Some Further MENA Issues

APICORP at DIFC-OECD EmNet Meeting Dubai, 12 December 2011 Some Further MENA Issues Medium-term Microeconomic Challenges; Long-term Macroeconomic Threats By Ali Aissaoui, Senior Consultant Arab Petroleum Investments Corporation

Outline of presentation Medium-term Microeconomic Challenges: Focus on the investment climate, energy investment and the funding challenges facing corporations Long-term Macroeconomic Threats: Focus on the impact of the global energy security-climate change nexus and the need to step up economic diversification APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 2

Our approach to corporate investment and financing Macroeconomic Outlook Energy demand APICORP Research Investment & financing Credit markets Interest rates Investment climate Energy markets Oil & gas prices APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 3

Credit ratings have tended to reflect on-going socio-political turmoil in parts of the region Bahrain, Tunisia and Egypt downgraded Libya suspended GCC countries are expected to retain their higher investment grades with only Bahrain s credit outlook still negative Investment grade Speculative Rated Current Current Pre- turmoil countries rating outlook Kuwait Aa2 Aa2 Stable Qatar Aa2 Aa2 Stable UAE Aa2 Aa2 Stable Saudi Arabia Aa3 Aa3 Stable Oman A1 A1 Stable Bahrain A3 Baa1 Negative Tunisia Baa2 Baa3 Negative Morocco Ba1 Ba1 Stable Jordan Ba2 Ba2 Negative Egypt Ba1 B1 Negative Lebanon B1 B1 Stable Libya 1 Suspended Suspended Suspended 1 Libya is rated by Fitch and S&P APICORP Research's Compilation - Data as of 1st December 2011 APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 4

Our perceptual mapping offers a more comprehensive picture Use an MDS analysis Three attributes: potential investment Vast investment potential IDEAL POINT Strong enabling environment Low country risk country risk enabling environment A two dimensional representation of a 3-D space Note the ideal point High country risk APICORP Research Weak enabling environment Limited investment potential APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 5

A pre- and current-period-turmoil snapshots point to significant position changes vs. the ideal point Strong enabling environment Strong enabling environment Vast investment potential Ideal Point KSA UAE QAT KUW Low country risk Large energy investment opportunities Ideal Point KSA UAE QAT Low country risk IRN IRQ YEM MAU OMA LIB ALG SYR SUD EGY TUN BAH IRN IRQ MAU YEM KUW OMA BAH ALG LIB EGY TUN SYR SUD High country risk Limited investment potential High country risk Small energy investment opportunities APICORP Research Pre turmoil Mapping Weak enabling environment CRA Sovereign Rating Investment grade Speculative grade Not rated APICORP Research Current-turmoil Mapping Weak enabling environment CRA Sovereign Rating Investment grade Speculative grade Not rated APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 6

Current picture Saudi Arabia near the ideal point UAE, Qatar and Kuwait move back Strong enabling environment nearer to each other Iran and Iraq in an odd position Dislocation of the rest of clusters Egypt, Libya and Syria break out of the Algerian cluster Large energy investment opportunities High country risk IRN Ideal Point KSA UAE KUW OMA ALG BAH IRQ LIB EGY TUN SYR MAU SUD YEM QAT Low country risk Small energy investment opportunities Tunisia and Bahrain out of that formed of Oman APICORP Research Current-turmoil Mapping Weak enabling environment CRA Sovereign Rating Investment grade Speculative grade Not rated Yemen out of that of Mauritania APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 7

Impact on MENA energy investment: broken momentum, mixed outlook (*) Energy investment for the period 2012-16 appears on a downtrend Our standpoint is mixed:$525bn is higher than the $478bn actual requirements found in the last review But remains well below the potential of $615bn identified on that occasion US$ billion 700 600 500 400 300 200 100 0 APICORP Research Sep. 2011 2004 08 Review MENA apparenty shelved (LS) MENA actual requirements (LS) "Average project cost" index (RS) 2005 09 Review 2006 10 Review 2007 11 Review 2008 12 Review 2009 13 Review 2010 14 Review 2011 15 Review 2012 16 Review 350 300 250 200 150 100 "Average project cost" index (*) A detailed analysis of MENA/Arab energy investment outlook is provided in APICORP s Economic Commentary dated Sep-Oct 2011. APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 8

Country pattern: unbalanced regional distribution Two-thirds of energy investment in Saudi Arabia, UAE, Iran, Qatar and Algeria None of which has faced the upheaval witnessed in Tunisia, Egypt, Libya, Yemen, Syria and to a lesser extent Bahrain GCC: 54% of MENA total with Saudi Arabia UAE Iran Qatar Algeria Kuwait Iraq Oman Egypt Libya Syria Sudan * Bahrain Tunisia Jordan Morocco Lebanon Yemen Mauritania 2011 15 Review (Potential) 2012 16 Review (Actual) APICORP Research using internal database * Sudan: Aggregate (see footnote no. 1) KSA, UAE & Oman above potential 0 30 60 90 120 150 US$ billion APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 9

Sectoral pattern: prominence of the oil downstream and steady growth of the power-water sector Distribution of investment 200 2005 09 Review 2006 10 Review 2007 11 Review 2008 12 Review 2009 13 Review 2010 14 Review 2011 15 Review 2012 16 Review 42% in the oil value chain 150 34% in the gas value chain US$ billion 100 24% in power/water 50 Most salient link: 0 oil downstream sector Most steady growth: power/water sector APICORP Research Oil upstream Oil midstream Oil based Refining Petroch Gas upstream Gas midstream Oil value chain Natural gas value chain Power LNG GTL Gas based Petroch/Fertil Generation APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 10

Investment & Financing: Capital structure (empirical), financing (conceptual) INVESTING (empirical) Upstream C: $152bn L: 0:100 Aggregate Midstream C: $27bn L: 0:100 Downstream C: $220bn L: 60:40 Power Generation C: $126bn L: 70:30 APICORP Research Capital required Resulting capital structure [L: Debt:Equity] capital required and capital structure C: 525bn L: 43:57 Internal sources External sources FINANCING (Conceptual) Retained earnings State budget allocation Common stocks Bonds or sukuks Medium and long term loans APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 11

External financing: Collapsing loan market Recovery in 2010 reached a record but was short-lived Collapsing loan demand and supply in 2011 and persistently high borrowing cost Shortfall could be even larger if the sources of local public Value (US$ bn) 50 45 40 35 30 25 20 15 10 5 APICORP Research using Dealogiac database 2011*: inferred from 10-month observations Deal value ($bn) 'All-in-one' pricing (Bps) 36 Number of projects 9 18 15 15 20 30 28 35 35 24 36 28 350 300 250 200 150 100 50 "All-in-one" pricing (above Libor) investment funds dry up 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 0 APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 12

Summing up Part I Socio-political turmoil blurred the energy investment climate Energy investment: broken momentum, mixed outlook Corporations facing many challenges with funding most critical Given the level and structure of capital stemming from the review: Internal financing is conditional to OPEC basket above $90/bbl External financing predominantly loans - likely to be daunting APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 13

Outline of presentation Medium-term Microeconomic Challenges: Focus on the investment climate, energy investment and the funding challenges facing corporations Long-term Macroeconomic Threats: Focus on the impact of the global energy security-climate change nexus and the need to step up economic diversification APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 14

Energy security-climate change nexus and oil Higher global energy needs but lowest increment for oil among fossil fuels (Insights from : IEA s 2011 WEO, Current Policies Scenario ) APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 15

Economic diversification: A recurrent MENA concern, better articulated within GCC Long-term consensual visions to guide their diversification agenda Common principles: globalization, competitiveness, social progress Ultimate goal: leverage non-renewable hydrocarbon resources for sustainable development and prosperity Central questions: What paths on the journey to that destination? How pressing is the urgency for economic diversification perceived? What are the drivers of policies and how they translate into strategies? What are the main problems, challenges, and handicaps? APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 16

Defining economic diversification: best by antonyms Concentration on a given economic sector, measured by a pseudo- Herfindahl-Hirschman index Dependence on a single source of income, measured by a combination of the shares of petroleum in Exports earnings Fiscal revenues Value added to GDP Dependence better reflects the structural anomalies, imbalances and vulnerabilities within MENA APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 17

Measuring it: A still long way to go! Libya (combined index of 1.00) the most dependent within MENA Egypt (combined index of 0.54) the least dependent Norway (combined index of 0.49) serves here as an external benchmark Kuwait (0.87) Algeria (0.85) Saudi A (0.85) Libya (1.00) Qatar (0.80) Norway (0.49) Iraq (0.76) Egypt (0.54) Oman (0.73) UAE (0.59) Bahrain (0.66) Iran (0.71) GDP Index Budget Index Export Index APICORP Research APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 18

Four arguments for stepping up diversification First, limits to growth of petroleum exports Insights from IEA s 2011 WEO, 450 Scenario Focus on energy-related CO 2 emissions, consistent with stabilizing all GHGs at 450 ppm Key mitigators include energy efficiency, renewables, biofuels, nuclear and CCS Demand for fossil fuels (coal, oil and natural gas) likely to peak around 2020 Global demand (Mtoe) 12000 40% 10000 8000 6000 4000 Fossil fuels Zero-carbon fuels % zero-carbon fuels 30% 20% 10% 2000 0 Compiled from IEA's 2011 WEO 0% 2035 2030 2025 2020 2015 2010 2005 2000 1995 1990 Share of zero-carbon fuels APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 19

2 nd Argument: Petroleum fiscal unsustainability PIH model and basic assumptions Reference date: 2010 Assumptions Remarks Proven hydrocarbon reserves 185 Gtoe + 25% reserve growth and Y-to-F Y-to-F: Yet to find from undiscovered resources R/P ratio 95 years Simulation horizon : 2100 Petroleum production profiles Crude oil & NGLs Tuned to the OPEC's Reference Case (2010 WOO) Hydrocarbon export prices 0.70 of Dated Brent Prices moving together in the long run Domestic pricing At average cost No rent extracted on domestic consumption Governments take 70% of export take Past 5-year calibration, declining to 65% in 2030 Discount factor 5% real Up-pricing of risks - Long term horizon Population 440 million in 2010, doubling in 2050 Dynamics depends on labor imports within GCC APICORP Research using statistics from OPEC, IEA, BP and own assumptions Million ton per year 3500 3000 2500 2000 1500 1000 500 APICORP Research Total hydrocarbon production Crude oil & NGLs production profile Total hydrocarbon demand 90 80 70 60 50 40 30 20 10 million barrel per day 0 0 2100 2090 2080 2070 2060 2050 2040 2030 2020 2010 2000 1990 1980 1970 1960 APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 20

Resulting sustainable governments spending Real sustainable spending near to historical record: an average of $750/cap (adjusted from inflation and appreciation or depreciation of US$) False assurance that accumulated financial assets could ensure fiscal and macroeconomic sustainability at historic rent level Annuity value ($/capita) 2,000 1,600 1,200 800 400 OPEC Ref Case - $90/bbl OPEC Ref Case - $75/bbl Average historical record $750/cap APICORP Research 0 2% 3% 4% 5% 6% 7% 8% 9% Discount factor APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 21

3 rd argument: daunting task of stabilizing petroleum export-dominated fiscal revenues Which avenue? Balancing the oil market to ensure price stability? Removing price uncertainty through hedging? Smoothing income flows using a stabilization fund? MENA $ per-capital governement fiscal revenues 2500 2000 1500 1000 500 APICORP Research using OPEC database and own estimations Nominal Real (inflation+dollar) Base: 2010 0 1960 1970 1980 1990 2000 2010 APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 22

4 th argument: Inability of the dominant petroleum sector to create sufficient jobs VA of petroleum >50% of GDP- Petroleum employment <5% of TE Very low employment-to-population ratios Massive import of labor In the Saudi context: Extremely high female unemployment 2009 estimates Unit World GCC KSA Saudi males Saudi female Total Saudis Non Saudis Population mn 6,799 41.8 28.7 11.0 10.5 21.5 7.2 Working age population (15 years +) % 68.7 67.8 65.9 61.9 62.0 61.9 77.8 Employment-to-population ratio 1 % 62.0 53.9 41.1 45.3 7.7 26.9 74.7 Official unemployment 2 % 6.5 5.1 5.6 8.3 24.7 11.0 0.4 1 Proportion of the working-age population that is employed 2 Proportion of labor force that is unemployed and "actively seeking a job" APICORP Research using data from ILO and local sources APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 23

Summing up Part II Serious impact of global energy security-climate change nexus Economic diversification: a solution to a growing threat Better articulated within GCC but slow progress Four arguments for stepping up the process First three may not be so compelling as to create a sense of urgency First: post-kyoto agreement anticipated to be weak Second: Financial assets could support fiscal sustainability Third: OPEC perceived as efficient in stabilizing oil markets? Fourth argument is strong enough to warrant drastic and rapid changes Inability of the petroleum sector to provide sufficient jobs! APICORP 2011 DIFC-OECD EmNet 12 Dec 2011 Slide 24