Comments on The Arab Energy Investment Outlook Arab

Comments on The Arab Energy Investment Outlook Arab Fund for Economic and Social Development (AFESD) Tenth Arab Energy Conference December 22 nd, 2014 Abu Dhabi, United Arab Emirates

Two Comments 1) Energy Investment: How important is the Investment Climate? What dimensions are more important? 2) Investment Requirements in the Power Sector of the Arab countries up to 2030

1. Impact of Investment Climate v Energy investment in the region depends on many underlying forces: o Global demand supply considerations o Domestic market conditions o Cost and availability of financing o Available fiscal space v Investment climate, however, has a less important influence on energy investment in comparison with other sectors. Projects in resource-intensive sectors are more immune to political instability and inadequate business environment

Growth in Oil Prices and FDI Inflows to MENA: Economic Considerations Matter the Most Note: Crude oil price is the simple average of prices of Brent, Dubai and West Texas Intermediate (WTI) oil. Source: World Bank and UNCTAD.

Effects of Different Investment Climate Dimensions on Greenfield FDI in MENA 2003 -2012: A Disaggregate View Investment in Resource General Sector (Energy) Tradable Non-Tradable Resource Commercial Services Manufacturing Services Political Instability Lack Law&Order Unstable Business Environment Low Quality of Bureaucracy Corruption Weak Democratic Accountability Government Instability Ethnic and Religious Tensions Conflict RED: means negative and significant effect of the particular dimension on FDI, otherwise no effect. Source: World Bank (2013) based on Burger, Ianchovichina and Rijkers (2013).

Reasons for Irresponsiveness of Energy Investment to the Investment Climate v. Geographically constrained availability of resources v. There is first-mover advantage v. High risk-adjusted profit margins

2. Required Power Capacity in the Region up to 2030 v Arab Fund financed a study (by Ramboll-CESI) to establish a strategy and master plan to develop the trade of energy among Arab countries, and determine the trade-offs between export of electricity and/or natural gas. v Study involved estimation of electricity demand as well as capacity requirements for 2012 -2030, under a number of scenarios with/without energy trade

The Underlying Assumptions of Projections v Business as Usual scenario (BAU): Least cost power development option expressed in the national generation master plans of each country to meet domestic load only v BAU assumed no energy exchanges between countries and no use of pre-existing or planned Arab electrical interconnections v Three growth scenarios were considered: baseline scenario, low growth scenario and high growth scenario

Peak Load in Arab Countries 2000 -2030 (MW) 600, 000 512, 541 500, 000 5. 9% 5. 2% 400, 000 446, 481 391, 076 4. 5 293, 555 300, 000 200, 000 162, 314 100, 000 Baseline Peak Load Low-Growth Peak Load High-Growth Peak Load 04 20 06 20 08 20 10 20 12 20 14 20 16 20 18 20 20 20 22 20 24 20 26 20 28 20 30 20 02 20 20 00 0

Demand for Electricity in Arab Countries 2000 -2030 (GWh) 3, 000 2, 822, 044 6. 1% 2, 500, 000 5. 4% 4. 7% 2, 000 2, 458, 519 2, 153, 199 1, 588, 664 1, 500, 000 1, 000 878, 584 Baseline Gross Demand Low-Growth Demand 500, 000 High-Growth Demand 2030 2028 2026 2024 2022 2020 2018 2016 2014 2012 2010 2008 2006 2004 2002 2000 0

Planned Capacity Development in Arab Countries up to 2030 (MW) 471, 596 500, 000 450, 000 400, 000 331, 788 350, 000 300, 000 250, 000 233, 672 200, 000 150, 000 93, 864 100, 000 50, 000 0 Existing Capacity 2013 Planned Capacity Retired Capacity Final Capacity 2030

Findings of Base-Line Scenario v Present value of Capital costs excluding T&D for 2012 -2030 is $276 Billion, PV of operation costs is $1, 112 Billion. Natural Gas requirement: 123, 638. 4 Tbtu, with mean growth of 4. 2% per year v Estimate of AF/Ramboll-CESI for the aggregate capacity increment for the period 2015 -2019 is 85 GW. It is lower than the estimate provided by APICORP : 131 GW v BAU scenario has the highest capital and operation costs in comparison with other scenarios. Substantial cost savings are possible under alternative scenarios involving trade of electricity and/or natural gas among Arab countries

Thank You