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How producers in the Middle East and North Africa can free up more natural gas for exports

Oil and gas producers in the Middle East and North Africa have been a cornerstone of the global energy system for decades, recently accounting for about 50% of oil exports and 15% of natural gas exports worldwide. As markets tighten due to lost supplies from Russia following its invasion of Ukraine, Middle Eastern and North African producers with a long track record of providing stable energy supplies could play a vital role in averting global shortages.  

But this near-term increase in demand for oil and gas from non-Russian suppliers contrasts with the need for longer-term structural declines in global fossil fuel use as energy systems transition towards cleaner energy sources. The immediate incentives facing producers amid today’s crisis could lead to longer-term investments that are inconsistent with sustainable energy pathways. How can these tensions be reconciled?

The producer economies of the Middle East and North Africa have various options to increase exports of oil and gas. They can invest in additional upstream capacity and output, which could start producing in a few years’ time. They can prioritise efforts to eliminate gas flaring and methane leaks, which could increase gas supplies by almost 20 billion cubic metres much more quickly. And they can also free up supply by rationalising their own consumption, starting with the power sector.

Currently, oil and gas account for almost 95% of electricity generation in the Middle East and North Africa. Thermal plants in the region consume over 290 billion cubic metres of gas, or more than one-third of its gas production, and 1.75 million barrels a day of oil. This dominance of fossil fuels in Middle Eastern and North African producer economies makes the emissions intensity of their power generation almost one-quarter higher than the global average.

Of this overall sum, over 150 billion cubic metres of natural gas – around one-fifth of the region’s total gas consumption – is used each year in low-efficiency gas-fired power plants1, which have an average efficiency2 of 30-35%. Combined-cycle gas power plants with an average efficiency of close to 50% could produce the same amount of electricity using about 50 billion cubic metres less gas. Replacing the current low-efficiency plants with more efficient combined-cycle ones would enable the producer economies to save and export that gas, which would generate USD 50 billion if sold at USD 30 per Mbtu – the current continental European wholesale prices.

There is also considerable potential to replace low-efficiency gas power plants with renewables, which could free up even more natural gas for export and strengthen the region’s infrastructure for the clean energy transition. Renewables currently produce less than 3% of total electricity generation in 9 of the region’s 10 producer economies. (Egypt is the outlier, with renewables accounting for around 10% of electricity generation.) Replacing the entire low-efficiency gas fleet in the region with solar PV would require around 250 gigawatts of new solar PV capacity, an amount that would take several years to deploy, at a cost of around USD 220 billion. This would free up 150 billion cubic metres of natural gas a year, either to be used in more productive ways or exported. This would generate USD 150 billion per year at current continental European wholesale prices, implying an investment payback period of just 18 months if prices remain elevated3 and underscoring the low cost of solar PV in the region relative to the high opportunity cost of continued use of natural gas in low-efficiency power plants. 

Boosting upstream natural gas production by the same amount (150 billion cubic metres) would require investing more than USD 120 billion across the region. While this is considerably less capital than would be required to scale up renewables, investments in natural gas fields are intrinsically more prone to volatile energy markets and risk becoming underutilised in a future where the clean energy transition gathers pace and demand for natural gas declines. It would also risk prolonging economically wasteful and environmentally harmful consumption of natural gas in low-efficiency power plants. Furthermore, large solar PV projects typically have shorter lead times and can be deployed much quicker than new upstream projects and even expansions of current gas fields.

Major international efforts are needed to ensure that all the world’s regions make progress on their clean energy transitions in ways that are equitable and affordable. Quick deployment of renewables and significant reduction in the use of low-efficiency gas power plants in the Middle East and North Africa would require concerted action not just from the countries concerned, but also from their international partners. Countries looking to reduce their imports from Russia, especially in the European Union, could play a significant role in mobilising capital and investment, for example through the EU’s Global Gateway initiative. And the returns are potentially huge. The region stands to gain gas export revenues while boosting local economies and clean energy supply chains. That’s a deal well worth making.

Notes and references
  1. These include both gas steam turbines and simple-cycle generators.

  2. Efficiency indicates how much of the fuel’s energy content is converted to electricity.

  3. We note that current prices in Europe are at historic highs, but considering the five-year average continental European wholesale price, this payback period would extend to 5 and a half years.