GCC economies to remain reliant on hydrocarbons into 2030s, says S&P

24 Feb 2020
GCC economies to remain reliant on hydrocarbons into 2030s, says S&P

Energy transition may pose long-term risk to region’s oil exporters, but low production costs should give them more time to diversify


The economies of oil exporting countries in the Gulf will remain reliant on hydrocarbon revenues well into the 2030s, according to S&P Global Ratings.

In its latest report, ‘The Energy Transition: The clock is ticking for Middle East Hydrocarbon Exports,” S&P says that oil and gas will remain the primary source of economic activity in the Gulf, referring to GCC countries and Iraq, well into the next decade.

According to S&P, hydrocarbons contributed to 91 per cent of government revenue for the GCC and Iraq, and contributes on average to about 40 per cent of GDP.

Discussing its finding at a media roundtable in Dubai, S&P said that progress had been made from GCC economies to diversify their economies away from oil, albeit slow.

S&P estimates that the nonoil private sector’s share in Gulf economies real GDP will reach an average of 36.8 per cent by 2022, up from 29.2 per cent in 2012, an average 0.8 per cent percentage points per year.

The ratings agency partly attributes the percentage increase in non-hydrocarbon private sector revenue to lower oil prices. Qatar is likely to have made most progress with growing nonoil sector according to S&P, with its non-gas share of real GDP expected to have almost doubled from 18 per cent in 2012 to 33 per cent by 2022.

Oman and Bahrain are expected to have increased percentage of non-hydrocarbon revenues of GDP by 13 per cent and 11 per cent respectively.

In the period since 2012, GCC governments have started to diversify public revenue away from a near total reliance on oil. Nonoil revenues for the bloc increased on average by 81 per cent, largely driven by the introduction of value-added-tax (VAT).


Energy transition

The global push towards decarbonization, a process which has been accelerated since the signing of the 2016 Paris Agreement, may present a long-term risk to Middle East oil exporters, with international investors likely to “reappraise their appetite for investment in sectors and regions they perceive as most at risk from decarbonization initiatives,” S&P states in its report. A shift in investor appetite could cause a “headwind to economic diversification.”

S&P notes, however, that the low cost of hydrocarbon production in the region, in comparison to other areas of the world, provides the GCC states with some respite from the energy transition risk – allowing them more time to implement economic diversification strategies.

However, while the energy transition may, on the face of it, provide challenges to the economic growth of a region still heavily reliant on hydrocarbons, governments are also beginning to make tangible progress with some of the largest planned renewable energy programmes in the world. Investors may see these programmes as “compelling investment opportunities,” according to S&P.

In addition to delivering large-scale renewable energy projects, developing clean energy offers the prospect of economic development into new industries such as the manufacturing of components for solar and wind energy schemes.

“Saudi Arabia and the UAE are both putting a lot of investment into renewable energy,” says” and this will bring attention to investment houses and this is potentially quite exciting for them,” Benjamin Young, associate director, S&P, Dubai, told Energy & Utilities.  “The economic validity for [manufacturing renewable energy components]  it has happened – the challenge will be to exporting it, particularly for battery technology – the industry as a whole has some strides to be made before the viability of exports is large-scale.”

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