Global energy markets have changed dramatically during 2022. Global economies are now dealing with the repercussions of the Russian invasion of the Ukraine on top of the effects of the COVID-19 pandemic, which has pushed major economies to the brink. Global energy patterns and investments are clearly grappling with both direct and indirect impacts of ongoing shifts in the global balance of power, the changing position of China and Asia, and an increased focus on energy security. The West has been confronted by a cataclysmic situation as its historically stable energy supply has become unpredictable. Its reliance on Russia as the single supplier of natural gas and crude oil has become a threat to its security and economic and social stability. Escalating Western sanctions on Russia have at times backfired as shortages of much-needed oil and natural gas have resulted in an energy market crisis and economic recession at home. For Europe and the UK, the new strategic goal has been to diversify the energy supply and identify new energy sources.
Rethinking Current Alliances
Most European countries, and the EU as a whole, are currently reassessing their geopolitical energy alliances, with particular attention to developing EU-MENA relations. Since May 2022, the EU has started to establish a new strategic partnership with the Gulf. Josep Borrell, vice president of the European Commission, announced that the EU would launch a "Strategic Partnership with the Gulf" with the aim to broaden and deepen its cooperation with the GCC and its member countries. Borrell stated that "at a time of insecurity and significant challenges to the rules-based international order, aggravated by Russia’s war on Ukraine, the European Union and Gulf countries stand to gain from a stronger and more strategic partnership stretching over a number of key areas. We need to work more closely together on stability in the Gulf and the Middle East, on global security threats; energy security, climate change and the green transition, digitalization, trade and investment."
As the EU has clearly indicated, a stronger partnership would be beneficial for the EU and for its Gulf partners. With regard to current projected demand for renewable energy supplies, especially green hydrogen and ammonia, the EU will be the world’s largest single market for the foreseeable future. At the same time, after years of neglecting the GCC and MENA region, the EU is now stepping up its role as an important security actor in the Gulf and as the leading actor on global challenges such as climate change and digitization.
In a statement on 9 November, EU foreign policy chief Borrell reiterated that energy and security cooperation with the GCC was particularly important in light of current events. The EU diplomat indicated that the current energy supply scenario could continue for years. During COP27, Borrell said an EU-GCC energy partnership made more sense now than ever before, but emphasized that hydrocarbon would not be the energy source forever and that new sources of energy needed to be pursued. Borrell noted that the current energy crisis had accelerated the green transition in the EU, adding that the Gulf has always been very important to Europe, not only as an energy supplier, but also as a strategic link between Europe and Southeast Asia.
The GCC’s Strong Position
The GCC has already become a major strategic partner for the EU in crude oil and petroleum products, and during the last few years, as a reliable LNG supplier. New energy relationships with non-Russian partners need to be set up in light of the current European energy crisis, particularly following energy sanctions on Russia, which will escalate on 5 December 2022 to include oil and petroleum products. The EU and most of its member states understand that the GCC will become a major supplier of renewable energy to Europe during the energy transition.
The GCC, especially Saudi Arabia and the UAE, is home to some of the best solar and wind resources in the world. For both sides, the development of renewables or alternative energy resources is a mutually beneficial strategy to meet climate commitments as well as other economic goals. The new strategy must be pursued by both sides, that is, by GCC power brokers as well as by Brussels and the EU. The UAE and Saudi Arabia will play a pivotal role in this regard, as already demonstrated by increased diplomatic and economic activity with these actors. The parameters of this future lie in the hands of EU consumers but also with the producers—Saudi Arabia, the UAE, and Egypt.
As is evident from the EU’s statements about energy ties with the GCC and MENA region, Europe hopes to join forces with regional actors to address climate change and support a sustainable economic future for all. Using renewable energy to pave the way towards a carbon-free economy will be a long journey. The power of hydrocarbon producers such as the UAE remains very strong and continues to shape global economic growth and prosperity. At the same time, there is an opportunity to develop an emissions-free green hydrogen and ammonia market which could meet some of the demand currently met by hydrocarbons in the EU and UK. The green hydrogen commodity market cannot fully emerge until demand is connected with supply. The UAE, Saudi Arabia, and Egypt will all play a crucial role in this transition. These countries hold vast renewable resources and also have a very attractive logistic advantage with regard to their geographical proximity to potential EU markets.
Renewed Importance of Hydrocarbons
Since the Russian invasion of Ukraine, the GCC—especially the UAE, Saudi Arabia, and Qatar—has started to play an important role for EU countries. The ongoing EU energy crisis has made hydrocarbon geo-economics a central concern for European leaders, who also became increasingly interested in the potential of renewable energy from the MENA in general and from the GCC in particular. The geographical proximity of the Middle East provides clear advantages for current and future European energy supply networks. Europe needs to find a way to replace approximately 150 to 175 billion cubic meters of Russian natural gas and LNG.
After 5 December 2022, it will also need to find an alternative source for Russian crude oil and products totaling more than 4.4 million barrels per day. Following Russia’s invasion of Ukraine, the EU has had to find new energy suppliers, while also working towards meeting renewable energy targets for the coming decades. The REPower EU energy plan focuses on accelerating Europe’s energy transition away from hydrocarbons and exponentially increasing renewable energy at the same time.
To meet renewable energy and climate change targets for 2030-2050, the EU needs to develop a new energy economy. Before the Ukraine crisis, it seemed that Brussels had failed to grasp the direct links between geopolitics and geo-economics, especially in the energy sphere. For the last several decades, the EU and especially Germany failed to invest in strong energy cooperation with the Middle East. Both the EU as a whole and national governments within Europe have been obsessed with renewables and climate change issues and adopted an anti-fossil fuel strategy that did not account for the role of hydrocarbons in the economy and society. This resulted in an apparent lack of interest in pursuing energy relations in the Middle East. European countries seemed to think that Middle Eastern and North African producers, such as Algeria and Egypt, would be there to provide necessary energy supply even if Europeans did not offer security assurances, economic support, or political cooperation in return.
Russian President Vladimir Putin’s attack on Ukraine dramatically shifted this status quo. European leaders are now eager to visit nearby energy producers such as Algeria, Egypt, and Israel, as well as "old partners" such as Saudi Arabia, the UAE, Qatar, and others. Even the Caucasus and Central Asia have once again become major focal points for energy supply. Brussels, Berlin, Rome, London, and Paris have recognized that giving the cold shoulder to major oil and gas producers was not working and was counterproductive to their own strategic energy transition goals.
As Europe searches for alternatives to Russian oil and gas, the Gulf’s LNG projects have received particular media attention. However, these political-economic arrangements are not going to bear much fruit in the short term, since additional LNG and even crude oil supply for energy-thirsty European markets is yet not available. The only possible additional LNG supply in the short term will be from eastern Mediterranean countries or Algeria, both of which are close to European shores. Qatar’s LNG is almost entirely unavailable since it is mostly tied up in long-term contracts with Asian and some European customers. The UAE might potentially have some spare capacity, but not enough to make a real dent in Europe’s current natural gas demand. New LNG supply from the GCC is not expected to hit the market until 2025 or 2026. Qatar’s major LNG expansion plans and the Abu Dhabi National Oil Company (ADNOC)’s ongoing projects will also help relieve market pressures, but not before the end of 2025.
Given the above, it is clear that Europe’s current energy crisis will not be resolved anytime soon. Both the EU and its GCC/MENA partners stand to benefit significantly from further developing their energy cooperation. Hydrocarbons will once again forge major ties between European capitals and Arab governments. EU energy strategies have always encountered obstacles due to the European tendency to address these issues unilaterally, an approach that the current crisis is gradually changing. Brussels is angling to become a real power broker on global energy markets in order to identify suppliers for oil, gas, and renewables. Everything becomes fluid under pressure, and Brussels will now allow collective purchases of energy or strategic products by a consortium of private energy companies and even by states.
Green Hydrogen and Ammonia
For GCC countries, the European energy crisis could be a major boon. As Europe’s geopolitical and energy geo-economics have shifted towards the GCC/MENA, Gulf states need to grasp the long-term opportunities on the horizon. Europe will remain a viable and very important partner for hydrocarbon products, but a new path forward also needs to be charted very soon. Europe’s stringent renewable energy and climate change targets for 2030-2050 could turn out to be a blessing in disguise for GCC producers. Renewable energy, including wind and solar, already offer opportunities for MENA producers to deliver electricity to Europe via grid connections available to southern Europe. The potential to develop green hydrogen and/or ammonia markets needs to be studied further. GCC producers can use the MENA’s vast resources in wind and solar production, including floating offshore wind, to establish a solid market position in developing European green hydrogen economies.
Renewable energy projects in the GCC region have been making headlines for over a decade. During the past year, green hydrogen has come to the forefront and outpaced even solar and wind. The emergence of this new energy source was first met by skepticism, but is clearly gaining momentum worldwide. As reports have already indicated, Saudi Arabia, the UAE, and even Oman will be promising suppliers for large-scale green hydrogen production during the coming years.
Egypt also has significant potential and should not be forgotten. As Moody’s Investors Service noted in its latest report, renewable energy projects in the Gulf region have faced "significant delays," which could slow down the production and export of green hydrogen. Moody’s reiterated that Saudi Arabia, Oman, and the UAE were particularly well-placed to produce and export these energy resources, given their access to cheap renewables such as solar power and expertise in water desalination. The current delays are partly caused by difficulties in the auctioning processes for renewable energy projects in the GCC, but primarily due to increased raw material and commodity costs and elevated freight and energy prices following the economic recovery of 2021.
During the last weeks, many major green hydrogen plans have emerged. Further plans are expected to be unveiled at the COP27 conference in Sharm El Sheikh, Egypt. The UAE, Saudi Arabia, and Egypt are accelerating their strategic planning in this field. Egypt and other MENA governments indicated last week that they hoped to position the region as a major green hydrogen exporter. European countries such as the UK and Germany, as well as the USA, Japan, and other nations, are all looking to find reliable long-term alternatives to Russian fossil fuels. The comparatively low costs of renewable power production in the MENA offer clear advantages. Europe is looking to Saudi Arabia, the UAE, and even Oman, while Egypt is scrambling to join the scene, with projects for green hydrogen production already hitting the 100 billion dollar mark. Cairo, spurred by the spotlight of COP27, could produce up to 3.6 million tons of green hydrogen annually, equivalent to around 30 percent of Europe’s projected demand by 2030. However, based on current resource availability and the status of MENA projects, the first significant exports of green hydrogen are not expected to hit European markets until 2025.
Cornelius Matthes, CEO of Dii Desert Energy, stated that the MENA region expects to see a massive acceleration in its capacities for solar, wind, and green hydrogen production during the coming years. Dii Desert plans to develop green hydrogen projects with a capacity of over 20 gigawatts (GW), which it will expand in the medium term to 100 GW. The MENA region will be able to produce solar energy for 1 to 2 cents per kilowatt hour (kwh) and wind energy at 1.5 to 3 cents per kwh, which is lower than other regional assessments and offers clear commercial advantages. Europe should focus on the MENA region to take advantage of low-cost solar and wind energy production.
The UAE-based news site Zawya Projects has indicated that the Middle East ranks third globally regarding hydrogen investments through 2030. The MENA and GCC region also already has transport infrastructure for ammonia in place, which would further facilitate implementation of hydrogen infrastructure. Green ammonia has vast potential as a climate-neutral feedstock. It could be an important raw material for the chemical and fertilizer industry and is easier to transport than other forms of energy. However, some challenges remain regarding existing hydrogen transport infrastructure. Green hydrogen projects in the MENA region will use grid-connected non-renewable electricity during the initial phases. In June 2022, Zawya Projects reported that the Saudi megaproject NEOM will initially be powered by up to 50 percent grid-connected energy from non-renewable sources.
Moody’s has reported that green hydrogen projects in the MENA region are continuing to make progress. These include the Helios Green Fuels project in Saudi Arabia, which has a 2-gigawatt electrolyzer capacity, and the NEOM Green Hydrogen Company, which operates in collaboration with ACWA Power Management and Investments One. The latter aims to produce 1.2 million tons of green ammonia per year and 650 tons of green hydrogen from 4GW of renewable energy. Taking into account that NEOM expects renewable energy production to reach 21GW or more, there are opportunities to expand further in this field. According to Moody’s, green hydrogen will reduce the GCC’s "heavy reliance on hydrocarbons and underlying credit exposure to longer-term carbon transition risks." It added that "reducing the economic and fiscal dominance of the hydrocarbon sector in the GCC will only be a gradual process."
Green Hydrogen’s Future
For energy-thirsty European markets, the GCC and North Africa offer strategic opportunities. GCC nations are ideally positioned to contribute to new blue and green hydrogen markets since they have access to cheap domestic gas production and renewable energy sources. As Europe’s carbon transition accelerates, these producers, including the UAE, Saudi Arabia, and others should take advantage of these developments by establishing green and blue hydrogen projects. This would mitigate the negative economic ramifications of reduced global oil demand and lower oil prices, since green hydrogen would make the GCC less reliant on hydrocarbons and reduce credit and other risks tied to the long-term carbon transition.
With regards to bilateral and multilateral relations between the EU and GCC/MENA, both sides stand to benefit significantly from developing green energy. However, further investments are still needed to develop a commodity market. GCC governments are already committed to setting up facilities to produce low-carbon blue hydrogen and zero-carbon green hydrogen from water using electrolysis and renewable energy (from natural gas with carbon capture). While blue- or grey-hydrogen will be the first step, since costs are relatively low, the GCC and Egypt are looking to also set up a global green hydrogen market.
This will take longer, since green hydrogen production is more expensive and difficult than blue hydrogen production. With regard to low-cost renewable energy production and water desalination capacity, Oman, Saudi Arabia, the UAE, and Egypt also have the potential to manufacture and export green hydrogen within the next 5 to 10 years. As previously stated, exponential growth in renewable energy production capacity is needed in order to accelerate investment in green hydrogen and ammonia. The latter will require a more flexible auctioning process from states. As analysts have observed, major investments in hydrogen storage and transport technology and infrastructure are needed to promote the large-scale commercialization of green hydrogen.
The UAE is currently leading the push for green hydrogen, especially with regard to cooperation with Europe. In October, the UAE and UK discussed how to pursue major green hydrogen initiatives that could result in the creation of around 100,000 new jobs. A report by the UAE-based Zest Associates and the World Green Economy Organization (WGEO) indicated that key collaborations across policy, innovation, investment, and business could "unlock mutual benefits for climate and economic development." Zest Associates stated that "by 2050, hydrogen is estimated to deliver up to $8.7 billion annually to Dubai’s economy alone, and $15.5 billion to the UK, as well as over 100,000 new jobs in each country under high-adoption scenarios." It also indicated that hydrogen-related investment in the UAE and UK could reach 50 billion USD by 2030, with the Abu Dhabi National Oil Company (ADNOC) aiming to become a leader in hydrogen by 2025 as part of its investment program.
In addition to ADNOC’s overall green hydrogen and ammonia investments, other major investments in the UAE include ENGIE and Masdar’s 5 billion USD 2GW green hydrogen joint investment, a 1 billion USD green ammonia facility in Abu Dhabi’s Khalifa Industrial Zone, and the 2GW green ammonia facility developed by TAQA and Abu Dhabi Ports. These projects could be linked directly to the UK pipeline project to unlock 4.8 billion in private investment for blue and green hydrogen production in the UK.
Potential UAE investments in the UK and other European countries are already being planned, as demonstrated by Masdar’s major investments in offshore wind in the North Sea and major onshore wind and solar projects in Poland, the Balkans, and elsewhere. ADNOC also has agreed to buy a 25 percent stake in British oil and gas giant BP’s H2Teesside blue hydrogen project. Abu Dhabi’s Masdar also signed a MOU to acquire a stake in BP’s green hydrogen project, HyGreen Teesside. These projects comprise a relatively small portion of global investment in hydrogen, which is projected to reach 500 billion USD by 2030. This still falls significantly short of the 1.2 trillion USD required to reach long-term net zero goals. For the UAE, hydrogen represents an opportunity to diversify energy sources to replace income from fossil fuel exports, which currently make up 30 percent of the country’s GDP.
GCC countries are clearly mapping out agendas to kickstart the hydrogen economy. The UAE, Saudi Arabia, and Oman are spearheading ambitious plans to supply Europe and the Asia-Pacific region with green hydrogen and ammonia. European countries and companies have signed an expanding series of memoranda of intent and contracts in this field, and the first large-scale projects are underway. For most Gulf countries, hydrogen is not only a means of diversification, but also a chance to maintain their current economic and political standing. Hydrogen from the Gulf could be an effective tool for mitigating climate change, but European countries will be faced with other trade-offs and questions to consider.
The GCC’s ambitious plans for a hydrogen economy are based on high solar yields and abundant territory for producing green hydrogen from renewable electricity. In the short term, the GCC and Egypt’s vast natural gas reserves offer opportunities for blue hydrogen production, which is produced from natural gas via carbon capture. The GCC and Egypt’s extensive oil and gas reserves, low-cost supply for international financial markets, direct decision-making, and existing infrastructure make these two countries excellent hydrogen first-movers.
Even prior to the Russian invasion of Ukraine, major green hydrogen projects and strategies were on the table. In October 2021, Saudi Minister of Energy Abdulaziz bin Salman Al Saud announced that Saudi Arabia aimed to become the world’s largest hydrogen producer. The country’s hydrogen policy is closely linked to Vision 2030, which outlines the holistic transformation of Saudi Arabia. Saudi Crown Prince Mohammed bin Salman (MBS)’s Vision 2030 aims to significant increase domestic value creation, non-oil exports, and renewable energy, and to expand the natural gas industry. Meanwhile, Oman’s Vision 2040 calls for a general "diversification of energy sources." In August 2021, Oman founded the Hy-Fly Alliance, which brings together government agencies, representatives from the oil and gas sector, educational and research institutions, and the ports of Sohar and Duqm within a joint platform.
The UAE has been the most aggressive in developing hydrogen as an energy source. At the COP26 summit in November 2021, the UAE announced that it was working on a Hydrogen Leadership Roadmap. It aims to establish new value chains for the export of low-carbon hydrogen and its derivatives and to pursue hydrogen-based production of steel and jet fuel. The UAE has already set a target of reaching 25 percent of the global hydrogen market. The UAE’s hydrogen agenda is also linked to its Energy Strategy 2050, which the country adopted in 2017. This strategy aims to increase clean energy in primary energy consumption from 25 to 50 percent by 2050.
Qatar, another key GCC country, is not pursuing a strong hydrogen strategy, but rather is focused on becoming the world’s leading exporter of liquefied natural gas (LNG). Bahrain and Kuwait are not currently pushing for green hydrogen investments.
In the Gulf, as in Europe, most energy strategies are being discussed by various government ministries and agencies. At the same time, national oil companies are making significant progress in this field. These companies include the Abu Dhabi National Oil Company (ADNOC), Saudi Aramco, the Kuwait Petroleum Corporation (KPC), and Petroleum Development Oman (PDO), and are closely linked to state ministries. In addition to operating the petroleum business, these companies develop and execute petroleum policy. Within this framework, they also have a mandate to design and implement hydrogen policy. Regional utility companies have a stake in hydrogen in coordination with government agencies. Sovereign wealth funds (SWFs) are also set to play a slightly underassessed but increasingly important role in the coming years.
Saudi Arabia is currently planning to produce blue hydrogen from shale gas in the country’s Eastern Province through the 110-billion-dollar Jafurah field project, which was launched in October 2021. An existing hydrogen plant in Jubail Industrial City has also been upgraded to produce blue hydrogen. In 2022, Saudi Arabia announced more than 15 new projects.
The UAE and its economic and political hub Abu Dhabi have already launched the first green hydrogen plant in the Middle East. The project is a joint venture between Siemens Energy and Dubai-based company DEWA and has been in operation since 2021. There are plans underway for a facility for hydrogen derivatives for land and air transport backed by a consortium that includes the Mubadala subsidiary Masdar, Siemens Energy, Lufthansa, and other UAE partners. In 2021, a new Emirati company called Helios announced that it had contracted ThyssenKrupp for a feasibility study to produce green ammonia in the Khalifa Industrial Zone in Abu Dhabi (KIZAD). In late 2021, Abu Dhabi developer Masdar and French utility ENGIE joined forces to develop a green hydrogen hub in the UAE.
From the outset, green and blue hydrogen projects in the region have looked to Asian-Pacific demand. Saudi Aramco and the Japanese Institute of Energy Economics announced the world’s first maritime delivery of blue hydrogen in September 2020. Aramco also has signed agreements with Japanese refining company ENEOS and South Korean giant Hyundai Heavy Industries. Saudi sovereign wealth fund PIF has signed contracts with South Korean companies Posco and Samsung C&T for green hydrogen production. The UAE has also ramped up energy cooperation in this region and South Korean companies plan to build a green ammonia plant in the UAE. In 2018, Emirati company ADNOC concluded an agreement with the Japanese Ministry of the Economy and South Korea’s GS Energy on ammonia as a transport fuel and to support blue ammonia production.
The current EU-GCC strategic discussion remains primarily focused on technology transfers, investments, and ad-hoc decision-making about sourcing energy. These very diffuse strategic propositions do not yet constitute a fully-envisioned path towards strategic energy cooperation, although the building blocks have been set for such cooperation in the future. There are new opportunities on the horizon, even as the EU deals with internal debates over whether to make levels of domestic fossil fuel consumption and unilateral reduction of this consumption the main indicators of climate change progress.
The Ukraine crisis, and before that, the COVID-19 pandemic of 2020-2021, made clear that unilateral geopolitical and geo-economic strategies are not feasible. These international crises demonstrated that setting up strong ties with neighboring countries are beneficial to all involved. The new power that the MENA region, and the GCC in particular, now holds with regard to European energy security needs to be taken into account. With Russia gone from Europe’s oil, gas, and coal energy markets, other alternatives need to be pursued. The GCC and countries such as Egypt are now of central concern for all European powers dealing with energy crises.
Before the Ukraine war, internal European energy discussions were focused mainly on removing hydrocarbons from the energy economy. However, it is now evident that such a shift has not yet happened, since the current energy crisis is a hydrocarbon crisis. Countries such as the UAE, Saudi Arabia, and even Qatar and Egypt are now reaping the rewards of their continuing vigilance with regard to investing in upstream capabilities to meet market demand. At the same time, European powers are starting to realize that the so-called hydrocarbon region (MENA) is also the most appropriate producer for renewable energy. The European demand for green hydrogen and offshore wind and solar gives GCC suppliers power with regard to energy security. The willingness and capability of major hydrocarbon-based GCC and North African economies to support green hydrogen or ammonia production is a unique selling proposition (USP) for their European energy consumers.
Up until this point, cooperation between European countries and their GCC counterparts has been purely economic, as is clear from trade balance sheets. Strategic security cooperation, economic diversification, and even power alliances were largely ignored or even actively avoided by certain parties. The current and future shifts inside Europe and the MENA region call for deeper long-term strategic cooperation across all fields, as Borrell observed.
Cooperation in the fields of water, energy, and food security will need to be expanded and codified into concrete agreements. Historically, there has been a one-way financial stream of European products to the GCC/MENA and of natural resources from MENA to the EU. This will need to shift, as the GCC and North Africa seize the opportunity to invest and participate in ongoing energy transitions in the EU and UK. It is time for lopsided balances of power to be righted and for the GCC to invest in Europe to support the vast energy changes to come while taking advantage of the opportunity to shape them. Abu Dhabi’s national oil company ADNOC, with its vast subsidiaries and joint ventures must play a central role in Europe’s natural resources, chemicals, and utilities futures. UAE companies such as Masdar and Fertiglobe, and even its vast sovereign wealth funds could help realize the green future that Europe imagines. At the same time, Europe can help realize Gulf Visions in the UAE as well. The same approach could be adopted by Saudi Arabia’s giant Aramco, as well as its sovereign wealth fund PIF, and others.
GCC countries should realize that there is a second or third largest market next door, the EU, with 320 plus million customers, vast industrial and high-tech opportunities, and perhaps better capabilities than those of its US or Asian competitors. Building a new energy path forward for renewable energy could help launch mutually beneficial strategic cooperation between the MENA and the EU. Both energy and security have long been neglected by both sides but now are back in the spotlight. GCC states could further bolster ties with the EU as a soft power move to mitigate skepticism or criticism of GCC countries within Europe. This time, instead of undermining cooperation, energy could be the GCC’s deal maker.