Endowed with almost half of the world's oil and gas reserves, Middle East and North Africa (MENA) region is a bedrock of the world's hydrocarbons supply. In 2017, the region provided 37% of global oil production, and 22% of global gas production.
The revenue from oil and gas exports to global markets has traditionally been the main contributor to the economies of MENA hydrocarbon producers. For instance, in 2017 this rent contributed to 38% of Iraq's GDP and to 37% of Kuwait's GDP.
These facts put pressure on the region to find alternatives to fossil fuel products, in the attempt to achieve effective energy transition, not only for neutralizing carbon emissions, but also to develop economic diversification, and structurally shift the source of income away from oil production.
Macroeconomic Outlook
The Covid-19 pandemic had a mixed impact on economic diversification efforts, despite large stimulus packages, as less resilient non-oil sectors were the most severely impacted ones (for instance: tourism, retail, and hospitality) witnessing bankruptcies and default. For hydrocarbons net producers, this decade might represent the last chance for the low-cost producers to re-establish their market share, particularly KSA and Qatar. The asymmetric economic recoveries observed in the region in 2021 predict a fragile financial sustainability for several MENA governments, as they face the challenge of financing the growing debt and stimulus packages needed to accelerate the economic rebound in 2021 and beyond against worsening balance sheets. An adverse oil price shock then took place in 2021, as demand recovery started to gain momentum, fueled later by the war in Ukraine and the Russian attempt to deprive Europe from natural gas, in response to the western sanctions. This shock gave oil producers a special margin over the rest of the world. A surplus that can be channeled to other countries in the region, through direct and portfolio investments.
Financing Debt and Green Finance in MENA Region
Debt capital markets are the main tool through which stimulus packages are financed. A blended finance (conventional and green) has then been adopted by most countries to guarantee global market’s subscription. In 2020, GCC countries tapped a record USD 132.7 billion in international bonds and sukuk, (more than USD 66.3 billion) in the form of sovereign bonds. The UAE topped the region with USD 15 billion in issuances, followed by KSA and Qatar at USD 12 billion and USD 10 billion, respectively. Dubai raised USD 2 billion through a dual-tranche bond offering in September. GCC countries started 2021 with a splash on the debt capital markets front, with KSA, Oman and Bahrain selling multiyear-tranche bonds worth USD 5 billion, USD 3.25 billion, and USD 2 billion, respectively, in January. Beyond the GCC, Morocco successfully arranged its largest bond sale ever (USD 3 billion) in late 2020 of 7, 12 and 30-year debt, while Egypt in mid-February 2021 issued a USD 3.75 billion bond of 5, 10 and 40-year tranches.
2020 was a record year for green financing. Since 2016, the MENA region issued a total of USD10.38 billion of green bonds, a record USD3.3 billion of which came in 2020. ESG commitments, standards and certifications are expected to remain atop national agendas from 2022 onwards in lockstep with the accelerating momentum towards green price premiums in energy, petrochemicals and other commodities.
Energy Crisis in the Time of War and Pandemic
The energy crisis and Russia's invasion of Ukraine, along with the outbreak of the COVID-19 pandemic, have become major challenges for the global energy market. The price of oil and natural gas has recently reached its highest level in several years, and the price of electricity has reached its highest level as Europe and Asia grapple with widespread energy shortages.
The International Energy Agency (IEA) in its short-term energy outlook reported the following: “Unprecedented coal and gas prices and repeated blackouts are causing the electricity and energy-intensive industries to turn to oil in order to prevent them from shutting down.” Hence, investment in renewable energy must triple by the end of this decade if the world is to fight climate change effectively. This war undoubtedly setback energy transition, but the surplus in the balance sheet of the GCC countries, remains a source of finance to green projects and SDG goals.
In the meantime, energy resources in the Middle East have been considered by Europe. Due to the energy crisis and the Russian invasion to Ukraine, the option of increasing imports from Qatar and the United States has become more important to European governments. However, due to the energy infrastructure requirements and gas production capacity of the Middle East countries, the EU cannot expect to receive more natural gas from the region in the short term.
The United States called on Qatar to increase its production and export capacity to Europe. Qatar currently supplies 5% of Europe’s gas needs. The annual production capacity of Qatar is 77 million tons of natural gas/ LNG. With a $30 billion project, Qatar plans to increase its production capacity by more than 50%. Trump’s administration has repeatedly called on Germany and other European countries to gradually reduce their share of Europe’s gas basket by increasing gas imports from Qatar and the United States instead of Russian gas. Apparently, no one listened to this whistleblower, until they became obliged to manage a sever crisis instead of managing risks.
At present, Algeria and Libya can increase their natural gas export capacities to Europe through existing pipelines. Given the importance of Algeria’s energy resources, most European energy security experts have warned of the need to provide the infrastructure needed to increase the country’s natural gas exports to Europe. Given its high potential, Algeria is one of the most reasonable alternatives, to partially replace Moscow’s natural gas. Algeria’s main source of foreign exchange earnings is its export of energy. Thus, rising oil and natural gas prices have improved the country’s economic profile.
Energy Investments in the MENA Region
Total energy investments in the MENA region are expected to increase by 9% to cross US $879 billion over the next five years, according to the MENA Energy Investment Outlook 2022-2026 published by the Arab Petroleum Investments Corporation (APICORP).
In the Gulf region, committed projects comprise around 45% of total energy investments (50% higher than the MENA-wide average of 30%). For net-energy importers in the North Africa and Levant regions, their relative vulnerability to geopolitical risks stemming from the war in Ukraine compounded with the economic strains of inflation and debt burdens are beginning to show and impact energy investments.
As mentioned above, energy diversification is at the top of the agenda, with several MENA countries integrating renewables in their energy generation mix, as part of a shared policy objective to diversify the power mix with low-cost, low-carbon energy sources and boost power supply security. MENA region is predicted to add 5.6 GW of installed capacity from renewables in 2022, nearly double the 3 GW realized in 2021. By 2026, the region is planning to add 33 GW in installed capacity of renewables, with around 26 GW as utility and distributed solar PV.
APICORP forecasts that of the energy vectors constituting the power mix in MENA, natural gas (which is already a dominant fuel for power generation) is expected to grow to maintain a power generation share of around 70% to 75% across MENA by 2024. Another positive sustainability signal is oil-fired power, which is expected to drop from 24% of total generation to around 20% by 2024. Egypt’s first planned nuclear power plant is expected to come online in 2026. Saudi Arabia and Jordan also announced their intent to add nuclear energy to their power mix during this decade.
MENA green and sustainability bonds issued in 2021 more than tripled compared to 2020 to $18.64 billion. The year also saw the birth of MENA’s first voluntary carbon trading scheme by the Saudi Stock Exchange (Tadawul), paving the way for the development of a formal carbon market for trading credits and offsets. Under the recent net-zero pledges of the UAE, KSA, and Bahrain, carbon markets are expected to flourish in the region as hydrocarbon, petrochemical and heavy industry producers will need carbon trading platforms to offset part of their emissions especially in the hard-to-abate industries.
Oil and gas companies are facing tighter financing conditions and addressing evolving regulatory frameworks while trying to contribute to socio-economic development and the provision of affordable energy. Consequently, MENA governments continue to shoulder the main portion of hydrocarbon investments going forward to ensure the security of supply.
African countries in particular are not satisfied with the European-led discouragement of natural gas investment, during the COP26 last year. Sub-Saharan Africa's power consumption per capita (excluding South Africa) is a mere 180 kWh, compared to Europe's 6,500 kWh! Africa views natural gas as vital for desperately needed electrification for development. According to Bloomberg New Energy Finance , funding, for gas-to-power projects in emerging markets had already dropped by 10% in 2020 compared to the previous year.
The major oil-producing states of the Gulf are now grappling with the fact that they must reshape their economies in light of the long-term global transition away from carbon-based sources of energy.
