TOGY talks to
Risks and the energy transition in KuwaitOctober 11, 2018
Nader Hamad Sultan, chairman of Ikarus Petroleum Industries, talks to TOGY about the risks of being left behind if companies don’t consider the energy transition and the structural difficulties that can arise when investing in Kuwait. Ikarus Petroleum Industries is an investment company that focuses on petrochemicals manufacturing operations in the Middle East.
• On oil demand: “Shell has scenarios for this. One scenario is that governments become very firm on climate change policies and oil demand starts to level out 10 years from now. That frightens oil companies. There are other scenarios, though. Their conclusion is that the demand for oil will level off in 2030.”
• On China and India: “The two biggest countries for energy growth are China and India. Old systems are being bypassed because technology is moving so quickly. [Indian Prime Minister Narendra] Modi wants to bring electricity to every single family in India. They want villages where people burn wood for power to run on solar. These disruptive technologies will change the picture.”
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What are the challenges for Kuwait’s oil production targets?
A more interesting question is what are the challenges in the energy transition phase. The theme for the region is going to be energy transition. The test is how Kuwait as a country is coping with this energy transition. We will have to understand the potential market penetration of electric vehicles [EVs] and its impact on oil demand. That is the uncertainty.
Shell has scenarios for this. One scenario is that governments become very firm on climate change policies and oil demand starts to level out 10 years from now. That frightens oil companies. There are other scenarios, though. Their conclusion is that the demand for oil will level off in 2030.
From the perspective of Kuwait, we need to understand what the uncertainties are. For instance, the new Tesla battery factory is preparing to produce more batteries than the rest of the world combined. What will be the implication of this on the future cost of EVs?
Do these scenarios also take into consideration the increased oil demand in Asia? Is the industry not banking on growth in emerging markets?
The two biggest countries for energy growth are China and India. Old systems are being bypassed because technology is moving so quickly. [Indian Prime Minister Narendra] Modi wants to bring electricity to every single family in India. They want villages where people burn wood for power to run on solar. These disruptive technologies will change the picture. India and Africa will grow, but the question is whether it will be historical growth or growth of a slower kind as a result of greater energy efficiency technologies.
What would you identify as the main challenge in the Kuwait market?
It is not the easiest place to do business. The process to establish companies is very bureaucratic. If you ask big companies what the FDI record of Kuwait is compared to other countries such as Saudi Arabia and the UAE, Kuwait has a weak record. These other countries have one big policy advantage: They encourage foreign investment and the processes for investment are easier.
Is Ikarus looking to diversify its investments into renewables?
Our current investments are in petrochemicals in Saudi Arabia. We have been trying to diversify for the past several years. We are trying to see where are the growth and opportunities. One of the things we are looking to answer is, when KPC announces USD 114 billion of oil projects, how much of that will be disbursed locally, and what type of local content it requires.
The other area of focus is understanding how we can be a player in the transition to renewables, especially with solar. We have to consider several things, such as whether this industry is profitable and in which part of the value chain. We then have to figure out how to tie ourselves to that entity which makes the most money in the value chain.
Are you moving away from investing in petrochemicals?
Our current petrochemical business is generating the cash. We want to stay but not be totally dependent on that, and instead be focused on where to grow. Our current model is based on getting dividends from our big investments in Saudi public companies. We want a model that is much more operational, and not reliant on dividends.
We are working on a deal in which we will take 60% ownership of an operating entity in Saudi Arabia, and we will have operating cash flows from that. Our big objectives are to change the business model and to enter the renewable value chain in Kuwait, as well as be part of local content development. Maybe it is not as feasible in Kuwait, because it is easier to do business in other countries.
Are there other markets you are looking at?
We are MENA-focused, which includes Turkey. We look at where we can add value. We are keeping an eye out for trends, such as solar, or areas where companies are spending a lot of capex – ones that need local goods and services. We are trying to understand how we can capture a portion of that in the region.
For the time being, we find that Kuwait is not the easiest of places to start something if we want to do business. We have looked at three or four projects here, but we can do things much faster outside. One of the hotspots for renewables is Morocco. They have very interesting policies as well. The country succeeds in that area by having a business model that encourages investment. They are able to arrange financing at a low cost, so that if you come in and want to bid, they will provide financing for you.
We are also looking at Saudi Arabia, the UAE and Oman.
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