GCC Oil and Gas Reserves Are Worth US$18.3 Trillion: DIFC Authority Report

The enormous energy commodity assets are large enough to finance the transformation of the GCC economies, as well as to impact global asset valuations

The present value of the oil and gas reserves of the six countries of the Gulf Cooperation Council is estimated at US$18.3 trillion, larger than the 2008 GDP of the United States, according to an economic note released today by the Dubai International Financial Centre Authority (DIFCA).

That figure assumes a conservative price of oil at US$50 per barrel and gas at US$9 per million BTU; if oil prices were to average US$100 per barrel and gas US$15, the present value of GCC energy reserves would be US$ 37.7 trillion, equal to the world's total stock market capitalization at the end of 2008.

According to Economic Note No. 6, prepared by the DIFC Authority's Economics unit and entitled "Wealth Effects in the GCC from Energy Commodity Prices", this energy commodity wealth is sufficient to finance the transformation of GCC countries into diversified economies through investments in infrastructure and education. The report's authors also note that this wealth, as it is extracted, will be invested worldwide, with "non-negligible repercussions on asset valuations and in particular on the continuing restructuring of the world's financial and corporate sectors."

Commenting on the economic note, HE Dr Omar Bin Sulaiman, Governor of the DIFC, said that the significance of the results cannot be overstated. "The DIFC considers it a part of its mission, not only to provide the legal, regulatory and operating infrastructure necessary to support the growth and deepening of capital markets in the region, but also to contribute to the body of research and analysis that is so crucial to efficient decision making by all participants in today's sophisticated global financial markets."

In announcing the study, Dr Nasser Saidi, Chief Economist of the DIFC Authority, said, "Higher oil and gas prices over the past five years have resulted in large budget and current account surpluses and an enormous increase in the net foreign assets and international reserves of the GCC countries, with global repercussions. However, what we have seen pales in comparison to the astounding value of hydrocarbon wealth still in the ground. The implications of this are enormous, both in terms of long-term policymaking and in terms of the behaviour of market participants."

"For example, GCC governments have effectively outsourced the management of their external assets to banks and asset managers in traditional financial centres. Yet the financial crisis has undermined the basis and credibility of this practice. Instead they need to invest in, and develop, their own capacity to manage their financial wealth, whether they are deploying or investing it in their domestic economies, or making foreign investments. There should be a strategy of concerted investment in financial human capital and a large and systematic investment in the banking and financial sector of a magnitude on a par with, if not larger than, the existing and prospective investments in the energy and petrochemical industries. As a strategic matter, and for the safety of their assets, the GCC should develop the capacity, markets and institutions to manage their wealth."

Another implication of the study is that ratings agencies and other analysts should revise how they assess the fiscal situation and debt capacity of these countries, given "the vast current and prospective wealth of the GCC countries". While typically they make their decisions based on current flows of oil revenues, exports, GDP and other indicators, the study notes that they neglect the underlying natural resource and financial wealth of the countries. There should be a national balance sheet approach to credit assessments and ratings.

Breaking down the US$18.3 trillion total, the study shows that the present value to 2030 of GCC oil reserves is US$11.2 trillion, assuming a 3% rate of return (and discount rate) and a price of $50 per barrel (at 2009 constant prices), while GCC natural gas reserves would be US$7.1 trillion, assuming a discount rate of 3% and a price of US$9 per million BTU.

The analysis explores results under a variety of hypotheses, including energy prices with oil at US$25, US$50 and US$100 per barrel; gas prices at US$4, US$9 and US$15 per million BTU and three levels of the real discount rate, 1%, 3% and 5%.

The research calculations were conducted under the assumption that oil and gas production is kept constant at 2008 levels and that both oil and gas reserves in the GCC (as a result of new discoveries and/or improved recovery rates resulting from improved extraction technologies) grow, though at a decreasing rate from 0.5% in 2009 to 0 in 2030.