Global Energy by 2030 facing Restructuring of all countries would be a problematic required by an Energy Transition that raises Security Issues worldwide, the conjunction of the fossil fuels volatility and the need for protection of the environment and reduction of greenhouse gas emissions had required a revision of all energy strategies.
This is roughly why we need as a matter of urgency to, on the one hand, review our current mode of energy consumption and on the other, exploit all forms of energy and the renewable ones that fortunately remain the only alternative.
The recent devastating hurricanes pose many problems and Algeria is not immune from any of them. Studies of the United Nations anticipated drought unparalleled in North Africa between 2020 and 2025.
The world to know an energy change over 2020 through 2040
The weight of all fossil (coal, gas and oil) remains at a crushing 78.3%, while nuclear power plays only a marginal role on a global scale at a 2.5%. The share of renewables is growing in electricity production (23.7% by end of 2015 against 22.8% by end of 2014), but it remains minor in transportation and heating and cooling facilities.
This high proportion of the fossil fuels is due to imbalances between States subsidies to fossil energy and those allocated to the renewables: $490 billion for the first in 2015, compared to $135 billion, or nearly four times less for the latter.
This does not prevent the sector now to total 8.1 million direct and indirect jobs worldwide (+5% in one year), including 2.8 million in the photovoltaic (PV) industry with outputs increasing from 59 Gigawatts in 2005, to 198 in 2010, 279 in 2011, 283 in 2012, 318 in 2013, 370 in 2014 and 433 in 2015 including solar Gigawatts 227 against 73 in 2005.
Investment in billions of Dollars is increased from 73 in 2005, to 239 in 2010, 279 in 2011, 257 in 2012, 234 in 2013, 273 in 2014 and 286 in 2015.
Subject to long-term investments, the fact that currently the development of the technology costs and investments in production equipment (wind turbines, solar modules, biomass boilers, etc.) which weigh on the cost of renewables, in the future, all renewables hardware would tend to bring cheaper energy and at stable prices.
Regarding costs reduction, the IEA recently noted that the price of PV systems has been divided by two and sometimes more in five years (2008-2012). Today, joining hydroelectricity production costs, as some renewable energy technologies have almost reached parity with conventional costs of electricity from other energy sources if considering grants allocated to the latter.
Renewables have essential assets for taking an important place in the energy mixes of all countries, starting with bringing the production centers closer to the consumption sites, reducing the dependence of these countries on fossil fuels. contributing to the security of supply and energy independence, allowing a long-term price control, constituting the most appropriate vectors of development of decentralized energy production and finally offering a considerable industrial development potential and new growth.
This would also help to limit the impacts of the production of energy on the environment: reduction in emissions of greenhouse gases, reduction of all effects on the air, water and soil, no production of waste, the production of renewable energy facilities very little affect the environment, the biodiversity and climate.
According to a report of Bloomberg New Energy Finance (BNEF), it is a matter for fossil fuels to invest about $2,100 billion by 2040 to cover the global demand for energy, as opposed to $7,800 billion for all renewables. Thus, renewable energy would provide a quarter of the world’s electricity against 20% today.
But for a sustainable energy transition to ensure significant investment, adaptation, in electric networks to absorb and redistribute a greater proportion of current produced by all renewables energy for storage and manage the demand for flexible electricity production units on the importance of decentralizing energy production to bring them closer to points of consumption.
So, the world is moving towards a major energy shift based on a certain Mix with practically all enterprise already investing in alternative energy.
According to the same Bloomberg New Energy, it is expected reversal of energy consumption by 2025: a fall in the demand for fossil fuels and a significant increase in the demand for alternative energy.
This trend should be analysed considering the exponential growth of technologies (telecommunications, Internet, multimedia, etc.) more electro-dependant, for as much in the case of developed economies, as with the consumption to come of 1.3 billion people in the world still living without lighting, telecommunications, etc.
The conclusions of the IPCC – Intergovernmental Panel on Climate Change report published in January 2015 and the report of Rachel Kyte, Vice President of the World Bank responsible for sustainable development), shows an increased and everywhere visible in the world events of climate extremes like drought, heat waves, torrential rain, floods, hurricanes, typhoons, etc., with heavy human losses (2 and a half million people over the last 30 years), the number of climate refugees (more than 20 million according to the Norwegian Refugee Council) and of costs of natural disasters on the increase ($200 billion per year over the last decade, almost 4 times more than in the 1980s.
Energy transition and national security
The national security being under question, Algeria, this month of September 2017, knows no financial crisis, but is rather confronting a crisis of governance. But the risk of no correction of the current political economic and particularly the industrial sector is to go straight by the horizon 2018 and 2019 to the IMF when the financial crisis and crisis of governance would live together.
The main challenge for Algeria between 2017 through 2030 would be its control of time. It is within this framework that the national program of development of renewables in Algeria must be implemented. This foresees a production as of now of 22,000 megawatts (MW) of electricity from renewable sources by 2030, for the domestic market, in addition to 10,000 MW for eventual exports.
The goal is to reduce consumption of fossil energy by more than 9% by 2030 and save 240 billion m3 of natural gas, or $63 billion over 20 years.
So about 400 MW made renewable through 100MW by the hybrid power plant in Hassi R’mel and 1.1 MW from the solar pilot of Ghardaia, in addition to a capacity of 343 MW from 22 solar power stations throughout 14 governorates (wilayas), including 270 MW which are already in service.
A national and international tender is planned to produce 4,000 MW power from renewable sources with a specification requiring domestic and foreign investors to produce and ensure the local assembly of industrial equipment production and distribution of renewable energy, including photovoltaic panels.
According to official statements from the sector during 2016 as reported by Algeria Press Service (APS), and before the Government’s new territorial cutting, SONATRACH, the State oil company is expected to launch tender notices where 34 foreign companies are in the race for the realization of a solar Park in Algeria of 10 MW at Bir Rebaa North, in the East of the Algeria.
However, it is necessary to carry out this program that could offer 300,000 direct jobs, by making investments of more of $100 billion by 2030. In addition to a new policy of SONATRACH that cannot ensure it by itself only, this important investment, it is necessary to set up a national industry as a public – private partnership of national – international concerns.
This must include all elements of the renewables value chain, including engineering, equipment and construction to increase the pace of implementation, studies on the connection of these to the grid network.
These are strategic choices to ensure energy security of the country and its energy transition, which will be done gradually because the fossiliferous deposits of the country begin undoubtedly to dry up whilst energy consumption is growing and will continue to do so.
Indeed, Algeria through widespread and poorly targeted subsidies is one of the models the more fuel-hungry in Africa and in the Mediterranean, with a growth rate that has reached or even exceeded the 14% per year for electricity.
The Electricity and Gas Regulation Commission (CREG) forecast internal needs between 42 (minimum) and 55 (maximum) billion m3 of natural gas in 2019 and SONELGAZ, the State power utility provider could produce on the other hand, 75 billion m3 in 2030.
According to the 2015 energy balance, published by the sector, the distribution of consumption of primary energy is as follows, i.e.: total production: 155 million Tonne of Oil Equivalent (TOE), including 63% exported and 37% consumed on the domestic market (including the electric generation) with households and others: 16.5%; consumption of transport, 13% and the consumption of the industry & construction: 7.5%.
In Algeria, there is a true paradox that is residential consumption whereby rich and poor pay at the same rate (Ditto for fuel and water) represents 60% against 30% in Europe and the consumption of the industrial sector 10% compared to 45% in Europe showing the dieback of the industrial fabric, or less than 5% of the domestic gross product thus coordinated action should be implemented as part of a strategic vision of development taking into account the new global changes.
At the same time, it will be to improve energy efficiency through a new policy of prices (sale price of gas on the domestic market about a tenth of the real price) causing a waste of resources which are frozen temporarily for some social reasons.
It is the largest reserve for Algeria that would involve it in reviewing its policies of housing, transport and bringing awareness of the population whilst reviewing pricing. There must be some transitional period and not penalise the poorest; Algerian Waters being an interesting case in point to study.
For this purpose, thought needs to be committed to the creation of a national compensation chamber so as to achieve a system of equalization, both inter regional, socio-professional, segmenting activities to encourage the structuring sectors and taking into account the income by social strata, involving a new wage policy and any grants must have the endorsement of Parliament in all transparency.
For Algeria, therefore, arose the problem of energy security, and of the urgency of a reasonable and controlled energy transition inserting itself within the overall framework of a transition from a petrol-economy to a non-oil economy in the framework of global comparative advantages. This requires a broad national debate on the future model of energy consumption and raises all the bureaucratic environmental constraints hindering the expansion of added value wealth creative enterprise and of its basis that is the economy of the knowledge.
The proposed article of Paul Ebeling’s on Iran moves to opening up for GCC’s businesses would be best to be prefaced by an introduction to a respectable retrospective of modern Iran as it is striving to pick up speed after coming out of the darkness of years of sanctions. Read more in A History of Modern Iran .
In a radical reappraisal of Iran’s modern history, Ervand Abrahamian traces Iran’s traumatic journey across the twentieth century, through the discovery of oil, imperial interventions, the rule of the Pahlavis, and, in 1979, revolution and the birth of the Islamic Republic. In the intervening years, Iran has experienced a bitter war with Iraq, the transformation of society under the rule of the clergy, and, more recently, the expansion of the state and the struggle for power between the old elites, the intelligentsia, and the commercial middle class. The author, who is one of the most distinguished historians writing on Iran today, is a compassionate expositor. While he adroitly negotiates the twists and turns of the country’s regional and international politics, at the heart of his book are the people of Iran, who have endured and survived a century of war and revolution. It is to them and their resilience that this book is dedicated, as Iran emerges at the beginning of the twenty-first century as one of the most powerful states in the Middle East.
In January this year, senior diplomats from around the world formally announced the lifting of sanctions against Iran. In principle this put a definitive end to 37 years of various degrees of sanctions imposed on the country.
Boardrooms of global Fortune 500 companies and regional conglomerates alike have been lit up with debate on what this means for their business over the past 10 months, but two things are certain.
1st, the opening up for the nation to the world is arguably one of the most prolific global business opportunities of our generation.
2nd, the answer to the above question depends heavily on your company’s origin, DNA and risk appetite.
For the majority of the largest European and Asian companies excluding China, this marks a much-awaited opportunity to return to Iran, where many had investments, manufacturing facilities and large-scale operations prior to the financial sanctions made against Iran in 2011.
Chinese and American companies view the current situation as more of a threat, and for different reasons.
Chinese firms have greatly benefited from the international sanctions on Iran over the past few years, which provided a window where an inflow of Chinese products flooded the market without much foreign competition. The lifting of sanctions will see an inevitable curtailing of Chinese dominance in this market.
For American companies, the situation is more complicated.
Although US companies’ foreign subsidiaries are technically allowed to engage with Iran, there is still a minefield of regulatory, transparency and legal challenges that have left many hesitant to take even preparatory steps.
Furthermore, the fact that 2016 is a US Presidential election year, and the mounting layers of uncertainty of the future government’s policies towards Iran have left the majority of American companies unable to decide.
So, what does Iran opening up mean for GCC players?
There are both significant opportunities and many challenges, and to understand the complex nature of GCC-Iran ties we must first understand how Iran fits into the macro-economic fabric of the Middle East.
Iran: what’s the big deal?
The excitement felt by foreign companies can be understood when you look at Iran’s economic indicators.
Iran isn’t a stereotypical sanctioned economy, which might be perceived to be underdeveloped. On the contrary, the economy is more diversified than most emerging economies today, and is substantial in size across various indicators.
Despite the sanctions, Iran has maintained the 26th largest GDP in the world at $425-B, between Saudi Arabia (20th at $646-B) and the United Arab Emirates (31st at $370-B). It generates 1.5% of global GDP and is the only country that exported in every single category of exports, as defined by the IMF in 2012-2013.
Iran also boasts a population of nearly 80-M inhabitants, which is equivalent to the population of all 6 GCC countries combined. With a burgeoning middle class, Iranian consumers increasingly have disposable incomes. Moreover, Iran’s predominantly young population is amongst the most highly educated in the region, with 13.3% of the working population having graduated from university.
The country has the highest literacy rates in the region and is the 5th largest producer of engineers worldwide.
Like some of its GCC neighbors, Iran is blessed with natural resources, and in abundance. Iran has the world’s 4th largest proven Crude Oil reserves (4% global share) and the world’s 2nd-largest proven Nat Gas reserves (17.5% global share).
Iran is the world’s 12th largest Crude Oil exporter, as of 2015, and is expected to climb as it increases production.
But unlike its GCC neighbors, Iran has managed to build a diversified economy that does not rely solely on its Crude Oil and Nat Gas industry. Though Oil-based revenues still provide 25% of the country’s GDP, the automotive, mining and manufacturing, and agriculture sectors each also command 10% of the economy.
As the national GDP breakdown infers, Iran is blessed with many natural resources besides Oil and Gas; the country holds over 7% of the world’s total minerals. Iran has the largest global zinc reserves and the largest copper deposits and is a large global supplier of iron ore and chromite.
Iran is currently home to the 20th largest automotive manufacturing hub in the world, having produced approximately 1.4-M units in 2015.
Iran is expected to become the biggest market for new car sales in all of the Middle East and North Africa (MENA) by 2020. This translates into big opportunity for automotive manufacturing and automotive aftermarket players in the region.
Elsewhere, the country’s construction sector is still expected to continue at a relatively strong and steady growth rate of 6.1% CAGR from 2016 to 2020.
Driven primarily by residential construction projects, Iran’s construction market is expected to reach $196-B by 2020. Iran is the 13th largest steel producer in the world, and is also the 4th largest cement producer, behind China, India and the USA.
Beyond Iran’s impressive industries, the country’s strategic geographic positioning between Europe, the Middle East, South Asia, and the Far East also works in its favor. And it seems this is more relevant than ever before, as talks of reviving and modernizing the old ‘Silk Road’ trade routes between Asia and Europe have intensified in recent months.
Iran’s large market spells big opportunity for GCC businesses, which have a number of advantages over global competitors.
The 1st of these advantages is geography.
It comes as no surprise that most Fortune 500 companies that are entering Iran are predominantly doing so via the UAE or Turkey – primarily due to proximity and logistical ease, as well as ease of communication, travel and management of business operations.
Secondly, the GCC has already established grey channels into Iran.
Many foreign companies are surprised when they first visit Iran and realize the market is flush with their products and the products of all their competitors. The UAE and the wider GCC have acted as Iran’s unofficial backdoor during the sanctions, and distribution and supply chain channels are already carved out in these markets. The challenge will be to keep these channels open once official channels are developed.
3rd and perhaps most importantly, companies in the Gulf know how to operate in volatile and high-risk emerging markets. This is why many GCC companies have done well in emerging Asia and Africa. Due to the ability of GCC companies to take these risks, regional companies have an opportunity to enter Iran faster than their foreign rivals.
Finally, there are a number of sectors where GCC companies are primed to flourish.
For starters, the bank and financial sectors in the GCC are expected to witness an increase in longer-term business opportunities. The region’s top construction players which may be suffering from the contraction of the sector at home might also find a welcome respite in Iran.
Construction growth in the country is primarily driven by the residential segment – accounting for 45% of the market – due to a severe shortage of housing stock. The demand stands at 1.5-M housing units per year, of which Iran is able to provide less than 50%.
Infrastructure projects and construction of manufacturing plants are also expected to see sharp growth rates that cannot be met with local capacity alone.
Thus, all adjacent industries, from the excavators and heavy machinery sector to the construction materials sector, will be prime growth segments.
Opportunities outweigh the risks in most instances for GCC companies, but there are still risks and restrictions to be aware of.
First and foremost, opening Iran to the world will mean that Iranian industries will begin to compete more fiercely with Gulf businesses. Major industries where Iran and the GCC will compete include Oil and Gas, petrochemicals, aluminum, machines, engines, pumps, and dairy products.
In Oil and Gas exports, for example, Iran will directly compete with Saudi Arabia, the UAE and Qatar to become the energy importer of choice with lucrative Oil-importing nations such as China, Japan, South Korea and India, as well as Europe. This will be an ever-growing challenge, as Iran is the only country in the world as cost-effective as Saudi Arabia in Oil and Gas production.
Secondly, Iran will bring fierce competition for FDI (foreign direct investment).
As the Iranian government continues to develop policies that deter foreign entities from becoming an import-only partner to Iran, many large multinationals may decide to build local manufacturing facilities for their regional operations, instead of bringing this investment to the GCC.
Another challenge facing Gulf companies planning to operate in Iran has to relate to the marketing and origins of their products. Though Iranians have a strong demand for European, North American and Japanese products, there is little to no consumer affinity towards products produced in the Gulf or products with Arabic content. This may require many Gulf companies to invest in re-branding their products entirely to enter this promising neighboring market.
Iran’s regional gateway
The UAE has the highest trade exchange with Iran amongst its GCC peers, earning over $32-B in export value in 2014, and over $8.7-B in Q-1 of 2015 alone. The emirates accounts for more than 80% of Iran’s trade with the whole of the GCC.
Oman is the 2nd major GCC trade partner.
Many analysts suggest that the removal of sanctions on Iran will have a positive effect on the UAE economy over time, with trade between the countries likely to increase between 15-20 per cent. The International Monetary Fund (IMF) forecasts that $13bn will be added to the UAE’s economy as trade between the two countries steps up between now and 2018.
Some have argued that Iran opening up could see jobs move from the UAE directly to Iran, but the majority of Iran’s imports are likely to continue to go through Dubai’s Jebal Ali Free Zone Port.
Furthermore, Iranian businesses have a major presence in the UAE, with around 8,000 Iranian traders and trading firms registered in the emirates, according to the Iranian Business Council. Ethnic Persians are estimated to account for roughly 10 per cent of Dubai’s population of two million. The UAE also has a strong commercial presence in Iran, with leading companies such as RAK Ceramics, Majid Al Futtaim Group and Mammut Building Systems operating there.
Diplomatic and commercial relations
Iran and the GCC countries have economic incentives to expand their trade relations, but diplomatic and geo-political concerns are likely to play an important role as well.
Looking specifically at relations between Iran and the UAE, there exists one major unresolved conflict between the two countries. The UAE has challenged Iran’s sovereignty over three islands in the Arabian Gulf. In addition, the UAE’s close economic and political ties with Saudi Arabia led to the emirates downgrading diplomatic ties with Iran following the storming of the Saudi Arabian embassy in Tehran in January of this year.
Oman and Iran share close diplomatic, economic and military ties, upholding a tradition of cooperation that dates back to the Shah of Iran’s regime. The sultanate played a key role in the 2013 secret talks between the US and Iran, which paved the way to the current removal of sanctions.
Oman also signed an accord with Iran in early 2014 to construct a $1-B Nat Gas pipeline from Iran to Oman.
Qatar and Kuwait also have close relations with Iran; all three are members of OPEC, the Non-Aligned Movement, and the Organisation of the Islamic Conference. The two countries also generally refrain from criticizing Iran’s domestic and foreign activities.
Bahrain and Saudi Arabia are the two GCC states that have the most strained relationship with Iran. Bahrain-Iran relations have been under pressure since the Iranian Revolution and the 1981 discovery of a planned Iran-sponsored coup. However, in recent years, Bahrain has begun taking steps to improve relations.
Its relations with Saudi Arabia’s have been troubled, as both countries aspire for a leadership role in the Islamic world. The political differences between Riyadh and Tehran are stark, with little sign of rapprochement in the near future.
That said, there has been some economic activity between the two rival countries. Trade stood at a mere $215-M in 2015, mainly comprised of Iranian exports, but look closely and you can find a small number of notable Saudi businesses either directly or indirectly established in Iran via official distribution channels.
These include strategic investment holding group Savola Group, SABTEC, a subsidiary of Saudi Arabia’s largest public company SABIC, fast food chain Al-Baik, Saudi Ceramics Company, and Al Abdulatif Carpets.
While entering Iran might not necessarily be straight-forward, right or possible for every business in the GCC, its opening up to the world is one of the most significant global business opportunities of our generation, it is one many businesses in the Gulf should at least consider.
Erika Masako Welch, business development director for the Middle East at Solidiance