is to be leaders or let others lead.

Author Deck

Mr. Jeremiah Josey is an Australian who has been living in the Middle East for 7 years. Knowledgeable in the technology and energy markets, he is the Chairman of Swiss based Meci Group, a business and investment consultancy that operates across the Middle East, Central Asia and Russia.

See www.JeremiahJosey.com and www.Meci-Group.com for more.

Is the US Oil Sector in Denial?

I came across an interesting article in my email the other morning about how higher energy taxes threaten US shale boom, and I was intrigued not really by the message, but by how the message was being delivered.  Being close to the oil sector myself I know that it’s a  high-profile industry and so it attracts many bright minds.  What Nathan Randazzo did with the article was sensationalize it, and he used a great deal of statistics. It is clearly, and unfortunately, a sponsored point of view.  Bright minds are attracted to statistics, and can be distracted by articles like this one.
The key point he pivoted his article upon was the need to keep low-cost (i.e. subsidised energy production going because of the “rapidly expanding population in the U.S.” But this is not quite correct: slowest growth predicted in U.S. over the next 10 years since the 1930’s Great Depression.  Only 7.3% growth predicted over this decade we are in now. It was only 7.25% between 1930 and 1940.  In addition to this the USA has the lowest vehicle fuel efficiency profile of any country in the world (courtesy of studies produced by the Rocky Mountain Institute of Snowmass, Colorado). Hence there is scope to reduce oil demand in the USA by making vehicles more fuel efficient. Thus the price will come down.  Even less need for subsidies. Also the USA is the second largest producer of global greenhouse gases, whilst having only 4% of the world’s population, hence placing great emphasis on “green” energy production methods. These are “high tech” industries, driving entrepreneurship, smart thinking and advanced technologies.  That can only be a good thing for people. My point is there is ample scope for redirecting skills, talent and resources towards better ways of producing energy without employee funded tax reductions and subsidies. Said in June 2000, by Sheikh Zaki Yamani, former Oil Minister of Saudi Arabia (1962–86), “Thirty years from now there will be a huge amount of oil—and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the Oil Age will come to an end not because we have a lack of oil.” The present Saudi Oil Minister Sheikh Ali Al-Naimi recently said “We know that pumping oil out of the ground does not create many jobs. It does not foster an entrepreneurial spirit, nor does it sharpen critical faculties.”  Jeremiah Josey

Discussion with Kuwaiti Member of Parliament

A few nights ago I met up with recently elected member of Kuwait parliament the Right Honourable Nawaf Al Fuzaia.  We discussed many things, one of which was about the prospect of doubling of the budget for the Government of Kuwait over the next 10 years.

That reminded me about C. Northcote Parkinson and his famous discussions around the same topic from the 1960’s – about what is now known as Parkinson’s Law.

To understand why Kuwait’s government budget will roughly double in the next 10 years, in summary, is because:

People, events, work, plants even, will expand to fill the space allocated to them. If there is no restraints on growth, then they will simply grow, and grow and grow.

Put more simply, Parkinson explains succinctly that in a world free of restraints, in government:

1. An official wants to multiply subordinates, not rivals,
2. Officials make work for each other.

To counter this one must place restraints.  Free Market economics works very well because businesses are profit based, so there is a natural restraint upon spending, on expenses. Therefore a business will only grow if it is needed, if it is good.  This is a vital restraint that is missing in most governments of the world: therefore a government will grow whether that growth is needed or not.

Restraints on budget (as for example, as a percentage of GDP), the number of people, limiting the value of government managed assets: these are ideas for restraints for government.  The State can still own assets, however they are privately managed and therefore profit based – this is a PPP – Public Private Partnership: a concept gaining popularity in many parts of the world.

Parkinson’s book is available online here: Parkinson’s Law

This was the general thread of some of our discussion that evening. It was a good night.

Jeremiah Josey

Burqa Woman

I’m sitting at Arrivals with my regulation Starbucks semi- daily black brew. No sugar.  Grande.  I’m waiting.  All nationalities are arriving.  It’s busy.  I’m observing. Looking. Staring.

A couple emerge.  Business or married I can’t tell.  Either way it’s not nice.  Man and woman.  Perhaps Swiss or German from their looks.  Something like that.  He’s 6’1″, dark blue suit, flat shoes, black soft leather brief case.  Right hand.  He’s walking fast, but comfortable.  He’s fit. Head is up.  Looking where he’s going.  He’s been here before.

Behind him, she’s 5’7″, 4″ heels.  Fit too, but not set up.  Blond pony tail, the almost-stiletto heels, tight grey skirt and matching business jacket, small hand bag.  Scurrying.  She’s clutching a wad of files in her left arm.  Brochures or something. Hand bag under the right.  She’s done this before, maybe not here before but somewhere before.  Many times.  She’s 2 meters behind him, head down, trying to keep up. She speeds up to get closer.  He subconsciously does the same to maintain the regulation distance.  “Don’t come close”. It’s cold.  She’s too good for him.  He knows it. She doesn’t.

Out comes a Kuwaiti couple. He’s in jeans, t-shirt and sneakers. Sunglasses.  Trim.  Average height and build.  He has control of the porter with their luggage who’s walking off to the his right side.  Slightly behind.  He’s looking around in front, scouting, keeping an eye on the surroundings, their luggage. Their envelope is safe.  Behind but definitely together with him walks a very upright, much taller figure.  His wife. She’s in full burqa.  Fully covered.  A slit through the niqab.  I can see her eyes looking straight ahead.  Not flinching. Not wavering. Confident.  The burqa flows gracefully to the floor. She’s very proud. You can tell how she holds herself, how she moves.  She glides along as if on air.  I can’t see her feet because the burqa reaches and envelops the floor around her.

They move as a unit, husband and wife.  Even the porter and their luggage is involved.  The man is on guard for her woman.  The woman knows it.

It’s beautiful.

We in the “West” can learn a lot from these examples.

I am enjoying my lessons.

Burqa

Jeremiah Josey