Forget North America’s shale revolution , the world needs Middle East oil for long-term sustainability and to quench growing global demand for fossil fuels.
The International Energy Agency’s (IEA) latest report on global energy investments notes that while unconventional crude oil and natural gas reserves from North America have snared the majority of investments over the past decade, the Middle East will be crucial to meet the energy demand of a fast-growing world. 
“We look at the Middle East, where increased investment remains absolutely critical to the longer term outlook for oil markets, once the current surge in non OPEC production starts to plateau in the 2020s; if investment does not pick up as needed, this will mean much tighter and more volatile oil markets in the 2020s,” Maria van der Hoeven, executive director of the International Energy Agency said in a speech unveiling the report in June.
The IEA is worried that an uncertain investment climate in oil-exporting Middle Eastern countries  may lead to a two million bpd shortfall and a $15 per barrel jump in oil prices by 2025.
And it has every reason to be concerned. The rapidly deteriorating situation in Iraq,  where a sectarian group has rapidly taken over key towns, shows the fragility of peace in the country and the wider region.
Iraq has often been identified as central to the future growth of crude oil production, accounting for two-thirds of new OPEC production expected over the next two decades. Indeed, Iraq is expected to lead global growth with as much as 4.8 million barrels per day of new output in the medium term.
“In the medium term, should Iraq’s sectarian and regional tensions worsen – and the security environment weaken further – it would likely slow investment flows and blunt the expected steady growth of Iraqi output,” said Jamie Webster, senior director at IHS Energy.
Given the current fragmentation of the country, most analysts believe Iraq’s investment climate has deteriorated substantially as the extremist Islamic State in Iraq and the Levant (ISIL) group advances further south.
“Oil and gas infrastructure in ISIL- controlled areas – including the northern crude export route and its downstream assets – will be vulnerable to repeated attack, and the risk of disruptions to domestic product supply is high,” wrote Raad Alkadiri, senior director, Upstream Research at IHS Energy.
“ISIL will also pose a continued threat to operations in some Kurdish-awarded blocks that lie in disputed territories. The risk to operations will rise further if ISIL’s operations prompt external intervention, possibly by Turkey or Iran, which will exacerbate internal tensions even further.”
The Middle East region has typically invested $62 billion each year on average over the past decade in its oil sector, but it will need to steadily raise investment to $78 billion each year until 2020, and around $92 billion annually over the next decade.
All in all, the Middle East region needs to invest $3.2 trillion over the next two decades, with crude oil accounting for $1.9 trillion and natural gas garnering another $700 billion during the period.
With oil production expected to flag in non-OPEC countries after a decade, picking up the unmet demand in oil markets will require major investment upstream in the Middle East.
“Yet the required upturn in investment is by no means guaranteed, even though the oil resources of the Middle East remain ample and are among the cheapest in the world to develop,” the IEA said.
There is a danger that revenues from oil exports will level off, especially if non-OPEC supplies continue to rein in oil prices.
Lower or flat prices could deter Middle Eastern countries from investing heavily in the energy sector, especially as many oil-exporting nations are under pressure to divert resources to the non-oil sector and raise social spending.
In addition, oil consumption in the Middle East is expected to rise to 10 million bpd by 2035, from today’s level of three million bpd – roughly equivalent to Iraq’s current oil production.
Higher fuel subsidies are also leading to wasteful consumption and placing a huge burden on many countries’ public finances. The IEA estimates subsidies on oil products, natural gas and electricity in Middle Eastern nations has reached $203 billion collectively – or roughly one-quarter of the region’s total oil export revenues.
Political uncertainty in key energy exporting countries such as Iran, Iraq, Libya, Algeria and Sudan also suggests energy investment in many parts of the Middle East may be curbed.
“These potential constraints on capital flows to the upstream are compounded by commercial uncertainty over the right moment for Middle East producers to boost investment in anticipation of a plateau and eventual fall in non-OPEC supply,” said the IEA.
“This is related in large part to uncertainty over the prospects for tight oil production in the United States – whether and when the current growth will start to run out of steam. Investment decisions in the Middle East will need to be taken well in advance of this becoming evident, because of the long lead times in conventional production between initial investment and full production.”
The Middle Eastern refinery sector has the potential to emerge as a magnet for investment, with nearly $193 billion expected to be invested in the sector over the next two decade. More than $100 billion will likely be invested in new refineries to build new capacity of 2.9 million barrels per day.
FINANCING ENERGY WINDFALL
The trillions of dollars needed to fund energy projects in the region would require greater emphasis on capital markets, especially as most oil-exporting countries in the region are in the midst of major social spending programmes.
In addition, budget break-even prices in many countries are climbing upwards,as governments unveil ambitious investment stimulus programmes despite flatter crude oil prices and production. Budget break-even price is a useful tool to understand what price of oil is needed to ensure that a budget is in balance for a given level of government spending.
The Gulf states’ breakeven prices rose from a collective average of $43.2 per barrel to $78.8 per barrel by 2011, as governments loosened the purse strings and showered a restive population with salary hikes, subsidies and job- stimulating investments.
“We think that the break-even price for the region will increase a little further this year to $81 barrel with a moderate increase in oil production helping to offset the impact of further growth in government spending,” wrote Richard Burgess, analyst at Deutsche Bank in a note to clients.
The Arab Petroleum Investments Corporation (APICORP) believes the region will need a mix of equity and debt financing to meet the investment needs of $765 billion in the next five years alone.
“The burden of financing would fall increasingly more on the debt market,” notes Ali Aissaoui, senior consultant at APICORP.
“To be sure, the steady growth of the bond and sukuk markets in the region has somewhat reduced constraints on debt supply and lessened sourcing efforts particularly in key GCC countries. However, in nearly all other countries, the supply of debt could fall short of demand if the region’s loan market does not fully recover and/or access to the bond/sukuk markets is not assured.”
The key challenge will be even more daunting when considering anticipated higher future costs of debt.
“Hence, in the face of increasing aggregate capital requirements, funding availability, accessibility and affordability will hardly be achieved without a larger and sustainable fiscal space as well as deeper regional capital markets,” Aissaoui says.
GAS GIANTS LOSE THEIR INFLUENCE
The Middle East may also lose its natural gas prowess as domestic demand takes precedence over natural gas exports.
“The Middle East is the second-largest source of incremental demand [of natural gas], with domestic production filling in only 88 per cent of the additional needs, thus implying that the region’s net exports are to decline over time,” the IEA said in a separate June 10 report.
“The region has always been a significant growth centre, but this trend will slow down over the projection period as incremental consumption is lower than it was over 2007-13.”
Gas demand in the region is expected to rise 3.9 per cent annually over the next six years to reach 535 billion cubic metres. Middle East consumption of liquefied natural gas alone could rise to 110 bcm, especially as oil-exporting countries such as Kuwait, Saudi Arabia and the UAE look to switch from crude oil to natural gas for domestic consumption.
But while demand in the region is rising, Qatar is widely expected to lose its crown as the world’s largest liquefied natural gas supplier to Australia by 2020 as a new wave of developments down under comes on stream.
Qatar has imposed a moratorium on new natural gas development till at least the end of the year, and the country is unlikely to add significant production at least until the end of the decade.
The fastest-growing countries in terms of natural gas consumption are Saudi Arabia, Iran and Iraq.
“Iran is very much a wild card due to the uncertainties regarding future political developments, both on the international scene and on the domestic market, but the domestic market is expected to benefit from the completion – albeit late – of phases of South Pars,” said the IEA.
“For Iraq, it will be mostly a question of using gas currently being flared in the power generation sector.”
RISE OF RENEWABLES
The Middle East has invested $16 billion annually in the power sector, but that figure needs to double to $32 billion to meet soaring energy demand, expected to reach 1,474 TWh within two decades, compared to its current level of 760 TWh.
The Middle East’s renewable energy sector is expected to rise to meet huge demands of the regional economy that will more than double to $5.9 trillion by 2035.
IEA data shows renewables will rise from a paltry $1 billion in 2013 to $181 billion in cumulative investments by 2035. Solar will take the lead in renewables, securing investment of $58 billion, with wind power accounting for $39 billion.
While renewables will command a huge chunk of investments in the power sector, natural gas will emerge as the single-biggest source of energy with investments touching $120 billion over the next two decades.
Middle Eastern and national energy companies will be playing crucial roles over the next few years to construct energy plans that balance energy security, competitiveness and environmental goals, said IEA chief economist Fatih Birol.
“These goals won’t be achieved without mobilising private investors and capital, but if governments change the rules of the game in unpredictable ways, it becomes very difficult for investors to play.