Fostering a New Energy System for the Gulf, the Red Sea, and the Mediterranean

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

Through investments in solar and wind power, grid connections, and hydrogen, energy transition in the Middle East is well under way. This transition is urgent for large countries such as Saudi Arabia and Egypt, since their rapidly growing economies and populations have vastly increased their consumption of domestic energy. Continuing to burn oil and gas for domestic energy could lead to Saudi Arabia struggling to export oil by as early as 2030, and therefore the Saudi transition to renewables alongside cutting fossil fuel subsidies has been a significant milestone in the economic development of the Arab region as a whole. The story is similar in Egypt; alongside its transition away from fossil fuel subsidies, the country has cut its energy import bill by investing in renewables.

The neighbouring regions of the Gulf and Europe have shown a strong interest in cooperating with North Africa on energy transition. Both regions see economic opportunities here, as well as the potential to advance their own transition from fossil fuels to renewables. With renewables now more economically feasible, this type of energy is no longer simply about electricity and is penetrating other sectors, for example desalination, agriculture and hydrogen production. Interregional cooperation on renewable energy is complex and embedded within visions for the wider economic development of the Middle East. However, cooperation is in its early stages and faces challenges.

Cooperation between Egypt and the Gulf states will also benefit Europe, which is promoting increased grid connections with Africa and the development of green hydrogen in Egypt. Looking at the parallel pushes for energy transition in the Gulf and Mediterranean regions, one can envision cooperation between the Gulf, the Red Sea, and the Mediterranean in the field of renewable energy.

The North African countries have announced ambitious renewable energy targets. By 2030, Morocco, Tunisia and Algeria aim, respectively, for 52% (of power capacity), 35% (of power generation), and 27% (of electricity) to come from renewable sources, while Egypt is aiming for 42% (of electricity) by 2035. The Gulf countries have similar ambitions, and Saudi Arabia’s target of 50% of electricity by 2030 seems significant considering its status as both the largest economy and heaviest energy user in the region.

Motivations for energy transition in the two regions are similar—lowering emissions and meeting increasing domestic demand. However, in carbon-rich countries such as the Gulf states or Algeria, energy transition is also seen as a vehicle for economic diversification. Many of these countries still depend on carbon revenues and the public sector. Renewable energy can free up resources in North Africa by importing less fossil fuels and in the Gulf by decreasing domestic consumption and expanding exports. These resources can be invested in modernising industries or giving financial incentives to encourage innovation.

For concurrent energy transitions to work, cooperation among neighbouring states is necessary. For example, grid connections are essential in improving energy efficiency and grid stability once renewables are deployed. The $1.8 billion grid connection project between Egypt and Saudi Arabia will start trial operations in 2024, linking the two major economies in the region and two different continents. Another key project is the ongoing Euro-Africa interconnector, joining Egypt to Cyprus and Greece. Alongside the existing connections between Morocco and Spain, this project creates further connections between North Africa and Europe.

Regional partners are also involved in the Middle East’s transition to renewable energy, and European interests are particularly important as the continent explores clean hydrogen importers and energy suppliers in the wake of the war on Ukraine. However, there are also valid concerns that allowing big European corporations (such as Italy’s Eni, Germany’s Siemens, Denmark’s Maersk, Norway’s Equinor, or Netherland’s Vitol) to invest in green hydrogen projects in North Africa may lead to resource grabs and exploitation of the region. The Gulf states are also investing in blue and green hydrogen for export to Europe and Asia. Asian companies—for example, Japan—have long industrial legacies in the Gulf Cooperation Council, whether in building desalination plants or in energy projects such as the Saudi–Egypt grid connection mentioned above, which is being built by Hitachi Energy.

The relationship between Egypt and the Gulf states is nowadays embedded within a broader vision for redefining the regional economy of the Middle East through new cities, and improving the water energy infrastructure. While Egypt is building its New Administrative Capital (a city with a population of 6.5 million) eastwards of Cairo, Saudi Arabia is investing $500 billion in constructing the world’s largest urban megaproject, NEOM, on the Red Sea, which will eventually accommodate 10 million people. NEOM uses the most advanced sustainability technologies and already involves companies from all over the world, including European countries such as Germany. The region from NEOM to Egypt’s New Administrative Capital, and perhaps northwards to Jordan and Israel, will constitute a new regional economic centre—alongside the region of Riyadh and the surrounding Gulf cities—which requires major new desalination, renewable energy, and hydrogen projects.

Cooperation between Egypt and the Gulf on clean energy is set to increase. Saudi Arabia is investing in renewable energies that will provide for NEOM’s entire energy and desalination needs. At the same time, it is building the world’s largest green hydrogen plant in NEOM, at a cost of $8.4 billion. Saudi companies have also committed billions of dollars to investments in Egypt in the areas of desalination, renewable energy, and, increasingly, green hydrogen. Similarly, the UAE is using its strong experience in desalination and renewables to profit from the highly attractive Egyptian market. One example of this is the Masdar-led consortium which is set to build a $10 billion wind project in Sohag, Egypt. During COP27 in 2022, Egypt’s Suez Canal Economic Zone signed $83 billion in green energy deals with investors from Saudi Arabia, UAE, Norway, and the UK.

The Red Sea, particularly the Ain Sokhna port area, is touted to host many of Egypt’s green hydrogen projects, adding to this region’s importance. However, as the country’s economy has been unstable in recent years, Gulf investors have been reluctant to invest in Egypt before a deal is reached with the International Monetary Fund. However, since this deal has been formalized in in early 2024, this could be an opportunity to to realise the projects that have already been announced. It is worth noting, though, that as of January 2024, European-Gulf consortia, India, and China have all expressed interest in investing in renewable energy projects in Egypt. The country has set an ambitious goal of becoming a regional energy hub, and plans to achieve this by investing in clean energy and gas, improving transport, and refining its infrastructure. One of its key infrastructure projects is the $23 billion high-speed train connecting the Ain Sokhna port to the Mediterranean, which is being delivered in collaboration with Germany’s Siemens and has been dubbed a “Suez Canal on rails.”

Due to differing interests and expectations, it is difficult to predict the outcomes of cooperation between the Gulf, North Africa, and Europe on sustainable development issues. While the Gulf is seeking economic diversification via investments, Europe is mainly driven by its energy and climatic goals. Some North African countries suffer from weakened institutions and political instability. Therefore, for some countries, a cautious green hydrogen approach might be necessary. Such an approach should aim to create local value, prioritise domestic energy transition, and address social, human, and sustainability requirements. North African countries might have weaker negotiating positions compared to Europe or the Gulf due to inequities in finance, capacity for negotiation, or geopolitical power. The competition between the Gulf and Europe for renewable energy projects can mobilise funds and offer more choice for North Africa, but it is important to also consider ownership of clean energy projects in the destination country.

Interregional cooperation between the Gulf, the Red Sea, and the Mediterranean is complex, and it is reasonable to assume that legacies and outcomes of joint investment in clean energy will be mixed. In the case of Egypt, cooperation on renewables has some distinctive characteristics. Egypt’s renewables projects are embedded within an economic vision by Saudi Arabia and Egypt to create a new regional center in the north of the Red Sea connecting the Gulf to Europe. In addition, relative political stability is likely to further the energy transition of the Arab region’s largest country which can serve as gateway for investors into the Arab region. While this transition will solicit both local and foreign investments, the domestic will to decarbonise and create job opportunities is essential if energy cooperation is to succeed.

Photo: Stuart Rankin

The Case for Cooperation on the Energy Transition 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.

Regional security and economic development among the Gulf states—Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—can improve if cooperation is fostered in the energy, minerals, and water industries, by encouraging joint exploitation of resources, establishing neutral regional zones, and creating energy sources that are interconnected. The positive diplomatic environment of 2023, particularly after the rapprochement between Iran and Saudi Arabia after seven years, holds the key to unlocking a new era of cooperation in the region across the resource mix.

Fostering Renewable Energy Cooperation

The region’s geographic location means it receives some of the highest annual amounts of solar energy in the world—more than 2,100 kilowatt-hours (kWh)—and a wind speed that can reach about 10 meters per second (m/s). These natural clean energy resources could be exploited regionally and also exported beyond the region, benefitting the economy both directly and indirectly and encompassing many sectors of industry, including energy, manufacturing, and information technology.

The Gulf Cooperation Council Interconnection Authority (GCCIA) envisions establishing a robust interconnected power grid. This would leverage the region’s abundant solar and wind resources and further position the are to become a hub for producing and exporting clean energy. As of early 2024, part of the region is already interconnected through this grid—from Oman in the south through the UAE, Saudi Arabia, Qatar, and Bahrain, and then to Kuwait in the north. In addition, Iraq recently signed an agreement with the GCCIA to join the grid. GCCIA has an ambitious plan to extend to Eurasia and East Africa. Iran is also part of this planned grid, as is Turkey. Such interconnection would give domestic power grids more reliability and stability in the face of increasing challenges, such as unexpected electric load rise, as well as blackouts due to natural disasters or equipment failures.

Envisioning a Gas Network

Expanding the gas sector across the Gulf is a potential solution to some of these problems. Doing so would pave the way for a joint gas pipeline network that could facilitate hydrogen transmission—which is key to achieving net zero carbon emissions. Several Gulf countries have either not fully developed their gas production sectors or have insufficient resources. Iraq, Kuwait, and the UAE are net gas importers, and in 2022 imported 50%, 40%, and 20% of their gas demand respectively (see chart below). For example, Iraq imports most of its gas from Iran, and the UAE sources much of its gas from Qatar through the Dolphin pipeline.

Kuwait is the only Gulf country to source a large percentage of its imported gas (46%) from non-Gulf regions, such as Africa, Europe, and North and South America. This sourcing of around 4 billion cubic meters of natural gas annually from faraway countries is deemed to be a lost economic opportunity for Gulf countries, including Iran and Qatar.

Expansion of the gas sector in the Gulf would play a key role in the region’s energy transition. Having a joint pipeline network capable of carrying hydrogen products could also pave the way for the region to become a world hub in the production and export of carbon-neutral (blue and green) hydrogen.

Gulf Minerals Powering the Future

The Gulf region’s mineral wealth, essential for energy transition, has come to the forefront. Recent discoveries of lithium, cobalt, nickel, copper, and other minerals mark a turning point in the global race to secure mineral supply chains. These minerals are essential components of renewable energy technologies and energy storage systems.

Recently, Iran announced the discovery of a huge lithium deposit—an estimated 8.5 million metric tonnes—on its territory. This makes the country the fifth lithium reserve resource holder after Bolivia, Argentina, Chile, and the United States. Moreover, Iran also revealed the discovery of additional vital minerals, among them manganese, nickel, and cobalt.

Saudi Arabia also recently announced the discovery of mineral reserves with an estimated market value of US $64 billion. Among the discovered minerals related to energy transition are copper, iron, and nickel. Oman, too, has announced an ongoing project to update its national geographical and geological minerals database with more discoveries of copper and iron reserves.

The envisioned regional collaboration would include joint investments in developing the infrastructure needed in the region for extraction, preliminary mineral processing, and export logistics. Joint efforts to invest in the management of mineral resources could position the Gulf as a key influencer in the global transition to clean energy. This could be pursued by establishing joint venture companies where investors include the Gulf states’ public and private sectors.

Working together, the Gulf states could pool resources, share costs, and achieve economies of scale. By doing so, the region would be able to collectively manage and mitigate risks associated with volatile commodity prices, environmental challenges, and geopolitical uncertainties. As a result, such collaborative ventures would contribute to political stability in the region. The Gulf countries would have broader access to markets and assert their role as key players in the energy transition agenda.

It is worth noting that Iran’s current economic sanctions may discourage other states from establishing joint ventures. However, these restrictions do not prevent discussion of joint strategies for making the most of the Gulf’s mineral reserves and developing regional value chains.

Developing Shared Fields

The collective strength of Gulf countries lies in their vast natural resources, accounting for approximately 48% and 40%, respectively, of the world’s proven oil and natural gas reserves. Shared oil and gas fields, as illustrated in the table below, are poised for active development, offering potential solutions to regional energy challenges. 

In early 2022, Kuwait signed a memorandum of understanding with Saudi Arabia to develop the joint offshore Arash/Durra gas field in the partitioned neutral zone. However, Iran has objected to the agreement and demanded its share. Most likely the Arash/Durra field will not be exploited in the short term until an agreement is reached on the demarcation of maritime borders between Iran, Kuwait, and Saudi Arabia. However, joint exploitation of Arash/Durra could be achieved without compromising the territorial sovereignty of the three countries; Iran is already jointly exploiting oil and gas fields with neighboring Gulf states, including the South Pars/North Dome gas field with Qatar and the Esfandyar/Lulu oil field with Saudi Arabia. These joint models can provide lessons and open the door for pragmatic and logical negotiations to enable cooperation in exploiting other joint fields, including Arash/Durra.

Establishing a Regional Water Network

A region is labelled as water-scarce when the availability of natural renewable water (waterfalls, rivers, freshwater lakes, and aquifers) is below 1,000 cubic meters per person per year. This definition implies that all Gulf countries except Iran are under the natural water poverty line. Consequently, these countries depend on energy-intensive seawater desalination to meet their potable water demand. The power stations in these countries are mostly cogeneration systems that produce electricity and heat.

Addressing water scarcity is paramount for Gulf countries, especially those heavily reliant on desalination. Despite challenges including geopolitical tensions, a strategic imperative is to establish a regional water interconnection network. With this in mind, GCC leaders decided to carry out a water interconnection study in the year 2000. The proposed network would supply fresh water to all GCC states from desalination plants that would be built on the shores of certain states. Three desalination plants were proposed—to be built in Sohar, Oman; Al-Sila in the UAE; and Al-Khafji in Saudi Arabia. Unfortunately, there has been no tangible action on the project since 2013.

There is an urgent need for increased cooperation in the areas of seawater desalination, water treatment, water resource management, and water transmission across the Gulf region if its future is to be more sustainable. The latter of these in particular is a key survival strategy, and such a water network would make the region resilient to natural and changing environmental conditions challenges. The feasibility of a regional water grid should not therefore purely be based on financial profits—it also needs to consider the grave water scarcity challenges the region is poised to face in the years ahead.

Moving Towards Sustainable Horizons

While it may take time to achieve regional cooperation in energy, water, and environmental sustainability, diplomatic rapprochement between Iran and Saudi Arabia could pave the way for positive outcomes. Policies should focus on establishing interconnected regional infrastructures, including gas and water networks, and implementing a joint financing system to support balanced development across the Gulf region. It is essential to overcome political differences and address challenges through dialogue for these policies to succeed.

As we chart the course toward sustainable horizons in the Gulf, the call for cooperation echoes loudly. Embracing shared objectives, drawing on collective strengths, and navigating challenges with a collaborative spirit will propel the region towards a future defined by sustainability, resilience, and mutual prosperity.

Photo: Shams Power