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Analysis |

The future of theoil and gas industry in the Arab Gulf regionIn many Middle Eastern countries, several projects are currently investigating the abundantly freely available energy sources such as solar and wind to capitalize on further energy portfolio mix, and by doing so devoting hydrocarbons for more value-add industries. Preserving gas for new investments can be attractive, employing new investments, providing jobs to youngsters and adding new gas-based industries.

The significance of the GCC region in the global oil and gas supply market.

The Gulf Corporation Council (GCC) region is part of the wider Middle East, and presently consists of six member-states, namely, the State of Kuwait,

Kingdom of Saudi Arabia, State of Qatar, Kingdom of Bahrain, United Arab Emirates (UAE) and Sultanate of Oman. Relative to world hydrocarbon scales, these six states are highly oil and gas rich, and combined, produce today about 25% of the world’s oil production and 10% of the world’s gas production. In terms of future reserves, they combined hold today about 30% of the world’s oil reserves and 20% of the world’s gas reserves. This signifies the impact such a region has on the global energy market.

Having said the above, it is interesting to note if nearby Iran and Iraq are included in the above statistics, then the extended region holds 45% of the world’s oil reserves and 35% of the world’s gas reserves. The extended region has the potential to produce

significantly higher than current production rates, in terms of both oil and gas, if the political and investment environments were to be favoured, stabilized and commercially optimized.

Are we approaching peakproduction in the Middle East?

It seems many parts of the world, and not only the wider Middle East or GCC regions have been producing for the past 50 to 100 years, and have certainly produced - and still producing from - most of their large hydrocarbon accumulations or the so called ‘crown jewel’ fields. Several large fields seem to be presently exhibiting close to peak potential production capacity. Globally and regionally, declining field production is usually counterbalanced by new but smaller field additions or by intensifying existing field development programs to sustain production capacity, i.e. moving to expensive enhanced or tertiary production regimes. The production plot below shows the production leveling capacity in the GCC region beyond 2010 to current date.

By: Dr. Anwar Al Kharusi

Vice PresidentUpstream Business Development

Upstream Business Unit, OQ

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The future of the oil and gas industry in the Arab Gulf region | Analysis

Added value to crude oil export barrels in the Middle East.The Middle East has been maximizing value by not only exporting crude oil and gas, but also investing in additional refining and petrochemical production capacities for both local use and export. In the GCC region, almost all member states have started, beside crude oil and gas export, the production and export of increasing volumes of fuels, commodity petrochemicals in the form of polyethylene and polypropylene,

and specialty chemicals such as derivatives used in the plastics, rubber, pharmaceutical and cosmetics industries. Manufacturing of such chemicals is either made inside the GCC region or other regions worldwide, targeting sale of such materials in the regional and international markets, usually and primarily targeting the East Asian region. By utilizing some of the crude to manufacture chemicals,

these countries can now positively extract additional value from each oil barrel, but this is not trivial as petrochemical manufacturing requires heavy investments, and expensive technology licensing acquisitions or alliances.

Tightening oil margins due to oil price fluctuations.The world has lived through several peaks and troughs in oil price fluctuations, which seem to occur periodically almost every decade or less, as the case proved lately,

and this has affected not only suppliers of hydrocarbon but also consumers. Oil prices do impact quite heavily world economies with indirect effect on several related industries, some affected more than others. It is clear that, in the Middle East region, even something like real estate is directly affected by oil price movements as GDP is lowered, demoting all associated businesses during

24,00023,00022,00021,00020,00019,00018,00017,00016,00015,00014,00013,00012,00011,00010,000

9,0008,0007,0006,0005,0004,0003,0002,0001,000

0

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Oil Production Chart GCC Region - 6 Member States

Oil

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Gas to Market

ElectricityThe diagram depicts a typical full barrel manufacturing, utilization and trade.

Source: U.S Energy Information Administration

https://www.eia.gov/beta/international

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Analysis | The future of the oil and gas industry in the Arab Gulf region

rapidly declining oil price periods, while energy companies reducing activities and sometimes cutting staff.

Oil Companies reverting to more efficient integration of Upstream and Downstream businessesSeveral major oil and gas companies have in the past spun off downstream from upstream businesses, in their desperation to detach their low margin refining segments from their highly profitable upstream business segments. However, at later years, and while oil price fluctuations were more frequent due to changing world political and financial stability, the integrated upstream and downstream business model started to show resilience and robustness. The integrated model retained by some companies and newly adapted by others has exhibited more sustainability in the profitability of these integrated oil and gas companies. The profitability of Upstream may be challenged during a low oil price cycle while Downstream businesses flourish due to cheap feedstocks of either crude or naphtha. On the other hand, the profitability of Downstream may be negatively impacted during a high oil price cycle due to the rising costs of feedstock, while Upstream enjoys sales at expensive crude oil prices.

Diversifying from hydrocarbon economies in the Middle EastEconomies in the Middle East have been heavily impacted by fluctuating oil prices, and since this has increased in frequency in the past 2 decades, and with hydrocarbon-based GDP marking more than 50% of governments’ income, it has necessitated the start of a new era in most of the Middle Eastern countries including the GCC region. The search and hunt for additional GDP sources has been key in the agendas in many countries to diversify from hydrocarbon-based economies. Several projects are now being investigated in various segments of the economy including fishery, agriculture, logistics, minerals, trading, manufacturing and tourism, to name just a few.

In addition to economy diversification,

alternative energy sources are also simultaneously being seriously investigated. In many Middle Eastern countries, several projects are currently investigating the abundantly freely available energy sources such as solar and wind to capitalize on further energy portfolio mix, and by doing so devoting hydrocarbons for more value-add industries. Preserving gas for new investments can be attractive, employing new investments, providing jobs to youngsters and adding new gas-based industries.

Examples of solar energy utilization in the Middle East include the newly upcoming small power plants for trial purposes, to be operated on solar photovoltaic cells in both Oman and the UAE, and the currently ongoing solar focused mirror based steam project in Oman.

The global hydrocarbon environmental challenge and its impact on the Middle EastThe developed countries, pioneered by the European Union, mostly agree today on taking serious steps towards mitigating the foreseen environmental threats, post COP21. Overwhelming scientific evidence confirmed the potentially devastating effects of further increases in atmospheric temperatures due to global warming. Reduction of carbon emissions is top in the EU agenda, and one prime way to achieve this is by diverting from fossil fuels for energy means, into exploiting cleaner renewable sources of energy.

On top of this, there is serious research and technological advancements currently being made to make standard fossil fuel-based engines more efficient to consume less fuels and hence make less emissions. In addition to this, many innovative companies are researching on collection of CO2 technologies from the atmosphere to reprocess the CO2 back into carbon based fuels for energy, in circular form. Other still far-fledged and prohibitively costly ways, and at the edge of today’s technology, include emission collection directly from the source engines or industrial sites, before emission into the atmosphere, and again recycle into useful products or fuels.

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The future of the oil and gas industry in the Arab Gulf region | Analysis

The European Union has been, as always, in the forefront in formulating tighter policies on emissions for inner cities, and setting out ambitious goals for cleaner energy mix, such as renewables targeting 20% of renewables in the energy mix by 2020, to increase to 27% by 2030. Different EU member States are presently improvising relevant national plans to achieve these targets.

The impact of any cut in fossil fuels due to the move to cleaner energy will be severe on global fossil fuel demand, and as a result on

the Middle Eastern rich hydrocarbon region, as more and more of the developed countries worldwide adopt cleaner energy mix policies. This in turn will result in less reliance on fossil fuels from the GCC countries in the longer term. Therefore, there is a necessity for the GCC countries to plan ahead, and to begin taking serious steps towards integrating renewable energy into their energy portfolio, thereby gradually decreasing their dependence on hydrocarbons.

The solar focused mirrors project was lucrative for Oman, providing excess gas volume savings which allowed further uses of the gas to support the ongoing diversification initiatives of the economy, and newly install gas derived industries in Oman.

Use of solar focused mirrors to generate steam for oil operations in Oman(PDO/GlassPoint, Oman).

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Analysis | The future of the oil and gas industry in the Arab Gulf region

The emerging renewables and its impact on the Middle EastResearch and technology into renewables have been inclining in the past two decades, and with the continuing and focused efforts supported by the increasing push away from fossil fuels by the environmentalists, renewables have achieved significant cost

reductions and remarkable technology progress.

Columnist, T. Friedman in New York Times, indicated that solar cell prices have decreased by 80% while wind energy generators went down by 60% according to Hal Harvey, CEO of Energy Innovation.

The above diagram depicts the possible containment of CO2 emissions by reducing coal dependency and introducing more renewables in the energy mix.

Gt CO2

13.5

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BP Statistical Preview of World Energy© BP p.l.c 2019

10% Coal-to Gas

switchor

Add renewablegeneration of

China + US

The above diagram shows the interesting increasing installations of both wind and solar energy capacities. This trend is projected to steeply incline in the next decade.

Renewables consumption by regionExajoules

Renewables generation by sourceTerawatt-hours

BP Statistical Preview of World Energy© BP p.l.c 2020

35

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Courtesy: BP Statistical Review of the World Energy

68th Edition: Energy in 2018, An Unsustainable Path.

Courtesy: BP Statistical Review of the World Energy

68th Edition: Energy in 2018, An Unsustainable Path.

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The future of the oil and gas industry in the Arab Gulf region | Analysis

The future of international investments in the Middle East It is clear that renewable energy sources are inevitably penetrating the energy mix portfolio, and has started to take shape in the last decade along with the fossil fuels; their share is rising and will continue to rise and is thought to stabilize at rates which could disturb the fossil energy industry. This has started in Europe, and shall follow in USA, East Asia, Middle East and the rest of the world.

The annual growth rate of renewables in 2007 was under 0.5%, whereas the rate in 2018 has increased to about 1%. Comparatively, natural gas growth rate was 0.5% in 2007, and in 2018, it increased aggressively to over 1%. It is interesting to note that the growth rate for oil is unchanged under 0.5%.

Although the Middle East sets distant today from taking serious part in the emission conservation initiatives, but the world will soon realize there is little point for one part of the world to be stringent while other parts are not improvising atmospheric emissions and dictating greener energy. Therefore the Middle East as well as other parts of the world will soon be pushed to follow green energy policies if the world leaders are serious about

The above diagram above shows the increased penetrations of renewables in various countries. Within a span of 20 years, the technology penetrated 3 folds in number of countries worldwide, from some 22 countries to almost 60 countries presently.

conserving undesired atmospheric emissions.

Having said all above, however, and in terms of oil and gas production supply requirements, it is also clear that renewables are going to take time to take a significant share in the energy mix.

The graph below shows the world energy supply today, where oil, coal and gas are still dominating. In reality, it is going to consume significant time for renewables to be widely distributed, installed and used. Oil and gas infrastructure have been in operation for decades and to replace a significant part of that is going to require time, effort and hefty investments.

The share of fossil energy is some 80% today compared to nuclear and renewables, and not to mention oil and gas requirements for other industries including chemicals such as polymers, cosmetics, pharmaceutical and plastics. With increasing demands in all industrial segments including power and other uses, and declining existing oil and gas fields, indicates in short and medium terms, there will be increasing investments in new or enhanced oil and gas portfolios. Oil and gas prone areas like the Middle East, GCC and USA will be a prime focus for oil and gas investments in the next several decades.

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BP Statistical Preview of World Energy© BP p.l.c 2020

Courtesy: BP Statistical Review of the World Energy 68th Edition: Energy in 2018, An Unsustainable Path.