Central Asia Relies on Gulf as it Targets Energy Transition

Since gaining independence in 1991, states in Central Asia and the Caucasus have historically had the strongest energy ties with Russia and China. Yet in the past 5 years, they have significantly expanded their energy cooperation with the member states of the Gulf Cooperation Council (GCC). This cooperation is unidirectional: Gulf companies and institutions are investing substantial capital in energy assets and infrastructure across Central Asia and the Caucasus, but not vice versa.

The GCC and Central Asia have a history of ties in the traditional energy sectors of oil and gas, but the new interregional cooperation prioritizes alternative energy sources—including solar, wind, hydropower, and hydrogen. This shift reflects a change in the GCC’s wider energy diplomacy agenda: to transition from being the world’s leading fossil energy center to being the world’s leading energy center more broadly. Recent Gulf investments in Central Asia and the Caucasus are the active edge in this effort.  

To explain why these new Gulf-Central Asia energy connections are being developed, it is necessary to understand who is involved in bringing them to life. In both regions, the energy sector is defined by blurred lines between private and government-owned companies. The result is that the distinction between private and public interests at stake in strategic energy decisions can also be blurry in both regions. Nonetheless, the new Gulf investments in Central Asia’s energy landscape are typically led by a GCC company or a GCC government, though their specific project is routinely supported by the other.  

Today, the two largest Gulf companies involved in developing new energy assets in Central Asia and the Caucasus include the UAE-based Masdar, and Saudi-based ACWA Power. Masdar, once a wholly-owned subsidiary of the UAE’s Mubadala sovereign wealth fund, is now jointly owned by Mubadala, the Abu Dhabi National Oil Company (ADNOC), and Abu Dhabi National Energy Company (TAQA) since December 2022. ACWA is 44 percent owned by Saudi Arabia’s PIF sovereign wealth fund, alongside a number of wealthy individuals and institutional investors. In both cases, Masdar and ACWA cannot be considered solely private or solely governmental companies. While they are inarguably driven by basic financial motives, they also remain accountable to the political elites in the UAE and Saudi Arabia, who are well represented on their boards and among their shareholders.

If Masdar and ACWA are the largest Gulf companies active in Central Asia and the Caucasus, their projects vary significantly across the region. Masdar currently has the broadest range of projects. In Uzbekistan, this includes five solar parks (ranging from 100-457 MW), two wind projects (one 500 MW project already underway, plus a new 1GW park announced at COP29), as well as plans to explore pumped hydropower. In Azerbaijan, Masdar already operates three solar parks (ranging from 230-445 MW) and one 240 MW onshore wind park. Next door in Armenia, Masdar also has a 200 MW solar park. In Kazakhstan, Masdar does not have any completed projects, but at COP29, the company signed an agreement to develop 1 GW solar park, including 600 MW of battery storage. Likewise, in Kyrgyzstan, Masdar only has a set of agreements,  including a vague promise offered in January 2023 to develop 1 GW of renewables, followed by, in December 2023, a commitment “to explore” 3.6 GW of hydropower and  renewables alongside the British EDF energy provider. Notably missing here are investments in Turkmenistan, Tajikistan, and Georgia. 

ACWA Power’s regional assets currently include a 240 MW wind park in Azerbaijan, and in Uzbekistan, four wind parks (ranging from 100-1500 MW) already completed or soon to be finished. They also have several utility-scale solar parks in Uzbekistan’s Samarkand region, which include large battery energy storage systems (BESS), and a new project underway for a 1500 MW Combined Cycle Gas-Turbine (CCGT) facility in the Sirdarya region. In each of these cases, the National Electric Grid of Uzbekistan is listed as the sole off-taker, and each facility is described on the company’s website as being a “Build, Own, Operate, Transfer” project, in which ACWA Power has claimed it ‘will take the lead in the construction, engineering, operation and maintenance the plant.’ What, when, or how the “transfer” phase will take shape remains unclear, however.

The COP29 United Nations climate talks in Azerbaijan in November 2024 saw a wide range of new energy cooperation agreements between the regions, with Saudi Arabia showing the most ambitious outlook to the developing energy landscape of Central Asia and the Caucasus. At COP, the Saudi Minister of Energy signed an agreement with three of the region’s presidents—Azerbaijan’s Ilham Aliyev, Kazakhstan’s Kassym-Jomart Tokayev, and Uzbekistan’s Shavkat Mirziyoyev—to enhance cooperation in renewable energy development and transmission and to push forward a long-elusive goal of regional power grid interconnection. The Saudi renewable energy champion ACWA was also involved in these agreements, being named as the company responsible for the renewable energy projects in the three countries. 

At COP29, the Saudi Electricity Co. also signed an MoU to develop regional interconnection projects with its counterparts in Azerbaijan, Kazakhstan, and Uzbekistan. COP29 also yielded a new bilateral energy “roadmap” between Saudi Arabia and Azerbaijan, but the larger 4-country agreements that Saudi officials take interest in include extending their bilateral energy diplomacy to regional energy diplomacy. This symbolizes a move beyond the more limited series of bilateral energy agreements they have been signing with the other state’s leaders since 2022.

Another notable development at COP29 was the joint agreement between Masdar, ACWA, and SOCAR Green—a branch of the State Oil Company of Azerbaijan established to implement “renewable energy projects, green hydrogen production, [and] carbon capture, utilization, and storage.” This three-country initiative is focused on exploring a 3.5 GW offshore wind project within Azerbaijan’s Caspian domain, as well as a green hydrogen and water desalination plant. The new energy projects discussed in the MoU are not surprising in and of themselves, but the fact that Masdar and ACWA are working together is notable as GCC actors are often assumed to be in competition. Rather, this project may demonstrate the possibilities for cooperation between the Gulf’s two green energy pioneers– both across the GCC borders, as well as with the Central Asia and Caucasus states hosting their investments. 

By working with SOCAR Green, Masdar and ACWA are well positioned to teach Azerbaijanis about the Gulf model of “greening” oil money by funneling it into the alternative energy sector. Regardless of whether energy watchers deem this model to be good or bad, it is expanding at a rapid pace in the Gulf. As the GCC governments and companies continue to promote non-fossil energy projects abroad, including in Central Asia and the Caucasus, they are laying the groundwork for a cooperation model that puts the GCC at the center of the post-oil energy future. In this role, the Gulf’s political and business leaders aspire to do more than offer capital to undercapitalized regions; they also aim to reap the most profits possible from controlling the vast networks of technology, infrastructure, knowhow, and resources that are needed to realize the transition to alternative energy sources. 

The Gulf’s investments in Central Asia and the Caucasus thus reflect a broader energy diplomacy agenda: to leverage their role as the world’s leading fossil fuel producers in order to remain an energy epicenter, whatever the fuel system. In this respect, the GCC’s interregional cooperation with Central Asia and the Caucasus is already a success. But whether these high-level agreements and large-scale projects will yield the kinds of financial and political returns that their Gulf proponents hope for remains an open question.

Photo: Dunyo

New Climate Financing Targets Present Opportunity for the Gulf

Following two weeks of COP29 negotiations, exhibitions, and panel events, delegates representing governments around the world reached a major consensus. Most significantly, they agreed wording on a new climate financing target for developing countries, international carbon market standards, and a support programme for national adaptation plans (NAPs) for the least developed countries.

These three key victories for the climate agenda present great opportunities for the Gulf states, particularly Saudi Arabia, the United Arab Emirates, and Qatar—collectively referred to as the Gulf 3—to play a leading and supportive role in investing in a 1.5C-aligned and resilient future, which was the fundamental aim of the 2015 Paris Agreement.

At the 2009 Copenhagen Climate Summit (COP15), developed countries agreed to mobilise $100 billion of annual climate financing for developing countries by 2020. This target was unfortunately never met, with the deadline extended to 2025 during the Paris Agreement signifying a commitment to updating the target to increase its ambition by the end of the decade. This brings the focus to 2024’s negotiations, which culminated in this target being updated to $300 billion annually by 2035.

This target and metric are highly contested. Developing countries want to increase the target further as their financing needs are much greater than this amount. The Overseas Development Institute has estimated that the need is closer to $1.3 trillion per year by 2035, which is the new cumulative goal. Moreover, much of this financing is currently provided in the form of debt rather than grants, adding to existing debt obligations, which is especially challenging for small and developing nations.

The new agreement requires the 24 developed nations, across Europe, the United States, Japan, Australia, and New Zealand, to deliver on this target. A broader climate financing target of $1.3 trillion has also been set by 2035, and “voluntary” contributions from countries outside the original 24 are allowed to be included in this figure.

Fossil-fuel-dependent states, including the Gulf 3, have faced criticism for their role and influence over the talks, but the opportunity remains for them to contribute further, as part of this new metric for South-South financing.

Documenting and disclosing existing investment flows can build transparency and show the world that the Gulf 3 are serious about contributing to global climate finance flows. Once this reporting infrastructure is in place, the next opportunity for the Gulf 3 would be to demonstrate their leadership and commitment to South-South climate financing by increasing financial flows from the baseline to help meet the $1.3 trillion annual funding target by 2035.  Alongside the likes of China and Korea, this effort will help to further increase South-South climate financing.

According to the World Investment Report released earlier in 2024 by the UN Conference on Trade and Development, foreign direct investment outflows from the Gulf 3 totalled some $38.2 billion in 2023, down from its peak  of $58.2 billion in 2022. While a more detailed breakdown of the share of these investments that can be considered climate financing and the proportion  allocated to other developing countries is not available, this demonstrates the scale of capital available from the Gulf 3 for this opportunity.

A significant chunk of this financing came from Saudi Arabia’s sovereign wealth fund, known as the Public Investment Fund (PIF), with some $620 billion in assets under management. Of the thirteen “vital and strategic" investment sectors PIF has identified for the upcoming five years, seven are crucial to climate financing going forward: food and agriculture, metals and mining, transport and logistics, automotives, real estate, construction and building, utilities and renewables.

A similar sector focus can be seen in the investment portfolios of the UAE and Qatar. The Abu Dhabi Investment Authority (ADIA), Mubadala Investment Company (MIC), Emirates Investment Company (EIC), and Qatar Investment Authority (QIC), which boast a combined portfolio of $1.8 trillion, are responsible for driving investments that can help to fill this global green financing gap. In particular, the Abu Dhabi Fund for Development has a designated mandate for concessional and sustainable financing to local and global emerging economies.

COP29 also led to defined rules for both Article 6.2 and 6.4 in relation to carbon markets. The International Emissions Trading Association estimates this can raise $1 trillion of additional financing for developing countries by 2050, by channelling funding into nature-positive projects, particularly in developing nations. Article 6.2 defines the framework for countries to make bilateral agreements to exchange and trade carbon credits. Article 6.4 creates a centralised international carbon market, supervised by the UN who then validates, issues, and verifies carbon credits.

The defining of Article 6.2 and 6.4 market mechanisms means that legal and regulatory frameworks now exist for the Gulf 3 to partner bilaterally and multilaterally with countries around the world to improve the supply and demand for these carbon credits, working towards a high-quality and high-price carbon credit market.

In Baku last month, Saudi Arabia’s PIF launched a carbon credit exchange called the “Regional Voluntary Carbon Market Company,” with the auctioning of 1 million tons of carbon offset credits. Last year, the UAE Carbon Alliance announced targets to buy USD450m of Africa’s carbon market initiative, with the UAE additionally considering developing its own Emission Trading System. At the same time, Qatari firm Emsurge has announced a public-private partnership to fuel its own carbon market development.

The outcomes of COP29 present a critical opportunity for the Gulf 3 to align their financial resources with global climate goals. By scaling investments through sovereign wealth funds like PIF, ADIA, and QIC, these nations can help close the global climate financing gap and drive South-South cooperation. Transparent documentation and a commitment to increasing flows will showcase their leadership in building a resilient, 1.5C-aligned future.

Photo: WAM

Climate Policy and Cross-Border Hydrocarbon Development in the Gulf

This article is part of a series exploring regional energy cooperation in the Gulf and is published in cooperation with Istituto Affari Internazionali.

The Gulf countries are leading global producers and exporters of oil and gas. They have long reserves lives at current production levels, well beyond 2050, and substantial potential to increase reserves through field development, enhanced recovery, and exploration. They are intrinsically low-carbon producers measured by upstream emissions per barrel, although this is obscured in Iran and Iraq by high levels of flaring of unused associated gas (a by-product of oil production) and leakage of methane. They have strong involvement of state oil companies in oil and gas production, though this varies from an effective monopoly (Kuwait) to a leading role for international operators (Iraq and Oman).

With the exception of Iraq, they have large domestic petrochemical industries. Saudi Arabia and, increasingly, the UAE, have extensive international investments in refining and petrochemicals across the US, Europe, and Asia. While this is mainly on their own account, Kuwait does have a stake in the important new Duqm refinery in Oman. The region’s oil exporters also make use of the extensive oil storage and bunkering facilities in the UAE and Oman. On the other hand, Qatar is the world’s biggest LNG exporter and has a major expansion programme to be completed during 2026-27, Oman and the UAE are smaller LNG exporters (the UAE also expanding), while Iran is an important supplier of gas by pipeline to Turkey and Iraq.

The role of the Gulf states as oil exporters has limited the potential for cooperation between them. The dominance of the state in the upstream industry means that cross-border hydrocarbon investment is very limited. Mubadala Energy, the energy arm of the Abu Dhabi government strategic development company, has some upstream assets in Qatar and Oman, and utility Taqa has oil operations in the Kurdistan region of Iraq. QatarEnergy recently entered a project in southern Iraq led by TotalEnergies for development of oil, gas, water injection and solar power. Sanctions and political disputes have prevented any GCC investment in Iran’s hydrocarbon sector. There has been some interest, for example, and various plans since the early 2000s for gas and electricity connections, and most recently, discussions between Saudi Arabia, the UAE, and Iran in July 2023 concerning investment and the development of shared fields.

Gas is more promising for cooperation, given that some of the Gulf states are relatively gas-short. The most notable project, Dolphin, exports gas from Qatar by pipeline to the UAE, with small volumes continuing to Oman. Dolphin faced opposition from Saudi Arabia, which argued that the pipeline crossed its own maritime territory. A similar plan to supply Qatari gas to Kuwait was entirely blocked by Saudi Arabia, which did not want the smaller GCC states to be linked beyond its influence. Although LNG exports from Qatar to the UAE stopped during the boycott of Doha between June 2017-January 2021, Dolphin continued operating as normal, a sign of its importance to both countries, and of the promise of energy projects to constrain conflict.

Some oil and gas fields in the Gulf lie across borders. In general, countries have developed them competitively, extracting as much as possible without an agreement with the neighbouring state. The most notable field affected by a boundary dispute is the large gas-field Dorra, known in Iran as Arash, which lies partly in Kuwaiti waters, partly in the Kuwaiti section of the Partitioned Neutral Zone with Saudi Arabia, and partly, in Tehran’s view, in Iranian waters. Kuwait’s shortage of gas leads to heavy domestic use of polluting and expensive oil. An agreement on Dorra, perhaps via a joint development zone without concession of sovereignty, could be a way forward. Such agreements have enabled Saudi Arabia to supply half of the oil from the Abu Safa field to Bahrain as part of a boundary settlement and Qatar and the UAE to divide the resources of the offshore Bunduq oil-field.

The most important cross-boundary field, not just in the Gulf but in the world, is called the North Field in Qatar and South Pars in Iran. It is world’s biggest gas field. The field, which also contains shallower cross-boundary oil resources, has been developed by each side without formal agreement, but there are tacit understandings to avoid one side moving too far ahead of the other on extraction levels. Qatar imposed a moratorium on further development of the North Field in 2005, and lifted it in 2017. Ostensibly this was for technical reasons, more plausibly for gas market management purposes, but it also gave Iran time to catch up to and even exceed relative Qatari production levels. As Iran’s own output from South Pars increased, so eventually Qatar was able to decide to raise production further, without risking tensions with Iran over unfair levels of extraction.

More intra-regional gas trade would enable reducing the use of oil in the power sector. Qatar, Iran (if its gas resources were properly developed), and the Kurdistan Region of Iraq, would be natural gas suppliers by pipeline to neighbours. This would require more regional trust, and transparency to put gas supplies on a reliable commercial basis. Cross-border investment in gas-using sectors such as petrochemicals, multi-country gas networks, and robust arbitration procedures, could create structures that would be more resistant to politically- or commercially-motivated cut-offs. Iran is, for example, a 10 percent shareholder in Azerbaijan’s important Shah Deniz gas field and in the South Caucasus Gas Pipeline from Azerbaijan to Turkey via Georgia, along with BP, Russia’s Lukoil and Turkish and Azeri state entities. But the recent history of Russian gas supplies to Europe, and the interruption of federal Iraqi and Kurdistan region oil exports through Turkey, reveals how even long-standing pipeline deals with strong mutual profitability can be derailed.

As COP28 in Dubai signalled, climate policy will exert ever-greater influence on the oil and gas industry: first through requirements to zero-out its own emissions, second through a longer-term reduction in demand, at least for oil. The Gulf countries present a wide spread of economic and environmental vulnerability, and sophistication of climate policy ranges from the very limited (Iraq) to the relatively advanced (UAE). The Oil and Gas Decarbonisation Charter (OGDC) concluded at COP28 was signed by the national oil companies of Abu Dhabi, Sharjah, Bahrain, Oman, and Saudi Arabia, among others, but not by Iran, Iraq, Kuwait, or Qatar.

With the exception of Qatar, all of the Gulf countries are members either of OPEC or the OPEC+ alliance. OPEC and the OGDC, as well as other structures such as the Oil and Gas Climate Initiative, offer potential to foster cooperation on decarbonisation paths within the petroleum industry, which include ending flaring and methane leakage, improving energy efficiency, electrifying operations, and incorporating renewable and nuclear power, implementing carbon capture and storage, piloting carbon dioxide removal technologies, producing sustainable aviation and maritime fuels, and developing hydrogen and its derivatives.

Specific cooperation would include aligning standards and regulations; sharing technological learnings and best practices; conducting joint studies on regional carbon dioxide storage capacity or satellite monitoring of methane leakage; and possibly some shared infrastructure, though this is more challenging and probably not essential. Joint investments, either within the Gulf countries or in third countries, could include the production of low-carbon hydrogen and sustainable fuels.

This collaboration can also include policy-related and diplomatic endeavours, on areas such as carbon caps, prices or taxes, international carbon trading under the Paris Agreement’s Article 6.4, dealing with the growing use of carbon border tariffs, and appropriate certification and regulation for low-carbon hydrogen.

The global energy market has been evolving rapidly, notably with the rise of Asia as the world’s key importer and consumer of energy and emitter of greenhouse gases, and the evolution of the natural gas business into a truly internationalised market via LNG trade. Most recently, the Russian invasion of Ukraine, the elimination of most of its pipeline gas exports to the EU, and a near-total ban on imports of Russian oil by the EU and other Western countries, have reshaped the global energy market and the patterns of trade in Gulf energy. The increasing US-China tensions, and the moves towards more diversity and robustness in supply chains and greater domestic self-sufficiency in key energy-related materials and technologies, is another emerging and evolving theme.

Greater Gulf cooperation on hydrocarbons, as a part of balanced strategies incorporating climate protection, could manage some of these threats and promote longer-term cooperation solutions to problems facing the region’s critical economic sector.

Photo: Aramco

Pipelines and the Challenges of Energy Integration in the Middle East

This article is part of a series exploring regional energy cooperation in the Gulf and is published in cooperation with Istituto Affari Internazionali.

Energy cooperation in the Middle East has long been pursued through the establishment of petroleum pipelines, built with the goals of connecting to energy markets in the broader Eurasian context, diversifying oil export routes, and reducing vulnerability. After several years of renewed regional diplomacy in the Gulf and an increase in the level of regional trade and investment, energy integration is once again on the agenda in bilateral and multilateral forums.

However, in a region characterised by both internal instability and external threats, most intra-regional energy trade agreements have been short-lived. The legacies of the Middle East’s major oil and gas pipelines offer important lessons for regional leaders hoping to integrate energy markets and infrastructure.

The region’s seven major pipelines have existed for a cumulative 445 years. But they have only been active for 168 of those years. In other words, the seven pipelines have been operational for just one-third of their lifetimes. Every international oil pipeline in the region has also shut down at least once, and the majority remain closed today.

Political conflicts within producing and transit countries, as well as interstate disputes, remain the primary reasons for pipeline shutdowns. While the mutual dependency stabilising factor ensures continued oil supply from the region, short-term interruptions persist due to geopolitical tensions. Historical events like the Arab oil embargoes and international sanctions against Iraq and Iran underscore the region's susceptibility to temporary disruptions. The military attacks during the eight-year war between Iran and Iraq (1980-88) prompted a reconsideration in pipeline strategies in the region as the conflict both underscored the vulnerability of the infrastructure to military attacks, but also their potential in assisting countries at times of isolation.

For example, Iraq, whose meagre Gulf coastline was blocked during the war and its export outlets through the Mediterranean (Syria and Lebanon) were shut down, sought to diversify its export channels through pipelines with Turkey and Saudi Arabia. Iran, on the other hand, facing security concerns due to sporadic Iraqi air strikes on its territories, also explored pipeline options to bypass vulnerable terminals. But the 1986 Iraqi strikes on Iran’s Larak and Sirri terminals raised doubts about the security and usefulness of such infrastructure, resulting in the postponement or cancelation of many pipeline projects.

In the 1980s, to reduce  dependence on the Strait of Hormuz and vulnerability to Iranian threats, Saudi Arabia built its main export pipeline “Petroline” from the oil-producing Eastern Province to Yanbu on the Red Sea. Yet, liftings at the Red Sea must transit through the Suez Canal which is controlled by Egypt or through the Strait of Bab Al-Mandeb which is controlled by Yemen. Oil could also be piped through the Sumed pipeline which links, within Egypt, the Gulf of Suez to the Mediterranean, or through the Eilat-Ashkelon pipeline in Israel. But these avenues pose their own challenges.

The Eilat–Ashkelon pipeline has recently gained attention, with press reports of the UAE considering it for transporting crude from the Red Sea to the Mediterranean. Interestingly, this pipeline was built in 1968 as a joint-venture between Israel and Iran to transport Iranian crude oil to Europe. However, Iran ceased using the pipeline following the 1979 Revolution and the subsequent nationalisation of the pipeline by Israel. Today, with the ongoing war in Gaza and the fate of Arab-Israeli normalisation agreements mean the future of this pipeline is uncertain.

Limited Success in Gas Cooperation

In the realm of gas pipelines, the Middle East has seen some limited success, but only few interstate gas pipelines have been built. The first interstate gas line in the region was built in 1986 linking Iraqi fields to Kuwait. This short-lived pipeline closed after the Iraqi invasion of Kuwait and switched to supplying water for Iraqi troops. Around the same time, a small gas link was constructed between Oman and the UAE’s emirate of Ras Al-Khaimah. That link later expanded and became the much larger Dolphin pipeline which came on stream in 2007, supplying Qatari gas to the UAE and Oman.

In the Eastern Mediterranean, a gas pipeline linking Egypt and Israel was initially built to channel Egyptian gas to Israel, before reversing its flow to supply Israeli gas to Egypt. On a more regional scale, the Arab Gas Pipeline (AGP), built in 2003, has been linking Egypt, Jordan, Syria, and Lebanon, and has plans to connect to the European network in Turkey. However, the AGP has faced serious challenges since its inauguration, including the acute shortage of gas feedstock from Egypt.

The development of liquified natural gas (LNG) has also dealt a blow to the prospects of increasing gas pipelines around the Middle East. In fact, Bahrain, the UAE, Kuwait, and Jordan are already operating LNG import terminals, while Oman, Saudi Arabia, and Lebanon are pursuing the same strategy as well. The LNG option has been favoured over gas pipelines as a result of many factors, including the security related factors as well as the competitive costs and prices for building the different parts of its chain, i.e. the liquefaction plants, transport vessels, and regasification units.

Revitalising Pipelines

Despite persistent challenges, international pipelines are needed in the region and they can be an efficient and secure way of energy trade, if operated properly. To turn a new page, addressing various issues is crucial. First and foremost, the issue of transit fees must be clearly resolved, especially if a third country is involved in the transit. Those fees, returned in cash or commodities, could well affect the entire economic feasibility of a pipeline network project.

Adherence to World Trade Organization (WTO) agreements is also a significant challenge. In fact, each member of the WTO has to give the owner or operator of any pipeline passing through its territories full and free access to its own domestic market. That right for market access has not always been admitted by all Middle Eastern countries.

There is also the question of “energy independency” which needs to be addressed. In the Gulf and the broader region, governments are hesitant to depend on neighbouring countries for their fuel supplies. At the same time, the psychological desire among oil-producing countries for self-sufficiency also promotes a greater willingness to burn more liquid fuels than import gas, despite their higher relative and opportunity costs and the damage they induce on the environment.

Trust building measures and gradual expansion of bilateral and multilateral engagements could contribute to increasing energy cooperation, in addition to increasing the interdependency between the countries along the routes of pipelines through transit fees and large reliance on the pumped supplies.

Gas pricing is a challenge which is further compounded by the fluctuations in demand throughout the year. Demand for electricity, and consequently for natural gas, peaks in the summer for the majority of countries in the region, and consequently gas sales fall in the winter. To offset these challenges, regional countries could either create storage facilities at the upstream producing end or at the downstream consuming side. This requires much closer regional cooperation on gas.

While the challenges are evident, the pursuit of energy cooperation through pipelines in the Middle East remains a complex yet vital endeavour, requiring continuous adaptation to geopolitical realities and global market dynamics. Despite the current favouring of LNG over gas pipelines, policymakers must keep the idea of building a regional gas network on the agenda.

Regional players need to learn from past failures and match infrastructure with institutions to provide platforms for dispute resolutions and enhanced cooperation. Such a way forward could bolster regional economic development, enhance intra-regional trade, and contribute to long-term political cooperation and economic integration in the broader region.

Photo: Aramco

When it Comes to Middle East Diplomacy, Chinese and European Interests Align

A version of this article was originally published in French in Le Monde.

In March, China managed to a broker a détente between Iran and Saudi Arabia, achieving a diplomatic breakthrough that had eluded European governments. But Europe and China have shared interests in the region and there is scope for the two powers to work together to foster further multilateral diplomacy.

Europe and China, which both depend on energy exports from the Persian Gulf, have long relied on the US-led security architecture in the region. But the 2019 attacks on oil tankers in the UAE and oil installations in Saudi Arabia, widely attributed to Iran, were a watershed moment. Shifting US interests and President Trump’s erratic reaction to those attacks forced the Chinese and Europeans to take more responsibility for regional security over the last four years.

In 2020, China presented its idea for regional security in the Persian Gulf, arguing that with a multilateral effort, the Persian Gulf region can become “an oasis of security.” In the time since, the agreement between Saudi Arabia and Iran, signed in March, can be considered an outcome of such efforts.

European governments have also sought to back multilateral diplomacy. France was intent on creating a platform for Tehran and Riyadh to engage in dialogue. President Macron helped launch the Baghdad Conference for Cooperation and Partnership that was held in August 2021. The conference was a unique opportunity to gather countries that had not sat around the same table for years. Officials from Iraq, Iran, Kuwait, Qatar, Saudi Arabia, and the UAE, in addition to Egypt, Jordan, Turkey, and France participated. Oman and Bahrain joined the second gathering which took place last December in Amman, Jordan.

The European Union also expressed its support for the Baghdad process. Joseph Borrell said during the Second meeting that “promoting peace and stability in the wider Gulf region…  are key priorities for the EU.” Adding that “we stand ready to engage with all actors in the region in a gradual and inclusive approach.”

The Joint Communication to the European Parliament and the Council on a strategic partnership with the Gulf reflects the EU’s keenness on expanding its engagements with the region, particularly on economic ties. The partnership is focused on the GCC, but it mentions that “involvement of other key Gulf countries in the partnership may also be considered as relations develop and mature”—a reference to Iran and Iraq.

Clearly, China and the European Union have multiple areas of mutual concern in the Persian Gulf region. Ensuring freedom of navigation, the undisrupted flow of oil and gas from the region, and non-proliferation of nuclear weapons are shared priorities. But while China is now a central player in the strategic calculations of all states in the region, the Europeans are being largely left out.

European diplomatic outreach has faltered in the face of new political pressures arising from Iran’s continued nuclear escalations, its involvement in Russia’s war against Ukraine, and its repression of ongoing protests for democratic change.   

The French president was coincidently in China when the Beijing Agreement was signed, and he welcomed the rapprochement between Saudi Arabia and Iran. Given shared interests, European officials must now find ways to engage with Chinese counterparts on fostering greater regional diplomacy in the Persian Gulf. 

There are reports that a regional summit will take place in Beijing later this year, involving all GCC states, Iran and Iraq. This is an important opportunity for multilateral dialogue and cooperation. European governments should consult with regional players and China to secure a seat at the meeting. The EU can help regional countries find ways to jointly tackle basic issues that have impeded economic growth which have resulted in spillover effects such as increased food insecurity and inability to mitigate the rising challenges of climate change.

In parallel, the Baghdad Conference could emerge as an EU-backed platform for economic cooperation in tandem to the now ongoing political and security dialogue process in China. The EU can draw in regional countries to help with reconstruction efforts in Iraq, a country that is in dire need of foreign investment. Given the shuttle diplomacy conducted by Iraqi officials between Iran and Saudi Arabia, and considering the role of France and the EU in the Baghdad conference, it would be apt to explore EU-supported joint economic projects in Iraq, especially those projects that create mutual economic interests between Iran and Saudi Arabia.

Whether in Baghdad, Amman, or Beijing, inclusive regional gatherings are needed to address common economic challenges facing all eight countries surrounding the Persian Gulf. Europe can make significant contributions towards regional dialogue on economic integration by helping to create multilateral platforms, transfer knowhow and technology, and provide financial support. These are areas where China has significantly increased its activities, but European countries enjoy far greater experience in establishing the institutions and infrastructure needed for regional economic development. European officials can leverage this experience to support regional diplomacy. Such efforts would also cement European regional influence at a time when US influence may be waning.

The newly appointed EU Special Representative for Gulf Affairs, Luigi Di Maio, should directly oversee and coordinate initiatives in support of economic diplomacy and integration in the region, finding common ground with China to head off competition. Achieving security through stronger diplomacy and deeper economic ties represents a transformative goal that the region can rally around.

Photo: IRNA

SIPRI Has Revised Four Years of Data on Iran's Military Spending

SIPRI—the Stockholm International Peace Research Institute—has just published its “Yearbook” for 2022. The flagship annual publication offers civilian and military leaders around the world a way to compare military spending between countries and to gauge which countries are investing in greater military power.

Last year, I identified a major problem with the data about Iran’s military spending. The 2021 Yearbook estimated Iran’s military spending at $24.6 billion, a total that put it just above Israel in the rankings, as the 14th largest military spender in the world. This did not make sense.

Iran’s military, while posing a threat within the region, does so primarily because of inexpensive missile and drone systems and heavy reliance on proxy forces. Iran’s military lacks the kinds of advanced aircraft, armour, and other systems that are typically found in the arsenals of the world’s top military spenders.

A closer examination of the SIPRI data, and communication with SIPRI’s researchers, revealed that the Swedish think tank had been using the wrong exchange rate to convert Iran’s local currency military expenditures into dollar values. The researchers were using the “official” central bank exchange rate, which has for several years been a subsidised exchange rate used exclusively for the import of essential goods.

This common mistake has been rectified. SIPRI researchers note in the 2022 Yearbook dataset that they are using the NIMA exchange rate to convert to dollars, which results in a far better estimate of the Iranian state’s true purchasing power. The historical data has been corrected going back to 2018.

The impact of the correction is significant. The revised figures mean that instead of ranking as the 14th largest military spender in the world in 2021, Iran was actually ranked 39th. In 2022, spending totalled $6.8 billion. That is a mere fraction of the military spending of regional rival Saudi Arabia, which spends an estimated $75 billion. Iran even spends less on its military than regional minnow Kuwait.

SIPRI should be commended for making this correction. But in certain respects, the damage has been done. For several years their data was used to suggest that Iran posed a much greater threat to regional and global security than it truly did. A significant number of authoritative publications and news reports relied upon the SIPRI data to put Iran’s military spending in context and unfortunately used the inflated dollar totals published between 2018 and 2021. Those inflated figures conformed to a pervasive and convenient narrative—this may explain why the issue went unresolved for so long.

Photo: IRNA

Can 'Unitisation' of Oil and Gas Fields Power Diplomacy in the Persian Gulf?

In March, the Saudi Energy Minister met with his Kuwaiti counterpart to sign an agreement for the joint development of a shared offshore gas field. The Dorra field lies about 50 miles off the coast at the border between Saudi Arabia and Kuwait and is around the same distance from Iran’s southwestern shores. The field could produce 1 billion cubic feet of natural gas and 84,000 barrels of condensate per day.

Shortly after the Saudi-Kuwaiti declaration, Iran’s Foreign Ministry swiftly expressed its dismay and said that any step for the joint development of the field—called the “Arash” field in Iran—must be carried out in cooperation between the three countries. In a surprising response, Saudi Arabia and Kuwait invited Iran to hold negotiations to determine the eastern limit of the joint, energy-rich, offshore area. While the proposed talks have yet to take place, the Dorra-Arash field is a clear example of how an area of contestation has the potential to be turned into an area for cooperation, if the political and security environment of the region allows.  

As key regional players move towards de-escalation and dialogue, evidenced by the end of the intra-GCC conflicts as well as Saudi Arabia and the United Arab Emirates’ diplomatic engagements with Iran, it is worth considering potential for regional energy diplomacy. The shared oil and gas fields in the Persian Gulf and Gulf of Oman are largely untapped areas for bilateral and multilateral cooperation. Iran and Qatar share the largest gas reserve in the world and Iran shares a further two-dozen oil and gas fields in the Persian Gulf with the Gulf Cooperation Council (GCC) countries and Iraq. There are also numerous fields shared among the GCC states and Iraq. To move the energy produced by these fields, regional countries have long mulled pipelines projects, such as one between Iran and Oman, as well as talks for the re-exportation of Iranian gas as Liquified Natural Gas (LNG) by Qatar and Oman.  

But most of the shared fields amongst the Persian Gulf states are either inactive or are disputed. In the absence of cooperation agreements, countries have mainly opted to develop and extract the reserves on their own. Disputes over median lines, extraction rights, and varying concessions have often led to tensions between regional states.

Iran has disputed Kuwait and Saudi Arabia’s claims on the Dorra-Arash field since it was discovered in the 1960s. At the time, maritime boundaries in the Persian Gulf were poorly defined and bordering countries did not pay much attention to them. This was also the case for the South Pars-North Dome field—the shared gas field between Iran and Qatar—as the median line between the two countries had been negotiated before the gas field’s discovery in 1971. When Iran and Qatar determined their boundaries two years prior, the predominant factor underlying the delimitation was equidistance.  

Because of the fact that the boundaries continue to be poorly defined, Kuwait, Saudi Arabia, and Iran have each asserted their sovereignty on the Dorra-Arash field by awarding overlapping concessions throughout the past five decades. By the year 2000, Saudi Arabia and Kuwait had reached an agreement on the corresponding offshore zones where their concessions could be awarded. In retaliation for its exclusion in the negotiations, Iran deployed drilling equipment to the field the following year. A cycle of actions and retaliations that have largely continued to date, rendering the field underdeveloped on the Saudi, Kuwaiti, and Iranian sides altogether.

The output from the Dorra-Arash field will have an “inconsequential” impact on today’s global gas and LNG markets in the wake of the Russian invasion of Ukraine and rising global demands, as Wayne Ackerman argues. This is primarily because the three countries will need to use the outputs to satisfy their own domestic energy demands. But inconsequential as it might be, the output from the field is significant in both adding to the global gas reserves and establishing an area for inclusive multilateral cooperation in the region.

Economic diplomacy, if enacted through joint projects such as the development of the Dorra-Arash gas field,  could give new impetus to relations between Iran and GCC countries. The establishment of a long-term cooperation project to jointly develop the Dorra-Arash field would provide a way to measure the state of regional economic diplomacy in the region and provide Iran and its GCC neighbours to show good faith. Another possible area for cooperation is in the Salman field shared between Iran and the UAE. So far, Iran and Iraq appear the closest to putting join development plans into action. Following years of negotiations, they recently decided to form joint technical groups to develop energy ties and shared fields. 

In this context, the European, and Asian, countries and companies could step in to promote confidence-building measures between the Persian Gulf countries by proposing multilateral projects with their participation. External players, particularly those who have the capacity to mediate and work with both Iran and the GCC states, could assist the regional countries in defining their boundaries using international law, proposing win-win multilateral projects, and investing in the development of the fields.

The GCC states and Iran have largely overlooked the benefits of “unitisation,” the joint development of an oil or gas field extending across two or more territories. Unitisation would allow the GCC states and Iran, as well as external players such as European or Asian companies, to jointly develop shared fields and benefit from cost-effective solutions for extraction, processing, and export. Regional leaders should leverage energy cooperation to creating the shared incentives necessary to make regional diplomacy more durable.

Photo: Shana.ir

The Stage is Set, But Will Rouhani Deliver in His Next Act?

Last Friday, Hassan Rouhani emerged victorious in Iran’s contentious election, winning nearly 60% of the vote in a contest which saw 72% turnout. The clear victory confirms the incumbent’s popular mandate, and reflects the electorate’s belief that he remains the only politician able to lead on Iran’s wide range of economic, political, and social challenges.

Crucially, his chief opponents Ebrahim Raisi and Mohammad Bagher Ghalibaf were unable to present a cohesive alternative to Rouhani’s economic program, relying instead on unrealistic promises to expand welfare handouts to Iran’s lower classes.

The promises of greater handouts had an undeniable appeal, however, as voters aired their frustrations with the lack of improvement in their standard of living during Rouhani’s first term. While growth has rebounded since the lifting of international sanctions, stubborn unemployment and wage stagnation have left the average Iranian patiently waiting for the much touted windfall of the nuclear deal. Nonetheless, Iranian voters understand that international engagement is a precondition of any eventual improvement in their economic fortunes. In a boon to electoral fortunes, Rouhani and his administration were widely and credibly seen as the most effective advocate for Iran’s international relations. 

Yet, just two days after Rouhani’s victory, American President Donald Trump issued a scathing address from the specially-convened Riyadh Summit, during his first overseas trip. Trump’s speech, issued in concert with the Saudi leadership, cast Iran as a chronic human rights violator and the leading supporter of international terrorism. He called for the international community to isolate Iran.

The juxtaposition of Iran’s energetic and significant popular vote (driven in great numbers by Iranian women voters), with the cynical pageantry of the Riyadh Summit, held in a country where elections do not occur and in which women have limited freedoms, could not have been more stark. 

While the Trump administration has quickly aligned itself with the particular vision of Iran espoused by Saudi Arabia and its Persian Gulf allies, the rest of the international community has watched the weekend’s events with greater pause. In the election, Iran put its best foot forward; demonstrating quite vividly that it cannot be caricatured as the destructive force portrayed by Trump, but should understood as a multifaceted country whose civil society is yearning for international engagement.

Though Trump’s speech risked adding fuel to the regional rivalry between Iran and Saudi Arabia, President Rouhani struck a measured tone in his first press conference since being re-elected, noting on Monday that the Saudi people remain Iran’s friends.

Overall, the weekend’s events may actually prove a blessing for Iran. By putting Iran’s better qualities into such clear relief, and by making so transparent the subservience of US foreign policy in the Middle East to an agenda defined by Saudi Arabia, a much wider political space is opening for ties between Iran and the wider international community, especially in regards to relations with Europe.

Senior leaders from the European Union, such as High Representative Federica Mogherini, were the first to congratulate President Rouhani on his reelection. His electoral success will no doubt give greater confidence to the slew of major multinational corporations that have been pursuing trade and investment deals in Iran. At the same time, the elections serve as a validation for the European policy that expanded economic relations can help encourage Iran’s move to a more open and accommodating political and social posture. 

Consider also that despite the rhetoric, the Trump administration looks unlikely to interfere with the basic sanctions relief afforded through implementation of the JCPOA nuclear deal. As such, the baseline conditions for Iran’s economic engagement with the international business community have improved significantly.

In order to fully deliver on his promise of economic growth and to more effectively attract investment from industrial players and financial investors, the Rouhani administration must commit to a bold agenda of sustained reform. While his first term was largely focused on addressing fiscal and monetary policy (tightening budgets and reducing money supply in order to tackle inflation, for example), his second term must focus on industrial policy.

Iran needs to quickly decide how it will balance the requirement to support domestic industrialization and job creation with the need to welcome leading multinational companies who wish to bring their products to the Iranian market. A lack of clarity on this issue has meant that many long-standing trading partners in Iran are struggling to get the same support from government ministries and agencies that are afforded to outside companies promising new investment in the country.

This unequal treatment belies a lack of coordination among Iran’s government and business stakeholder groups on issues pertaining to the country’s business environment. European governments and trade promotion bodies could do much more to help transfer best-practices to their Iranian counterparts, helping to support the business development efforts of both foreign and Iranian companies. This kind of technical cooperation, which goes beyond delegations and trade events to address the practical challenges facing the business community across-sector, remains the elusive next step in Europe-Iran ties.

Rouhani’s great success has been to set the stage for an economic resurgence. The question now remains whether he can successfully direct the actors to play their parts.

Photo Credit: Wikicommons

Arab Business in Iran: Looking Beyond Regional Rivalry

With high disposable incomes furnished through oil rents, the GCC economies are geared towards the consumer. Famed for massive malls, expensive cars, luxury housing, and entertainments galore, perhaps no other group of countries around the world are as defined by such conspicuous consumption. To underscore the point, a recent report by Global Footprint Network, an environmental protection institute, suggests that if every person in the world consumed resources at the same level as Emiratis, we would need 5.4 planet earths to sustain humanity.

Created to answer this insatiable demand, the GCC region's most successful conglomerates are not in manufacturing or industry, but in consumer-focused sectors like food service, real estate, hospitality and leisure, luxury retail, and FMCG.

Given that Iran has a large consumer driven economy, with a middle class that will benefit from post-sanctions economic growth, GCC companies are actually very well positioned to transfer their knowhow to the Iranian marketplace. A recent study of which companies would most quickly benefit from an Iran deal was “loaded” with GCC companies, particularly those based in Dubai.

This fact complicates the political economy of regional relations in the Perisan Gulf region. Most analysis focuses on the increasing rivalry between Iran and the Gulf states, especially Saudi Arabia. However, the prospects for business tell another story, in which trade and investment can aid the development of a regional geopolitics based on mutual gain rather than mutual antagonism.

To illustrate this point, below are 5 leading companies from the GCC, which could make it big in Iran due to their consumer driven businesses.

It remains to be seen if opportunities in Iran will be enough to outweigh the rivalry in regional politics. But it wouldn't be the first time that commerce has overcome conflict.

• Majid Al Futtaim Group, Dubai, UAE- Retail Development

Revenue: USD $6.8 billion 

A holding company specializing in large-scale retail and hospitality projects, MAF Group owns some of the iconic malls and hotels in the Middle East. While we might imagine an MAF backed five-star mall development in Iran one day, it is MAF’s longstanding role as the regional partner for French hypermarket chain Carrefour that has won them early success in Iran. With the first store opening in 2009, a subsequent $400 million dollar investment has seen hypermarkets open in Tehran, Shiraz, and Esfahan. The company boasts of plans to open 15 more locations, and aims to dominate the sector with a mix of hypermarkets and smaller supermarkets.

• Aujan Group Holding, Dubai, UAE- FMCG

Revenue: USD $200 million (Iran entities only)

Continuing the FMCG theme, another Arab success story in Iran can be seen in the experience of Aujan Holding Group, the regional partners for The Coca-Cola Company, which purchased 50% of the Aujan Industries subsidiary in 2011 for nearly USD $1 billion. A separate Iran-registered joint stock company, Aujan Industries Iranian Company, is the manufacturer and distributor of Rani and Coca-Cola beverages in Iran.  Importantly, Coca-Cola’s tie-up with Aujan excluded the Iranian business. This leaves the door open to future capitalization and expansion, as Iran exhibits the second largest absolute value growth in MENA region soft drinks in the next few years.

• Olayan Group, Saudi Arabia- FMCG and Food Service

Revenue: Undisclosed

A diversified Saudi conglomerate, Olayan has operations in everything from business services to construction. But it is the group’s holdings in fast-moving consumer goods (FMCG) and food service that position it for an Iran market entry. In the area of consumer goods, Olayan has longstanding relationships with global giants such as Mondelez International, Nabisco, Kimberly Clark, and Colgate-Palmolive. These US-based multinationals have limited exposure to Iran’s market, and Olayan’s local supply chain could be adapted to ensure distribution to Iran. But perhaps more uniquely, Olayan is the regional franchisee of Burger King. The first firms to rollout globally recognized fast food and fast-causal chains in Iran will tap into a massive unmet demand, and Olayan is a company with the muscle to do so.

• RAK Ceramics, Ras al Kamiah, UAE- Ceramics

Revenue: USD $1 billion

It is a little known fact that the largest ceramics manufacturer in the world is located in one of the lesser-known Emirates. RAK Ceramics produces everything from toilet bowls to tableware in over 8000 designs. RAK Ceramics has a presence in Iran, but tough economic conditions and supply chain issues have depressed profits this year. The company has begun scaling back its Iran operation. RAK Ceramics boomed on the back of procurement in the GGC, as large-scale residential and hospitality developments mushroomed. In this way, the supplier’s success is connected to consumer demand. Similar construction volumes could be expected across Iran’s multiple metropolises in a post-sanctions environment. As a global leader, RAK Ceramics is certainly poised to benefit as this massive market on its doorstep becomes easier to engage.

• Damac, Dubai, UAE- Real Estate Development

Revenue: $556 million (Damac Properties only)

With over 100 buildings either complete or nearing completion, Damac has emerged as a leader in Dubai’s crowded real estate development market. Until now, groups like Damac have seen Iran as a source of high network individuals, eager to establish a residence in Dubai. But looking forward, economic growth and freer financing will make Iran the next big real estate story in the Middle East. As a private entity, Damac is likely to be less entangled in the political battles between Abu Dhabi and Dubai on the issue of engaging Iran. This differentiates it from Emaar, with its legacy as a formerly 100% government owned entity. Investors are taking note. The listed entity Damac Properties Dubai saw its stock rise over 8% immediately following the conclusion of the April JPOA framework agreement between Iran and the P5+1 powers. 

Photo Credit: Koroush Complex