Édito Énergie - Middle East Oil and Gas Producers: Soon to Be Back in the Lead? The Energy Editorial, March 2014

First, the Middle East is also emerging as a major consumer for gas, oil and refined products. To give a glimpse at the challenge: the IEA estimates that Middle East demand for oil will equal that of China in 2035. Finding gas in the region is already not as easy as it used to be. Egypt is just one example of how a country can struggle to maintain its export volumes. The country which set up gas exporting infrastructures, actually started to import gas in 2011. Algeria, one of the major suppliers of European gas, is hardly coping with its internal demand either and investments are not yet sufficient to keep the country on the gas exporters map. The GCC countries, although to a lesser extent, are facing unprecedented surge in internal demand. Saudi Arabia, the world number 1 oil producer, has increased imports of fuel oil to feed its power plants. The country has been developing new gas projects as well as renewable and nuclear power plants to feed its greedy domestic market for electricity and it commissioned new refineries, but clearly fuel oil import show that it struggles coping with internal consumption. The Gulf will probably emerge as one of the major gas consumer worldwide in a few years, and the output of most of the big refineries under construction will likely be directed towards the internal market of these countries.

Secondly, the region needs massive investments if it wants to maintain its share of global energy supply markets. The IEA highlighted the challenge in its 2011 World Energy Outlook, stating that $10 trillion will be necessary in the oil sector, but also $9.5 trillion in the gas and $11.5 trillion in the electricity sectors. Both the Arab revolutions and the development of unconventional oil and gas resources in North America and elsewhere have negatively impacted these investments. The development of huge renewable projects, meant to decrease the domestic consumption of crude and fuel oil in the power mix of the Gulf countries and North Africa, have failed yet to provide any significant electricity production or water desalination. The demand for gas from power plants has on the other hand significantly increased leaving countries like Saudi Arabia or Kuwait to rely on gas imports. The impact of the Arab spring, and its domino effect has affected energy infrastructure in the Mediterranean region (like in Libya or in Algeria -where the incident in In Amenas left IOCs more concerned about security matters), and resulted in the freezing of energy subsidies -responsible for the non-sustainable path of energy consumption across the region - unreformed. The region now appears increasingly unstable - if it ever was. The Syrian conflict has resurgence in Iran, Iraq and even in Turkey and could arm the development of East-Mediterranean gas.

A lot seems therefore to be expected from new comers: Iraq and Iran. These countries do not appear however to escape the regional tragic faith. Iraq return on oil markets should provide a relief and its massive oil and gas reserves would calm the hunger of rising Asian markets: the WEO 2012 executive summary stated that “Much is riding on Iraq’s success”. Although the IEA has since then reduced its Iraqi oil production forecasts, the situation is still far from settled in the country. Ten years after the war started the resume of oil exports and the development of oil and gas fields still remains chaotic. The country has not been able to develop gas to fuel its internal demand and electricity needs today; so it will probably take a little more time before it stops importing gas from neighboring countries. Major IOCs have also withdrawn from exploration and production as contracts were not sufficiently attractive. Surely Kurdistan represents a real option today, but exports from that region without the approval of the federal government may just end up destabilizing the country furthermore and their exports to Turkey have been put on hold - due to regional politics. New resources found offshore in east-med will definitively not balance the loss of output from North Africa.

Everyone is thus now tempted to turn its head towards Iran. But to the question of how rapidly and how much oil and gas could the country export, no clear answer can be given. Besides the issue of international security and negotiations around the country’s nuclear programme, challenges will also arise from the country domestic energy situation. Iran is facing a similar problem of rising domestic consumption, favored just like elsewhere in the region by high subventions. Despite holding the second world wide reserves of conventional gas, the country is already importing gas from Azerbaijan and Turkmenistan when winter temperatures hit the bottom, and the electricity sector faces serious shortfalls. Attempts to reform the country energy consumption failed so far to materialize.

Thirdly, that curve shows that the Middle East producers getting back in the lead again depends on the shale oil phenomenon in the US going into decline. There might be reasons to suppose that improving technologies, resurgent demand and sustained high prices may cause that curve to slip into the future. Alternatively, if demand is time lag, oil prices will slide and producers bearing the burden of high oil budget breakeven costs may find themselves in trouble to pursue high subsidies policies - that were assessed by the IEA a year ago.

Middle East politics are a crucial (and unpredictable?) element in the equation that should not be underestimated.