Why global energy giants are increasing their presence in the Middle East and North Africa


Al-Monitor Pro Members


Gerald Kepes

President, Competitive Energy Strategies, LLC


March 27, 2023

Bottom Line:

International energy is a government business. Governments make the rules, regulate investment and ultimately determine performance as much as the investors. This is especially true of the national oil companies (NOCs) in the Middle East and North Africa (MENA) region; whether high performing or not, these government-owned entities will inherit their energy sectors.

The MENA region possesses many of the most attractive hydrocarbon basins worldwide. As government-owned entities, regional NOCs have had upstream operations since the 1960s. Significant attention has been put into increasing institutional capacity. In many cases, these NOCs had no or little competition vis-à-vis opportunities. Many have partnered with foreign energy companies, benefitting from decades of joint venture experience. So, why does most of the MENA region continue to require upstream investment from foreign companies?

Growth in institutional capacity for most MENA NOCs has stagnated or failed to keep pace with resource maturation and steepening technical challenges in their countries. For some, the culprit is international sanctions, war and political instability. Often political and institutional ambitions of governments/NOCs exceed their capacities. More recently, evolving political and economic needs of regional governments have made new demands.

Foreign equity investment policy in a number of MENA countries has evolved or devolved to very targeted opportunities, as opposed to broad openings. Most are struggling with antiquated contractual structures which are inadequate for the challenges their upstream sectors face. Some lack the political consensus to bring about needed changes.

Global energy companies (GEC) have evolved their strategies to fit this varied competitive landscape. Shaped by the status and contribution of their non-MENA portfolios, as well as differing operating signatures, they have all made the strategic assumption that they will be able to invest in E&P in the region for several decades to come. And that they must.

Background Facts:

Strategic assumptions and business models

  • Larger, integrated IOCs (rebranded as GECs) still need exploration and production for a 10-to-20-year cashflow bridge to provide for competitive returns and the massive capital outflows required to complete the energy transition successfully. They are pursuing more narrowly defined upstream portfolios with fewer operating areas and a shift to natural gas.
  • The upstream business model of the GECs is based on repeatable, profitable investments in the same basins over time generating scale efficiencies.
  • Their collective strategic question is: where can they build businesses of scale and return, consistent with individual operating strategies, in jurisdictions that will permit reinvestment over time.
  • Globally, more basins are reaching resource maturity, different national policy choices de-emphasize investment in hydrocarbons, and above ground risks and realities limit areas for investment. Russia’s upstream is the latest addition to the list of no-gos.
  • In that context, among the important strategic assumptions GECs have made is that they "believe" their investment activities in the MENA region will not be challenged for the next several decades.
  • Grouped with the above are company decisions regarding investment in specific countries. For example, when Chevron acquired Noble Energy in 2020, there were several drivers but the biggest was Noble’s gas assets offshore Israel. Chevron appears to have made a strategic assumption that an investment in Israel would not increase the risk to its business interests elsewhere in the MENA region. (It is also true that Chevron has a more limited exposure in MENA than its peers.)

Strategic signatures in the MENA region

  • These companies have had decades of investment activity in the region, in some cases downstream also. In Oman and the UAE, there are legacy holdings where GECs are embedded in/alongside the NOC. The most prominent example being Shell's 34% and TotalEnergies 4% equity holding in Oman's NOC. Chevron’s participation in the onshore Partitioned Neutral Zone is another variation of a historical relationship.
  • The opportunity set post-2015 is tailored to host government requirements which differ by country. In response, local corporate strategies are dictated as much by the dimensions of the commercial opportunity as by the strategic predilections of the individual companies.
  • Where GECs have invested alongside each other, their country strategies and asset choices are quite similar. In a number of MENA jurisdictions, little differentiation is possible assuming a requisite set of attributes amongst those shortlisted.
  • In other countries — where investment opportunities are less precisely defined — individual company strategies are more likely to be visible, with differentiation arising from flexibility in operating structure and proposal scale.
  • Finally, companies differentiate their regional portfolios and strategies by virtue of which countries they do or do not enter.
  • Of the GECs, Eni and TotalEnergies appear to be the most flexible. This includes bundling renewables in large investment proposals. Eni appears to be the most comfortable with domestic market-oriented gas production. Historical assets aside, BP, Shell and particularly Chevron and ExxonMobil tend to focus on operating single large assets.
  • Offshore Egypt, Libya, Cyprus, Israel and Oman offer the most open competitive space for large company capture. The objective is to play a key, operated role in the energy sector, large enough to reshape the competitive landscape. These are exploration led and, if successful, engender development proposals that often include critical pieces of infrastructure (export or domestic). Not surprisingly, offshore Egypt and Cyprus (Eastern Mediterranean play) are the only countries in which all of these peer companies are active and engage in exploration.
  • Onshore Algeria, Libya, Oman and Iraq offer what can be termed large asset capture: one or two, large discovered assets are targeted which they can operate (solo or in a NOC joint venture with acceptable control) and reinvest in over time. Increasingly, companies also bundle renewables, power and water investments into proposals; the larger of these overlap with large company capture. TotalEnergies’ proposal to invest in/operate four oil, natural gas and renewables projects in Iraq fits this description.
  • The UAE and Qatar offer investments in non-operated, minority stakes in large, long-lived assets, where there is an opportunity to influence the NOC operator via joint venture operations (see Asset Leaders in Abu Dhabi). Alongside of non-operated, minority holdings, Abu Dhabi has expanded its offerings, including operated exploration in unproven areas. Qatar’s offerings include the development of tranches of natural gas reserves in its North Field and paired investment in LNG liquefaction facilities. ExxonMobil, TotalEnergies, Shell and now Eni (very recently) are all investing in Qatar LNG. TotalEnergies, ExxonMobil, BP and Eni (recently) all have upstream interests in Abu Dhabi.
  • Kuwait offers technical service agreements (TSA) for its NOC-operated oil fields. Shell and BP have existing TSAs in Kuwait but these contracts and previous do not appear to offer what is needed to increase production capacity.
  • Apart from a short-term episode of gas-focused exploration with foreign companies, Saudi Arabia/Saudi Aramco has concluded that it does not need foreign equity investment in its upstream sector. Note that Chevron has a historical joint venture in the onshore Partitioned Neutral Zone between Kuwait and Saudi Arabia.
  • Iran has enormous hydrocarbon resources but given external sanctions, limited openings, and aggressive domestic companies, none of the GECs are investing in Iran’s upstream.
  • The focus in this memo is on the peer group of global energy companies, but there are a number of other companies active in the region. Not active as broadly, some occupy important niches in specific countries, not mentioned here.
Alternative Scenarios:

Scenario 1: A greater expansion of regional NOC activity, representing less relative success for the GECs in terms of access.

This scenario would require that NOCs increase institutional capacities, although results to date are mixed. A scenario where the great majority of the MENA NOCs converge onto a path of increasing institutional capacity appears to be less likely at this juncture. But longer term, 20 plus years, this scenario envisions more of the regional NOCs enhancing institutional capacity as policy evolves and international conditions change.

Scenario 2: There is a significant penetration by Chinese energy companies over a ten year period (including others from large import markets like India).

It seems inevitable that as China’s energy trade grows in the region, political relationships and equity investment will follow. Until now, most regional governments have eschewed Chinese operatorship of important assets (as opposed to non-operated). This is less true in Iran but likely a matter of available choice of foreign operators given the degree of sanctions imposed on Iran’s energy sector. A higher degree of Chinese energy company involvement in the region is probable, but whether that involves more substantive operating investments (other than Iran, Iraq and Yemen) is less certain.

Conclusion - Most Likely Scenario:

The most likely scenario envisions that the GECs will be most successful in the large company capture basins offshore Egypt, Libya, Cyprus, Israel and Oman, depending on exploration success and export markets access. Onshore Oman looks positive provided additional tight gas reservoirs can be commercialized. GECs will continue to be successful investors in the UAE and Qatar; returns are limited but large scale. More bundled investments with renewables and other non-upstream assets are anticipated.

The outlook for the large asset capture areas of onshore Algeria, Libya and Iraq is more mixed. Resistance from the host NOC — or continued political, policy or contractual instability — will reduce the chance of success. In Kuwait, the lack of political consensus around the role of foreign equity will continue to drive poor performance. Regionally, Chinese (and Indian) equity investment is predestined to increase and will include more operating roles over time. The biggest inroads will be in Iraq and Iran.

One constant throughout the MENA region is the central role of the NOCs. These government-owned corporations are entrenched; paradoxically, the presence of foreign equity investment appropriately partnered alongside host NOCs is more likely to ensure the long term success of the stated-owned companies.

Contributor Background:

Gerald Kepes has more than 35 years of experience as a consultant and petroleum geologist in the global energy industry. Most recently, he was Vice President in Energy & Natural Resources for IHS Markit (now S&P Global), and previously, a PFC Energy Partner, where he established PFC’s global upstream consulting practice. He also held various positions with a US oil company in North Africa and the Middle East.

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