Macro Trends: Energy Transition Shaking Up the Mideast Order

Copyright © 2021 Energy Intelligence Group

• The energy transition is going to reshape the global political economy, leaving no region or relationship untouched. • One critical dynamic to watch will be the relationship between the top global climate adaptor, Europe, and the energy transition’s biggest victims, the petrostates of the Middle East and North Africa (Mena). • The overall trend will be one of political disengagement and reduced bilateral trade but there are also growth narratives in the energy sphere, notably hydrogen. The emergence of the Mideast Gulf as a pillar of the post-World War II energy system bears testament to oil’s power as driver of globalization. In turn, globalization midwifed the modern Gulf. However, the energy transition will be a key driver of deglobalization, as lower hydrocarbon exports and the three Rs (Reduce, Reuse, Recycle) of the circular carbon economy localize energy production. Impacts will vary across companies, but pressure on Western majors to wean themselves off oil will inevitably lead to an overall shrinkage of Western investment in the region. But perhaps underappreciated is how much bigger an issue the transition will be for Mena than merely oil, because the Gulf’s primary export underpins a much wider economic and political ecosystem. At stake is the region’s traditionally lavish spending on Western luxury goods and arms, and its high-profile sovereign wealth fund property and bond investments. In short, the flow of petrodollars is under threat. This economic system has been backed up by a Western security guarantee. Notable interventions include the 1953 coup against Iran's then Prime Minister Mohammed Mossadegh, the 1991 Gulf War to liberate Kuwait and the 2014 war against Islamic State. This Western security commitment has looked shakier in recent years, with US shale undermining the region’s importance in Washington’s eyes (EC Oct.11'19). Nevertheless, for the Mena elites, there is an organic link between Western oil investment and security. “We feel more confident when we see Western companies in Iraq ... that this will support stability in Iraq,” notes an Iraqi oil official. For their part, French and British oil majors, as national champions, have always had a symbiotic relationship with the state, enabling it to project influence in a key part of the world, while also securing reliable access to a vitally important resource. A Rocky Ride Clearly, the energy transition will be a slow, patchy and uncertain process. In some cases -- Qatari LNG or United Arab Emirates onshore blocks, for example -- Western investor interest is likely to remain strong for some time. The coming changes will not simply see Western influence replaced by Chinese hegemony, either on an economic or political level. A messier, multilateral regional security structure will instead emerge, as we are already seeing with the UAE-Israel peace agreement. In economic terms, some things -- whether Western arms or second homes in London and Paris -- will not be easy or even desirable to replace. Nevertheless, the growing Chinese and Indian presence in the region seems likely to intensify as Western influence wanes (related). Just how the transition pans out is critical. In some fast-track scenarios, oil’s fall is so dramatic that it is difficult not to see Mena’s economic future simply fading into insignificance, its economic ties with all parties, whether Asian or Western, becoming far less important than today. The IEA’s recent Net-Zero by 2050 report, for instance, sees world oil demand at just 24 million barrels per day in 2050, at an oil price of $24/bbl (EC Jun.11'21). Other scenarios see more modest pressure on prices, with lower overall demand being balanced out by Mena’s increased market share. It would be a mistake to assume transition-driven deglobalization would make for a less conflict-riven Mena region because regional stakeholders and outside powers will have less to fight over. The fact is that change and uncertainty trigger conflict. Throw in the destabilizing impact of transition-fueled economic pressures and the real-life impacts of climate change, like increased water scarcity and food insecurity that the region is already witnessing, and Mena’s future looks even more combustible than it is now (related). Silver Hydrogen Bullet? These challenges will only strengthen the resolve of the many in the region fighting moves to fast-track an oil phaseout. “The only resource most of these countries have is oil and gas,” explains Radia Sedaoui, head of the energy section at the UN Economic and Social Commission for Western Asia. For all but the richest in the region, “access to finance and technology with adequate capacity building is needed” to adapt to the energy transition, she argues. But the emergence of hydrogen as a possible panacea in the energy transition has given a new twist to what had been a pretty bleak Mena-EU energy transition dialogue. While before “it is like you go to the butcher and you tell him you want to become a vegetarian” now “there is a growth narrative,” explains Frank Wouters, director of EU-GCC Clean Energy Technology Network. The region’s high temperatures, ample land, and low-cost gas give it natural advantages with both green (made with renewables) and blue (via gas with carbon capture) hydrogen. Nevertheless, any advantages Mena has on hydrogen clearly pale into insignificance compared to the vast ultra-low-cost oil reserves it currently benefits from, and for Gulf producers, margins will never be comparable. Furthermore, considerable technological hurdles remain to the creation of a global hydrogen industry, many of them linked to transportation. Pipeline and short-haul trade in this development phase will enjoy significant benefits, with North Africa looking a better bet for large-scale exports to Europe, and Australia better placed than the Gulf to sell into South Korea and Japan, hydrogen’s other main growth markets for the next decade. North Africa also makes sense for an EU keen to prioritize the stability of neighboring countries and minimize illegal immigration. The experience of the ill-fated Desertec project to import solar power from the Sahara scarred a generation of EU green power developers. A new business model and regulatory framework will be needed to spark large-scale foreign investment in North African renewables and hydrogen. Rafiq Latta, Nicosia

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