New opportunities in gas production to define future of Middle East energy giants

To:

Al-Monitor Pro Members

From:

Dr. Karen E. Young

Senior Fellow, Director of the Program on Economics & Energy, Middle East Institute

Date:

June 30, 2022

Bottom line:

While there will continue to be a market for oil and associated petrochemical products for some time to come, the short- and medium-term opportunities in gas production will be transformational for some MENA states. For some, like Egypt and Israel, this is as a new net hydrocarbon exporter. And for others like Qatar, and neighbors UAE and Saudi Arabia, gas will be a source of longevity for resource-based income streams. The difference for the UAE is that domestic production will be combined with external investments and partnerships, creating new gas energy giants.

Background facts:
  • Egypt has signed several new deals with major energy firms to build green hydrogen and green ammonia capacity, mainly based at the Red Sea port of Ain Sukhna, located within the Suez Canal Economic Zone (SCZone).
  • The European Union signed an agreement with Israel and Egypt to encourage new gas shipments on June 15. Israel and Egypt, in turn, hope to see more investment flow into their Eastern Mediterranean fields, shifting the dynamic of European policy that has discouraged investors from new oil and gas projects.
  • Masdar, the renewables arm of UAE state investment firm Mubadala, will partner with Egyptian firm Hassan Allam Utilities. Masdar and Hassan Allam are “targeting an electrolyzer capacity of 4GW by 2030, and output of up to 480,000 tons of green hydrogen per year,” a Masdar statement says.
  • Two-thirds of Qatar’s gas sales are tied to long-term contracts, mostly to customers in Asia. Qatar may only be able to partly re-route one-third of its output sold on the spot market, though resales are now coming to market when contracts allow.
  • In the medium term, as Europe looks to diversify its sources of energy, global gas markets will likely welcome the planned capacity increase in Qatar’s North Field by as much as 65%.
  • While the UAE has set a net-zero emissions target by 2050 and Saudi Arabia has its net-zero ambition at 2060, Qatar has pledged only to reduce emissions by 25% by 2030. The more realistic approach to its domestic energy production and its ambitious export targets in LNG favor a less aggressive climate action agenda on paper and in practice.
  • Qatar’s energy exports were already due to reach $100 billion this year for the first time since 2014 based on trends from the first quarter, according to Bloomberg calculations. 
  • Europe’s new energy insecurity as a result of the Russian invasion of Ukraine came after Qatar announced a $30 billion project to boost its exports by 60% by 2027.
  • Saudi Arabia is also refocusing on its domestic gas production for export. With the recently announced Jafurah Field moving into the development phase, Aramco has again stated it is keen to enter the global gas market after suspending all international gas activities in the spring of 2020, during the oil price war with Russia and outset of the COVID pandemic.
  • Abu Dhabi National Oil Company (ADNOC) announced in December 2021 a $127 billion capital spending plan for 2022-2026, as it reported an increase in the UAE’s natural gas reserves of 16 trillion standard cubic feet (scf), 289 trillion scf, as part of a New Energies Strategy to capitalize on hydrogen and lower-carbon fuels.
  • JP Morgan estimates that total capital expenditure on energy supply will reach $1.9 trillion in 2022, up 3% year on year, and set to rise a further 33 % to $2.5 trillion per year by 2030. However, the bank sees a shortfall, as they calculate $2.7 trillion per year by 2030 in necessary investment to meet expected energy demand.
Alternative scenarios:

Scenario 1: The outlook for gas is limited by uncertainty on climate regulation and the extent of Russia's isolation in energy markets. While the race to increase natural gas production has intensified, there remain considerable unknowns on two fronts: 1) how carbon fuels will be regulated and taxed, especially in Europe, where supply is most in threat due to the Russian invasion of Ukraine, and 2) if and for how long Russian gas might be disrupted to Europe and global markets. For investors, a shift in production and infrastructure to supply Europe must go along with some surety in the longer-term purchase agreements of gas. There could be mounting pressure to increase energy capital expenditure in renewables at the cost of new investment in gas pipelines and terminal infrastructure, unless it can be justified as a transport vehicle also for hydrogen in the future. New gas-fired power plants will also face investment hurdles.

Scenario 2: The unevenness and shortfall in capex for oil and gas will benefit Gulf exporters over traditional IOCs. While necessary capital expenditure on energy supply may fall short, there is already sustaining or expanding investment happening in some parts of MENA, notably by Aramco with a significant change in capex year on year in 2022, in Qatar and in the UAE, all led by state-owned entities. Gulf gas businesses may be best positioned to take advantage of a period of opportunity and capture market share in both Europe and Asia.

Scenario 3: The shortest route to Europe through the Mediterranean will define new gas production via LNG deliveries and new discoveries in Egypt, Cyprus and Israel. A third scenario may be a reversion within the Gulf away from new gas business models to double down on oil, while the Eastern Mediterranean becomes the central location of gas production with export capacity to Europe, and Qatar stays focused on Asia. In investment from Gulf SWFs, we may see a rising interest as major stakeholders in East Med projects (e.g. Mubadala investment in the Israeli Tamar field) over production at home. However, this scenario is balanced by a rationale to boost gas production and expansion plans in the Gulf, if only for domestic demand and Asian export.

Conclusion - most likely scenario:

The most likely scenario is that capital expenditure in energy will indeed fall short of energy demand, but that the invigoration in gas production in various new sites, from the Eastern Mediterranean to the Gulf, will continue apace. The flurry of European deals is more about lines of communication and encouragement than actual pipelines or shipments of gas. Germany's energy diplomacy with Qatar has run into similar challenges. There is a desperate search for available deliveries for this calendar year, but most of the agreements are more about future volumes and possible construction of new infrastructure in Europe to take on deliveries from the Middle East and North America. (Qatar has offered Germany future deliveries of LNG from its assets based in the United States by 2024, for example. This is separate from new US commitments to Europe for LNG.) There is no quick fix. And while an EU agreement with Israel and Egypt strikes a chord of unity in energy security, the truth is that EU member countries are actively competing with each other in search of gas deliveries.

Climate targets may continue to include natural gas as an intermediate and preferential choice to oil and coal, and more price competitive than nuclear. For Russia, there is long-term damage to its place as a major gas exporter to Europe that is unlikely to be reversed, though some supply is likely to continue as part of a broader energy mix. The entrenchment of Gulf energy producers looks highly likely, given their ability to accelerate local gas production and investments in production abroad, along with combining expertise in gas facilities to grow their blue hydrogen and ammonia potential.

Contributor Background

Karen E. Young is a senior fellow and founding director of the Program on Economics and Energy at the Middle East Institute. She was a resident scholar at the American Enterprise Institute, and taught courses on the international relations and economy of the Middle East at George Washington University and at the Johns Hopkins School of Advanced International Studies. Before joining AEI, she served as senior resident scholar at the Arab Gulf States Institute, a research and visiting fellow at the Middle East Centre of the London School of Economics and Political Science, and an assistant professor of political science at the American University of Sharjah in the UAE.

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