Natural Gas: Powering the Dubai Overshoot

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Gregor Macdonald submits:

You've seen the before-and-after pictures, like a Vegas slug of glass rising in the desert. And, you've read the stories about indebted foreign workers leaving their Range Rovers behind, as they flee. Perhaps you've seen video of the indoor ski arcade? Or, caught the gaze of the photographer's eye on the poor, underpaid migrant workers constructing the Burj Dubai. Welcome to today's obligatory Dubai blog post. Brought to you courtesy of some very hot, sovereign default action as the UAE's most glittery city announced overnight a request for a stay on debt payments from Dubai World. How could a country so rich in energy resources have gotten itself into such a mess?

It's generally assumed that just about every Mid-East oil producer is a big, net exporter of oil and while that's also true for the United Arab Emirates what's worth noting, or retelling today, is the means by which the UAE, principally because of Dubai (an Emirate within the UAE), started to become a net importer of natural gas. Let's start with a chart of electricity demand ( click to enlarge ).

As in the rest of the world, though primarily in Asia, the Mid-East is now finally in the process of transitioning away from using industrial diesel for its power generation-though in many cases starting from very high levels. You can understand why that practice lingered in places like Saudi Arabia for so long, when the cost of oil extraction was effectively near zero.

However, Saudi Arabia has now elected to build more NG fired power generation (and even adding Solar) and in places like the UAE, natural gas power generation has now become well established. But in a nice portrait of demand outstripping geology, the UAE now must import LNG to fund its parabolic growth in electricity demand. (part of that demand is also for water desalination). And this is despite the UAE's very sizeable reserves of natural gas. Worse, at times the UAE has even had to switch back to oil-fired power generation, owing to infrastructural limits to the NG-fired portions of the power grid. This too offers an insight: it's easier and faster to put up buildings and build roads than it is to develop oil and gas for production.

Now, let me just pause here and say one of the implications of this story that I really like is that human beings, universally, are overshooters . And the people of the UAE have now shown themselves to be overshooters in classic fashion. The UAE obviously looked at its considerable resource inheritance of oil and gas and then got about the business of attaching as much possible debt to this wealth and future growth as the world could stomach. This is yet another example of an infinite debt philosophy on both the part of the borrowers, and the lenders. And by the way, if you think humanity is going to collectively decide to build sustainable, low-growth economies on a voluntary basis then I say dream on. We're all overshooters now. ( this post continues below the theoretical street level limits of the Al Burj, the not-yet-built rival to the now completing Burj Dubai ).

To get the latest data on the UAE's thirst for LNG, I had to go to the CIA Factbook as the EIA in Washington currently has nothing but a hole to show, for all 2007, 2008, and 2009. I should also mention that Jeff Rubin when he was at CIBC was among the first to really highlight the structure of domestic energy demand among the Gulf State oil producers. You can read a July 2008 piece by Rubin here , just on this subject.

According to the CIA Factbook , the UAE in 2008 "only" consumed 18% more natural gas than they produced. Now, it's probably the case that when the data arrives for 2009 on UAE total energy demand we'll see some form of a crash in electricity consumption. Perhaps in the next few years the great Dubai buildout will largely halt for a time and the Emirates will return to developing their natural gas resources. If the economy crashes hard enough, perhaps their NG balance could get back to even.

Finally, I'm thinking of another state that has to import a large amount of energy, has severe water problems on which it has to spend additional energy for conveyance and treatment, and is also in deep fiscal trouble. The State I'm thinking of has also overbuilt for many years, has an opaque government, and is hoping to be bailed out by its overseeing government. The state I'm thinking of now struggles with vast, empty housing stock. And, like UAE, has an enormous "sovereign-wealth fund" (actually a pension fund) that has suffered large losses. Oh, and this state is also filled with lots of overshooters who think there's no limit to either physical growth, or the growth of debt. Name that state!


See also Report from Europe: Stocks Back in the Black Upon a Thursday on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: GAF , GULF , UNG

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