Middle East's oil producers embark on a new energy strategy

29 April 2019
While a clean energy future is the end goal, hydrocarbons will be called on to finance the region’s economic transformation
By Robin Mills, CEO, Qamar Energy and the author of The Myth of the Oil Crisis

The Middle East’s energy developments present an odd paradox. To escape from dependence on volatile oil and gas prices, the region is seeing a new wave of investment in energy projects. This evolution makes more sense when we realise that in building a new economy, the leading countries are trying to build on a foundation of strength.

Key trends

There are four key energy trends that will dominate in the decades to come. The first is economic might, and so energy demand is shifting ever more towards Asia, and particularly in favour of the giants China and India. While China’s demand growth is slowing, it is from a much higher base than its early 2000s’ boom. India is set to be the world’s fastest-growing area for energy consumption, at 3.1 per cent annually to 2040, according to BP’s latest energy outlook released in February 2019.

Secondly, the rise of North American shale oil and gas has turned the continent from an importer into a growing exporter of oil and liquefied natural gas (LNG).

Thirdly, there are concerns over future oil demand, given the competitiveness of electric vehicles, pressure to act on climate change and worries about plastic pollution.

Fourthly, an environment of low oil prices paired with the financial challenge of relying on wildly varying commodity prices has emphasised the need for the Middle East to generate more diverse economic growth, exports and employment.

In response, the region’s energy industries show a sharp divergence. Some are leading the change, some are adapting, while others, often through no fault of their own, remain in stasis. There is only a limited window of time for the laggards to get moving or they will fall behind irreparably.

Middle East governments’ new strategies are carried out by their national oil companies (NOCs), sovereign wealth funds and state-owned utilities, either independently or in cooperation with international investors guided by policy. They have to create new commercial relationships; generate value beyond the simple export of crude oil and gas; and adapt to a low-carbon future.

Sustaining production

The leading regional producers—Saudi Arabia, Iraq, UAE, Kuwait, Iran and Qatar—are not short of resources. State behemoth Saudi Aramco’s recent reserves audit indicated a slight rise on its previous official numbers, to 268.5 billion barrels of oil, more than a 70-year supply at current production rates, and 325 trillion cubic feet of gas.

Iraq will lead the region’s production growth with investments by Asian, Russian and Western firms in its giant fields, while independent companies lead the autonomous Kurdistan region’s renewed expansion. Security has greatly improved and new technocratic ministers in electricity and oil understand the challenges. However, the country’s energy infrastructure remains ramshackle, its commercial terms uninviting, and corruption and bureaucratic inertia are still severe problems.

Next-door Iran remains tied down by US sanctions, exacerbated by its own political infighting. Despite improved domestic capabilities, shortage of technology and finance coupled with closed-off export markets will continue to prevent it from realising its potential.

Kuwait’s upstream production plans, after a brief boost, remain mired in parliamentary wrangling. Meanwhile, the small petroleum industries of Yemen and Syria, devastated by war, show tentative signs of recovery in places.

Some countries’ fields are becoming mature and all seek to save costs and stretch their human resources further, putting more stress on the deployment of advanced technologies: digitisation, automation, artificial intelligence and drones.

Oman has been a regional leader in enhanced oil recovery (EOR), using solar-generated steam for heavy oil production and the injection of miscible gas and polymers. The sultanate has also pioneered the extraction of gas from tight (low-permeability) reservoirs, helping to turn around declining exports.

Bahrain hopes for world-first production of offshore unconventional oil and gas. Shale gas is a key part of Aramco’s plans to double gas output over the next 10 years.

These upstream plans represent improvements to the long-time core businesses of these countries. Beyond this, the most progressive NOCs are becoming more commercially minded, finding new partners and actively investing over- seas. The proposed initial public offering (IPO) of Saudi Aramco has been rescheduled for early 2021, but Energy Minister Khalid al-Falih told the Financial Times in early February that “the world is going to be Saudi Aramco’s playground”.

Channelling downstream

Downstream—oil storage, refining and petrochemicals— has for decades been a major focus for Aramco, with refineries in the US and China, among others, as well as for Kuwait Petroleum, as it seek to anchor and perhaps create demand in the most important markets.

But Aramco is now also open to worldwide upstream, the exploration and production of oil and gas, with ambitions to create a global gas business to compete with the Western supermajors. It has looked at LNG opportunities in the US and Russia. It will also become a world-leading petrochemicals firm with the acquisition of the majority 70 per cent stake of compatriot Saudi Basic Industries Corporation from the Public Investment Fund (PIF), freeing the latter to pursue new targets such as Uber and Tesla.

Adnoc strategy

Abu Dhabi National Oil Company’s (Adnoc’s) transformation has been the most striking. From a staid and essentially domestic company, it has recently started a push into international downstream too, partnering with Aramco for a $44bn refinery and petrochemicals project in the western Indian state of Maharashtra. It has launched an IPO of 10 per cent of its fuel retail arm, sold 35 per cent of its refining arm to Italian supermajor Eni and Austria’s OMV for $5.8bn, and announced a $45bn plan to create what it calls the world’s largest refining and petrochemicals hub at Ruwais in western Abu Dhabi.

CEO Sultan al-Jaber highlighted the company’s “strategy to grow its presence across the energy value chain and secure greater market access for its products, as well as the integral role that partnerships will play in this journey”.

In its core upstream business, Adnoc has restructured all of its expiring concessions, swapping out older share- holders such as Shell and ExxonMobil for a bigger role with long-term partners Total and BP, and new entrants including Eni, Spanish refiner Cepsa—and, most significantly, Asian firms China National Petroleum Corporation, Zhenhua, GS and KNOC of South Korea, and a consortium of Indian state oil companies.

It has also announced a massive expansion of gas production in a bid to be self-sufficient, by developing both its costly offshore sour gas fields (with a high content of toxic, corrosive hydrogen sulphide) and onshore shale gas resources. And it is saving on greenhouse gas emissions by capturing carbon dioxide from a steel plant for EOR.

Qatar Petroleum’s approach has reflected its different circumstances. With a mature and slowly declining oil sector, it has taken larger stakes at home as international firms’ contracts have expired. It has taken steps towards a major expansion of its core LNG business, firstly by announcing an expansion from its current 77 million tonnes a year (t/y) capacity to 110 million t/y by 2023-24, and secondly by committing in early February to its $10bn, 16 million t/y Golden Pass LNG export project with ExxonMobil in Texas.

A growing need

These moves by the NOCs do not take place in a vacuum. Most countries in the region are seeking to save on government budgets and energy waste and preserve hydrocarbons for export by slowing unsustainable demand growth.

Iran reformed energy subsidies in 2010, with mixed success, but more recently, the UAE and Oman have linked road fuel prices to world levels, and electricity and water tariffs have been raised across the region. Energy efficiency policies include ‘green building’ codes, appliance efficiency standards, public transport systems such as urban metros, and district cooling plants for air conditioning.

More dramatic has been the rise of renewables. Dubai set a world record for the cheapest solar photovoltaic power in 2014, at 5.85 $cents a kilowatt hour ($c/kWh), then halved that cost with bids in 2016, and also attract- ed a record low bid for concentrated solar power in 2017.

Saudi Arabia and Abu Dhabi have subsequently gone even lower. Bids below 2 $c/kWh are likely this year. Saudi Arabia set a record low onshore wind price of 2.13 $c/kWh in January.

With Jordan and Egypt moving ahead enthusiastically with solar and wind, and Oman finally making progress on renewable electricity too, 2019 is likely to be the year in which other regional countries awaken to the potential.

This success points to a contradiction. Middle Eastern states have the world’s lowest production cost for oil in the world, yet ultimately they are all chasing a declining pool of demand, whether that decline begins in the 2030s or 2040s. They are expanding in petrochemicals, and moving into more complex and demanding speciality products.

They see the market opportunity in gas, yet except for Iran, Iraq and Qatar, they have lost the advantage of low-cost resources.

Gas, too, will eventually have to adopt carbon capture and storage to remain compatible with climate targets.

Hydrocarbons will be called on to finance the region’s economic transformation. The end-goal is a sophisticated, clean energy economy that supports a wealthy yet sustainable lifestyle, and some Middle East states have already taken their first steps towards that.

Robin Mills is the CEO of Qamar Energy and the author of The Myth of the Oil Crisis

This article is extracted from a report produced by MEED and Mashreq titled Middle East Energy in the 21st Century. Click here to download the report

To know more about the MEED Mashreq Partnership, get in touch with us at MEEDMashreqPartnership@meed.com or find more info on www.meedmashreqindustryinsight.com

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