The energy sector in the Middle East has relatively improved due to the increase in oil prices by the end of 2017. Such improvement is expected to raise the revenues of oil companies during 2018. It will further contribute to reducing the budget deficit of the oil exporting countries. This momentum is encouraging the oil and gas producers in the region to increase their capital spending and production capacity. In addition, regional countries will continue to expand in the renewable energy sector, such as solar and wind energy, to diversify their energy sources and increase their economic revenues. However, the energy sector in the Middle East faces a number of threats, the most prominent of which are fluctuating oil prices, cyber threats and conflicts over oil resources in the region.
Stability of Oil Prices
The oil sector in the Middle East has been strongly affected by the decline of global oil prices throughout the past three years. However, 2017 witnessed the stability of the prices at relatively high levels. Prices exceeded USD 60 per barrel, the highest benchmark since 2015. It is further anticipated that the oil revenues will gradually increase reflecting upon the budgets of regional oil companies.
The rise in global oil prices is attributed to the OPEC's agreement, in November 2017, with the non-OPEC oil producers, led by Russia, to extend production cuts. This coincides with the escalating political tensions in the Middle East concerning oil production and the targeting of oil facilities and export ports in some countries such as Libya. According to analysts, the average oil prices are expected to increase by USD 2-7 in 2018 to reach an average of USD 65 per barrel.
According to Goldman Sacks, Brent crude is likely to settle at USD 62 per barrel in 2018, while the US West Texas Intermediate crude will reach USD 57.50. On the other hand, the World Bank conservative estimates anticipated that oil prices will not exceed USD 56 per barrel.
According to the International Monetary Fund, oil revenues of oil-exporting countries are expected to improve. The increasing oil prices, along with fiscal reforms, will contribute to an evident reduction in their budget deficits from 6.5 percent in 2017 to 4.5 percent in 2018.
Expanding Investments
Rising oil prices are encouraging producers to pursue their ambitious investment plans to increase their production capacity, yet the growth rate of capital expenditure in the region will naturally be slower than in previous years. By the end of 2017, a large number of oil-producing countries in the region had announced expansionary investment plans such as Saudi Arabia, which intends, through Aramco, to spend USD 334 billion in the oil and gas sector by 2025.
Furthermore, Iraq seeks to double the production capacity of some of its oil fields, as part of a plan to increase oil production from 5.5 million barrels per day to 6 million barrels per day by 2020. In December 2017, the Iraqi Ministry of Oil approved a plan to develop the field of Nasiriyah to increase production to 200 thousand barrels, rather than 90 thousand barrels currently.
The current climate of the oil markets seems to be favorable for some newly introduced countries in the hydrocarbon industries, such as Lebanon, which aims to exploit its oil and natural gas reserves across the Mediterranean coast. In December 2017, the Lebanese Cabinet approved an offer to explore and produce oil and gas from a consortium of the French, Italian and Russian companies, Total, Eni, and NOVATEK respectively.
Derivatives' Production
The refinery industry is expected to revive in the Middle East this year, as various countries are willing to operate new refineries. Saudi Arabia will start operating a new refinery in southwestern Jizan province. According to Reuters, "when complete, the 400,000 barrels per day refinery will process heavy and medium crude oil into around 75,000 barrels per day of gasoline and 250,000 bpd of ultra-low-sulfur diesel."
Other countries, such as Oman, Bahrain, Algeria and Iran, are also expected to implement projects to increase their refining capacity. The capacity across the region is anticipated to reach 13.3 million barrels per day in 2021, an increase of an average of 2 million barrels per day.
Increased Gas Production
Countries in the Middle East are developing their capacity to produce natural gas to meet the growing demands, whether domestically or exported. In December 2017, Egypt has started operating its Zohr field in the Mediterranean Sea producing 200 million cubic feet per day, and anticipated to rise to 350 million cubic feet in 2018.
Iraq is seeking to increase its gas production in the east of Baghdad to reach 20 million cubic feet per day. On the other hand, Iran is relying on French Total to develop the eleventh phase of the South Pars field, which is expected to add 2 billion cubic feet to its current production of natural gas. In light of previous developments and the growth of production across the Middle Eastern countries, the region's natural gas production is expected to double by 103 billion cubic meters per year to reach 911 billion cubic meters by 2026.
Reforming Aid to the Energy Sector
Some governments in the region, including Jordan, Morocco, Egypt, Tunisia and Sudan, raised oil and diesel prices by more than 100 percent in some cases, due to the financial burdens and budget deficits resulting from subsidizing the energy sector.
Despite the positive impact of reducing energy subsidies on states' budgets, the prices of goods and services have increased. Yet, the prices of oil derivatives in some countries of the region are still lower than their global counterparts. Thus, this allows states to take additional decisions to reduce energy subsidies in 2018. One example is Tunisia, which decided on January 1, 2018 to increase gasoline prices by 2.8 percent.
Renewable Energy Expansion
Middle Eastern countries have intended to increase their reliance on renewable energy and capitalize on the technological boom in the sector. Oil exporters have developed their technological capacity to benefit from solar energy and wind energy not only to meet the growing demand for electricity, but also to allow exporting a larger portion of their crude oil abroad. As for the oil-importing countries, they seek to reduce their imports through relying on renewable energy as an alternative.
It is expected that the Middle East countries will continue to provide financial and logistical support to the renewable energy sector, in order to increase its contribution in the production of electricity. In 2018, major solar energy projects will be fully functioning. The most prominent of which is the Moroccan "NOOR IV" plant, with a capacity of 72 MW. The four-phased project aims to meet half of Morocco's electricity demands. The GCC is also implementing several projects expected to boost its production of renewable energy in coming years. Saudi Arabia plans to spend an average of USD 50 billion to generate 3.45 gigawatts of solar and wind power plants by 2020.
Heading East
The economic roles of China and Russia have escalated coinciding with their expanding political and military influence. This has led to their increasing involvement in the regional energy sector. For example, the Chinese companies have become a significant player, specifically China National Petroleum Corporation (CNPC), in the Iraqi oil industry, operating more than 20 percent of the Iraqi oil projects. This role is expected to increase in the coming period, after the contract signed between the Iraqi Ministry of Oil and China ZhenHua Oil company to develop an oilfield east of Baghdad, at a cost of USD 3 billion.
Russian companies have increased their investments in the region throughout the last two years as well. The most prominent of these investments is the acquisition of the Russian company "Rosneft" of 30 percent of the Egyptian Zohr field from Eni, worth USD 1.125 billion. It is likely that the Russian companies will further increase their investments through being involved in the production and refining of oil and gas, in addition to the supply of liquefied natural gas to domestic markets in the Middle East.
Conflicts over Resources
Conflict over resources remains one of the key challenges facing the oil sector in the Middle East. Across Iraq and Syria, the increasing influence of ISIS in 2015 escalated conflicts between the terrorist organization and other armed militia on one side, and the regular armed forces of the two countries on the other side over seizing and controlling the oil fields. Yet, with the retreat of ISIS in 2017, governments were able to regain control over most of its oil resources.
In Libya, the Libyan National Army have been able to sustain its control over its oil crescent area since 2016. Despite that the intensity of conflicts over oil fields and ports declined through the past years, many conflicts remain unresolved due to the deteriorating political and security situation in Libya.
It is expected that various oil fields and facilities, in war-torn countries such as Libya, will be the target of armed militia and terrorist organizations. This was evident in targeting of Libyan Sidra pipeline in December 2017, causing a temporary production shortage of about 100 thousand barrels per day .
Cyber Threats
Cyber threats are at the forefront of the challenges facing the oil and natural gas sectors in the Middle East. In the past year, many oil companies in the oil-exporting countries have been subjected to multiple cyber attacks. According to a recent study conducted by Siemens in cooperation with the Ponemon Institute, 50 percent of all cyber attacks are directed against the oil and gas industry, severely affecting productivity, efficiency and safety.
In addition, "19 percent of the region’s oil and gas companies rated themselves as relatively slow in implementing adequate cyber security measures, compared with 13 percent in the rest of the world. Similarly, only 17 percent saw themselves as leaders, compared to 22 percent among global counterparts."
Deployment of logistics centers
Several countries in the Middle East are aiming to utilize their geographical location to reinforce their position as a regional hub to export oil and gas to Europe. Turkey is expected to start operating its pilot phase of the Trans-Anatolian gas pipeline from Azerbaijan to Europe passing through Turkey, in mid 2018, with a capacity of 16 billion cubic meters of gas. Turkey and Russia are also rushing to complete the construction of the first phase of the TurkStream gas pipeline running from Russia to European countries by the end of 2018, to operate fully in 2019.
Egypt is also seeking to strengthen its position as a regional hub, taking advantage of its strategic location overlooking the Red Sea and the Mediterranean Sea, and the expected increase in the natural gas production from its Mediterranean fields. In November 2017, Egypt held talks with Cyprus to discuss the construction of a pipeline to to deliver gas to Egypt from Cyprus's Aphrodite field, opening the door to the rest of the European market.
Finally, the energy sector in the Middle East is expected to witness significant improvement in prices, investments, rate of production, and infrastructure's development in 2018. However, the sector still faces multiple challenges including fluctuating oil prices, increased security tensions, and cyber threats, which may hinder the prospects for growth, and development of the industry.
