The world of energy is rapidly changing at the confluence of new trends in technology, politics/policy and economics. This necessitates a big picture view of energy investment beyond conventional determinants.

Therefore, I shall endeavor to develop the topic of investment for energy along three broad lines:

>Major shifts taking place in the growth patterns of world energy;

>The investment needed to balance global supply and demand and in particular MENA’s role and expected contribution; and

>The key issues and challenges facing MENA investment.

But first, a review of current projections to decide which is the most comprehensive for this purpose.


We are fortunate that the energy industry has always taken a long term view of the challenges and opportunities it faces. This is well reflected in the projections it regularly publishes, including the latest offerings from the IEA and OPEC (see p16). They are all broad in scope and strategic in focus, with OPEC, understandably, more concerned about the future of petroleum and the call on its oil.

They have very long term but varying time horizons, ranging from 2030 for BP to 2035 for the IEA and OPEC and a bit further to 2040 for ExxonMobil and the US Energy Information Administration (EIA). In addition, early this year, Shell released new ultra long term scenarios to explore how possible futures could unfold in the 21st century and what would be their implications for society and the world’s energy system (MEES, 26 April).

Though these projections differ in nuance and emphasis, they all convey authority to the common goals we are collectively working to achieve, including expanding and diversifying energy supplies; improving energy efficiency; alleviating energy poverty and mitigating the environmental impacts of energy use. However, common to these projections is also the fact that, after failing to perceive early enough major demand and supply shifts, they have now swung with the pendulum to the other side: they hype up expectations of the shale revolution, confusing the investment options.

Regrettably, not all forecast providers divulge the investment implications of their projections. And certainly not the major oil companies, which have always refrained from releasing into the public domain key elements of their growth, diversification and investment strategies. We are left with the three policy oriented institutions as the only ones that explicitly consider investment, though to contrasting degrees.

The EIA addresses investment only qualitatively. OPEC delves quantitatively into investment but for the oil upstream and downstream only. While the IEA evaluates investment requirements along the whole energy supply infrastructure both qualitatively and quantitatively. A further difference is that EIA and OPEC base their views of investment on current policies and dynamics. In contrast, the IEA bases its investment outlook on announced policy commitments and plans as reflected in its ‘New Policies Scenario’. To the extent that expected polices shape investment for the longer term, the IEA approach tends to magnify uncertainty further into the future. However, its central scenario and the corresponding investment outlook remains the most suitable reference for our purpose.

Before proceeding further on investment let me summarize the major findings of these projections. Driven primarily by population and income growth, global energy demand increases by 33% to 2035. This growth is underpinned by massive and ongoing shifts in the geographical pattern of energy consumption. According to the IEA’s projections non-OECD countries will be responsible for over 90% of the total increment in energy demand, with China, India and the MENA region accounting for 65% of that total. The latter’s energy policies, which have long been considered a domestic prerogative, have become more relevant to the rest of the world and, as a result, have come under growing scrutiny.

To meet incremental energy demand world supply increases from all sources. However, the relatively modest net oil increment (after fully compensating for rapidly declining production) contrasts with that of natural gas whose growth is nearly four times higher. This notwithstanding, oil, which continues to be driven by transport, is expected to remain the primary source of energy for the world economy. And with the boundaries of energy resources pushed further and the geographical pattern of energy supply changing accordingly, MENA will be competing with new regions to supply the growth in oil and gas demand.


Under these central scenario projections, the IEA has established that the investment needed to meet global energy demand to 2035 will total some $37 trillion. Oil and gas supply infrastructure accounts for $10 trillion and $9 trillion respectively, with the two adding up to 51% of total investment. The power sector, which includes electricity generation, transmission and distribution, requires $17 trillion investment, representing 45% of the total. The remaining 4% of global investment is made up of coal and biofuel. Worth noting is that investment in renewable electricity generation – from biomass, hydro, wind, solar, and geothermal – accounts for more than 60% of investment in new power generation capacity.

Cost inflation remains one of the most important factors driving the increase in energy investment. All policy oriented institutions have established that the costs of energy projects have been soaring. The IEA for instance has found that the upstream investment cost has doubled during the past decade largely due to rising cost of input factors (construction material, industrial equipment, skilled personnel and oil field services).

But, as shown in Figure 1, APICORP has established that in MENA the cost of an “average energy project” has more than tripled since 2003. Our focus has been on the main cost components of EPC contracts. In addition to the cost of input factors highlighted by the IEA, these include contractors’ margins, project risk premiums and the cost of what we have dubbed ‘excessive largeness’. The latter stems from the documented fact that large scale projects tend to incur significant delays and cost overruns. Energy project costs would have certainly quadrupled during the last decade or so, if not for the dampening effect of the global financial crisis. The likelihood is that costs will continue rising.


Despite greater uncertainty in the production outlook for new regions, MENA is expected to keep its pivotal role in supplying global markets with oil and to a lesser extent natural gas. When factoring in growth of domestic renewables and nuclear, the region’s total energy investment could total $3.9 trillion (2012 prices) to 2035, representing a little over 10% of global energy investment.

However, in the context of lingering political turmoil, the region’s medium term investment faces many challenges, including:

>A poor and deteriorating investment climate as is the case of the so called ‘Arab Spring’ countries and Iraq;

>Conservative depletion policies as is the case of Qatar’s moratorium on further development of the North Field;

>Tougher economic sanctions on the region’s biggest holder of combined oil and gas reserves, ie Iran;

>Durable loss of production due to armed conflict and resulting damage to infrastructure, as is the case of Syria;

>Last but far from least, is a serious constraint on financing across the region.

Financing is at the heart of corporate strategies and investment decisions. It is basically determined by the structure of capital requirement, which we have established to be 43% debt and 57% equity for MENA energy investment as a whole (see Figure 2). Debt, which is a dominant feature of the downstream industry, is sourced externally. With still limited opportunities for raising funds from the capital markets, debt is typically provided through the region’s bank loan market. As most European banks have pulled out in the wake of the Eurozone debt crisis, this market has yet to recover. For sure, export credit agencies (ECAs) and local commercial banks have stepped in to an extent; but they could hardly fill the gap. In contrast, internal financing is a dominant part of the upstream and midstream sectors. It has been more easily provided through retained earnings and state budget allocations, thanks to sustained high oil prices.

We have established that internal financing can hardly be secured for key MENA countries if the value of the OPEC basket of crudes falls below $105/B for an extended period. This level corresponds to APICORP’s estimated OPEC output weighted average fiscal breakeven price for 2013 (MEES, 26 July 2013). Since a fiscal breakeven oil price can be interpreted as a cost, a fiscal cost curve can be drawn. A reasonable approximation to such a curve is obtained by ranking each country’s petroleum output, from lowest to higher costs (see Figure 3). Because it is a fixed cost, a fiscal breakeven price cannot be interpreted as a reserve price: no OPEC country would likely withhold production until its ‘preferred price’ is met. The likelihood is that market prices risk receding on lower demand for OPEC oil and resulting higher spare capacity. In this respect, three OPEC related factors are likely to dominate the outlook: Iran’s ability to solve its nuclear impasse, Iraq’s push for higher production and OPEC’s capacity to close ranks in time of predicament. Beyond OPEC, as unconventional technologies mature and their costs decline, oil prices will likely come under greater pressure. The risks facing OPEC and MENA oil producing countries now and then will differ depending on their position on the fiscal cost curve. The higher their fiscal cost the less money will be left to invest in the energy sector.

With this challenging concern in mind, we can conclude our assessment of the changing global energy landscape and its implications for MENA investment. Amid major shifts in the patterns of global demand and supply, the region is expected to compete with emerging production from other sources and areas to provide the bulk of increment in oil supply and still a large amount of natural gas.


This involves investment of some $160bn/year (2012 dollars). It is far from certain that such levels of investment will be forthcoming in the medium term. The causes for delay have become more serious as a result of a long lasting deterioration of the investment climate in most parts of the region.

At the same time, and as far as funding is concerned, two opposing forces in tension with one another will drive the availability and cost of internal financing. On the one hand, a relentless upward fiscal cost curve, on the other hand an anticipated downward pressure on oil prices.

*The author is a policy-oriented energy economist and Senior Consultant at APICORP. The views expressed are those of the author only. Comments and feedback may be sent to [email protected]