Green Energy Transition in the MENA Region:
Economic and Geopolitical Implications

November 23, 2021 MENA Region

Executive Summary

Balancing domestic and international energy transition concerns

  1. A timely and successful green energy transition is critical for MENA countries as the region enjoys an abundance of hydrocarbon sources but is also a “hotspot” for climate-related risks and extreme events.

  2. The countries’ adoption of ‘green-ish’ nuclear energy presents an opportunity for non-Western suppliers of large and small modular reactors, resulting in increased Russian and Chinese influence.

  3. While regional leaders are reluctant to implement long-term initiatives as they bet on lower commitment to climate action from future US administrations, intra-GCC competition may add impetus to act..

Watch out for

  • US bid to retain key role in global nuclear reactor market by contributing components or faster licensing of small modular reactors

  • Next two UN climate conferences taking place in Egypt (2022) and the UAE (2023)

  • Saudi Arabia and the UAE to concretize their planned investments of $180bn and $160bn separately to reach “net zero” goals by 2060 and 2050, respectively

  • Europe conducting more active climate diplomacy in the MENA region

Key Figures

  • Five of the top twenty firms responsible for >30% of all energy-related carbon dioxide and methane emissions since 1965 are state-owned oil firms from the Gulf

  • A rise in manufacturing, construction, and transportation expected to drive MENA’s electricity demand to triple by 2050

  • The region’s first industrial-scale green hydrogen project (in the UAE) is set to generate 5000 MW of clean energy by 2030

State of Play

Short-term commitments to the green energy transition

Few regions in the world have more at stake than the Middle East and North Africa (MENA) when it comes to the green energy transition. The region’s hydrocarbon abundance made Gulf countries rely on oil and gas exports for more than 80 per cent of government revenue, while exposure to climate-related risks and extreme events has increased water scarcity and desertification. Yet, it will be difficult for the region’s oil producing countries to diversify their economies, partially due to concerns about social and political stability and partly because past financial and economic reform efforts did not create alternative productive sectors. Given the US’ influence in the region, the Biden Administration’s emphasis on climate action has led several MENA countries to set net zero goals and introduce respective initiatives. The EU’s leverage, in contrast, is more moderate, especially in Gulf Cooperation Council (GCC) countries. Still, the ability of regional governments to continue delivering public goods at lowered prices for citizens will clash with the climate change agenda sooner or later, potentially leading to a revision of current commitments.

Key Issues

The energy transition drives nuclear energy adoption and local clean energy projects

Efforts to combat climate change and accelerate the energy transition in the MENA region are lagging Western countries’ endeavors. The lack of urgency to act on the part of oil producing countries can be attributed to continued demand for the region’s fossil fuels from Asia for the foreseeable future. Furthermore, regional leaders recognize a significant gap between the ideals and realities of the global climate change agenda, which in turn reduces the incentives to enact change domestically. With regard to the energy transition, MENA’s non-oil producing countries face the challenge of limited access to finance and poor energy infrastructure. At face value, the regional reaction to the recently concluded United Nations climate conference, COP26, was positive, but participation was primarily viewed as a political and diplomatic necessity. Climate advocates have accused regional heavyweights, such as Saudi Arabia, of having worked with lobbyists ahead of the Glasgow gathering to water down the conference’s outcomes.

Since most MENA countries will struggle to simultaneously meet emission targets and energy demand, a renewed drive to explore nuclear energy and the attempt to rebrand it as a green alternative to the hydrocarbon sector is likely. The first of the UAE’s four South Korean-built reactors is also the first to come online in the region and the remaining three will be completed in the next two years. Egypt is already in contract with Russia to build four reactors while the race is on to meet Saudi Arabia’s stated interest. The possible shift to nuclear energy does not bode well for Western nuclear power plant manufacturers as Asian and Russian manufacturers currently dominate the market. One exception may be small modular reactors below a capacity of 1000MW in which Western manufacturers can still compete.

With a view to the energy transition, the GCC states, especially Saudi Arabia and the UAE, will present the most interesting opportunities for investors. These countries will likely focus on leveraging existing technologies in carbon capture and storage while also seeking to develop several clean energy products from natural gas to solar power as well as blue and green hydrogen production (designating the low-carbon or carbon-neutral making of the stuff, respectively). Efforts to increase electrification of GCC economies (i.e., replacing fossil fuel-based technologies with those using electricity as a source of energy) and offsets in green initiatives (like tree planting to capture carbon) constitute other attractive opportunities for international businesses. For instance, Saudi Arabia plans to create hundreds of man-made lakes to capture seasonal rains or draw seawater inland.

Further climate action impeded by uncertainty about lasting US commitment 

While regional leaders recognize the importance of tackling climate change and the global push for climate action, they question whether environmental policies will remain a priority of future US administrations. This still being the most important benchmark, critics view current measures in the region mainly as lip service to gain goodwill with Washington. MENA countries will likely continue with highly aspirational commitments, such as Saudi Arabia’s Vision 2030 plan to increase the share of renewable energy production to 50% from today’s 1%, or pledges that disguise details, such as Riyadh’s unsubstantiated net-zero claim that excludes oil exports. In contrast, observers view Egypt’s commitment to increase its share of renewable energy from 20% today to 40% in the next fifteen years as more reasonable.

Intra-GCC competition may actually add impetus for Gulf countries to take climate change seriously and position themselves as leaders in this space. Further action by China and India, the region’s primary energy resource consumers, could also drive the region’s green energy transition – not least because of China’s dominance of the nuclear reactor market. While European businesses could stand to benefit from the GCC’s energy transition, the EU is expected to be more relevant in the Levant and North Africa. There, it can actively foster the green energy transition through its numerous financing mechanisms, especially as Algerian, Egyptian, and East Mediterranean gas are critical for Europe’s energy security.