Energy Hubs and Sustainable Economic Development

The Success Story of Monetizing Reserves

In the past few decades, most oil and gas producing countries mastered the art of monetizing oil and gas reserves. This was no small achievement. It involved substantial progress in the efficient management of both below-ground resources (i.e. reserves) and to some measure also certain above-ground resources (largely commercial, managerial, and technical skills). Countries succeeded in this area by either building their own full-scale reserve monetization capacities, or by learning how to make effective use of the capacities of the international oil and gas companies.

The Next Challenge

The next substantial challenge facing oil and gas exporting countries goes beyond monetizing reserves, and enters into the realm of economic maturity and sustainable development. Here the record is more murky and uneven. Producing governments, which generally have not had to rely on economic value creation to finance their budgets and to create employment, had neither the political imperative nor the motivation to take sustainable development seriously.

However, this situation changed considerably in the past several years. The current oil boom has triggered a new determination to try and establish certain economic engines which, even if initially driven by the energy sector, would not depend on constant financial subsidies from oil and gas revenues. The private sector has been a major actor in this new economic cycle. However, in general and with a few notable exceptions, the economic diversification effort has focused on establishing various industries outside of the hydrocarbon sector — such as creation of a financial services sector, establishment of regional trading hubs, development of tourism, and, in certain countries, attempts at industrialization and agricultural development.

But the most natural first step in an energy-driven, but energy independent economic development strategy has generally been neglected. This would be a well-organized and concerted effort to develop all of the above-ground economic, technical, commercial and managerial pre-requisites for the running of the hydrocarbon sector. Thus, the economic development potential of the hydrocarbon sectors of most producing countries remains largely unrealized.

The key for realizing the economic development potential of energy lies in establishing real economic (i.e. non-financial) linkages between the oil and gas sectors and the rest of the economy. The amount of oil and gas production and exports from these countries can easily support vast and diverse secondary and tertiary economic activities that normally are required to support a certain volume of oil and gas production. Such support services are routinely outsourced by the oil and gas industry. This is the foundation of major energy hubs such as Houston, Singapore, Calgary, Stavanger, and Aberdeen. Today, there is no such economic hub in any of the major producing regions, including the Middle East Gulf, North Africa, or the Caspian region.

An energy hub would not be involved in the extractive side of the industry; the current activities and actors (including the role of National Oil Companies, oil ministries and International Oil Companies) of extracting oil and gas from reserves and monetizing them would remain the same.

An energy hub would instead focus on creating the necessary conditions for providing as much of the above-ground services required by these operations as possible. Unlike reserves, which generally are owned by governments and controlled by NOCs, above-ground technical and managerial skills can be owned and provided by the private sector. And unlike extractive industries, these services represent considerable value added. These activities will create the demand for specific types of education and training, rendering many of the initiatives in education more meaningful. They will also attract substantial regional and foreign investment in oilfield services, machinery manufacturing, and advanced technical services to the industry.

An energy hub, through its own high-value-added activities, would thus add an entirely new economic segment to the economy of the region. This would be a new layer of income generation and employment creation, as well as a new source of wealth creation.

_______________________________________________________________________________

Vahan Zanoyan is President and CEO of PFC Energy International, a subsidiary of PFC Energy based in Lausanne, Switzerland. For further information on this article contact Enews_vzanoyan@pfcenergy.com.