The Energy Sector and Energy Geopolitics in the MENA Region at a Crossroad

Front matter

Perspect evelopment in the Middle East and No ore Eta

Manfred Hafner Pier Paolo Raimondi Benedetta Bonometti

The Energy Sector and Energy Geopolitics in

Foreword

The perspective of rapidly decreasing demand for fossil fuels obviously constitutes a strategic challenge for all countries and economies in which hydrocarbon exports are a large component of GDP. This epochal shift is bound to affect all regions and continents, but it is an especially acute problem for the Middle East and North Africa (MENA), a region that not only includes some of the key global oil and gas exporters but also has limited alternative opportunities for economic diversification.

This timely volume proposes an in-depth, detailed, and very well-informed analysis of the situation of the region, as well as of individual countries in it—which is necessary because conditions are far from uniform in the region and not all countries face the same problems. It is a blessing that this volume is available in open access, because much of the information contained in it, while in the public domain, is nevertheless found behind paywalls and not freely accessible to scholars and commentators.

It has always been known that fossil fuels, being a finite resource, would someday run out and be exhausted. In this sense, oil and gas-producing countries have always been aware of the reality that, at some point in time, they might need to transform their economies and find new opportunities for creating value added. Nevertheless, in many, indeed most cases, this simple consideration has not led to the adoption of long-term strategies to achieve the required economic transformation. Well-known exceptions, such as Norway, can be easily compared to the careless behavior of, say, the UK.

Some of the major oil and gas producers in MENA have pursued economic transformation at least since the 1970s (some, like the UAE or Qatar, only became fully independent at that time). They have obtained some significant success, but the task remains far from being fulfilled. Furthermore, they are the exception: most countries in the region are victims of international or civil wars or of authoritarian governments lacking popular support. These prioritize maintaining power over guaranteeing the economic future of their people. In most cases, there simply is no appetite for a great transformation, not even at the rhetorical level.

It is now almost thirty years since the United Nations Framework Convention on Climate Change (UNFCC) entered into force (1994). For the best part of the first vi Foreword twenty years, the major oil exporters of the region—notably Saudi Arabia—directed their diplomatic activity to slowing down progress and hindering the adoption of any decision to phase out the use of oil and oil products. More recently, the United Arab Emirates has taken the leadership in proposing a new narrative that emphasizes investment in clean energy sources—such as wind, solar, and, in their case, also nuclear—while at the same time asserting that continued reliance on fossil fuels is inevitable at least for several decades, and priority should be given to reducing emissions while continuing their use. At COP27 in Sharm el Sheikh, Saudi Arabia and the UAE aligned with large coal-producing and exporting countries in asserting that the problem is not the use of fossil fuels, but the emissions that are released in the atmosphere. By this, it is meant that, to the extent that emissions can be eliminated or prevented from entering the atmosphere, the use of fossil fuels may continue.

Saudi Arabia has been theorizing the circular carbon economy, i.e., a transformation whereby carbon molecules are recycled, reused, or sequestered back into the ground. Saudi Aramco has pledged to become carbon neutral by 2060 with respect to scope 1 and 2 emissions—but the company rejects responsibility for scope 3 emissions, generated by final users when they burn the hydrocarbon molecules, which are the largest component. How is this ambitious, albeit limited, objective to be achieved?

To begin with, both the UAE and Saudi Arabia claim that their oil is one of the lowest emission already now, because extraction methods are less energy-intensive than elsewhere in the world. In addition, they believe that emissions can be further reduced by substituting some of the use of fossil fuels in extraction, treatment, and refining, with electricity from clean sources. For the rest, they aim at capturing and using the CO, as Enhanced Oil Recovery (EOR) method or simply sequestering it in the same geological formations that have contained oil and gas for millennia.

It may also be possible to transform hydrocarbons into products that are not primarily meant for burning—i.e., in the production of petrochemicals or other energy-intensive processes, accompanied again by carbon capture and sequestration.

The Saudi approach to the circular carbon economy has been acknowledged and incorporated in the final document of the G20 meeting that took place in Riyadh in 2020, in this way acquiring a degree of legitimacy. But the proof of the pudding must be in the eating: in other words, the purported strategy must be translated into actual project implementation, and this is not happening in any significant way, as this volume documents in detail.

The next Conference of the Parties (COP 28) will be hosted by the UAE. The CEO of the national oil company of Abu Dhabi (ADNOC), Sultan al Jaber, has been appointed to chair the conference. Al Jaber is the same person that has led Masdar, the Abu Dhabi company that is investing widely in renewable energy projects in the UAE as well as internationally. He insists that investment in renewable sources must be massively increased worldwide, but even if this happens, fossil fuels will not be eliminated overnight. There is a transition period during which they are still needed and must be provided for.

Can an acceleration of decarbonization of oil and gas be envisaged? For exporting countries, the exit from the COVID pandemic and the Russian invasion of Ukraine has

Foreword Vii brought about a significant improvement in export prices and increase in revenue: financial resources are therefore certainly available to allow for greatly increased investment to reduce emissions and convince the rest of the world that there is merit in the circular carbon economy. However, there are also competing destinations for the available financial resources, some in the direction of sensible economic diversification, but many also in the direction of supporting prestige projects that stand no chance of ever becoming cash-flow positive; or in the acquisition of assets of dubious intrinsic value, such as football clubs or the equity of e-gaming companies; not to speak of military expenditure, which remains at record level in the region, and absorbs a large share of government budgets.

It is also a fact that investment in decarbonizing existing oil and gas exports promises to increase production costs rather than the available rent. It may legitimately be argued that in the absence of such investment, the value of the oil and gas countries’ resources will be undermined, but there is little direct connection between emissions abatement and the prevailing price for oil and gas on international markets. Rather, the drive toward decarbonization in the OECD countries has been accompanied by the stigmatization of further investment in fossil fuel. This is limiting available supply and enhancing the bargaining position of the major producers, which can obtain higher prices independently of whether they invest in decarbonization or not.

One may also argue that high prices will encourage the OECD countries and China to speed up the process of diversifying away from fossil fuels, but it is not clear that this may justify much-increased investment in decarbonization in the eyes of the major exporters. The alternative for them is to continue maximizing the obtainable hydrocarbon rent and use it to pursue politically motivated projects, the accumulation of financial assets, and enhanced military or repression capacity.

The same is also true for some projects that are much talked about, whereby MENA countries might become exporters of clean electricity or even hydrogen. The idea is well-founded inasmuch the region is comparatively very well endowed with solar and wind resources but is not greatly convincing from an economic point of view. The price of a barrel of oil produced in the UAE or Saudi Arabia is commonly at least eight or ten times its production cost, generating a rent that has no equal in any other sector/geography. In contrast, although it is most likely cheaper to produce electricity from renewable sources in MENA, exporting electrons to Europe (the presumed importer) requires expensive transmission capacity: it is not clear that the delivered cost would be competitive with alternatives, and in any case, it will at most allow for a rate of profit which might be acceptable for a utility, but will never generate a significant rent.

Similarly, it has been proposed that the region might export clean or low-carbon hydrogen, and it is indeed likely that producing hydrogen there may be relatively cheaper than in other geographies, but it is highly unlikely that a demand for imported hydrogen might materialize at prices much above the production cost. It is extremely difficult to visualize hydrogen as a source of significant rent for the states of the region.

The implication is that decarbonization will in any case bring about the demise, or at least drastic reduction, of the hydrocarbon rent available to the state, forcing viii Foreword greater reliance on taxation and attention to value-added generation in all economic activities—with predictable consequences on the stability and nature of the regimes in place. Power incumbents may not be ready to face the political consequences of the transformation and opt for a strategy of continuing maximization of the hydrocarbon rent—which may be doomed in the longer run, but still allow them access to large financial resources in an intervening period during which fossil fuels will still be needed. As the intervening period is, even in the most optimistic of “net-zero by 2050” scenarios, at least three decades long, the temptation for any ruler to postpone the required transformation and persist in the well-established rentier policy mode is certainly powerful. The Russian invasion of Ukraine has precipitated a profound transformation in international relations that further encourages continuing rentier behavior.

International energy relations have become intensely politicized. For the past half-century, the dominant narrative has been that closer economic interdependence would consolidate peace and eventually also support democratization and respect of human rights. Facts have validated this narrative until approximately the turn of the century, but in the last 20 years, things have been moving in the opposite direction. Authoritarian regimes have only selectively adopted international norms, while testing the will of liberal democracies to defend their principles—in the belief that short-term economic interest and disunity would allow their infringement of norms to remain unpunished.

In light of Russian behavior, it has become clear that pursuing economic interdependence with countries whose governments are cheating on the rules is not a wise strategy. As many (most) commodity-exporting countries are ruled by authoritarian regimes, the politicization of international trade inevitably impacts relations between industrial countries, which are primarily liberal democracies on the one hand, and commodity exporters, on the other hand. China occupies a special position, as a predominantly industrial country which, however, has come to dominate the production and refining of key metals and is ruled by an increasingly authoritarian regime.

In the immediate, the decision to terminate Europe’s imports of Russian oil and gas has forced the USA and Europe to solicit MENA producers to come to help and increase production to contain prices. These requests have been criticized by numerous commentators, who do not consider MENA authoritarian regimes much preferable to Putin’s. In any case, the major MENA exporters have ignored them: they have confirmed the OPEC+ alliance with the Russian Federation and reduced exports to sustain prices—the opposite of what had been requested of them. A closer Russia-Gulf-China triangle has emerged, which is clearly antithetic to the OECD democracies and their values.

Undoubtedly, the MENA region will remain central to global energy trade, but a narrative that saw it playing a growing role in global hydrocarbon production, because it supposedly would be irrational to invest in new, as yet untapped oil and gas resources, has lost credibility. Refusing to invest in new resources from other parts of the world would only enhance the geopolitical weight of the region’s authoritarian governments. This does not seem acceptable. It is instead to be expected that

Foreword ix the OECD countries will accelerate the process of decarbonization and, in parallel, promote investment in fossil fuels production in politically more acceptable countries, meaning countries in the OECD itself and other democratic countries that are willing to abide by international norms of respect of human rights and peaceful resolution of conflicts.

Short of a new, more successful Arab Spring, OECD relations with MENA will remain difficult. This book provides a very useful and timely resource to understanding the details of the energy dimension of the relationship.

Giacomo Luciani

Scientific Advisor

Master in International Energy

Paris School of International Affairs (PSIA) Sciences Po University

Paris, France

Adjunct Professor

The Graduate Institute of International and Development Studies

Geneva, Switzerland

Acknowledgements

We are particularly thankful to Fondazione Eni Enrico Mattei (FEEM) for its support in the realization of this book and financing its open access.

We owe special thanks to Barbara Racah for her precious help throughout the editorial process and to CASSINI for creating compelling maps regarding key energy access in Algeria, Libya, and Eastern Mediterranean as well as the one regarding Middle Eastern key energy assets and religious groups. We also express our gratitude to Prof. Simone Tagliapietra for his useful feedback on our first draft of the manuscript.

Finally, we very warmly thank Prof. Giacomo Luciani for his inspiring foreword to our book.

Zug, Switzerland Manfred Hafner Milan, Italy Pier Paolo Raimondi Milan, Italy Benedetta Bonometti

January, 2023 xi

Introduction

Over the past century, oil has significantly affected every aspect of our daily life, substantially shaping the world’s economy and society, and enabling economic growth and socioeconomic development. In no other part of the world is this fact more visible than in the Middle East and North Africa (MENA) region, which is endowed with around half of the world’s proven reserves of oil and gas and is home to some of the world’s major oil- and gas-exporting countries. The hydrocarbon resources within the region, however, are not equally distributed geographically, creating a first cleavage between hydrocarbon-rich and hydrocarbon-poor countries. The MENA region therefore includes both net energy-exporting and net energy-importing countries.

Hydrocarbon wealth (or the lack thereof) has shaped the socioeconomic, political, and energy evolution of all MENA countries. National governments of hydrocarbon-rich countries have collected revenues from hydrocarbon exports—commonly known as oil rents, which have steadily become the main source of revenue for these countries’ economies, eroding the need for a relevant fiscal regime and consolidating the ruling elite. Hydrocarbon revenues (i.e., oil rents) have thus become a key component of the economy, and the allocation of wealth is a key feature of the social contract. The allocation/distribution of wealth consists of several instruments, such as employment in the public sector and massive fossil fuel subsidies among others. This rentier mentality has developed not only in the MENA-exporting countries but also in the importing countries, especially in the aftermath of the 1973 oil crisis when the Gulf monarchies distributed wealth across the region. This approach has also been fueled by the exporting countries’ reliance on a foreign and cheap workforce.

The vast hydrocarbon reserves of MENA countries have contributed to their increasing relevance in the international arena, placing them at the center of the geopolitical energy map and enhancing their geopolitical role. Consuming countries have established relations with oil-producing countries since post-World War II in order to secure stable and affordable supplies, which are vital for running their economies. The meeting on the USS Quincy between US President Franklin Delano Roosevelt and Saudi King Abdul Aziz Ibn Saud on Valentine’s Day of 1945 marked xiii xiv Introduction the beginning of the pivotal role of the Saudis (and the MENA region) in the energy landscape.

The domestic socioeconomic model and geopolitical relevance of the MENA area may become unsustainable in the long term as the world is trying to reduce its thirst for hydrocarbons. Climate change and global warming have become pressing issues, and climate policies are climbing the global political agenda. To fight climate change, governments all over the world aim at transforming the energy system through decarbonization. Countries have set climate targets, and there has been a steep acceleration in global climate ambitions since 2019, as several countries have introduced (or are considering to introduce) net-zero targets by and around mid-century. According to the International Energy Agency’s (IEA) Net-Zero Scenario by 2050, the share of fossil fuels in the world’s energy supply will need to decline from 80% in 2020 to 20% in 2050. In short, the global energy transition is expected to drastically transform both energy supply and demand over the next 30 years by removing energy sources (i.e., fossil fuels) for the first time in the history of energy evolution. Even if the goal of carbon neutrality by mid-century is not achieved, strong policy intervention will deeply modify the future energy landscape.

Such a fundamental overhaul of energy systems will have a major impact on several aspects, in particular on the economy, industry, international relations, and social cohesion. While the consequences are expected to be global, they will differ in intensity and magnitude across different regions and people. The MENA region is set to be one of the most exposed regions in the world as it is a cornerstone of the current global energy architecture—today, the MENA region is responsible for about 40% of the world’s oil exports and 15% of the world’s gas exports. Climate policies and technological developments (e.g., electric vehicles) are expected to reduce the world’s demand for hydrocarbons even though the world population is rising, and large parts of it aspire to enter the middle class, thus potentially increasing consumption levels. A global deep decarbonization scenario, characterized by a looming decline of oil and gas demand, poses pressing challenges to MENA-exporting countries.

Besides the international pressure to adapt and adjust their domestic energy and economic systems to a low-carbon future, MENA countries also face increasing pressure for some sort of domestic transformation. Despite the different levels of their available hydrocarbon reserves, all MENA countries have developed a heavy reliance on fossil fuels for their domestic energy markets. Over the course of the past decades, MENA countries have become not only major producing countries, but also major consuming countries. Growing populations, energy subsidies, industrialization, and availability of vast, cheap hydrocarbon resources have stimulated domestic energy consumption and limited energy efficiency measures.

Indeed, the energy systems of MENA countries rely heavily on oil and gas with a limited role of other energy sources, and they have been characterized by a high per capita growth rate from 0.02 Exajoule (EJ) (equivalent to 0.5 Mtoe, million ton of oil equivalent) in 1965 to 0.11 EJ (2.7 Mtoe) in 2019, corresponding to a 2.8% average growth rate per annum (some Gulf Cooperation Countries experienced an average growth rate per annum of around 4%). Environmentally, the lack of energy efficiency and high consumption per capita results in high CO2 emissions passing

Introduction XV from 169.6 million tons (Mt) of CO in 1965 to 2,626.7 Mt of CO, corresponding to an average growth rate per annum of 5.2% (with some GCC countries, such as Qatar and the UAE, recording rates above 10%). Furthermore, the MENA region is one of the world’s areas most affected by the negative consequences of climate change and global warming. Extreme heatwaves, water scarcity, sandstorms, and rising sea levels have become common features of the region, and their intensity and frequency are expected to increase in the future.

By becoming large energy consumers, MENA countries also face macroeconomic challenges. Hydrocarbon-poor countries need to allocate larger financial resources to energy import bills as they need to meet growing domestic demand, whereas hydrocarbon-exporting countries see their main revenue source being eroded as the domestic energy sector is supplied with oil and gas. In this context of growing international and domestic pressure, MENA countries have started considering the development of low-carbon alternatives to transform their energy sector. Regional countries have announced renewable targets to harness their vast potential, and they have increased their participation in the international climate debate. The energy transformation could also be the opportunity to address non-energy related issues, such as job creation, diversification of the economy, and development of new business models. Such a transformation would respond to multiple needs: (i) tackling and reversing the negative consequences of climate change in the region; (ii) meeting the growing energy consumption; (iii) freeing additional oil and gas volumes for export markets; (iv) providing jobs for the young, growing population; and (v) attracting new investments and technologies.

As the global energy transition unfolds, the role of MENA countries in the geopolitical map will become a pressing issue. While the world attempts to reduce its oil and gas demand, oil- and gas-exporting countries need to prepare their hydrocarbon industry for a more demand-constrained world and more stringent environmental measures (e.g., carbon pricing, methane emissions), enhancing the industry’s resilience through investment and innovation. At the same time, renewable sources can create new business models, also for hydrocarbon-importing MENA countries, and whole MENA region could become a provider of clean energy and low-carbon products to the world given the region’s vast renewable potential.

The current energy scenario is characterized by major transformations, to which MENA countries will not be immune. This book provides a multidisciplinary analysis of the region’s energy and geopolitics to better understand how the countries in this area are preparing themselves for this great challenge. The countries of the region share some common features, but they are also characterized by different socioeconomic, energy, and political features. We therefore analyze how each country deals with this transformative time and discusses the consequent challenges and opportunities according to national peculiarities.

We have divided the analysis in each chapter (excluding Chap. 6) into three clusters:

xvi Introduction

— the Arabian-Persian Gulf! region, composed of the six Gulf Cooperation Council (GCC) countries plus Iran;

— the Mashreq region, composed of Egypt, Iraq, Israel, Jordan, Lebanon, Palestine, Syria;

— the Maghreb region, composed of Algeria, Libya, Morocco, Tunisia.

Given the complexity of the expected transformation and its consequences not only on energy patterns, but also on socioeconomic development, the social contract, and geopolitics just to mention a few, this book attempts to address these different transformations of the MENA countries across six different chapters which are regrouped into four parts:

e Part I (Chaps. | and 2) provides an overview of the region and the major features that drive and hinder a real transformation. Here, the issue is related to the conformation of the energy and socioeconomic systems. Chapter | provides a brief introduction of the region from a demographic, economic, energy, and historical point of view. Chapter 2 identifies the barriers and drivers for a great transformation in these countries.

e Part II (Chaps. 3 and 4) tackles the energy field in MENA countries: Chap. 3 analyzes the historical evolution of the energy sector up to today with a main focus on fossil fuels. Chapter 4 provides an analysis of the attempts and efforts to push renewable energy sources in the MENA region.

e Part III (Chaps. 5 and 6) addresses the geopolitical dimension of the energy sector in this region, with Chap. 5 focusing on oil and gas geopolitics and Chap. 6 addressing the potential geopolitical consequences of the energy transition and the strategies that MENA countries can pursue to remain relevant on the international stage.

e Part IV (Chap. 7) provides overall conclusions and key takeaways on all major aspects addressed by the book. It also includes considerations regarding the most recent energy and geopolitical developments in 2021/22.

Manfred Hafner Pier Paolo Raimondi Benedetta Bonometti

! Hereafter as “the Gulf.” 2 Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Part I Context and Drivers for the Regional Energy Transformation

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Part II The Energy Sector in the MENA Region at a Crossroad

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XX Contents

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About the Authors

Manfred Hafner is Professor of International Energy Studies (Geopolitics and Economics of Energy), teaches as an adjunct professor at The Johns Hopkins University School of Advanced International Studies (SAIS Europe) and at SciencesPo— Paris School of International Affairs (PSIA), and is involved in many executive education programmes worldwide. He has been Programme Director of the “Geopolitics and Energy Transition” and “Future Energy” research programmes at the Fondazione Eni Enrico Mattei (FEEM), a non-profit, policy oriented, international research center, and think tank, where this book has been designed. Previously, he was for many years Scientific Director of the Observatoire Méditerranéen de 1’Energie, a think tank and association of Euro-Mediterranean energy operators. He has over his more than 30-year professional career extensively consulted on international energy issues for governments, international organizations, and industry and has coordinated several major interdisciplinary research projects for the European Commission. He has in particular a longstanding experience working with governments and energy operators in most MENA countries on energy strategies and policies. Dr. Hafner holds master’s degrees in Energy Engineering from the Technische Universitat Miinchen, Germany; in Energy Economics and Business from the IFP-School of IFPEN, France, and the Université Paris2/Panthéon Assas, France; and in Energy Economics, Management, and Policy from the University of Pennsylvania, USA. He also holds a Ph.D. in Energy Studies from Mines Paris PSL (Ecole des Mines de Paris). He has published several books on international energy issues.

Pier Paolo Raimondi is a researcher of the “Energy, Climate and Resources” programme of the Istituto Affari Internazionali (IAI). He is also Ph.D. Candidate at the “Institutions and Politics” Doctoral School of the Universita Cattolica del Sacro Cuore, Italy, with a research project on the European Green Deal and its consequences for the MENA region. He was a research fellow at the “Geopolitics and Energy Transition” and “Future Energy” research programmes at the Fondazione Eni Enrico Mattei (FEEM) from 2018 and 2021. His main research activity is related to energy markets, geopolitics, and geoeconomics in different geographical areas, mainly the MENA region, Europe, Africa, and Former Soviet Union area. He holds a xxii About the Authors master’s degree in International Relations and a bachelor’s degree in Political Science from Università degli Studi di Milano, Italy.

Benedetta Bonometti currently works for Eni S.p.A in the Commercial Negotiations Department. She was previously (2020) a researcher at the “Geopolitics and Energy Transition” programme of the Fondazione Eni Enrico Mattei (FEEM) where she has contributed to the first drafts of this book. She holds a second level specializing Master in Energy and Environmental Management and Economics from Pavia University and Eni Corporate University, as well as a M.Sc. in Public Policy: Energy, Resources, and Development from Sciences Po Paris. Her research interests focus on energy policy and political economics in the Middle East.

Part I Context and Drivers for the Regional Energy Transformation

Chapter 1 A) The MENA Region: An Economic, crest Energy, and Historical Context

This first chapter focuses on some key socio-economic features of MENA countries and their impact on the energy sector. It discusses the general present context of MENA countries focusing in particular on demography, economy, energy and history and highlighting differences and similarities anong MENA countries. As such, this chapter sets the scene for the whole book which concentrates on the need, the capability, the challenges and the opportunities of the energy transformation and its geopolitical consequences.

The Middle East and North Africa (MENA) region is often considered as a whole, but it includes as many as 18 countries! with a total of 425.8 million people (UN DESA 2020). It stretches from the Atlantic coast of North Africa in the West to Iran beyond the Hormuz Strait in the East passing through the Mashreq (Map 1.1). Stretching across such a vast territory, MENA countries present some important features, but they are also characterized by major differences from an economic and energy perspective. Tables 1.1 and 1.2 show this heterogeneity.