As relations between the United States and the Gulf Arab states face increasing tension over energy policy, Europe and the Gulf grow closer. In Europe, there is little quibbling over how the Gulf states choose to deal with Russia; there is, instead, a more transactional urgency to meet Europe's energy needs. We can see major shifts in oil and gas deliveries, the preparation for renewable energy exports, including hydrogen, and prospects for the transmission of electricity from both gas and renewable sources. The oil and natural gas flows are immediate in their new trajectories from the Gulf to Europe. The prospect of renewable energy and electricity supply from the Middle East to Europe is tentative. The financial and political linkages forming now are important, especially in contracting opportunities for European firms and with backing of European state credit guarantees and development banks.
Russian Oil to Europe and the World
While the intention of American and EU sanctions on Russian oil exports is meant to diminish oil revenue and to dampen demand for Russian oil and oil products, we see little evidence that Russian oil production is actually falling. Russian oil continues to get to customers, even as those customers have somewhat changed. Russian seaborne crude deliveries in October were about 2.9 million barrels per day to China, down slightly from the previous month by about 800k barrels per day. But Russian crude exports to India in October surpassed Saudi exports as its largest supplier.
Seaborne crude exports to the European Union (excluding Bulgaria) fell by a nearly a quarter on a monthly basis to 600,000 barrels per day October, in anticipation of the December 5 embargo. Italy constituted half of these volumes, facilitated by the ISAB refinery that is owned by Lukoil. The refinery is expected to be sold, or for the Italian government to arrange credit and permits for its operation with non-Russian oil. These volumes of seaborne Russian oil to Europe are generally very small, and more easily replaced from other suppliers. Gulf states have certainly been beneficiaries, though Europe accounts for just 10 percent of Saudi exports.Saudi crude transits to Europe via two routes —on tankers from export terminals in Ras Tanura and Yanbu, and from Sidi Kerir in Egypt via the SUMED pipeline.The Netherlands, Poland, Spain, France and Italy have been the top five destinations for Saudi oil in the region this year.
In some cases, though, Russian oil continues to go to the same customers as before sanctions, but it is re-routed, or refined, in an intermediary location, often in the Gulf. Russian crude oil production remained steady at 9.9mbd in October, ahead of the December 5 start of the EU embargo. Some analysts expect a small decline in production, of just under 1 million barrels per day in December. However, the February 2023 planned embargo on Russian oil products, namely diesel, will be more difficult for markets to balance. The effect of French refinery strikes and an already tight market for diesel will affect Europe and global oil markets more directly. Diesel oil fuel is about a third of global oil consumption and refining capacity is stretched by these political decisions, but also by lack of capital investment in the infrastructure; no one in the west is building new refineries. This has created an interesting opportunity for arbitrage, as Russian oil is pushed to the east, it returns west, often with an intermediary stop in the Gulf as crude storage, (or to a refinery) and then traded, frequently in Fujairah, UAE.
Europe's Growing Appetite for LNG
Europe is now a market maker for natural gas, especially for LNG exporters. For Qatar, Europe now represents a major source of revenue, as exports to Europe more than tripled from 2021 to 2022. Sales to Europe accounted for about 21.5% of overall export revenues for Qatar in the second half of 2022. Qatari LNG exports to Asia fell below 70 percent of volumes for the first time. Within Europe, Qatari LNG goes mainly to the UK, Italy and Belgium, as a factor of available infrastructure to receive shipments and then re-gasify the liquid, to send on to other locations via pipeline. The UK has accelerated its pipelined gas exports, totalling 10.3 billion cubic meters in the first half of 2022, more than double its exports in the first half of 2021.
The shift in European demand is also changing how the Gulf traditional oil exporters consider their ability to expand their domestic gas production and export facilities. Saudi gas production is expected to grow by about five percent a year, in the next decade. Shifts in gas markets, much well underway before the Russian invasion of Ukraine, are also compelling traditional oil exporters in the Gulf to intensify their gas production to meet domestic electricity demand (but also for industrial use), as in electrolysis processes and in creating (blue) hydrogen.
Renewable power generation goes hand in hand with this diversification of the energy product mix. Saudi Arabia, for example, plans to reduce domestic oil consumption and phase out the use of oil for power generation. Part of the Vision 2030 objective is to produce 50 percent of its electricity from renewable sources (mostly solar) by 2030, up from just 0.3 percent in 2021. This, combined with expanded investment in oil production, should increase Saudi oil for export, a way to green local economy (working towards a net-zero target in domestic carbon emissions), but still take advantage of a consistent global demand for oil.
Renewable Energy Expectations and European Links
There is a hyper expectation of green hydrogenand the possible linkages that might develop between the Gulf states and Europe. The reality is much more subdued, as the challenges to creating a market for green hydrogen as an energy product that can be stored and transported remain significant. Green hydrogen is generated by splitting water through electrolysis, to produce pure hydrogen and oxygen, using solar or wind power in the process. (Pink hydrogen is created from nuclear power). Yet, hydrogen is highly unstable and currently used to produce ammonia for fertilisers in a more stable state, but through a more energy-intensive process. Even as it might be a fantastic fuel source in the future, green hydrogen now accounts for just 0.1% of hydrogen produced globally. The Gulf states are well placed to push that global use of hydrogen higher and greener with their investments and plans for domestic renewable power production. European interest in green hydrogen production in the Gulf is now more about procurement than investment opportunity. In Oman, for example, the government-owned firm OQ leads a consortium to develop green hydrogen; the facility (as others in Kuwait, Qatar and Morocco) will be contracted by European firms, namely Greece-based Consolidated Contractors Company and Ireland's Fusion Fuel Green.
Electrifying Europe from the Middle East
More concrete and immediate energy linkages between the Middle East and Europe are taking place in the transmission of electricity. Yet, even this fact presents challenges in shared decarbonisation aspirations. Saudi Arabia and Egypt have announced plans to interconnect power grids. Saudi export of power to Egypt would depend first on availability of excess capacity and (to be green) new construction of solar power plants in the kingdom. Nonetheless, the project to construct a 3GW, $1.8billion interconnection is financed by a loan from Japan's Sumitomo bank, guaranteed by the Swedish Export Credit Agency (EKN) and funded by the Swedish Export Credit Corporation (SEK). For Egypt, exporting LNG to a European market is a national economic priority, as reducing the use of local gas for electricity generation would be helpful. In fact, Egypt has relied on oil-fuel-fired electricity plants to redirect more gas for export. Egypt struggles to generate sufficient electricity from renewable sources, with just 5% or 10.5TWh was produced from wind or solar in the fiscal year 2021-22, even as solar power plants become more common in their energy mix. Egypt is also planning to be an exporter of electricity thanks to a transmission line connecting to Greece part of the sub-sea Euro-Africa Interconnector, and then on to Cyprus via Crete, through the EuroAsia Interconnector. One wild card in this massive inter-regional network could be the proliferation of nuclear power plants in the Gulf, with an excess electricity capacity at the ready.
Energy Crisis Draws Gulf Closer to Europe and Eastern Med
One under-appreciated effect of the current energy crisis and war in Europe is the growing energy and electrification ties within the Middle East. The Gulf Arab states are drawing closer to gas projects in the Eastern Mediterranean as investors in Israel and in power and gas developments in Egypt. This bridge, based on energy expertise and opportunity within the region, has wide political implications, particularly as traditional hydrocarbon exporters of oil and gas now find Europe more amenable to their products and bilateral ties. This flexible, more transactional approach from Europe stands in contrast to the handwringing over US-Gulf relations in Washington. These burgeoning ties bringing the Gulf closer to Europe are already extending into the security sector, as even Germany resumes arms sales to Saudi Arabia. Energy security will be a lasting motivation for regional integration, investment and new bridges between the Middle East and Europe.
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