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.

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.