The first and immediate consequence will be the rise of air temperature, which has already repeatedly broken records in recent years. In 2016, the highest recorded temperature in the region was 54 °C in Kuwait, while in the same period, Basra in Iraq recorded 53.9 °C. As air temperatures rise, the countries' energy demand will rise too, particularly in the cooling sector. This will trigger a further increase in energy consumption (also due to subsidized energy prices), threatening oil exports and governments' revenues.

The growing temperature also affects water availability. The MENA region currently faces a general water scarcity, being the world's most water-stressed region. If the MENA region is endowed with 52% and 42% of the world's oil and gas proven reserves, it is endowed with as little as 1% of global renewable freshwater resources. Over 60% of the population of the MENA region lives in areas of high or very high water stress, compared to some 35% for the rest of the world (World Bank 2022). Climate change will inevitably worsen this challenging condition, harming regional growth prospects. It is estimated that the negative impact of water scarcity on GDP growth in the MENA region ranges between 6 and 14% of GDP reduction. Also regarding water scarcity, MENA countries may resort to desalination plants, which are energy-intensive and almost entirely powered by fossil fuels in the region. MENA countries are also on the front line of climate change as several regional cities, located on the coast line, are imperiled by rising sea levels. Moreover, climate change will also affect food production, which could lead to a general increase of food prices. This would further challenge MENA countries economically, since this area is one of the most important food dependent regions.

**Table 2.2** Major milestones of the international climate change regime

(continued)

**Table 2.2** (continued)

*Source* Authors' elaboration on Bodansky and Rajamani (2016) and Van de Graaf and Sovacool (2020)

Despite its exposure to climate change, the MENA region has always had a "conflictual" approach to the issue of climate change, with special reference to the major oil and gas producing countries in the Gulf (Luomi 2020). Over the past ten years, climate change has gained an increasing attention in the region, as a result of the increasing focus on this issue worldwide. Nevertheless, it is crucial to reiterate that also regarding climate change the MENA region is far from being a homogeneous group, despite its exposure to global warming and its consequent fragility. The political consideration and commitment to address the issue diverges widely across the region. On one side of the spectrum, there are countries like the UAE and Morocco, which have increasingly invested in building a reputation as climate and clean energy leaders in the area. The decision to locate the new headquarters of the International Renewable Energy Agency (IRENA) in Abu Dhabi illustrates the Emirates' political commitment to position themselves at the center of the climate policy map. Morocco has enhanced its commitment to climate and low-energy targets due to domestic reasons (e.g. cleaning the country's energy mix, energy security) as well as international ones (export of clean energy such as electricity and hydrogen to Europe). On the other end, there are countries like Oman, Kuwait, Bahrain and Algeria that have been less engaged with international climate policy. In the middle of the spectrum, there is Saudi Arabia which has always had an ambivalent relationship with the issue. It has been accused of obstructing progress and undermining political ambition within the UN international climate change negotiations, while it has stepped up its ambition in terms of renewable energy targets (Luomi 2020).

A shared approach to climate actions has emerged over the past decade within the region and particularly in the Gulf and oil producing countries. While the Gulf countries have tried to intertwine domestic climate actions and economic plans, they have downgraded climate change to an environmental issue to be managed by dedicated departments within environmental ministries or agencies (Luomi 2020). This dual approach illustrates the essence of the challenge for climate change policy. Although big emitters make commitments to fight global warming, it has proven difficult to translate these commitments into actual and collective action. The international sphere collides with domestic politics and constraints, especially in those countries that rely heavily on hydrocarbons for their economy and/or energy sector. In this sense, MENA countries are particularly illustrative. Climate change mitigation requires considerable investment, while climate change adaptation may lead to substantial changes in the current socioeconomic and energy models of MENA countries, posing a serious threat to their domestic political stability.

All MENA countries are parties to the UNFCCC and its legally binding instrument, the Kyoto Protocol, and to the Paris Agreement. At the international level, the climate change policies of MENA countries have been characterized by an absence of strong domestic strategies; this is particularly true for Gulf countries (Luomi 2020). Generally, they have stressed their status as developing countries and their vulnerability to response measures, while prioritizing adaptation over mitigation as a policy option.

Under the Kyoto Protocol, MENA countries have been considered as developing countries with no commitments for GHG emissions reduction. Some Gulf countries have also tried to seize monetization opportunities with Pre-Paris mitigation projects, such as the Kyoto's Protocol's CDM. In this sense, oil producing countries have sponsored carbon capture and storage (CCS) as a viable solution. The six Gulf states collectively have 27 projects (15 in the UAE, six in Saudi Arabia, and two each in Kuwait, Oman, and Qatar), comprising 0.6% of Clean Development Mechanism projects registered worldwide in terms of size (Luomi 2020).

Under the 2015 Agreement, almost all MENA countries have submitted their NDCs. Through their NDCs, MENA countries have expressed their real ambitions on climate change. Of the six Gulf states, only Oman had set a quantitative emission reduction target (2% by 2030), while three Gulf governments had communicated no quantitative targets (Luomi 2020). The UAE are currently the only MENA country that has submitted its updated NDC in December 2020, which aims for a decrease in emissions of 23.5% below business as usual in 2030. Regarding mitigation measures, MENA NDCs refer normally to renewable energy, energy efficiency, and CCS. Some of the Gulf countries have framed mitigation contributions or actions in the context of economic diversification efforts. MENA countries announced mitigation contributions in the form of GHG targets, non-GHG targets, proposed actions or a combination of these elements (Griffiths 2017). The Gulf countries have not made any unconditional GHG emissions reduction commitments (Griffiths 2017). Generally, major oil exporting countries have mentioned their special status as countries highly dependent on fossil fuel export revenues, stressing the need to minimize the negative impacts of response measures (Luomi 2020).

In their NDCs, some Gulf countries, namely the UAE and Kuwait, refer to the fossil fuel subsidies reform. The Eastern Mediterranean countries (e.g. Israel, Jordan, Lebanon) have a different approach, having announced unconditional commitments, with Israel being the most ambitious with a reduction target of 26% by 2030 below the 2005 level (Griffiths 2017). The North African countries, with the exception of Egypt, have made at least some form of unconditional commitment (Griffiths 2017). Syria has submitted its NDC only in 2018 given its critical conditions caused by the 10-year civil war. The other war-torn nation, Libya, has not yet submitted its NDC. The lack of ambitious unconditional commitments within the NDCs of MENA countries shows how these countries call for international support and financing in order to pursue an emissions reduction policy—especially those countries that are highly dependent on hydrocarbon revenues.

The year 2021 was particularly relevant for climate policies in the MENA region as three countries pledged to reach net-zero emissions by and around mid-century: the UAE by 2050, while Saudi Arabia and Bahrain by 2060. As a result, two distinct groups have emerged regarding climate ambitions: on one side, higher ambition, high-emission group of mainly oil and gas exporters, and on the other hand lower ambition, low emission group of mainly developing countries (Elgendy 2022). These two groups reflex a geographical distinction with the former generally located in the GCC countries (plus Morocco) and the latter located in North Africa. The two groups own also different financial capabilities to pursue and implement such plans, with Gulf countries holding massive financial reserves while North African countries facing fiscal tightness. Nonetheless, all MENA countries have submitted their first NDCs, except Libya which is not ratified the Paris Agreement. As of end of 2022, around ten countries have submitted their updated NDCs, while Morocco, Tunisia, Oman and the UAE have submitted their second NDCs (World Bank 2022).

Climate targets and policies have been boosted by the COVID-19 crisis as a part of economic recovery plans. Moreover, there has been a greater political willingness to act on climate. Some major developments are happening also in the MENA region even though it is home to major oil and gas producers. Ahead of COP26, the UAE had launched its plan to achieve net-zero emissions by 2050 in October 2021. Moreover, it would oversee \$163 billion in investment in renewables making it the first country in the region to pledge to achieve carbon neutrality. A few weeks later, Saudi Arabia affirmed its plan to become carbon neutral by 2060. During its G20 presidency, Saudi Arabia launched its Circular Carbon Economy in 2020. These two countries seek to develop several low-carbon technologies such as renewables, hydrogen (both green and blue) and CCUS, exploiting their competitive advantages in order to adapt and adjust their economy to a low-carbon future. At the same time, they are still committed to remaining big oil players in the foreseeable future. In the same period, another MENA country has joined the net-zero club: Bahrain, which announced its pledge to reach net-zero emissions by 2060. To achieve its goal, Bahrain will adopt a circular carbon economy, strengthened by various offsetting schemes including CCS technology and afforestation. Since 2021, MENA countries have increased their climate targets following the global steep acceleration in net-zero ambitions, but increased focus and bold action is needed to translate such growing, ambitious commitments into projects and actions.

In conclusion, climate change represents a major external driver for the energy transformation of MENA countries. Climate change has shaped international politics, as governments have increasingly committed to fighting climate change and achieving decarbonization. The ever-growing consensus, combined with a deeper scientific knowledge of the harm caused by climate change, has led to the formation of the international climate change regime, which forces MENA countries to act in collaboration with all the other countries. Moreover, climate change is expected to further exacerbate some of the existing challenging conditions that MENA countries must deal with: rising air and water temperatures, water scarcity, desertification and so on. These conditions have a direct impact also on the energy sector.

 Oil-producing countries have often combined climate change actions with their need to diversify their domestic economy, while others have set more ambitious reduction plans.

#### *2.6.3 Oil and Natural Gas Demand in a Decarbonized World: Peak Demand for Oil and More Pressure for Natural Gas*

The ever-growing international political commitment towards decarbonization will have profound consequences for fossil fuels demand in the coming decades. MENA oil and gas exporting countries need to transform their business model or they will face severe economic losses, which could also cause social instability.  To testify the strong political pressure on fossil fuels, the IEA released a roadmap for the global energy sector in May 2021, called 'Net Zero by 2050'. The report analyzes how to transition to a net zero energy system by 2050. In this report, the IEA claims that there are no new oil and gas fields approved for development beyond projects already committed as of 2021. In October 2021, ahead of the COP-26 in Glasgow, the IEA released its World Energy Outlook (IEA 2021a) where it compares four scenarios (IEA 2021a):

The **Net Zero Emissions by 2050 Scenario (NZE)** shows, according to the IEA, a "narrow but achievable pathway for the global energy sector to achieve net zero CO2 emissions by 2050", with advanced economies reaching net zero emissions in advance of others. This scenario also meets key energy-related United Nations Sustainable Development Goals (SDGs), in particular achieving universal energy access by 2030. The NZE does not rely on emissions reductions from outside the energy sector to achieve its goals, but assumes that non-energy emissions will be reduced in the same proportion as energy emissions. It is consistent with limiting the global temperature rise to 1.5 °C without a temperature overshoot (with a 50% probability).

The **Announced Pledges Scenario (APS)** takes account of all of the climate commitments made by governments around the world in advance of the COP-26, including Nationally Determined Contributions as well as longer term net zero targets, and assumes that they will be met in full and on time. The global trends in this scenario represent the cumulative extent of the world's ambition to tackle climate change as of mid-2021. The remaining difference in global emissions between the APS and the goals in the NZE or the Sustainable Development Scenario shows the "ambition gap" that needs to be closed to achieve the goals agreed upon in the Paris Agreement in 2015.

The **Stated Policies Scenario (STEPS**) does not take for granted that governments will reach all the announced goals. Instead, the STEPS explores where the energy system might go without the implementation of additional policies beyond the ones already implemented (or under development). As with the APS, it is not designed to achieve a particular outcome. It takes a granular, sector-bysector look at existing policies and measures and those under development. The remaining difference in global emissions between the STEPS and the APS, represents the "implementation gap" that needs to be closed for countries to achieve their announced decarbonization targets.

The **Sustainable Development Scenario (SDS)** is a "well below 2 °C" pathway, and represents a gateway to achieving the outcomes targeted by the Paris Agreement. The SDS assumes all energy-related SDGs are met, all current net zero pledges are achieved in full, and there are increased efforts to realize near-term emissions reductions; advanced economies reach net zero emissions by 2050, China around 2060, and all other countries by 2070 at the latest. Without assuming extensive net negative emissions, this scenario is consistent with limiting the global temperature rise to 1.65 °C (with a 50% probability). With some level of net negative emissions after 2070, the temperature rise could be reduced to 1.5 °C in 2100.

Fossil fuels are expected to decline drastically in a decarbonized world, even though oil and natural gas will decline at different rates.

As shown in Fig. 2.7, global oil demand, which had reached its record level of 97.6 mb/d in 2019 before falling to 88.5 mb/d in 2020 during the shutdowns of the

**Fig. 2.7** Future oil demand under IEA scenarios (mb/d). *Source* Authors' elaboration on IEA data of the WEO 2021

first Corona year, is expected to reach by 2050 a level of 45 mb/d (− 54% compared to 2019) in the SDS and even down to 21 Mb/d (minus 78.5%, or compared to 2019) in the NZE. The sharp decline will be mainly driven by significant changes in the transport sector as electric vehicles will gain an increasing market share, especially in countries with net zero pledges.

In the STEPS scenario oil demand would remain at around 100 mb/d up to 2050, but this is a counterfactual scenario. Taking account of the pledges proposed for the COP-26 in Glasgow as of mid-2021, oil demand by 2050 would already be 26% lower than in the STEPS. These pledges have already been reinforced as the COP-26 came closer, and will again be reinforced at the COP-27 in Sharm el-Sheikh in 2022, and again later. It is clear that the policy is to move towards some carbon neutrality by mid-century. The planet might indeed not achieve carbon neutrality by mid-century, but this is the clear direction towards which policies are increasingly moving worldwide. In other words, the stated policies' and the announced policies' scenarios will bend a bit downwards year after year towards the SDS and NZE scenarios.

Oil is thus expected to become less and less relevant as a result of growing decarbonization policies and technological developments in oil demand-driving sectors such as transport (i.e. electric vehicles). In recent years, attention has moved from the concept of 'peak oil supply' to 'peak oil demand'. Peak oil demand consists of a decline of global oil demand in the relatively near term. The scale and pace of the declining role of oil is driven by a combination of climate policies (e.g. improvements in energy efficiency, greenhouse gas emissions limits, carbon pricing) and the development of technological solutions (e.g. expansion of EVs). In SDS, Middle East4 oil production is expected to fall from some 30 mb/d in 2019 to some 18 mb/d

4 The IEA definition of Middle East excludes North Africa.

by 2050, a reduction of 40%. At the same time, the global market share will increase from some 31% of today to 38% by 2050.

Natural gas demand has a different, yet also challenging, future (Fig. 2.8). The IEA foresees that in decarbonization global natural gas demand remains roughly stable at around 3860 bcm (the 2020 level) up to 2030 as on the one side it will be challenged by increased energy efficiency in all sectors as well as the strong continuation of renewable energy penetration in the power sector, and on the other side it will partly replace coal for power generation and the industry. Indeed, burning coal in power plants emits twice as much CO2 for every kWh produced compared to burning natural gas. After 2030, the global demand for natural gas (in particular for unabated natural gas) should decline rapidly. By 2050, natural gas demand is expected to reach around 2367 bcm (minus 39% compared to 2020) in the SDS and 1686 bcm (minus 56% compared to 2020) in the NZE. In NZE, natural gas demand falls largely in all regions, except those that are currently heavily reliant on coal, where natural gas largely displaces coal.

For the outlook for natural gas a key driver is the degree of coal-to-gas switching. Its potential varies across sectors and regions. Moreover, it depends on the pace and scale of emissions reductions plans undertaken at the national level. Due to higher economic and demographic growth, natural gas could experience a longer future especially in developing Asia, Africa and the Middle East.

Natural gas has enjoyed the status of 'transition fuel' as it is the least polluting fossil fuel, making the outlook for natural gas more durable than for oil. Natural gas plays and is expected to continue to play a crucial role in supporting fastgrowing developing economies as they decarbonize and reduce their reliance on more polluting fuels, notably coal. Natural gas is also expected to enjoy some gains in the short- and medium-term in some developed countries as they are phasing out

**Fig. 2.8** Future natural gas demand under IEA scenarios (bcm). *Source* Authors' elaboration on IEA data

of coal and sometimes also nuclear. Nonetheless, unabated natural gas is expected to be under more and more pressure in a fully decarbonized world.

Despite generating less CO2 than coal, unabated gas releases methane (CH4) which is a potent GHG. Methane released directly into the atmosphere is 80 times more potent than CO2 over a 20-year time period. The sixth IPCCC report notes that to limit global warming to 1.5 °C, a deep reduction in emissions of methane must be achieved over the 2020 decade. As methane's atmospheric lifespan is relatively short, a fall of methane emissions can yield the most immediate reduction in the rate of warming. On November 2, 2021 at the COP-26 in Glasgow, the EU, the US and over 100 countries launched the Global Methane Pledge. Under this initiative, these countries, which represent 70% of the global economy and are responsible for nearly half of anthropogenic methane emissions, commit themselves to a collective goal of reducing global methane emissions by at least 30% by 2030 from 2020 levels.

In decarbonization scenarios, gas use will progressively need to be CO2 abated, thus either in form of carbon neutral hydrogen, biogas or natural gas with CCUS. Figure 2.9 presents the penetration of CCUS associated to natural gas demand in the different scenarios. As can be seen, deep decarbonization scenarios require high volumes of CCUS. Starting from almost nothing today, CO2 abated natural gas production with CCUS is expected to reach by 2050 717 bcm in the SDS and 1200 bcm in NZE. Therefore, while in the SDS by 2050, 70% of demand will still be constituted by unabated natural gas and 30% by CCUS abated natural gas, in the NZE—which has a 30% reduced remaining demand for natural gas by 2050 compared to the SDS scenario—the proportion is the other way round: 70% CCUS abated natural gas and 30% unabated natural gas. CCUS thus allows partial offsetting of the needed general decline in natural gas production post 2030. In fact, in the NZE, by 2050 a total of 7.6 Gt CO2 will be captured, almost 50% of which from fossil fuel combustion, 20% from industrial processes, and around 30% from bioenergy use with CO2 capture and direct air capture (DAC).

There is some upside for natural gas demand in the NZE as a result of its role in scaling up low-carbon hydrogen production: by 2030, around 250 bcm will be used in steam methane reformers equipped with CCUS. After 2030, natural gas use in the power sector in NZE will decline globally by more than 80%. By 2050 less than 190 bcm of natural gas will be used for power generation in NZE, accounting for around 1% of electricity generation worldwide (compared with almost a quarter today), mostly equipped with CCUS. Energy demand in buildings will also transition quickly away from natural gas. In 2050, more than 50% of global gas production will be used to produce low-carbon hydrogen; a further 15% in the industrial sector, mainly for cement production and in light industries.

In NZE, in 2050, about half the global gas will be produced in the Middle East and Russia. According to this deep decarbonization scenario, the Middle East production of natural gas would fall from around 650 bcm in 2019 to some 400 bcm in 2050, representing a quarter of the global natural gas supply (another quarter is expected to be supplied each by Russia and the US—the balance by Africa and the rest of the world). Therefore, even though overall production in the Middle East would decline, its market share on a worldwide scale would increase from 14% of today to 24% by

2050. Still according to NZE, interregional trade of natural gas will fall to less than 300 bcm, around 40% of current levels.

From today's perspective, NZE seems an extremely ambitious scenario. SDS still seems very ambitious but more likely to be achieved. According to SDS, Middle East5 gas production is expected to increase from around 650 bcm in 2019 to 740 bcm by 2030, but then to fall to 580 bcm (a quarter of the world total) by 2050.

To conclude, if we assume the world to progressively implement decarbonization scenarios, global oil and gas demand will need to fall over the next decades. Compared to oil, the fall in gas demand will be less rapid and less dramatic. Due to the important reserves and low production cost of the MENA region, the market share of this region is expected to increase, even though their absolute exports will nevertheless fall importantly.

This explains the pressing need to transform and diversify the economies of these countries. The advantage these countries have is that hydrocarbon revenues, if well used, will provide the financial resources necessary for this transition.

#### **Bibliography**

5 The IEA definition of Middle East excludes North Africa.

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

## **Chapter 3 National Energy Sectors: Historical Evolution and Current Situation**

*This Chapter presents the present energy, economics and politics landscape of the MENA region country by country. Fossil fuels fuels have been at the center of this landscape in the MENA region. Each MENA country has gone through a transformation of their energy systems. Understanding this historical evolution is instrumental to better understand the starting point for future national energy transformations (Chap. 4). While fossil fuels play a key role in all national energy sectors, countries vary regarding energy endowment, population size and economics. A clear regional cleavage can be identified between hydrocarbon-exporting and hydrocarbon-importing countries.*

*The Arabian-Persian Gulf (GCC countries plus Iran) is home of the largest hydrocarbon-producing countries embodying the most prominent example of rentier state. Given high hydrocarbon resources, limited population, they have generally benefit economically from the hydrocarbon industry with high wealth level per capita. Saudi Arabia and the UAE have become major oil producers and exporters. Nonetheless, they all have a very strongly increasing domestic hydrocarbon consumption which could in the future undermine their main income source. Gulf countries are also endowed by large gas reserves but so far only Qatar has been able to become a global powerhouse of gas (LNG) trade, while other countries with large gas reserves (e.g. Iran and Saudi Arabia) have not managed to gain an international or regional gas trade role. Saudi Arabia consumes its entire gas production domestically, while Iran has seen its ability to attract LNG technology hindered by international sanctions. Natural gas has, over the years, gained relevance in the domestic energy mix of Gulf countries in the attempt to decarbonize the power sector and free additional oil export volumes. Since all of them have a strongly rising energy consumption and are among the highest energy consumers per capita in the world, they have* *started to undertake some energy subsidy reforms albeit at different pace and intensity.*

*The Mashreq cluster (Egypt, Iraq, Israel, Jordan, Lebanon, Palestine and Syria) is home of both hydrocarbon-rich and hydrocarbon-poor countries. Some of them have experienced multiple transformation in terms of energy conditions with countries shifting from being net-importers to net-exporters. Egypt for instance, which is an old oil province, has since mid-1990s strongly expanded the role of gas. However, in the aftermath of the Arab Spring it became a net gas importer in the 2010s. Later, in 2018, thanks to the discovery of the Zohr offshore gas field, Egypt returned to be a net gas exporter. Another major transformation occurred in Israel, which has managed to reduce its dependence on coal (traditionally used for energy security reasons) and increase the role of gas in the energy sector thanks to the discovery of offshore gas fields. While sharing several characteristics, Lebanon and Jordan have undertaken different energy pathways with Jordan undergoing through a transformation of its energy sector while Lebanon remaining very much reliant on oil imports. The most striking difference between the two countries comes from the role of natural gas, which is absent in Lebanon's energy system. Different sociopolitical and economic features in these two countries have heavily influenced their ability to reform and transform the energy sector, with Lebanon experiencing a dramatic economic (and political) crisis. Lastly, the cluster is home of two countries (Iraq and Syria) whose energy sectors have been heavily affected by the long-lasting security and governance issues. Iraq holds large hydrocarbon reserves but its ability of monetizing them (and create socioeconomic development for its citizens) has been impacted by numerous international and regional events.*

*Within the Maghreb cluster (Algeria, Morocco, Tunisia), Algeria and Libya stand out in terms of hydrocarbon reserves. Algeria is particularly important for Europe's gas security as it is linked with it through three pipelines (two to Spain and one to Italy). Nonetheless, Algeria represents also the perfect example of rentier state—with high dependence on oil rents extremely visible during the periods of low oil prices. Libya has important oil reserves and a gas pipeline to Italy, but the country has long suffered international sanctions and over the last decade a civil war, deeply affecting oil and gas production and exports.*

#### **3.1 The Arabian-Persian Gulf**

The Arabian-Persian Gulf cluster is composed of GCC countries plus Iran. These countries represent the most prominent example of rentier states. They share numerous similarities in political and socio-economic terms and a common evolving context, mostly due to the changing role of oil in the global energy system (Table 3.1).

Countries in this cluster greatly vary in population size, ranging from just over 1 million people (Bahrain) to nearly 35 million (Saudi Arabia). The population comprises both nationals as well as expats, which can make up to roughly 80% of the total population in countries such as Qatar and the UAE. Countries with limited oil and/or gas endowments (i.e. Bahrain and Oman) have lower GDP and GDP per capita levels, with the exception of Iran, which for a few decades was under international sanctions that limited its economic growth and well-being. Regarding energy, electricity consumption depends on population size, the amount of energy subsidies and on consumers' lifestyle, as some countries may consume above their needs.

A key common characteristic of these countries is the abundance of hydrocarbon resources, which puts them on the global energy, economic and geopolitical map. With the exception of Algeria, Iraq and Libya, all the main oil producers and the largest oil reserve holders in the MENA region are located in this cluster, with Saudi Arabia and Iran playing the predominant roles, closely followed by Kuwait, as summarized in Table 3.2.

This cluster's wealth, however, is not limited to oil. The Gulf countries are also endowed with natural gas reserves, which are expected to play a key role (at least as a transition fuel) in the energy transition process. Iran and Qatar are the largest gas reserve holders worldwide after Russia. In terms of global production share, the role of Gulf gas producers has been mostly downsized following the surge in US shale gas production. Nevertheless, as of 2019, Iran, Qatar and Saudi Arabia are the third, fifth and eighth largest gas producers in the world (BP 2020). Table 3.2 illustrates the great potential of gas in the region in terms of reserves, production and consumption, although in some countries of the area its full exploitation is hindered by a number of barriers.

**Table 3.1** Key socioeconomic and energy indicators by Gulf countries, 2019

*Source* Authors' elaboration on The World Bank Data, IEA

*Note* Imports ( −) *Source* Authors' elaboration on ENERDATA

Over the last decades, Gulf countries have seen a growing domestic energy demand, which affects the stability of their macroeconomic structure based on oil, the product that these countries export and that provides their revenues. Gulf countries have a significantly higher oil consumption per capita rate compared with other (developed and developing) countries. In 2019, the per capita consumption in Gulf countries, except for Iran, was two times the per capita level of the US and four times the level of European countries (see Fig. 2.6 in Chap. 2).

Despite the high gas potential, only few countries in this cluster export relevant gas volumes. Figure 3.1 shows the different evolution of their gas balance. Traditionally, some countries have faced high domestic consumption (i.e. Saudi Arabia and Kuwait), which has absorbed their entire gas production. Kuwait has recently had to rely on some gas import volumes from Iran to meet its domestic demand. Iran, though having the second largest gas reserves in the world after Russia, has traditionally been either a very minor net gas exporter or sometimes even a net gas importer. In fact, the country exports gas to Turkey and Iraq, and at the same time imports gas from Turkmenistan. Only recently, gas exports have increased to a record level of above 20 bcm/y, which is very little for a country with such important gas reserves and gas production levels. The reason is that most of Iran's gas production is consumed domestically (including the amount reinjected into aging oil fields to boost their output). Obviously, the geopolitical barriers (i.e. sanctions) did not help Iran to become a major gas exporter. Indeed, the country had important LNG export projects that had to be abandoned due to the sanctions. Thanks to Abu Dhabi's gas production, the UAE has been a net exporter, although it has recently become a net importer, through the Dolphin pipeline, mainly due to the rising demand and lack of reserves in Dubai and in some of the other minor emirates. Although Bahrain and Oman import gas from Saudi Arabia and Qatar, Oman is a net gas exporter, exporting LNG to Asia. Graph 3.s does not include Qatar given the great difference in terms of scale of gas exports. Indeed, it is the largest gas exporting country in the region, reaching a level of 122 bcm of total gas exports in 2019 (both by LNG and pipeline).

Historically, GCC countries, with the exception of Qatar, have made no particular investments in gas exploration and development. This trend is now changing with the National Oil Companies, especially in Saudi Arabia, the UAE and Kuwait, which are planning to invest also in upstream gas projects. The push towards gas investment is dictated by numerous reasons. Firstly, gas can substitute oil in domestic consumption, enhancing oil volumes available for export. Secondly, gas itself may become a precious source of revenues, as global oil demand is expected to peak in the coming decade. Lastly, the decision to invest in gas is vital for these countries, mostly reliant on oil revenues, in order to remain at the forefront of the global energy system in the medium-term, gas being a key component of the global energy transition for European and Asian countries alike.

Key chokepoints, however, are located in this region (Map 3.1), such as the Hormuz Strait, where 21 million barrels of oil pass through every day, corresponding to nearly one-third of the total sea-traded oil. After passing through the Hormuz Strait, the oil export volumes must pass through other major chokepoints: the Bab el-Mandab and the Suez Canal before reaching Europe, and the Malacca Strait before

**Fig. 3.1** Gas balance\* of selected Gulf countries, 2000–2019, bcm. *\**: Production minus consumption. Exports (+) Imports (−). *Source* Authors' elaboration on BP

arriving to Asia. Map 3.1 highlights the two main oil chokepoints of the Gulf region (Hormuz and Bab el-Mandab). In 2018, 27 million barrels of oil passed through these two chokepoints every day.

Gulf countries have enjoyed massive oil revenues thanks to their vast hydrocarbon resources and relatively small population. Thanks to the distribution of their conspicuous hydrocarbon rent, these countries have been able to put in place solid social contracts.

As already mentioned in Chap. 1 (Sect. 1.3), oil plays a pivotal role in the governance and politics of these countries, even though it is important to understand that this is true only for the most recent part of their history. Krane (2019a) highlights how before oil the main feature of the Arabian Peninsula was isolation. The ascent of Islam in the V century AD, and centuries later (XX century AD) the advent of oil, have put the Arabian Peninsula in the world's political map. Before the rise of the present monarchies in the XX century, people in this area were organized under a system of tribal rule. As Britain expanded its interests in the Gulf, it became mandatory to overcome the ill-defined tribal rule as a way to protect British interests in the region. Britain thus created clear political institutions, providing political and financial backing to sheikhs who were in favor of and followed the terms of the Queen's treaties (Krane 2019a). This allowed the creation of the hereditary sheikhly rule. The Gulf sheikhs extended control over their territories and a consequence was the settlement and loyalty of nomadic tribes. After the end of British control, the monarchies developed strong governing institutions and remained politically stable throughout the following decades, albeit with some differences, as described here below.

Oil has contributed to the integration of this area with the rest of the world, prompting significant socioeconomic development. Benefiting from their vast hydrocarbon resources and small populations, Gulf countries have experienced a generally high wealth level per capita, with a GDP per capita (PPP) ranging between \$12,389.2 (Iran) and \$90,043.8 (Qatar).

**Map 3.1** Oil chokepoints in the Middle East. *Source* Authors' elaboration on CIA

Gulf countries have in general experienced a high degree of political stability over the last decades. In the aftermath of the Arab Spring, GCC countries in the MENA region were the least affected by revolts and social unrest. The only exception was Bahrain, the worst-off among GCC countries, which holds the smallest hydrocarbon reserves and oil revenues to redistribute to the population, which is starkly divided between a ruling Sunni minority and a vast Shiite majority (Map 3.2). Saudi Arabia and Oman also experienced some protests in 2011, but to a lesser extent.

A major driver of the revolts in the region is the unequal redistribution of the oil rent and benefits among the population, as we will analyze in the specific case of Saudi Arabia. Following these protests, governments in most GCC countries sharply increased their direct cash transfers and public sector wages to nationals.

Iran has also experienced numerous protests during the last decade, especially since the 2009 presidential elections. Overall, Iran is a different type of rentier state compared to most GCC countries, mainly due to its large population. Afflicted by international sanctions, Iran has made considerable investments in non-oil related

**Map 3.2** Religious distribution and energy resources and infrastructure in the Middle East. *Source*  CASSINI

industries, especially manufacturing, in order to satisfy its citizens' requests for a better standard of living. Over the years, the private sector has significantly developed and it has become a lifeline for the country amid sanctions. For instance, in 2019–2020, the exports of the private manufacturing sector (roughly \$41.3 million) exceeded oil exports.

All in all, a small or unequal redistribution of oil revenues is one of the main drivers of social instability, threatening the political power in place. Thus, the need of these countries to gradually change in order to keep their political status quo is enhanced by volatile and low oil prices, coupled with the (likely) decreasing role of oil in the global energy system in the future.

#### *3.1.1 Saudi Arabia*

Oil might stand as a synonym for Saudi Arabia. The Kingdom of Saudi Arabia holds 17% of the world's proven petroleum reserves and is the world's largest oil exporter. The hydrocarbon sector plays a paramount role in the Saudi economy, accounting for 70% of the Kingdom's exports and 50% of its GDP (OPEC 2019a). Figure 3.2 presents the historical oil production and demand evolution of Saudi Arabia. Between 1980 and 2015, oil demand grew by an average of 6%/y.

**Fig. 3.2** Saudi Arabia's oil production, consumption 1980–2019, Mt (left), mb/d (right). *Source*  Authors' elaboration on ENERDATA

In the early 1980s, Saudi oil production declined significantly as Saudi Arabia played the role of swing producer trying to keep up its oil prices, and deciding to leave the administered pricing system in 1985 (Chap. 5, Sect. 5.1.1). However, in the second half of the 1980s, Saudi Arabia's oil production swung progressively back to around 8 mb/d, a level it kept throughout the 1990s. These 15 years were years of low oil prices which therefore pushed up world demand. Indeed, during the 2000 and 2010 decades, when global oil demand increased strongly in particular due to China's strong economic growth rates, Saudi Arabia further increased its oil production, which amounted roughly to 10–11 mb/d during the 2010 decade. Over the same period, crude oil production increased by 18%. This higher production level was needed to satisfy both the increasing domestic and international demands. The difference between production and domestic consumption is what Saudi Arabia can export. With exports of around 7 mb/d, Saudi Arabia is by far the largest oil exporter in the world.

At the same time, Saudi Arabia is one of the largest gas producers worldwide (113.6 bcm in 2019). However, the entire gas production is used to satisfy the country's internal demand, leaving no room for gas exports.

The Saudi National Oil Company, Saudi ARAMCO, owns and operates Ghawar, the largest conventional oil field worldwide (discovered in 1948, it accounts for roughly a third of the cumulative oil production of Saudi Arabia as of 2018), with 48 billion barrels in reserves and a daily production of nearly 4 million barrels, as well as Safaniya, the largest offshore oil field in the world, with 37 billion barrels in reserves and a daily production of up to 1.3 million barrels.

Besides its vast oil resources, Saudi Arabia can also benefit from low production costs. It is often affirmed that Saudi Arabia has the lowest oil production costs in the world, with some estimates below \$3 per barrel (Al Jazeera 2020a). That figure may be true for old oil fields, which however face declining production levels. New oil fields will inevitably be developed at higher production costs, albeit remaining competitive compared to other global oil producing areas. Saudi Aramco declared an average upstream cost per barrel of \$7 per boe (Saudi Aramco 2021). In any case, Saudi Arabia is traditionally considered the world's oil supplier of last resort due to its vast and cheap reserves, meaning that it is potentially able to produce and supply oil as long as anyone is willing to buy it.

Hydrocarbons play a pervasive role not only in Saudi GDP and export revenues, but also in its energy mix. As in other MENA countries, the availability of vast and cheap fossil fuel resources has shaped the Saudi energy mix. In the total primary energy supply (TPES) (213.6 Mtoe in 2018) the share of oil amounts to 63% while the share of gas represents 37% (IEA 2018a), while other sources, namely solar and biomass, play a very marginal role (Fig. 3.3).

A relevant development in the Saudi energy sector is the evolution of the power sector, which has evolved over the past decade both in terms of growth and fuel mix (Fig. 3.4). Power generation has increased by an annual average of 6.4% since 2005. However, between 2000 and 2015, power generation has grown by 7% per year (which means doubling every ten years!), while since 2015 it has drastically slowed down (1% per year) due to the economic crunch following the fall in international oil prices. In terms of fuel mix, the Kingdom decided to strongly expand its natural gas production and installation of gas-fired generation since 2016. Back then, oil-based liquid fuel covered more than half of the power generation feedstock needs. In 2019, Saudi Arabia had a total capacity of 86 GW, which is almost entirely thermal (53% oil and 46% gas). Saudi electricity generation (357.4 TWh in 2019) was dominated by gas (206 TWh, equivalent to 58% of the total) and oil (147 TWh, i.e. 42% of

**Fig. 3.3** Total primary energy production of Saudi Arabia, 1990–2019 Mtoe. *Source* Authors' elaboration on ENERDATA

**Fig. 3.4** Saudi Arabia's electricity generation by source, 1985–2019, (TWh). *Source* Authors' elaboration on BP

total), while renewable energy sources still play a very modest role (less than 1%) (BP 2020).

Prior to the 1980s, Saudi Arabia had only a limited interest in gas production, resulting in a high flaring rate of its associated gas from crude oil production. This approach drastically changed as the government invested massively in gas infrastructure to utilize its gas output. In the past two decades, gas output has risen significantly from 47.3 bcm in 2000 to 113.9 bcm in 2019 (BP 2020). Natural gas is expected to play an even more important role in Saudi electricity generation as the deployment of renewable energy sources (RES) in the Kingdom faces several limits and barriers despite their great potential (Chap. 4, Sect. 4.2.1).

A peculiarity of Saudi electricity is the large use of crude oil for power generation. Indeed, Saudi Arabia is the biggest user of crude oil for power generation worldwide. Burning unprocessed oil results in significant economic loss since crude oil could be refined into much higher value oil products with a very high valorization on international markets, while for power generation the much lower value of the fuel oil component would be largely sufficient. Over the last years the usage of unprocessed crude oil for power generation has, however, strongly declined and at the same time a strong shift to natural gas has been implemented. But still in 2019, out of 2.6 mb/d of oil used for power generation, Saudi still burned 0.43 mb/d (16.5%) of unprocessed oil. In 2015, its average use of crude oil in power generation peaked at 0.9 mb/d (i.e. 26% of the 3.4 mb/d of the oil used for power generation that year) (Al Ghamdi 2020).

Like other Gulf countries, Saudi Arabia consumes a significant amount of oil (40.4 barrel per capita per year), which leads to a lower economic gain and a higher environmental footprint (Fig. 2.6 in Chap. 2).

Since its growing domestic energy demand may erode its profitable export volumes, Saudi Arabia has also considered developing and harnessing its solar and wind potential to satisfy its domestic needs. Saudi Arabia holds a great potential in renewable energy sources, especially solar, which is however still largely untapped. In 2019, renewable energy sources accounted only for 0.3% of the Saudi energy mix. Saudi Arabia has set several targets throughout the years. In 2013, the King Abdullah City for Atomic and Renewable Energy (K.A. CARE) announced ambitious plans to develop solar power, reaching 41 GW, 17.6 GW of nuclear power thanks to 16 nuclear power plants, and 9 GW of wind power by 2032 (Krane 2019b). During the second half of the 2010 decade, however, these plans were cut down due to low oil prices and political commitment. Saudi Arabia now plans only two nuclear power plants of 1.4 GW each. The renewables target has been reduced to a modest 3.45 GW of renewables capacity by 2020 and 9.5 GW by 2023. In 2020, Saudi Arabia has a total installed renewable capacity of 413 MW. Despite the challenges, natural gas and RES can play a more important role in the foreseeable future, allowing Saudi Arabia to free additional oil volumes for export from the domestic market, resulting in higher revenues.

Most of Saudi oil flows through the Hormuz Strait heading to Asia (69% of its total oil exports in 2019). In 2019, Saudi Arabia exported 415.8 Mt of crude and oil products and its main markets were China (86.8 Mt, i.e. 21% of total exports), Japan (53.9 Mt, 13%) and India (50.7 Mt, 12%), while it exported 56.4 Mt (14% of total exports) to Europe. Due to political hostility, Saudi Arabia fears the closure of the Hormuz Strait by its regional nemesis, Iran. For this reason, Saudi Arabia has tried to enhance alternative export options, in particular through its East–West pipeline. This pipeline has a total capacity of 5 mb/d and brings Saudi oil from the Eastern province to the Red Sea Yanbu port. Yet, Saudi still depends largely on the Hormuz Strait for most of its oil exports, leaving political and security risks as Chap. 5 Sect. 5.1.3 will analyze.

#### • **Saudi energy companies**

The Saudi energy market is largely dominated by state-owned companies. Saudi Electrical Company (SEC) is the vertically integrated power utility which holds the Kingdom's monopoly of power supply. According to the Electricity Law of 2005 (issued by Royal Decree N. M/56), the Saudi electricity market aims at introducing competition. Unbundling is currently taking place, which should establish one transmission company, one distribution company and four generation companies, all regulated with a SEC holding company (Li et al. 2017).

Concerning oil and gas, Saudi ARAMCO is the well-known National Oil Company of the Kingdom. Its presence in the oil and gas sector dates back in time. Saudi Arabia was completely overlooked by British regional and oil interests, leaving the door open to a new company, Standard Oil of California, known as SOCAL (now Chevron). In 1933, SOCAL signed a 60-year concession agreement with the new Saudi king, Ibn Saud, who was eager to receive money in exchange of concessions. A subsidiary company, called California Arabian Standard Oil Company (CASOC), was created to manage the agreement. SOCAL initially did not have any major discovery success; thus, it decided to share the risks with one of the major American oil companies, Texaco. In 1944, the company changed its name to Arabian American Oil Company (ARAMCO). However, the two companies decided to include other companies in the development of the concession agreement and secure capital. The Saudi king insisted that Aramco remained 100% American. Thus, they identified Standard Oil of New Jersey (then Exxon) and Socony Vacuum (then Mobil) as the two new partners. SOCAL and Texaco held 30% each of Aramco, while Standard Oil of New Jersey purchased 30% and Socony Vacuum 10% of the company. In 1948, the first well was drilled in the supergiant Ghawar field, which is considered the biggest oil field in the world. Several decades and stages of development were required to realize the extent of this reserve, which is really a network of five fields. Already in the 1950s, ARAMCO was able to produce 500,000 barrels per day also thanks to an increasing oil demand. A couple of decades later, in 1973, Saudi Arabia bought 25% interest in ARAMCO, which increased to 60% the following year. Finally, in 1980, the Saudi government acquired full ownership of ARAMCO and in 1988 the name was changed to "Saudi ARAMCO". This company was a precursor of the "Saudization policies" carried out in the 2010s by the Kingdom. In fact, by 1989, all senior executives and 73% of the workforce were Saudi nationals (ARAMCO Museum, Dhahran), but at the same time the Government was clever enough to persuade a large number of American and international expats to keep on working at Saudi Aramco—of all NOCs, Saudi Aramco is often referred to as the best. Since the early 1990s, Saudi ARAMCO has formed joint ventures in Asia, Europe and North America, and in 1993 a Royal Decree merged Saudi Arabia Marketing and Refining Company with Saudi ARAMCO, integrating the Kingdom's petroleum activities. In the 2000s, it considerably increased its gas activities, thanks to, for instance, the Hawiyah Gas Plant which began production, boosting Saudi's gas supplies by more than 30%. Today, Saudi ARAMCO is regarded as one of the world's most profitable companies, generating \$88.2 billion in net income in 2019, a 22% decrease compared to the previous year (Gambrella 2020). In 2018, it decided to disclose for the first time the accounts in preparation for the IPO of 1.5% of the company, which took place in December 2019. It was traded only on the Saudi stock exchange, Tadawul. In December 2019, the IPO raised a record \$25.6 billion, by selling 3 billion shares at SAR32 (\$8.53) per share (Gross 2019). In January, an additional 450 million shares were sold, increasing the size of the IPO to \$29.4 billion (Reuters 2020). The goal of the IPO is to raise capital vital for the diversification strategies enacted by Saudi Arabia, since the current socio-economic system may not be sustainable in the long run.

#### • **The unsustainability of the rentier state: an economic and energy perspective**

Saudi Arabia experiences all the pains and gains of the classic rentier state. The Saudi debt (as a percentage of GDP) changes in relation with the fluctuations of oil prices. In 2014, when oil prices were rather stable and over \$100 per barrel, the country's debt reached its lowest level (1.5% of the GDP). Since the fall of oil prices in 2014, Saudi Arabia has seen its debt expanding. This condition reached a new peak with the unprecedented crisis in 2020 caused by the Covid-19 pandemic. In that year, oil prices plummeted below \$20 per barrel, reaching an 18-year low for Brent crude. To tackle oil prices volatility, Saudi Arabia used its large foreign reserves to preserve the social welfare for its citizens. In March 2020, oil prices fell at the fastest rate in the last 20 years with a monthly drop of nearly \$27 billion, reaching the lowest point in the last 19 years (Barbuscia and Rashad 2020).

In 2020, Saudi Arabia started also a price war with Russia following the fallout in the OPEC + meeting in March 2020. The Kingdom showed its unique capacity to increase oil production on very short notice, as it promised to reach 12.3 million barrels per day in April 2020, thus increasing its ability to export greater oil volumes. This ability, however, may be hindered over time due to the steep rise in domestic energy demand. Indeed, the internal electricity demand grew at a rate of 5% per year between 2010 and 2018 and it is expected to increase by 8–10% yearly to 2032 (Khan and Salam 2018), due to an annual population growth of 2.62% (2010– 2018), an annual average GDP growth of 3.81% (2010–2018) (The World Bank 2020a, 2020b) and the expected localization of numerous industries in the country. All these factors contribute to a growing water demand, which relies for 60% on energy-intensive desalination plants, increasing the electricity demand even further (IRENA 2019). Overall, Saudi Arabia is the 13th largest energy consumer in the world, ahead of countries with considerably larger populations and economies (i.e. Canada, Germany). Other key factors also contribute to the Kingdom's high energy consumption.

Saudi Arabia's harsh environment (temperatures reaching 50 °C in summer, resulting in high consumption of air conditioning) and water scarcity also partly explain the elevated use of electricity. Another important factor regards the generous energy subsidies in place in the country, which hinder energy efficient measures. These subsidies also represent a fiscal burden for the government, since they amounted to \$80 billion (11% of the country's GDP) in 2012. Thus, Saudi Arabia planned and started to implement their gradual reduction. While the, energy subsidy reform is not yet complete at the time of writing, already in 2018 total energy subsidies had been partly decreased and amounted to less than 6% of Saudi GDP. Indeed, since 2015, Saudi Arabia has significantly increased tariffs for all fossil fuels. Energyintensive industries, the most developed in the country, were the most affected since they felt threatened in terms of competitiveness. Also, in 2015, households were impacted by a substantial increase in energy tariffs, especially in terms of transport fuel and electricity prices. Though low consuming households (< 4000 kWh) were exempt from the price increase, middle (4000–6000 kWh) and high (> 6000 kWh) consuming households saw a price increase of \$0.05/kWh and \$0.08/kWh, respectively (APICORP 2018). However, these new retail prices still do not cover production costs, since the Kingdom also raised the prices of the fuels employed for generating electricity. Despite the unpopularity of the subsidy reforms, which led to an inflation spike, the government explicitly set the goal of zero electricity subsidies by 2025. Table 3.3 summarizes the main drivers leading to an astonishingly high and rising energy demand.

**Table 3.3** Main drivers of high and increasing energy demand

*\**This percentage regards the period 2010–2018 *Source* Authors' elaboration

#### • **The unsustainability of the rentier state: a socio-political perspective**

Oil is predominant also in the socio-political sphere. A high and fairly equal redistribution of oil revenues within the framework of a rentier economy is key to social stability. Indeed, Steffen Hertog argues that regions with a more coherent regional identity, such as the central ones, receive the highest contributions thanks to their ability to organize around such identity (Haykel et al. 2015). The South, which is very similar to the center, but has developed a less cohesive identity, suffers the most. Concerning the Eastern Province, Hertog states that this region has enjoyed fewer contributions since it was not able to draw on regional identities, but rather on townbased ones (Haykel et al. 2015). Therefore, it was not the Eastern Province that was specifically discriminated against for religious/sectarian divide (inhabited predominantly by Shi'a), since there are other regions in the Kingdom, inhabited by Sunni Saudi nationals, that also suffer from unequal redistribution of resources (Haykel et al. 2015). The town-based identity argument is in line with Alamer research (Al Rasheed 2018), which focuses on the reasons why this region has seen the largest number of protests against the political regime in place, going beyond the dichotomy of the Sunni-Shi'a divide. He argues that the presence of strong town-based identities, dating back before the establishment of the Saudi state, paved the way to the formation of a homogenous and well-organized group, such as in Qassim, which experienced the highest number of protests. The strengthening of the town-based identity in Qassim was facilitated by its location: it is close enough to oil fields so that its inhabitants go to work and come back every day, but far enough so that migrants, as well as Saudis coming from other towns or regions, do not move here, preferring to reside closer to the oil fields.

Building on this argument, political mobilization and oil prices are positively correlated in the Kingdom. In fact, the Gregory Gause III shows that political mobilization occurs mostly during periods of high prices, since in times of low oil prices the government increases the level of subsidies and of general redistribution to the population (Haykel et al. 2015). The author concludes that Saudi Arabia presents a "rentier exceptionalism" because mobilization does not happen when oil prices drop, as is usually the case (Haykel et al. 2015). This policy also contributes to the unsustainability of the rentier economy in the Kingdom, arising especially from the volatility of oil prices due to the oil dependence of the Saudi economy. Until King Salman and his son, the current Crown Prince Mohammed bin Salman, came to power in 2015, periods with very low oil prices were coped with by spending and borrowing. Recently, various methods, such as selling a \$17.5 billion bond in 2016, were employed, but new strategies, such as Vision 2030 and the National Transformation Program (NTP), have also envisaged a decrease of subsidies and the introduction of VAT (Al Rasheed 2018).

As the world is expected to decarbonize and consume less oil, Saudi Arabia may experience lower income from oil rents. Therefore, its "rentier exceptionalism" may need to change. A small taste of potential future challenges occurred in 2020, when the Kingdom suffered from low oil prices caused by the effects of the Covid-19 pandemic. In May 2020 the Saudi government decided to raise the VAT from 5 to 15% starting from July and to cut the cost-of-living allowances for public employees by SAR 1000 (\$267), in response to record low oil prices and the effects of the corona virus lockdown (Bostock 2020). New austerity measures mean lower revenues for citizens, which could further stress the weaknesses of the current social contract.

#### • **The example of ARAMCO adaptation to the changing Saudi context**

Saudi ARAMCO, the national oil company, has significantly contributed to Saudi Arabia's economic and social development, and it has ensured stability through the social contract by becoming one of the main actors in the global energy system. It may be described as the "economic star" of Saudi Arabia. Recently, ARAMCO had to outline new strategies in order to adapt to and enhance its resilience in response to the changing energy context.

The following section analyzes the new strategies of ARAMCO in order to remain at the forefront of the global energy system and to strengthen the economic sustainability of the Saudi energy sector in the mid-long term.

#### *ARAMCO horizontal diversification strategy for a flexible adaptation*

Regarding horizontal diversification, namely diversification strategies within the energy sector, ARAMCO has made strong investments in activities with a forecasted high growth in the coming years, such as gas and petrochemicals/refineries both in Saudi Arabia and abroad. As a matter of fact, OECD countries are forecasted to externalize petrochemical activities in order to be in line with their decarbonization policies and targets. However, worldwide petrochemical demand is expected to increase in the coming decades and to account for more than a third of oil demand growth in 2030 and roughly 50% in 2050, according to the 2018 IEA report on the future of petrochemicals (IEA 2018b). Thus, ARAMCO is also making large investments in refining activities: in 2019, it set a goal to increase its refining capacity from 4.9 billion barrels per day to 10 billion barrels per day by 2030 (Dipaola 2019). By predominantly investing in Asia, the Kingdom manages to adapt these refineries to the quality of Saudi crude, managing to maintain and enhance its market share. A primary example includes ARAMCO's acquisition of 20% of stakes of the Indian Reliance Industries' refining and petrochemical business, which amounts to one of the largest foreign investments in India (Mukherjee and Ulmer 2019). Moreover, this strategy has had an important development also at home. In March 2019, Saudi Aramco announced the acquisition of a 70% stake in the country's petrochemicals giant, SABIC, from the Saudi sovereign wealth fund (SWF), Public Investment Fund (PIF). The deal is of considerable relevance and scale: the purchase price amounted to \$69.1 billion and SABIC is the fourth largest chemical company for sales. It usually employs natural gas to produce its chemicals, while Aramco employs liquids derived from crude oil (Seznec 2020). With this merge, ARAMCO is striving to expand also in the chemical downstream activities, coupled with the natural gas and general downstream (refineries etc.) sector to become a world player in numerous fields. Moreover, by focusing on non-combustion activities of oil and gas, ARAMCO is able to reduce its vulnerability with respect to decarbonization policies as well as to financially contribute to the economic and social diversification strategy through the PIF.

Regarding energy-related fields, ARAMCO, through its subsidiary Saudi Aramco Energy Ventures (SAEV) is aiming to invest in R&D regarding hydrogen fuels, higher efficiency for internal combustion engines, limiting carbon emissions and CCS technology for cleaner mobility in Saudi Arabia. SAEV is expected to launch a \$500 million fund for renewable projects and energy efficiency (Pyper 2020). Moreover, SAEV is exploiting venture capital to help minimize CO2 impact in the oil and gas sector, which is one of the main strategies of ARAMCO nowadays. For instance, by also investing in Zouk, a European equity fund for clean-tech startups, ARAMCO is acquiring expertise in related fields, which might generate an increasingly added value in the coming decades (Pyper 2020).

#### *ARAMCO contributes to the diversification of the Saudi energy mix*

ARAMCO is also striving to expand its trade and activities in the gas sector. ARAMCO has always been the only gas provider for domestic consumption in Saudi Arabia, in particular for water desalination and high energy-intensive industries (steel, aluminum etc.). As aforementioned, despite being the 8th largest gas market worldwide, high domestic internal gas consumption hinders gas exports. Therefore, Saudi Arabia has recently embarked on new large development projects in order to have a global outreach also in the gas market, such as Hasbah, Hawiyah and Marjan. Moreover, the Kingdom is also developing megaprojects in new areas, including the Jafurah shale development, which is expected to come online in roughly 2025 (IEA 2020). In May 2019, ARAMCO signed with the US company Sempra Energy a 20 year contract stipulating that it would buy 5 million tons of LNG per year. Moreover, it has also acquired a 20% equity in an LNG facility, currently under construction in Port Arthur, Texas (Bussewitz 2019). Nevertheless, due to the consequences of Covid-19, ARAMCO is reviewing its LNG investment plan in Texas. The stand-by of numerous new projects is in line with ARAMCO's current strategy to cut investments in new projects, while keeping investing in its assets and focusing on upstream oil and gas projects. Indeed, investments were downgraded from a \$40 billion target to \$25 billion, with possible further decreases (Ratcliffe et al. 2020). Similarly, Saudi Arabia put on hold its plans to enhance its refinery capacities and petrochemical activities worldwide. For instance, in August 2020 ARAMCO suspended a \$10 billion petrochemical project in China while in July 2021, it appeared to have put on hold the expansion of its petrochemical activities in Port Arthur, Texas (Faucon and Said 2021).

Saudi ARAMCO has increasingly looked into opportunities in the LNG sector, especially in the Asian markets. However, Saudi Arabia ought to deal with challenging conditions both at the domestic and international level. Domestically, the development of new gas fields comes with higher costs. Moreover, Saudi Arabia has prioritized the use of gas domestically in order to free additional oil export volumes. Internationally, Saudi Arabia would be a late comer, while other LNG exporting countries have better economic conditions to consolidate their power.

To conclude, economic diversification has become a priority for the Kingdom to ensure its socio-political and economic sustainability. In 2016, it published "Vision 2030", a document comprising targets and objectives in numerous fields to reduce reliance upon oil for revenues, envisaging, for instance, quite ambitious targets for renewable energy capacity. Saudi ARAMCO is already adapting to the new global context in order to try to remain at the front of tomorrow's global energy system.

#### *3.1.2 UAE and Qatar*

Qatar and the UAE share numerous characteristics in various fields. Both countries extend over relatively small territories, (Qatar area: 11,437 km2 and UAE area: 83,600km2), they are aviation (Qatar Airways, Emirates in Dubai and Etihad in Abu Dhabi are some of the most renowned airlines worldwide) and events hubs (Expo 2020 in the UAE and 2022 World Cup in Qatar). Also, in the demographic sphere, non-nationals make up the great majority of the population, representing 87% of the total population in both countries (Gulf Labour Markets and Migration 2019). Similarly, in the energy sector, both the UAE and Qatar are heavily reliant on gas, which represents 88% and 94% of total primary energy supply (91.4 Mtoe for UAE and 50.6 Mtoe for Qatar) and 98% and 100% of power generation, respectively (138.4 TWh for UAE and 49.8 TWh for Qatar) in 2019 (WEO 2021; IEA 2018c, d).

Before diving into the similarities and differences between Qatar and the UAE, it must be remembered that although the UAE is taken as a whole, it consists of a federation of seven semiautonomous sheikhdoms (or emirates): Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Quwain, Ras al-Khaimah, and Fujairah. The federation was initially formed in 1971 when the emirates became independent from the British empire, and achieved the present formation in 1972 following Ras al-Khaimah's reluctant join. Within the federation, Abu Dhabi and Dubai are by far the most important emirates. However, these two emirates present major differences in their economy and political power. While Abu Dhabi is rich in oil and gas (holding 93% of the UAE's oil and gas), Dubai is a post-oil economy. Abu Dhabi is the political and petroleum powerhouse of the UAE. Abu Dhabi and Dubai are the most influent emirates in the federation, holding key cabinet posts and economic relevance (Abu Dhabi with its oil and gas reserves, Dubai with trade and real estate). Power and authority in the UAE are shared between the federal and emirate levels and apportioned among the seven emirates based largely on population size. While nineteen issues (including foreign affairs, defense, finances, education, and health) are under federal government responsibility, the constitution allows each emirate to exercise sovereignty over issues not under federal jurisdiction. In this way, Abu Dhabi managed to retain control over its own oil and gas reserves (Ulrichsen 2020). For such reasons, in several occasions the two emirates had disagreements. They underwent several crises due to a rift over the degree of federal power and oversight; with Dubai in favor of a looser arrangement, whereas Abu Dhabi for a closer integration (*Idem*). Especially in the 2000s, Dubai's policy was strongly characterized by unilateralism, with decisions taken with little coordination with the federal government. The result was a less coherent UAE foreign policy.

The following section will analyze firstly the major differences between Qatar and the UAE in the energy sphere, such as energy security and diversification of energy sources, and then the main characteristics these two countries share in the energy sector.

#### • **Differences in the energy sector: energy security and diversification of energy sources**

Stark differences between Qatar and the UAE arise when analyzing more in depth the recent energy policies and the "sources" of natural gas, a key element of the energy mix of both countries. These two countries differ in energy security and in diversification of sources for their energy mix and power generation.

#### *The UAE: energy security as a major driver for diversification of energy sources*

The UAE holds significant oil and gas reserves (97.8 thousand million barrels and 5.9 tcm in 2019), which are almost entirely located in Abu Dhabi, and it is a major oil and gas producing country. It is member of the Organization of the Petroleum Exporting Countries (OPEC) and the Gas Exporting Countries Forum (GECF). The UAE mainly produces crude oil (around 3.1 mb/d) and a lower share of non-crude oil liquids (about 0.9 mb/d) (Fig. 3.5).

With a relatively small population (9.7 million people in 2019), the UAE is also a major oil-exporting country. Within the OPEC, the UAE is the third-largest oil producer behind Saudi Arabia and Iraq. It is committed to monetizing its vast resources, fueling growing tensions with the OPEC leader, Saudi Arabia. The UAE indeed announced its plans to increase its crude oil production capacity to 5 mb/d in 2030. In 2019, it exported 2.8 mb/d of crude oil, most of which went to Asia (93% of total exports) and primarily to Japan (30% of total exports).

The UAE's total primary energy supply amounted to 91.4 Mtoe in 2019, with natural gas (71% of total TPES) gaining increasing relevance and replacing oil,

**Fig. 3.5** UAE's oil production and consumption, 1980–2019, Mt (left), mb/d (right). *Source*  Authors' elaboration on ENERDATA Global Energy & CO2 DATA

especially in the last years (27%) (Fig. 3.6). Nonetheless, over the past years, the UAE has also increasingly used coal in its energy mix with a 2% share. At the same time the UAE has increased its effort in renewable energy sources, but with modest results.

Its domestic electricity consumption has increased constantly over the last three decades from 14.3 TWh in 1990 to 125.7 TWh in 2019 (+7.8% on average annual growth rate). The power sector is nearly totally reliant on natural gas. That is why the UAE is striving to enhance its energy security. The UAE has increased its gas production from around 20.1 bcm in 1990 to 67 bcm in 2019. However, it has also

**Fig. 3.6** UAE's TPES 1990–2019 Mtoe. *Source* Authors' elaboration on ENERDATA

experienced a growing gas consumption that forced the country to increasingly rely on LNG imports as well as gas pipeline imports to meet its domestic needs. The UAE became a net importer of natural gas in 2008 as UAE consumption exceeded production. However, Fig. 3.7 also shows the double nature of the UAE gas patterns. On the one hand, the UAE has exported constant gas volumes via LNG mainly to Asia, thanks to Abu Dhabi's gas production and liquefaction plant. On the other hand, growing gas consumption has contributed to higher gas imports both from Qatar via pipeline and, since 2014, LNG using Dubai's Floating Storage and Regasification Unit (FSRU) as well as a second FSRU-based import terminal in Abu Dhabi since September 2016.

The main route of gas supply to the UAE is through the Dolphin pipeline (Map 3.3), which connects Qatar with the UAE and Oman, providing one-third of the UAE gas supply. In 2010, Qatar and Dubai signed a contract whereby Qatar would sell gas via Dolphin pipeline at \$2/MBtu until 2032. However, taking into account the geopolitical tensions between Qatar and the UAE, culminated in June 2017 with the embargo on Qatar by the Quartet (Bahrain, Egypt, Saudi Arabia and the UAE), it is unlikely that Qatar will renew the contract with the same favorable terms and prices. Also, given the high growth of electricity and water demand in the UAE, it might be quite challenging for this country to secure increasingly higher quantities of gas, given the current political stalemate with Qatar.

The Dolphin pipeline currently satisfies more than one-fourth of the UAE's gas supply. Had the UAE chosen to increase its LNG from other countries, it would have had to pay on average 3 times more, assuming 2017 gas prices. As a matter of fact, by importing gas through the Dolphin pipeline, the UAE is able to guarantee affordable prices, even if the electricity subsidies are decreased, as planned in Vision 2021. In

**Fig. 3.7** UAE's natural gas production, consumption, imports and exports 1990–2019 (bcm). *Source* Authors' elaboration on ENERDATA

**Map 3.3** Dolphin gas pipeline connecting Qatar to the UAE and Oman. *Source* Authors' elaboration

short, the Dolphin pipeline has been a key factor for the Emirates' security of gas supply, especially when taking into account IEA's definition of security of supply as "uninterrupted availability of energy sources at an affordable price" (IEA 2019). Nonetheless, the UAE has increased its LNG imports especially in the aftermath of the crisis within the GCC. Such an increase was driven by the need to improve its security of supply.

Meanwhile, the UAE, through the national oil company Abu Dhabi National Oil Company (ADNOC) and joint ventures, has carried out major exploration activities for gas fields. Natural gas is expected to reach the target of 38% of the energy mix by 2050. However, Emirati gas production used to be rather low, and the newly discovered gas fields are usually rich in sulphur content so that the total costs for gas production and treatment for sulphur are expected to be quite high, standing at around \$8/MBtu (IRENA and MASDAR Institute 2015). Nevertheless, in February 2020, ADNOC announced the discovery of 2.2 tcm of gas in Jebel Ali, on the border between the emirates of Dubai and Abu Dhabi, representing the largest gas discovery worldwide since 2005 (Meliksetian 2020). This gas field is shallower than most other gas fields in the UAE, leading to possible lower production costs, even though it is sour. Also, ADNOC, with Wintershall and ENI, is developing the Ghasha ultra-sour gas concession, which is expected to come in operation in 2025 (Saadi 2020).

In order to enhance its energy self-sufficiency, the UAE is striving to diversify its energy mix and power generation sources. To date, the UAE is the country in the cluster with the highest share of renewable sources (excluding hydro) in the energy mix for electricity generation, amounting to 0.4% of total electricity (IEA 2018c). In 2017, the UAE published the so-called "Energy Strategy 2050" with the aim of increasing the percentage of clean energy (intended as renewables plus nuclear) in the energy mix from 25 to 50% by 2050 (UAE Ministry of Energy and Industry 2017). In order to meet this objective, the UAE has made considerable investments in renewable mega-projects, such as the Mohammed bin Rashid Al Maktoum Solar Park, which is expected to become the world's largest independent power producer in terms of capacity (5 GW by 2030) with a conspicuous investment of AED 50 billion (\$13.61 billion). The first two phases of the project have been carried out in 2013 and in 2017, and they started operating with a capacity of 13 MW and 200 MW, respectively. In full operation, the Al Maktoum Solar Park is expected to meet 25% of the UAE's internal demand for electricity from clean sources. Also, in 2013, the Emirate of Abu Dhabi, put into operation the largest concentrated solar power (CSP) plant in the world (at that time) named Shams 1, which provides electricity to roughly 20,000 households thanks to a capacity of 100 MW. It was developed and financed by Shams Power Company, a joint venture between the Emirati Masdar (60%) and a consortium composed of Total (20%) and Abengoa Solar (20%) (Masdar 2017).

Moreover, the UAE has not limited its diversification efforts to only solar and wind, but it has also launched the first nuclear energy program in the GCC, becoming the main frontrunner of the diversification of energy sources in the GCC. The UAE has begun the construction of a four-nuclear reactor power plant (5.6 GW), jointly developed by Emirates Nuclear Energy Corporation (ENEC) and Korea Electric Power Corporation (KEPCO). The plant entered commercial operation in 2021. Ahead of the COP26, the UAE reiterated its ambition to achieve leadership in the clean energy sources, announcing its ambition to achieve net-zero emissions by 2050.

Overall, in the medium-long term, the UAE energy security landscape is drastically improving, thanks to the newly discovered gas fields, the full operation of the Barakah nuclear power plant and of solar power mega-projects. Nevertheless, in today's context, the country is still reliant on imports, the majority of which come from Qatar, which is not considered a closed ally anymore. Thus, from the energy security point of view, the UAE is committed to bringing online the new gas, renewable and nuclear projects as soon as possible, especially before the termination of the Dolphin pipeline contract in 2032.

#### *Qatar: the global LNG powerhouse*

Qatar stands out among the GCC countries, as it holds a special place in the global gas market rather than in the oil market. The small emirate has focused on LNG exports rather than oil, benefiting from its vast reserves based on the giant field, North Dome—shared with Iran. These reserves and strategy allow Qatar to be the world leading player in the LNG industry. In fact, it holds the third largest gas reserves after Russia and Iran and it has very low production costs.

In 2019, Qatar holds 24.7 tcm of natural gas reserves, accounting for around 12.4% of the world's total gas reserves. The turning point for Qatar's gas production was 1996 (Fig. 3.8). Until then, its entire gas production was consumed domestically. After that year, Qatar's growing gas production has aimed at exporting LNG. Indeed,

**Fig. 3.8** Qatar's gas production and consumption, 1980–2019, bcm. *Source* Authors' elaboration on ENERDATA

the country entered the LNG sector in 1996 when it launched its first LNG train. Since then (4.3 bcm per year), Qatar's LNG capacity has expanded rapidly, reaching a production capacity of 101 bcm per year in 2009–2010.

Qatar has been able to expand its LNG industry thanks to the vital contribution of the IOCs (ExxonMobil, Total, Japanese Marubeni and Mitsui as well as Shell) in terms of both technology and expertise. Growing production volumes combined with a small population has allowed Qatar to consolidate its status as the world's top LNG producer and exporter. In 2019, Qatar accounted for 22% of the world total LNG production—the highest global share by a single country (GIIGNL 2020). The bulk of Qatar's exports are via LNG—with a smaller share via pipeline to UAE and Oman. In 2019, it exported 107.1 bcm via LNG and the main destinations are located in Asia (67% of total exports) and Europe (30% of the total) (BP 2020). The largest buyers are China, India, Japan and South Korea. Meanwhile, Qatar has also exported its gas through the Dolphin pipeline to UAE and Oman.

Prior to 2017, there were two main companies, Qatargas and RasGas, operating in the LNG sector. The state-owned Qatar Petroleum had a majority stake in Qatargas and in other international companies, such as Total and Mitsui &Co, and owned small stockholdings, while RasGas consisted of a 70/30 joint venture between Qatar Petroleum and Exxon Mobil, respectively. At the end of 2016, the chief executive of Qatar Petroleum announced the merger of the two companies into one company, named Qatargas. This merge established the largest LNG producing company in the world, which also produces helium and other derivatives, with a capacity of 77 million tons (Qatargas n.d.). This choice was predominantly dictated by the desire to take advantage of the economies of scale and to better coordinate and counteract the increasing competition from other LNG exporting countries. In fact, in order to remain a leader in the LNG market share, Qatar has to increase its investments in this sector to counteract fierce competition, especially from Australia, Russia and the United States (Fig. 3.9). Therefore, in April 2019, Qatar Petroleum invited bids

**Fig. 3.9** LNG export volume by world's largest LNG exporting country, 2000–2019, bcm. *Source*  Authors' elaboration on BP (2020)

from three joint ventures to develop a massive expansion project for the North Field, which is planned to be completed by 2024.

This move marked a sharp change in Qatar's approach to its LNG industry and natural gas resources management. In 2005, it established a self-imposed moratorium on the development of the North Dome in order to preserve its resources for future generations, and to understand the effect of the field's rising output on the reservoir. In 2017, Qatar decided to lift the moratorium in response to the growing international competition in the LNG industry. Qatar expects to boost output in the North Dome in order to increase LNG production by 64%, from 77 million tonnes per annum (Mtpa) in 2019 to 126 Mtpa in 2027.

Qatar's LNG exports increased significantly between 1997 and 2011, when they stabilized at slightly above 100 bcm (77 Mt). Until 2010, Qatar's LNG exports were divided almost equally between Europe and Asia; however, in 2019, the largest share (67%) flew to the energy-hungry Asian markets, with the main markets being South Korea, India and Japan.

Qatar feels pressure also in terms of pricing mechanisms. The US LNG has contributed to foster spot and gas prices. However, Qatar has been one of the strongest supporters—along with Algeria—of long-term contracts based on oil indexation. Oil indexed long-term contracts still represented around 60% of the exports in 2019. It considers them a more predictable and reliable mechanism for those involved in the industry. However, the US LNG has substantially changed the global LNG market, fostering the use of spot prices. Despite buyers' growing renegotiation calls, Qatar has remained extensively committed to oil indexation.

Along with the expanded production of natural gas since 2000, Qatar has also managed to increase its production of liquids, such as condensate LPG and NGLs, which are a significant and valuable byproduct of natural gas. Around 50% of the oil production in Qatar is related to NGL production (Fig. 3.10). However, total oil production (crude oil plus natural gas liquids) underwent an up and down during the

**Fig. 3.10** Qatar's production of crude oil and natural gas liquids 2000–2019 (Mt). *Source* Authors' elaboration on ENERDATA Global Energy & CO2 DATA

last two decades. Until 2013 it increased, reaching 80 Mt in 2013. Since then, total oil output declined to 71 Mt in 2019, and 60% of Qatari oil production is exported.

Qatar produces less oil than its regional peers, especially Saudi Arabia and the UAE, but it is by far the largest MENA gas (mainly LNG) exporter. In December 2018, Doha announced its decision to exit from OPEC. The move could have a political motivation as Qatar intends to distance itself from Saudi Arabia, the de facto leader of OPEC, especially following the 2017 blockade on Qatar. With only 600,000 barrels per day of crude oil output in 2017, Qatar accounted for less than 2% of OPEC's crude oil output. In recent years, small producers held little power in the cartel. This decision will be analyzed in more depth in Chap. 5 (Sect. 5.1.2), but the move was driven by political considerations and it was also based on the strong belief that natural gas will have a rosier future than oil and coal in light of the global energy transition.

Given its vast gas reserves, Qatar's total primary energy supply relies significantly on natural gas (Fig. 3.11), in particular following the massive investment in gas production in the 2000s, which has also allowed Doha to become the world's top LNG exporter. The country's TPES is therefore heavily reliant on natural gas (around 88% of TPES in 2019), with the rest being oil. Qatar's TPES is thus not very diversified, relying exclusively on gas and oil. Like other MENA countries, it has increased significantly from 6,558 Mtoe in 1990 to 43,408 Mtoe in 2019, i.e. an average annual growth rate of 6.7%. The strong growth is also due to its important industrial sector (in particular its LNG, refining, petrochemical, desalination, and gas-to-liquids complexes) which are very energy-intensive.

Natural gas also dominates Qatar's electricity capacity, which is nearly 100% gasbased. The country's total installed power capacity stands at 14.5 GW, after having been increased by 2.5 GW in 2019 with the commissioning of the Umm Al Houl gas

**Fig. 3.11** Qatar's TPES, 1990–2019, Mtoe. *Source* Authors' elaboration on ENERDATA

power plant. Electricity production (49 TWh) is all gas-based and has increased by 9.7% per year between 2005 and 2018.

Overall, Qatar has so far had no incentive to diversify its energy mix and power generation sources, since it is endowed with natural gas, which is used to satisfy its domestic energy demand and water desalination plants. Renewables thus play a very minor role in Qatar's energy policy. The only targets set in the renewable energy field (the Qatar National Development Strategy 2018–2022) envisaged the commissioning of 200 MW of renewable energy by the end of 2022. This target has already been outpaced thanks to the commissioning of a 350 MW solar PV plant in 2021. This capacity will be increased to 500 MW at an indefinite and future point in time (The State of Qatar 2018). Nevertheless, in 2021, Qatar Petroleum set a 4 GW renewable target by 2030 in its Sustainability Strategy (Ingram 2021). A detailed analysis on this subject will be conducted in Chap. 4, which is devoted to renewable targets and their possible attainment. However, Qatar's lower economic and strategic need to develop renewable energy, with respect to the UAE, is further demonstrated by the lack of specific renewable targets for the energy sector in Qatar's National Vision 2030 (General Secretariat of Development Planning 2008).

#### • **Energy subsidy reforms: some similarities**

Qatar and the UAE have carried out thorough energy subsidy reforms, motivated by the fast-growing electricity demand, which has grown by 8% per year between 2006 and 2016, one of the highest rates in the world. In recent years it was slightly below 6%, but it is still very high. Both countries share the need to curb electricity, fossil fuel and domestic water demand due to numerous common peculiarities. In fact, they experience not only high energy consumption growth rates, but also robust population growth, especially of non-nationals, due to the labor-intensive structure of the countries' labor markets and their migration policies. Moreover, the localization of industries within the countries, a key policy for economic diversification from hydrocarbon revenues and export, boosts domestic electricity demand. Decreasing water demand is also crucial since both Qatar and the UAE rely for more than 90% of their household and industry water consumption on energy-intensive seawater desalination plants (IRENA 2019). The roll out of water and energy subsidy reforms played a crucial role in the steep decrease in electricity and water consumption in Qatar and the UAE.

Qatar implemented electricity subsidy reforms between 2015 and 2017, increasing its electricity prices from 2.16 US cent per kWh to 2.43 US cent per kWh only for expats (Krane and Monaldi 2017). Indeed, Qatar is the last GCC country to provide free electricity and water to its nationals (Hussein and Lambert 2020). Regarding energy sources, natural gas subsidies fell from \$950 million in 2015 to \$493.1 million in 2017 (Krane and Monaldi 2017). Overall, Qatar substantially reformed total energy subsidies, including oil and gas, aiming at decreasing government expense from \$3 billion in 2015 to \$1.5 billion in 2017, representing 0.9% of the country's GDP, significantly lower than most other GCC countries (Kahramaa 2016). The majority of these reforms resulted in a significant growth in electricity and water tariffs for nonnationals, leading to a remarkable gap in prices paid by residents and nationals. The success of the energy subsidy reform was strengthened by the implementation of the National Programme for Conservation and Energy Efficiency, the so-called Tarsheed program. Under this scheme, the government set the goal to reduce electricity and water consumption per capita by 8% and 20% between 2011 and 2016, respectively. Already in 2016, the country managed to successfully curb electricity consumption per capita by 18% and water consumption per capita by 20%, especially thanks to the wide utilization of smart meters (Oxford Business Group 2019).

Similarly, also the UAE, depending on the emirate, has adopted some of the most successful energy subsidy reforms in the region. Fuel prices are traditionally set at the federal level, but in 2015 they were reformed throughout the country. Fuel prices are not yet deregulated, but they are set by a commission each month, based on international prices. The fuel prices reform was carried out timely in 2015–2016 when oil prices were already low, thus without triggering social discontent or instability. The Dubai Emirate was the forerunner for reforming electricity and water tariffs in 2011, resulting in a 15–20% growth in electricity and tariff prices for non-nationals, industries and government. Nationals witnessed very modest tariff increases and only when their consumption exceeded a cap. Overall, they paid electricity and water 3–4 times less than non-nationals. In 2015, also the Emirate of Abu Dhabi started implementing electricity and water tariff reforms, raising the electricity prices for expats by 40% on average and by 120% for high-consumption households, while nationals were not affected (Krane and Monaldi 2017). Similarly, water tariffs for non-nationals increased by 170% reaching peaks of 374% for particularly high consumption levels. In this case, an increase in tariff was also introduced for nationals, which, however, was roughly three times lower than the tariff paid by expats. Since then, no significant changes have occurred to the 2015 energy subsidies reform in the UAE (Al-Saidi 2020).

In conclusion, although the UAE and Qatar are often considered very similar, they score very differently in terms of energy security and type of source endowment. Thus, these two countries are not only taking diverging paths in the geopolitical landscape of the region, but also their current energy sectors, future energy targets and objectives vary greatly. Indeed, by relying on gas rent, Qatar is less pressed to quickly diversify, as gas is likely to play a key role in the future global energy system for some time. Nevertheless, both Qatar and the UAE are striving to carry out efficient and effective energy subsidy reforms and economic diversification, each country at its own pace, depending on their economic needs and on their natural resource endowment.

#### *3.1.3 Other GCC Countries: Bahrain, Kuwait and Oman*

Bahrain and Oman share multiple characteristics both in economic and energy terms, while Kuwait differs substantially from the other two countries. At the same time, Kuwait and Oman play similar roles in the region's geopolitics since they both strive to be perceived as neutral and independent. Thus, grouping Bahrain, Kuwait and Oman together enables a deeper understanding from a multidisciplinary perspective, as these countries share common characteristics as well as striking differences. For example, Kuwait has been one of the richest countries in the MENA region with a GDP per capita1 of \$27,156 in 2019, while Bahrain and Oman have a lower rate, that is \$21,199 and \$14,516, respectively.

This section will firstly provide an overview of energy peculiarities in Bahrain, Kuwait and Oman, highlighting similarities. It will then assess the role of natural resource abundance and rentier economy in shaping current economic trends and challenges for the three countries, also considering their geopolitical stance. Lastly, it will discuss the roll-out of energy subsidy reforms, common to all these countries, in order to offset high domestic energy consumption levels.

#### • **Key energy sector peculiarities**

The striking difference among these three Gulf countries is that Kuwait is a hydrocarbon-rich country. And it is responsible for a significant production, Bahrain and Oman own more limited hydrocarbon reserves and their production levels are significantly lower than those of Kuwait (Table 3.4).

Kuwait stands out in terms of oil production, and despite its relatively small geographic size, it ranks seventh worldwide for oil reserves (101.5 thousand million barrels), with oil production slightly above 3 million barrels per day and oil exports above 2 million barrels per day in 2019. On the contrary, Oman's oil reserves amount to 5.4 thousand million barrels (ranking 21st in the world). Its oil production is slightly below 1 million barrels per day, 87% of which is exported. The oil reserves of Bahrain amount to 189 million barrels (ranking 67th worldwide) and its oil production is unable to satisfy internal consumption, obliging the country to import 93% of its domestic oil consumption (BP 2020).

1 At constant 2015 US\$.

**Table 3.4** Key energy indicators of Kuwait, Bahrain and Oman in 2019

*Source* Authors' elaboration on ENERDATA

Gas reserves in Kuwait are also quite large, ranking 20th worldwide. However, Kuwait produces natural gas below its capacity so that it imports almost 20% of its total natural gas demand. Oman ranks 28th in terms of gas reserves worldwide, managing to export 21% of its total natural gas production while Bahrain has more limited gas reserves. In fact, it ranks 52nd in the world, with its natural gas production satisfying its internal consumption (BP 2020). Kuwait's inability to meet its gas demand with its domestic production explains why power generation is mostly provided by oil, which accounts for 57% of total electricity generation and the remainder is provided by natural gas (IEA 2018e).

Kuwait's total oil reserves include roughly half of the 5 billion barrels of the Neutral Area shared with Saudi Arabia. The bulk of Kuwait reserves are located in the Burgan area, which is considered to be the second largest oil field in the world after Ghawar in Saudi Arabia. Kuwait's oil production was severely affected by the war with Iraq in the early 1990s. However, Kuwait managed to rapidly resume, and even expand, its pre-war oil production level. In the past two decades, Kuwait's oil production has surged and then declined driven by OPEC quotas (Fig. 3.12). Between 2000 and 2013, Kuwait increased its oil production by around 50% when it peaked at 158 Mt (3.1 mb/d). The production remained stable until 2016, declined by 7.5% in 2017 and remained stable at around 145 Mt (2.9 mb/d) due to OPEC's production curbs. Most of Kuwait's oil production is exported to the Asia–Pacific region (85%).

Kuwait's gas reserves are also quite large. Since 2010, Kuwait managed to rapidly increase its gas production (by around 6%/y), reaching 18.4 bcm in 2019 (BP 2020). This volume meets almost 80% of Kuwait's gas consumption (23.5 bcm). For this reason, Kuwait decided to import LNG through a FSRU2 commissioned in 2009 with a capacity of 7.8 bcm/year. In 2019, Kuwait imported 5.2 bcm of LNG. The country is committed to increasing LNG imports with different agreements3 in order to secure future gas supplies. In addition, Kuwait is also considering importing pipeline gas from Iran and Iraq to help meet rising demand from power plants and industry.

The country's total primary energy supply is strongly reliant on fossil fuels. Compared to Oman and Bahrain, oil is far more important in Kuwait's TPES, accounting for almost 50% (Fig. 3.13). However, natural gas has increasingly gained

2 The Mina Al-Ahmadi FSRU.

3 In 2020, Kuwait signed a 15-year agreement with Shell and Mitsui for 8 bcm/year of LNG until 2035 and with Qatar Petroleum and Qatargas for 8 bcm/y from 2022 to 2037.

**Fig. 3.12** Kuwait's oil production and consumption, 2000–2019, Mt (left) mb/d (right). *Source*  Authors' elaboration on ENERDATA

ground in the energy mix. Fossil fuels dominate also Kuwait's total power capacity (19.8 GW in 2019), with natural gas accounting for 11.4 GW and oil for 8.3 GW. Total power capacity has been expanded by more than 25% since 2014. That has gone hand in hand with the expansion of power production, which has increased on average by 3%/year since 2010, reaching 75 TWh in 2019. Natural gas has increasingly gained relevance in the power mix by replacing oil; it increased its share from 40% (22.6 TWh) in 2010 to 61.5% (46.2 TWh) in 2019. The rest is being supplied almost entirely by oil (Fig. 3.14). The power sector is almost totally responsible for total gas consumption since the mid-2000s as Kuwait strives to keep more profitable oil for exports. Total energy consumption increased rapidly between 2000 and 2008 (5.4% per year on average). Since 2014, it has been fluctuating around 36 Mtoe.

Bahrain and Oman have more limited hydrocarbon reserves, in particular Bahrain is the country with the smallest reserves of the three. Since 2013, Bahrain's oil production has remained stable, reaching 10 Mt in 2019 (Fig. 3.15). The lion share of its production (around 75%) comes from the Abu Safah offshore field, where Saudi Aramco is the main producer. Currently, Saudi Aramco produces around 300,000 b/d from this field, half of which is owned by Bahrain. The Awali oil field, owned entirely by Tatweer Petroleum,4 is Bahrain's other historical oil reserve. However, this field has experienced a steady decline due to a steep drop in drilled wells and facility shutdowns. In 2018, a new tight oil field in the Khalij Al-Bahrain Absin was discovered. The oil field holds great potential since it is estimated to be the largest

4 Nagoholding owns 100% of Tatweer Petroleum since 2016 following the withdrawal of Occidental Petroleum and Mibadala Development Company.

**Fig. 3.13** Total primary energy supply in Kuwait, 1990–2019, Mtoe. *Source* Authors' elaboration on ENERDATA

**Fig. 3.14** Electricity production in Kuwait, 1990–2019, TWh. *Source* Authors' elaboration on ENERDATA

oil reserve ever discovered in the country. It could hold at least 80 billion barrels of tight oil and 282–565 mcm of deep gas.

Bahrain also produces natural gas, although at a modest level (around 15–17 bcm), which accounts for the majority of the national TPES (Fig. 3.16). Therefore, after several delays, in 2020 Bahrain commissioned an LNG import terminal with a capacity of 8.2 bcm/year. Power generation (34.7 TWh in 2019) relies entirely on natural gas (Fig. 3.17). Bahrain's power sector is among the most privatized sectors in the region since 2004. The total capacity stood at 8.8 GW, 4 GW of which is owned by auto-producers, mainly in the aluminum sector.

**Fig. 3.15** Bahrain's oil production and consumption, 1990–2019, Mt (left), mb/d (right). *Source*  Authors' elaboration on ENERDATA

**Fig. 3.16** Total primary energy supply in Bahrain, 1990–2019, Mtoe. *Source* Authors' elaboration on ENERDATA

**Fig. 3.17** Electricity production in Bahrain, 1990–2019, TWh. *Source* Authors' elaboration on ENERDATA

**Fig. 3.18** Oman's oil production and consumption 1980–2019, Mt (left) mb/d (right). *Source*  Authors' elaboration on ENERDATA

Oman stands in between Kuwait and Bahrain in terms of oil and gas production. Oman has produced stably around 48 Mt/y since 2015. However, the country's oil production experienced a phase of strong decline between 2001 and 2007 (from a peak of 50 Mt in 2001 to 38 Mt) and then a rapid increase between 2009 and 2015 (Fig. 3.18). 90% of Oman's oil production is exported and around 80% of it went to China in 2019. The upstream sector is dominated by Petroleum Development Oman (PDO),5 which accounts for about 60% of total oil production and holds more than 90% of Oman's oil reserves.

Concerning natural gas, Oman has expanded its efforts to increase gas production in order to free oil volume for exports. Natural gas production in Oman has increased

5 It is owned by Oman government (60%), Shell (34%), Total (4%) and Partex (2%).

**Fig. 3.19** Oman's gas production and consumption 1990–2019, bcm. *Source* Authors' elaboration on ENERDATA

four-fold from the level of 2000, reaching 41 bcm in 2019 (Fig. 3.19). Since 2010, gas output has increased by 3%/year. Oman owns Block 61, which is the largest tight gas reserve in the Middle East. The gas fields, Ghazeer and Khazzan, will be responsible for a combined production of 31 bcm. The Khazzan gas field is already producing 15.5 bcm/year, while the Ghazeer gas field started its production in 2020 (15.5 bcm/year of gas and over 65,000 b/d of condensates). Natural gas exports started much later than oil exports, with the Oman LNG company established in 1994. Oman has one LNG liquefaction plant for exports in Qalhat near Sur, composed of 3 units, with a capacity of 10.4 Mt/year. In 2000, Oman commissioned two gas liquefaction trains, with a third added in 2006. Oman has exported growing LNG volumes, while at the same time it imports Qatari gas through the Dolphin pipeline (Fig. 3.20). LNG has become a major income source for Oman, while reducing its dependence on oil.

**Fig. 3.20** Oman's gas exports and imports, 1990–2019, bcm. *Source* Authors' elaboration on ENERDATA

**Fig. 3.21** Total primary energy supply in Oman, 1990–2019, Mtoe. *Source* Authors' elaboration on ENERDATA

In 2019, Oman's TPES was 25.5 Mtoe, with natural gas accounting for almost 90%. In terms of TPES, natural gas has become more and more relevant after 2005 in line with Oman's strategy to diversify its economy away from oil (Fig. 3.21). Moreover, the domestic use of gas changed considerably over the period 2000– 2011. During that time, the industry's gas use increased from 27% in 2000 to 58%, while the electricity sector's share remained constant at around 19% (IRENA 2014). Moreover, gas use at oil fields, flared gas and other uses accounted for 22% of the total gas use in 2011, significantly less than the 54% share in 2000s.

Natural gas plays a dominant role in Oman's electricity production. Oman has a total power capacity of 14 GW (96% gas and the rest oil). In 2019, Oman's electricity production reached 38.1 TWh, 94% of which from gas and the rest from oil (Fig. 3.22). Power generation from natural gas grew at a remarkable average annual growth rate of 9.9% from 2000 and 2010 and at 6.7% over the period 2010–2019.

#### • **Unsustainability of the rentier economy: socio-economic consequences**

#### *Kuwait*

The energy sector is the pillar of the Kuwaiti economy since it accounts for more than 90% of government revenues and total exports, and 50% of the country's GDP, stimulating the consolidation of a rentier economy and the social contract. However, despite having the second lowest fiscal breakeven price in the GCC region (\$61 per barrel) and a positive budget balance (a surplus of roughly 6% in 2019), Kuwait's socio-economic model has become quite unsustainable in the medium term (Statista 2020). Given the predominance of the public sector, key feature of the social contract,

**Fig. 3.22** Electricity production in Oman, 1990–2019, TWh. *Source* Authors' elaboration on ENERDATA

54% of the government's budget for the fiscal year 2018–2019 was utilized to pay the wages of Kuwaiti nationals. The private sector is scarcely present as the government implements 90% of all development projects, which hinders human capital development and the shift towards a knowledge-based economy (Olver-Ellis 2019). Apart from very high expenditures, the Kuwaiti economy has been stagnating for nearly a decade. This means that it is falling behind, with respect to other GCC economies, in key economic indicators, such as regulatory environment and economic competitiveness, partly due to tensions in its parliamentary politics. Nowadays, Kuwait is striving to horizontally diversify its production and exports from hydrocarbons, shifting towards an integrated energy sector, by diversifying downstream activities, boosting refining capacities and realizing the full potential of natural gas fields (Oxford Business Group 2018). Kuwait, through its national oil company, Kuwait Oil Company, has therefore attracted numerous foreign oil companies, namely Shell, and mostly employed Service Agreements as fiscal arrangements.

Overall, in theoretical terms, Kuwait is one of the best placed countries in the GCC to diversify its revenues, export and energy mix from oil, thanks to a relatively small population (4 million people, contrary to Saudi Arabia), a large oil production and reserves base (contrary to Bahrain and Oman) and an ideal geographical position to develop both wind and solar energy. However, economic diversification and the introduction of renewable energy sources (0.11% of total electricity generation in 2018) (IEA 2018e) have not yet taken place mostly due to political stalemate, a low level of private sector involvement and low synergies among the numerous authorities involved (Butler 2019).

#### *Bahrain and Oman*

In Oman and Bahrain too the social contract is built upon the oil rent, which has shaped their socio-economic model, despite the lower abundance of their natural resources. Little diversification from oil revenues, volatile and low oil prices and social unrest in the broader MENA region (e.g. the 2011 Arab Spring) may in part destabilize these countries with lower natural resources. Both countries suffer from budget pressure, with increasing deficits, leading to higher debts to GDP (Bahrain debt amounts to 105% of its GDP and Oman to 60.1% in 2019) (Trading Economics 2019a, b), high fiscal breakeven oil prices (\$96 per barrel for Bahrain and \$87 per barrel for Oman in 2020) and an increasing unemployment rate, especially among the young people (IMF 2020). Worse financial and economic conditions have already led to some protests and social unrest since the demands of the population (i.e. high level of subsidies, a well-paid job in the public sector etc.) may not always be met. Austerity measures were discussed, and suggested by the IMF, but rarely implemented fearing further social dissatisfaction and unrest, especially in Bahrain, which has witnessed the highest level of social unrest among Gulf countries during the Arab Spring. Social unrest has been generated by a polarized population between Sunni and Shiites, with the Sunni minority holding the power, as well as economic dissatisfaction.

In order to deal with their poor economic outlook, both countries may need to request external economic aid. Nevertheless, both countries may privilege financial aid from neighboring countries rather than international financial institutions such as the IMF, which are often conditioned on the implementation of specific and possibly unpopular policies. However, access to external aid is different for Bahrain and Oman, depending on regional alliances. Bahrain is under the geopolitical influence of Saudi Arabia and the UAE so that these countries, along with Kuwait, may resort to Manama for financial assistance, as in 2018 with a \$10 billion stimulus package (Thafer 2020). On the contrary, Oman has always strived to adopt a neutral and balanced stance regarding the region's geopolitics. The new Sultan Haitham bin Tariq has expressed his willingness to follow the steps of his predecessor, Sultan Qaboos bin Said, and remain the neutral arbiter in the region. Thus, for Oman, accepting financial assistance from the UAE and Saudi Arabia may result in losing its geopolitical independence. Relying on Qatar might also lead to regional turbulence, since the Quartet (Saudi Arabia, the UAE, Egypt and Bahrain), which established an embargo over Qatar, may be angered by this request. Oman may request financial stimulus from Kuwait since the latter has always adopted a neutral stance, this would ensure that Oman's neutrality and independence are not threatened. At the same time, as mentioned before, Kuwait's economy is not thriving, especially following the Covid-19 crisis, and it may thus prefer to direct its finances internally rather than to Oman. Overall, while Bahrain may rely on its major allies and protectors to receive financial stimulus, Oman may find itself in a harder position, while trying to conjugate its neutral geopolitical stance with financial assistance. Oman is also likely to find it challenging to seek credit, given its high public debt to GDP ratio (above 80% in 2020) and strained capital reserves (The World Bank 2020c). Moreover, contrary to other GCC countries, net foreign assets are some of the lowest in the region and sovereign wealth fund assets are valued approximately at 50% of the country's GDP (Ismail and Narayanan 2020).

#### • **A common path: energy subsidy reforms**

Kuwait, Oman and Bahrain have considerably high energy and electricity consumption per capita rates. Of the three, Bahrain has the highest per capita energy consumption (9.7 toe in 2019), which is also three times the Middle East average and five times the global average. Kuwait's energy consumption per capita rate (around 8.5 toe since 2011) represents the world's sixth highest in 2019. Oman has a lower rate (5.1 toe in 2019) even though it is three times higher than the global average, due to its energy-intensive industrial production. Similarly, Bahrain's electricity consumption per capita rate (21 MWh) is higher than that of Kuwait and Oman due to the aluminum sector, which is five times the Middle East average and seven times the global average. Kuwait has a rate of 12–13 MWh/capita since 2008, representing the world's seventh highest in 2019, while Oman's per capita electricity consumption reached 6.7 MWh in 2019.

Kuwait, Oman and Bahrain revised their energy pricing policy in consideration of their high energy and electricity consumption per capita rates, while in all three countries the path to reform of the energy subsidies is hindered by economic constraints and sociopolitical issues.

#### *Kuwait*

In Kuwait energy subsidies made up 16% of the government's budget in 2018, a burden for public finances (Moerenhout 2018). Nevertheless, Kuwait was the last GCC country to introduce energy subsidy reforms, because of the robustness of its budget compared to other countries, its rather small population size, and the political struggle between the National Assembly, the legislative authority, and the government. Until 2016, electricity prices were one-twentieth of production costs and water was basically free, making the country the sixth highest energy consumer in the world (World Bank 2017a). However, low oil prices in 2016 led the National Assembly to propose and approve an increase in electricity tariffs for expatriates and for commercial use. Moreover, Kuwait was the last country to reform gasoline prices, which were the lowest worldwide: in 2016, the government, circumventing the National Assembly, raised gasoline prices by 41–83%, depending on octane levels (Shehabi 2017). A political confrontation between the government and the National Assembly took place, with the latter challenging the energy price reform in court. One year later, the Appeals Court ratified the energy reform carried out by the government. Overall, prices for some petroleum products were raised in Kuwait, for instance, gasoline increased from 0.24\$/liter in 2015 to 0.34 \$/liter in 2018, while prices for other products did not change in this time span (i.e. diesel) (Shehabi 2019).

#### *Bahrain and Oman*

In Bahrain and Oman the path to energy subsidy reform was rather similar in terms of time and content: both countries decided to raise natural gas prices in 2015 by 11% and 100%, respectively, and to reform diesel and petrol prices in 2016. In the same year, Bahrain increased diesel prices by 14% and petrol prices by 60%, while Oman increased diesel by 10% and petrol by 33% (Lahn 2016). Moreover, both countries are setting energy prices per unit by consumption slab, which might allow cross-subsidization, namely high-consuming customers are discouraged from excessive consumption by paying above the cost, subsidizing for low-consuming customers, who are usually the least well-off. Nevertheless, there are differences in the subsidy reforms of Oman and Bahrain: first, while Oman does not have differentiated prices for expats and nationals, in Bahrain prices were increased for both categories, although nationals are still benefiting from lower prices. Another striking divergence regards Oman's gradual increase of energy prices, which are linked to the international market—a strategy similar to the one adopted in the UAE and Qatar—while Bahrain applied "ad hoc" price adjustments more than once, in line with the policy of Saudi Arabia and, partly, Kuwait (Moerenhout 2020). Therefore, ever since 2016, Oman has increased its energy prices by employing a pricing formula that links Omani prices to international and UAE ones. For instance, in 2016, diesel price with the first adjustment amounted to 0.42 USD/l, while in 2018 it was equal to 0.65 USD/l. To curb opposition to its energy price reforms, Oman first unsuccessfully attempted to put caps for regular gasoline. Then, in 2018, Oman introduced the "National Subsidy Scheme" aimed at ensuring regular gasoline to low-income households at a subsidized price of 0.47 USD/l (in 2018 regular gasoline amounted to 0.59 USD/l with projected yearly increases) (Moerenhout 2020). In Bahrain, since 2016, energy prices were increased in 2018, in particular gasoline 95 went from 0.42 USD/l in 2016 (which was already 58% higher than in 2015) to 0.53 USD/l in 2018, while diesel from 0.32 USD/l in 2016 (which was already 19% higher than in 2015) to 0.42 USD/l in 2018 (Moerenhout 2020).

To conclude, the rentier economy and the social contract have become economically unsustainable for all three countries. Nevertheless, while Bahrain and Oman are already experiencing economic difficulties, for Kuwait economic diversification has become a priority to build an economically sustainable future and to dynamize the economy by involving also the private sector.

#### *3.1.4 Iran*

Iran is a major oil and gas producing country with vast oil and gas resources (155.6 thousand million barrels and 32 tcm in 2019). Iran's heavy reliance on oil and gas derives from its conspicuous hydrocarbon reserves: it ranks fourth in the world in terms of oil reserves, representing 9% of total proven oil reserves. It also holds the second largest gas reserves worldwide, preceded by Russia, accounting for 16.1% of total proven gas reserves (BP 2020). Iran shares with Qatar the largest non-associated gas field in terms of reserves worldwide, named South Pars for the Iranian side and North Dome for the Qatari side, as detailed in Map 3.4 (NS Energy n.d.). Discovered in 1990, South Pars accounts for around 40% of proven Iranian gas reserves. It has a 24-phase development plan with 18 phases already operational and it is managed by a subsidiary of the National Iranian Oil Company (NIOC), the Pars Oil & Gas Company (POGC).

**Map 3.4** Division of North Dome/ South Pars gas field between Qatar and Iran. *Source* EIA

Despite its great gas and oil potential, several cycles of international sanctions and the limitations on exporting these natural resources have greatly affected the development of the country's oil and gas sector, in terms of production and foreign investments. Iran remains nonetheless the second largest economy in the MENA region, after Saudi Arabia, and a slowdown of GDP growth has not directly affected the unemployment rate, which, on the contrary fell from 13% in 2011 to 11% in 2016, which is consistently lower than in numerous other MENA countries (The World Bank 2020d).

#### • **Iranian hydrocarbon sector: a turbulent history**

Iran's oil and gas history is a turbulent one, limited by both external and internal forces. The history of its hydrocarbon sector dates back over a century and represents the starting point of oil discoveries in the MENA region. In fact, oil in the Middle East was first discovered in today's Iran in 1908 by the British geologist G.B Reynolds and the following year a subsidiary of the British oil company Burmah Oil was established: the Anglo-Persian Oil Company (APOC). Oil production started in 1913 and its increasing importance was dictated by the willingness of the British navy to shift its fuel source from coal to oil. Already at that time, APOC was widely unpopular in Iran, since the host country was only receiving 16% of net profits (Kent 2015). After World War II, in line with other MENA countries, resource nationalism was on the rise in Iran with a specific animosity towards the British presence, embodied by the Anglo-Iranian Oil Company (AIOC), APOC's new name following 1935. Although the concession agreement was revised to include more favorable clauses for the country, resource nationalism gained consensus under the leadership of Iranian Prime Minister Mossadegh. In 1951, the Iranian Parliament decided to nationalize AIOC leading to the so-called Abadan Crisis. The UK responded strongly, putting pressure on other countries to boycott Iranian oil, leading to a substantial contraction of revenues for the Iranian government. In 1953, a US-backed coup overthrew Mossadegh and secured the power of the pro-Western Shah, Mohammed Reza Pahlavi. The AIOC changed its name to National Iranian Oil Company (NIOC) and Iranian oil was exported once again. Throughout the following two decades, the Iranian oil and gas sector witnessed a period of prosperity: in 1976 peak production reached 6.6 million barrels per day and in 1978 Iran became the second largest OPEC producer.

Iran's hydrocarbon industry, however, has experienced some major turbulent times since 1979. Following the Iranian Revolution in 1979, the National Iranian Oil Company (NIOC) took absolute control over the oil and gas sector, cancelling all international oil agreements. This process took place at the same time as the emergence of national oil companies in the broader MENA region. The war with Iraq in the '80 s considerably hindered oil production so that it was only from the mid- '90 s that NIOC started investing in the hydrocarbon sector with projects either financed by NIOC or in joint ventures with international oil companies. Figure 3.23 depicts the country's oil production and exports, highlighting the main sanctions introduced and changed.

**Fig. 3.23** Iran oil production and export (Mt) and key political events. *Source* Authors' elaboration

Sanctions on Iran have been recurrent in the last few decades, heavily affecting oil exports and production, as the table above highlights. The 1979 Iranian Revolution and the imposition of the first US sanctions on Iran in 1980 resulted in a drastic drop in oil production (from 263.7 Mt in 1978 to 74.4 Mt in 1980) and exports (from 193.6 Mt to 43.6 over the same period). The 8-year war with Iraq limited production levels and investments. Nonetheless, Iran showed significant resilience and managed to increase its oil output and export volumes, despite the 1984 listing of Iran as "State sponsor of terrorism" and the 1995 ban on American trade with and investments in Iran, targeting especially the energy sector. NIOC started investing again in hydrocarbon projects from the mid-1990s. In 2006, the new round of American and UN sanctions on Iran harmed oil exports, but it did not greatly impact production, since oil products were mostly employed to satisfy the growing internal demand for power generation.

In 2010, unilateral sanctions were imposed on Iran, which negatively decreased oil output (passing from 214 Mt in 2010 to 158.7 Mt in 2013) and exports (from 138.8 Mt to 73.3 Mt over the same period). This new round of sanctions targeted Iranian petroleum exports and imports, forbidding large investments in the hydrocarbon industries and cutting off sources for financial transactions with the EU and the US. In the last years, Iran has been able to increase its production and exports as the international community reached an agreement with Iran based on the Joint Comprehensive Plan of Action (JCPOA) related to its nuclear sector and to the possibility to remove several sanctions allowing foreign investments (see Chap. 5, Sect. 5.1.3).

Iran's gas potential is constrained by several factors resulting in a diametrically opposite position compared to Qatar, even though the two countries share the South Pars/North Dome gas field. Indeed, the two countries are in stark contrast in the gas sector: Qatar is a leading gas exporter, while Iran is unable to export large quantities of gas due to a much larger domestic gas market (population of 89.3 million in Iran vs. 2.8 million in Qatar) combined with geopolitical and regulatory constraints. Indeed, Iran's gas production is almost entirely consumed domestically (Fig. 3.24). Gas exports account for a small share of total production, characterizing Iran as an inward-looking gas power. Indeed, Iran is the world's third largest producer of natural gas but its exports (only via pipeline) constitute only less than 2% of global gas trade in 2019. The country has been able to increase its production levels, which have been crucial to meet domestic power demand. The prioritization of gas for the domestic market was part of the strategy to free oil export volumes for additional revenues. Since Iran is striving to substitute oil with natural gas for power generation and natural gas consumption levels are astonishingly high (it is the fourth largest consumer of natural gas worldwide), the need to refrain internal demand has grown (EIA 2019).

Thus, while gas production has increased since the 1980s, the share of gas exported, mostly to Turkey and Iraq via pipeline, has remained steady. More recently, Iran has been able to increase its gas production and divert such additional volumes to export rather than to the domestic market. Nonetheless, one of the most important features of Iran's gas industry is the limited role of gas exports compared to its reserves. In 2019, Iran exported 16.9 bcm of gas via pipeline out of a total production

**Fig. 3.24** Iran's gas production and consumption, 1980–2019, bcm. *Source* Authors' elaboration on ENERDATA