More efficient power sector in Middle East and Africa to unlock higher volumes of natural gas for export

Middle East, Africa to play ‘vital role in averting global shortages’ by unlocking more natural gas for export

Amid the current geopolitical crisis, resulting in tighter gas supplies, higher prices, and an uncertain outlook, the International Energy Agency (IEA) has looked into the ways producers in the Middle East and North Africa could free up more natural gas for export.

Illustration; Source: International Energy Agency (IEA)

Keeping energy security at the forefront, the IEA comes to the conclusion that this could be accomplished with a more efficient power sector, which would free up significant volumes of natural gas for export while advancing the clean energy transition.

Based on IEA’s recent analysis, oil and gas producers in the Middle East and North Africa have been a “cornerstone of the global energy system” for decades, recently accounting for about 50 per cent of oil exports and 15 per cent of natural gas exports worldwide. This analysis points out that Middle Eastern and North African producers with a long track record of providing stable energy supplies could “play a vital role in averting global shortages,” as markets tighten due to lost supplies from Russia following its invasion of Ukraine.

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However, this near-term increase in demand for oil and gas from non-Russian suppliers contrasts with the need for longer-term structural declines in global fossil fuel use as energy systems transition towards cleaner energy sources. In lieu of this, immediate incentives facing producers amid today’s crisis could lead to longer-term investments that are inconsistent with sustainable energy pathways.

The International Energy Agency explains that the producer economies of the Middle East and North Africa have various options to increase exports of oil and gas. This can be accomplished by investing in additional upstream capacity and output, which could start producing in a few years’ time.

Moreover, they can prioritise efforts to eliminate gas flaring and methane leaks, which could increase gas supplies by almost 20 billion cubic metres much more quickly. Additionally, they can free up supply by rationalising their own consumption, starting with the power sector.

At this point in time, oil and gas account for almost 95 per cent of electricity generation in the Middle East and North Africa while thermal plants in the region consume over 290 billion cubic metres of gas, or more than one-third of its gas production, and 1.75 million barrels a day of oil. Therefore, this dominance of fossil fuels in Middle Eastern and North African producer economies makes the emissions intensity of their power generation almost one-quarter higher than the global average.

Of this overall sum, over 150 billion cubic metres of natural gas – around one-fifth of the region’s total gas consumption – is used each year in low-efficiency gas-fired power plants, which have an average efficiency of 30-35 per cent, according to the IEA. In turn, combined-cycle gas power plants with an average efficiency of close to 50 per cent could produce the same amount of electricity using about 50 billion cubic metres less gas.

Therefore, replacing the existing low-efficiency plants with more efficient combined-cycle ones would enable the producer economies to save and export that gas, which would generate $50 billion if sold at $30 per Mbtu – the current continental European wholesale prices – based on this analysis.

Switching out gas power plants with renewables

Furthermore, there is also considerable potential to replace low-efficiency gas power plants with renewables, which could free up even more natural gas for export and strengthen the region’s infrastructure for the clean energy transition. The IEA says that renewables currently produce less than 3 per cent of total electricity generation in nine of the region’s ten producer economies. Although, Egypt is the outlier, with renewables accounting for around 10 per cent of electricity generation.

In light of this, replacing the entire low-efficiency gas fleet in the region with solar PV would require around 250 gigawatts of new solar PV capacity, an amount that would take several years to deploy, at a cost of around $220 billion.

If this is implemented, it would free up 150 billion cubic metres of natural gas a year, either to be used in more productive ways or exported, generating $150 billion per year at current continental European wholesale prices, implying an investment payback period of just 18 months if prices remain elevated. The IEA informs that this underscores the low cost of solar PV in the region relative to the high opportunity cost of continued use of natural gas in low-efficiency power plants. 

On the other hand, boosting upstream natural gas production by the same amount – 150 billion cubic metres – would require investing more than $120 billion across the region. While this is considerably less capital than would be required to scale up renewables, investments in natural gas fields are intrinsically more prone to volatile energy markets and risk becoming underutilised in a future where the clean energy transition gathers pace and demand for natural gas declines, outlines the IEA.

In addition, it would risk prolonging economically wasteful and environmentally harmful consumption of natural gas in low-efficiency power plants. More to the point, large solar PV projects typically have shorter lead times and can be deployed much quicker than new upstream projects and even expansions of current gas fields. The International Energy Agency highlights that major international efforts are needed to ensure that all the world’s regions make progress on their clean energy transitions in ways that are equitable and affordable.

Since the quick deployment of renewables and a significant reduction in the use of low-efficiency gas power plants in the Middle East and North Africa would require concerted action not just from the countries concerned, but also from their international partners, countries looking to reduce their imports from Russia, especially in the European Union, could play a significant role in mobilising capital and investment, for example through the EU’s Global Gateway initiative.

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The IEA believes that this would be a deal “well worth making” as returns for such investments are potentially huge with the region standing to gain gas export revenues while boosting local economies and clean energy supply chains.