Update 8 - Regional focus – Impacts on the MENA renewable and petrochemical market

Historically, low oil prices have hurt the renewable energy sector and benefited the petrochemical sector.  This is because tariffs for renewable energy become less attractive commercially when assessed against the tariffs for conventional thermal power projects (which tend to fall as feedstock prices decline).  Conversely, as feedstock prices fall, the cost of manufacturing petrochemical products declines and profit margins rise.  Whilst the fundamental economics behind this equation still apply, there has not been a correlation between this formula and the respective levels of activity in MENA within these two sectors.

The MENA petrochemical market is forecast to grow at compound growth of 7.5 per cent this year.  Whilst that may sound like a high number, it actually represents a drop in percentage terms.  Over the last decade, MENA petrochemical sector growth has been in the double digits rather than single digits.  Conversely, the MENA renewables market is growing very quickly, with many MENA countries now looking to significantly ramp up their activities.

MENA petrochemicals market

A weak oil price tends to hurt the petrochemical industries of MENA oil producing countries because they lose their comparative pricing advantage over traditional competitors based in Europe and North America that use oil-derived feedstocks such as naptha to make petrochemicals.

For those petrochemical products that utilise gas rather than oil as their feedstock, most of the major hydrocarbon players in the GCC (with the exception of Qatar) are struggling for gas allocations because of an increasing demand for domestic gas to be used in the utilities sector.  Industrialisation and strong population growth within the GCC has given rise to an ever increasing demand for power and water.  In the past, countries such as Saudi Arabia tended to exclusively burn oil to power their electricity generation and water desalination projects.  This is no longer the case and although Saudi still uses close to a million barrels a day to run its power and water facilities, the policy going forward is that new IPP and IWPP projects are to be developed using gas as the default feedstock.

Energy consumption in MENA is set to double by 2040 and most of the feedstock allocated to meet this growth will be natural gas, making the MENA natural gas market nearly on a par with Europe’s and growing nearly as fast as China’s gas demand.  The region has huge gas resources but much of that is in the form of "gas caps" associated with oil reserves and will not be recoverable until the oilfields are depleted.  Additionally, most of the recoverable gas reserves are located in Qatar, Iraq and Iran.  For geopolitical reasons, tapping into Iran's gas supply is not part of the plans for the GCC countries, and in Iraq, the fighting and uncertainty mean that offtakers cannot rely upon this market to provide the additional capacity needed.  This is a particular concern for countries like the UAE, which face a short-term gas crunch as demand outstrips domestic supply.  The end result of this dynamic is that gas allocations are being prioritised for use in the utility sector rather than for use in the petrochemicals sector.

The end result for many MENA countries is that for petrochemical projects that use oil as the base feedstock, competitive pricing advantages are being lost because US and European countries now have access to cheap supply, and for those projects that use gas as their feedstock, the petrochemical companies are struggling to compete for allocations against MENA utility companies.

MENA renewables market

In our last article, we looked at the impact of the declining oil price on the UK renewables market, concluding that, with the exception of the biofuels market, which we believe will be adversely affected, investment in proven renewables technology is likely to continue largely unaffected by declining oil prices in the short to medium term.  In the MENA region, it would be reasonable to conclude that low oil prices would have a material adverse impact upon proposed new renewable energy projects because conventional thermal power projects are producing cheaper electricity now.  In fact, this is not the case.  The MENA region is arriving very late to the renewable energy party, but it has serious intent; low oil prices will not derail this initiative.  Three high profile deals that have closed in the last few years are the 100MW Shams 1 solar CSP plant in Abu Dhabi, a joint venture between Masdar, Total and Abengoa Solar, which came online in March 2013, the 300MW Tarfaya wind farm in Morocco and the first phase of Dubai’s 1GW Mohammed Bin Rashid Al Maktoum solar park.  These projects herald a new wave of major renewable projects, many of which will be in Saudi Arabia. Indeed, Saudi Arabia has announced a colossal program to procure 54GW of new renewable energy capacity by 2032.  Meanwhile Morocco and Jordan have outlined plans to install 4,000MW and 1,650MW of renewable energy respectively by 2020, Oman has announced that it is targeting to produce 10% of its energy needs from renewable sources by 2020, and a few months ago Dubai announced that it has tripled its target to increase the share of renewables to 15 per cent of its energy mix by 2030.

Conclusions

Our view therefore is that whilst low oil prices have had a significant impact upon the economies of the oil producing nations in the MENA region, there will only be a minimal negative impact upon the region's petrochemical sector, and virtually no impact upon the region's push for a future where renewable energy plays a significant role in the energy mix.