Interview: Majid Jafar
What are the competitive advantages of Sharjah as a base for regional players in both the upstream and downstream segments?
MAJID JAFAR: Sharjah does not have the same scale of hydrocarbons reserves as, for example, Abu Dhabi or Kuwait. But what it does have – which is very positive not just for oil and gas, but for other sectors as well – is that it is completely open to the private sector. There is no crowding out by or competition from the state, which you have in many other countries in the region.
The emirate has the largest industrial base in the UAE and a lot of the small and medium-sized enterprises. This goes back to the 1960s and 1970s, when the ownership of land was made open for investors from outside the UAE. Here we have both local and international private companies, with the government playing the role of the regulator and maximising revenues, and this is what really differentiates Sharjah.
Why is now the right time for regional governments to address the issue of energy subsidies? How important is this for developing the region?
JAFAR: Energy subsidies are probably the biggest waste of economic resources that we have in our region. Two years ago, when oil prices were high, half of the world’s energy subsidies were found here and most of it goes to the wealthy. It goes to industrial corporations, to those with multiple cars and so forth. So, it is actually a regressive measure, and governments in the region are realising this and they are putting reforms into place so that there is a certain amount of energy or fuel that is sold at a lower cost, and then above that there are bands, so that the more you use the more you pay.
The main problem with energy subsidies is not that it makes us use far too much cheap energy, but rather its negative effects on upstream production. Because local domestic prices are subsidised, it kills the incentive to invest in producing more upstream. So it is critically important to tackle this, and the best time to do it is now that the oil price is lower, because the gap between the actual price and the subsidised price is more narrow.
Yet this is not easy and it takes education, communication and time. Usually you cannot implement these changes overnight and you have to build awareness. Sharjah has carried out some very good public campaigns on energy usage, but at the end of the day it is only when you address the price issue that you can really alter consumption patterns.
On the socio-economic development side, if you can reform subsidies by unlocking $250bn a year in savings across our region, you can then direct that into productive investments like infrastructure. So this is a challenge but also an opportunity.
To what extent can changes to regulatory and legal frameworks improve the prospects for private sector investment in upstream oil and gas?
JAFAR: Our region is punching below its weight in terms of its real potential. Tackling energy subsidies is one thing, but that is on the demand side. On the supply side, the regulatory frameworks and fiscal regimes for upstream oil and gas are outdated. Many governments in the region rely exclusively on national oil companies. These had a role to play when it was important for the state to manage its own resources and not be dependant on others, but with all the new investments and technologies required – and capital and management techniques – there should be a greater role for the private sector working in tandem with these companies.
Here in the UAE there has been a larger role for the private sector. In Abu Dhabi it has been through joint ventures, and in Dubai, Sharjah and the Northern Emirates in operating projects, either as contractors or as investors. But in many other countries in the region there is almost no role for the private sector, and therefore we are losing market share. Going forward, if we are going to maximise the value of the energy resources in our region, we need to expand the private sector.
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