Complex Made Simple

Stagnant oil prices, uncertainties, integration, leave no choice but to reduce oil dependence

How fast are regional governments making the turn to digital and renewable energy?

At the current pace, Saudi Aramco’s recent reserves audit indicating 268.5 billion barrels of oil will last 70-years Achieving renewable energy deployment targets in the GCC by 2030 could save 354 million barrels of oil equivalent in fossil fuel consumption in the power sector The Middle East to require a total of 483GW of power generation capacity by 2035 with renewables in the power mix to more than triple to 20.6% (100GW) in 2035

The International Monetary Fund (IMF) said that overall growth in the Middle East to decline from 2% last year to 1.5% in 2019, describing oil volatility as reaching levels not seen since the shocks of 2014-15, amid uncertainties around global trade tensions, Iran sanctions, geopolitical risks, security concerns, and uncertainty surrounding global financial conditions.

Jihad Azour, the IMF's director for the Middle East and Central Asia recently noted medium-term price projections of oil to remain around $65. "(Therefore) it's very important for countries to pursue and accelerate their diversification strategies … that will allow them to reduce their dependence, in terms of revenues on oil." 

And that’s already in the works

According to a MEED Mashreq Energy-Report on MiddleEast Energy, oil producers are looking beyond their dependence on fossil fuels for a sustainable energy future.

At the current pace, Saudi Aramco’s recent reserves audit indicating 268.5 billion barrels of oil will last 70-years.

From huge capital investments in large-scale oil and gas-fuelled power and desalination plants, governments are opting to a focus on renewables such as solar, wind and nuclear.

The MEED Mashreq report quotes The International Renewable Energy Agency’s (Irena’s) 2019 Renewable Energy Market Analysis for the GCC as saying a total of nearly 7GW in renewable power generation capacity is planned to come online by the early 2020s, led by the UAE, Oman and Kuwait.

Irena’s analysis suggests that achieving renewable energy deployment targets in the GCC by 2030 could save 354 million barrels of oil equivalent in fossil fuel consumption in the power sector.

“Most countries in the region are seeking to save on government budgets and energy waste and preserve hydrocarbons for export by slowing unsustainable demand growth. The UAE and Oman have linked road fuel prices to world levels, and electricity and water tariffs have been raised across the region,” said the report.

Electric vehicles find increasing favour following widespread availability, new models and cheaper battery costs. Renewable energy is seen as an effective solution for ‘clean electricity’, thereby reducing the dependency on internal combustion engine vehicles.

Digitization and power capacity

Both conventional and renewable power plants can use digitalisation to optimise performance while lowering costs with technologies such as Big Data analytics and software, predictive analytics and open, cloud-based internet of things (IoT) allow for more efficient energy generation, and smarter grids, according to the report.

“We expect the Middle East to require a total of 483GW of power generation capacity by 2035, an addition of 277GW from 2016. The share of renewables in the power mix is expected to more than triple from 5.6% (16.7GW) in 2016 to 20.6% (100GW) in 2035,” says the report.

The UAE in 3 years became host to nearly 80% of solar photovoltaic (PV) energy capacity in the Gulf region.

Value chain integration changing trade dynamics

OPEC’s leaders Saudi Arabia and UAE have stepped up their effort to capture more dollars per barrel via a full integration of the value chain, according to OilPrice.com.

The combination of upstream, mid- and downstream is a winning business model national oil companies (NOCs) are copycatting from International Oil companies (IOCs) who proved it decades ago.

Now NOCs are looking at integrating commodity trading.

“By setting up full-fledged trading departments, Aramco and ADNOC are openly taking on the conventional commodity traders,” says OilPrice.com.

“The changes currently occurring in Dhahran, Abu Dhabi or even several North African countries, such as Algeria, will be much stronger than most trading giants currently expect.”

By entering the commodity trading space, NOCs also will increase their own power over oil prices and supply issues.

“Giants such as ADNOC or Aramco will be able to squeeze a higher value from their own production than currently is the case,” OilPrice.com said, and added they could be in a position to not only remove weaker traders from the market but could also create a powerhouse of unprecedented proportions if Aramco and its peers would buy out trading houses or set up global alliances with IOCs.

“A new commodity hub in MENA, most probably Saudi Arabia or offshore, would be a life-threatening event for conventional commodity traders.”