How the MENA region and its NOCs are diversifying into new energies

The Middle East produces a third of the world's oil supply, exporting 75% of its domestic output. Growing climate risks and the inexorable rise in transport electrification mean we expect global oil demand to peak within a decade. The Middle East is faced with a significant challenge – building a new energy economy means accelerating nascent diversification efforts and pushing towards ambitious net zero goals.

Fossil fuels generated much of the region’s wealth, with hydrocarbon revenues accounting for between 30-60% of GDP for some of the region’s largest producers. Higher oil prices and recovering demand resulted in a positive fiscal balance in 2022 – the first surplus in over a decade. But headwinds are approaching.

Supply security has come into sharp focus against the backdrop of the Russia-Ukraine conflict. Countries around the world are seeking to reduce their reliance on energy imports amid geopolitical uncertainty and have ramped up efforts to secure domestic energy supply. Renewables are increasingly considered the obvious solution, supported by both compelling economics and climate concerns.

Wood Mackenzie expects global oil demand to peak in 2032 as a result of steadily increasing transport electrification. EVs represented 18% of sales in 2023 but rise to 65% by 2050. It is not difficult to imagine a world where EV adoption surges, having already achieved total-cost-of-ownership (TCO) parity in many markets. In this world, only the most advantaged oil producers would emerge unscathed.

Hydrogen presents a significant opportunity

Countries dependent on oil revenues are aware of the looming risks to demand and are taking steps to diversify their investments, enabled by replenished coffers from surging oil prices. These range from expanding petrochemical production to tap into the promise of demand growth in Africa and South Asia, to producing low-carbon hydrogen for export to Europe and Northeast Asia.

But few markets can accept the prices on offer – currently 3-4 times that of gas on an energy basis. Scale will be required to lower production costs, while policy support will be necessary to raise the price of carbon-intensive alternatives to parity. However, few places in the world are more suited to hydrogen production. In Wood Mackenzie’s base case and net zero scenarios, we expect the global hydrogen trade to reach 4 to 10 Mtpa by 2030 and 42 to 119 Mtpa by 2050.

The hydrogen pivot will be accompanied by a surge in power demand, further compounded by a 36% growth in population and 95% growth in GDP over the next three decades. The Middle East’s per capita energy and water consumption are among the world’s highest due to the intensive use of seawater desalination and air conditioning. This incremental electricity demand will largely be met by renewables, with wind and solar installed capacity rising from 30 GW today to over 600 GW and 1250 GW by 2050 in Wood Mackenzie’s base case and net zero scenarios respectively. This renewables-heavy power grid will need to be supported by dispatchable generation, with additional investments expected in nuclear power, CCS-equipped gas, and grid battery storage.

Those investing in hydrogen are states largely dependent upon oil revenues. Gas is a different story, with sustained demand even in our most ambitious climate scenarios. Energy security concerns have accelerated the growth of the LNG trade in the region, as markets around the world grapple with domestic field depletion and look to import LNG to fill the supply gap. Capacity expansions and new exploration are underway in Qatar and the United Arab Emirates (UAE), aimed at boosting their combined gas output 40% by 2030, supported in large part by investments from national oil companies in Asia.

Middle East can play a pivotal role in the global energy transition

The Middle East may play a key role in decarbonising the global economy given its abundant natural resources, both fossil-based and renewable. Current and upcoming investments in carbon capture and blue hydrogen projects could lay the foundation for regional CCUS hubs, lowering costs and enabling adjacent industries to participate.

Energy super basins may emerge as the nexus of new energies investments could add up to more than the sum of its parts. The Middle East has an opportunity to attract foreign investment in high-value industrial sectors based on the region’s low-cost renewables and CO₂ storage capacity as customers seek out low-carbon solutions in the face of the increasing adoption of carbon border taxes. Large-scale hydrogen production further allows the region to carve out new niches in the global economy, enabling expansions into adjacent areas such as the production of synthetic fuels, low-carbon chemicals, and emissions-free hydrogen into steel smelting.

Originally published in Oil Review Middle East, March 2024.