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

Al-Monitor Pro Members

Dr. Karen E. Young

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

June 30, 2022

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.

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.

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.