Investment Potentials in the Energy Sector of the Middle East

Master's Thesis, 2016

71 Pages, Grade: 1.6


The Middle East countries Iran, Iraq and Saudi Arabia that were analyzed for investment
potentials possess natural energy resources in copious amounts, share a high dependency
on oil or gas while renewables barely play any role and have strong religious tendencies
in politics as well as differences compared to western countries when it comes to aspects
of cultural, religion, understanding and business practices.
The most promising investments that were stated out are: LNG liquefication facility in
Iran, since Iran has large natural gas reserves and production capacities, but doesn't ex-
port gas at all. PV modules for Iraq, since expensive projects are comparably risky in this
country and some of the population has no or just limited access to electricity ­ the de-
mand exceeds the supply. For Saudi Arabia, larger scale solar power plant projects like
Parabolic Troughs are most promising, since Saudi Arabia is very dependent on oil and
has a very high carbon dioxide emission and a weak energy diversity.
Especially the liquefication facility in Iran seems to have enormous potential on the long
run. The implementation of PV in Iraq is highly dependent on the business model and
governmental support. Such support is also needed for the solar power plant in Saudi
Arabia, since the electricity prices are subsidized in a way, that the electricity generated
through a Parabolic Trough would most likely be not competitive without any form of
support. However, such support is likely, since the project is very beneficial for Saudia
Arabia and huge investments in the energy sector are planned anyways.
For the further realization of such projects its mandatory to make a sophisticated econom-
ically and feasibility analysis that considers all the relevant variables and more specific
information and data. But especially renewable energies which are massively underrepre-
sented in the Middle East seem to have a good potential which will probably increase
further since more experience and better technologies are achieved.
The Middle East is a region with large natural resources and therefore with a theoretically
enormous amount of investment possibilities. However, big players, state-owned compa-
nies, restrictions and difficulties regarding law, culture and business practices can overall
decrease the attractivity of investments in this area.

Table of Content
List of Figures ... IV
List of Tables... IV
List of Abbreviations... V
1 Introduction ... 1
2 Fundamentals ... 3
2.1 The Energy Sector ... 3
2.1.1 Definitions ... 3
2.1.2 Relevance ... 4
2.1.3 Source of Energy ... 7
2.2 The Middle East ... 24
2.2.1 Iran ... 24
2.2.2 Iraq ... 25
2.2.3 Saudi Arabia ... 26
3 Critical Analysis ... 28
3.1 Investment Potentials in Iran ... 28
3.1.1 Energy Sector Evaluation ... 28
3.1.2 Identification of Influential forces ... 30
3.1.3 Consideration of Risks and Potential Hurdles for Investors ... 32
3.1.4 Identification of Potential Projects ... 33
3.1.5 Evaluation of Iran as Target for Investments in the Energy Sector ... 35
3.2 Investment Potentials in Iraq ... 37
3.2.1 Energy Sector Evaluation ... 37
3.2.2 Identification of Influential Forces ... 39
3.2.3 Consideration of Risks and Potential Hurdles for Investors ... 41
3.2.4 Identification of Potential Projects ... 42
3.2.5 Evaluation of Iraq as Target for Investments in the Energy Sector ... 44
3.3 Investment Potentials in Saudi Arabia ... 46

3.3.1 Energy Sector Evaluation ... 46
3.3.2 Identification of Influential Forces ... 48
3.3.3 Consideration of Risks and Potential Hurdles for Investors ... 49
3.3.4 Identification of Potential Projects ... 51
3.3.5 Evaluation of Saudi Arabia as Target for Investments in the Energy Sector . 52
4 Discussion ... 53
4.1 Most Promising Investments ... 53
4.2 Economic Analysis ... 55
4.3 Results ... 57
5 Conclusion ... 58
Bibliography ... 61

List of Figures
Figure 1: WTI oil price development since 1946... 12
Figure 2: Forms and constituents of natural gas, cf. International Gas Union ... 13
Figure 3: Energy generated through nuclear power stations by regions ... 18
List of Tables
Table 1: Worldwide top 10 Companies in the energy sector by profits... 4
Table 2: Coal Production in 2014 and 2015 by country and region ... 8
Table 3: Crude Oil Reserves of countries of the Middle East in percentage of world
reserves by 2015. ... 10
Table 4: Global oil demand, by region from 2015-2020 ... 11
Table 5: Regional gas data by region in 2015. ... 14
Table 6: Natural gas consumption data by region ... 15
Table 7: Share of renewable energy in electricity production by regions for 2005, 2010
and 2015 ... 19
Table 8: Advantages and disadvantages of the different solar power technologie ... 20
Table 9: Iran basic energy sector information... 28
Table 10: Iraq basic energy sector information... 37
Table 11: Saudi Arabia basic energy sector information ... 46

List of Abbreviations
Gas-cooled reactor
Light water (cooled) graphite (moderate) reactor
Ministry of Energy
Organization of the Petroleum Exporting Countries
General Investment Authority

1 Introduction
Energy itself is one of the most crucial aspects for the modern civilization. Especially
electric power (electricity) generated through engines or other processes is important and
its consumption will probably increase further in the future, since the population is in-
creasing and different trends will rise its importance as well. One of these trends is the
upcoming electric mobility. Another trend is the massive digitalization of processes and
an increasing number of devices which run on electricity. The supply of energy and its
generations has furthermore an immense impact on various areas like living standard,
health, economic growth, geopolitics or environmental aspects.
Since energy and especially electricity is that important and will probably get even more
significant in the future, projects and investments in the energy sector are required. But
there are countless opportunities to invest in this sector regarding for example the coun-
try/region or the type of energy that is getting extracted, transformed or transported. How-
ever not every potential possible investment should be done regarding economical fea-
sability or other influencing factors like natural resources, political circumstances or ex-
isting local regulations.
This thesis aims to evaluate the potential for investments in energy projects for specific
countries of the region Middle East. These countries are Iran, Saudi Arabia and Iraq. For
various reasons, these countries are especially interesting to analyse regarding their po-
tential for promising investments in the energy sector.
For example, Iran faced and is still facing restrictions regarding trade and investments by
the western society due to its nuclear program. However, these restrictions started to lift
in 2016 which opens a whole lot of opportunities for companies who want to invest there.
Since Iran is rich on natural resources and the population is comparable large, the poten-
tial for such investments seems high.
However this potential comes with downsides
which will be explained later in this thesis.
Iraq as well seems to offer a huge potential (at least for risk affine investors), since the
past war left an investment vacuum with comparable few competitors on the market. The
U.S. State Department cites Iraq as having long term potential for various reasons like
Cf. Reed, S. (2017).

large oil reserves or needs for infrastructure.
Furthermore, Saudi Arabia seems interest-
ing based on the natural resources and the comparable high wealth of the country.
It can be stated, that the region of Middle East seems potentially interesting for invest-
ments in energy projects. In the further analysis of this paper the most interesting fields
for such investments in these countries will be compared to each other to reach a conclu-
sion about the possible investments that are most promising. However, since the covered
topics in this thesis are broad, it is not in scope of it to describe very specific projects in
detail rather than give an adequate overview over possibilities and circumstances of in-
vestment within these countries. It furthermore seeks to compare the potential regarding
different projects between the countries and point out promising areas of investments.
The first step of this paper is to describe the fundamentals of the energy sector, like its
relevance and the different sources of energy which will be examined as well as funda-
mental data about the countries Iran, Saudi Arabia and Iraq.
This will be followed in chapter 3 by a critical analysis of investment potentials in these
countries. It will contain an evaluation of the state of the energy sector, the identification
of influential forces and promising potential areas for projects. Furthermore, existing or
potential risks and hurdles for investors will be considered, whereas the overall potential
of investments in the energy sector of these countries will be evaluated. While the specific
country circumstances will be analysed, just the most important aspects will be pointed
out, regarding the length of the paper. The subjective rating of importance will however
lead to some lack of systematic, which could influence the comparability negatively. Nev-
ertheless, this approach seems reasonable regarding the coverage of important infor-
Based on the finding of chapter 3, there will be a discussion following in chapter 4 re-
garding the identification of the most promising investments regarding all countries. The
most promising investments in each country will analysed via a feasibility calculation. In
the end of Chapter 4 the results of the preceding analysis will be compared and the most
promising investments will be ranked.
After this the thesis will end with a conclusion of the findings and recommendations for
specific investment actions. The evaluation of the most promising investments will be
done from the point of view of a large western industrial energy company which could
Cf. McDonald, M. (2016).

potentially realize every possible project in the energy sector regarding its know-how,
experience as well as capital and technological resources.
2 Fundamentals
2.1 The Energy Sector
2.1.1 Definitions
The definition of energy sector can be divided into two sides, the supply as well as the
demand side. On the supply side, the energy sector is that part of the economy which
deals with the extraction, production or import of energy carriers as well as their conver-
sion, storage and transport.
The demand for energy from households, industry and commerce depends on the usable
final energy sources, such as electricity, fuels, natural gas or fuel oil, which together with
the appropriate plants are suitable to provide the desired energy services.
Companies that
form the energy sector are therefore engaged in one or more of the processes of the ex-
traction, conversion and transportation of energy carrier.
In the modern industrial societies, the energy sector can be described as a mutually inter-
dependent system of markets for various primary energy carriers such as mineral oil or
natural gas and secondary energy carriers such as diesel or electricity. However, every
kind of energy carrier has specific advantages and disadvantages which delineate their
possibilities of use and market opportunities.
A primary energy carrier is one which appears naturally without any further process of
conversion. Examples are fossil fuels like oil, coal or natural gas, mineral fuels like nat-
ural uranium or natural thorium as well as renewable sources like solar energy, wind en-
ergy, tidal energy, biomass sources or geothermal energy. However, these primary energy
carriers need to be converted through several types of energy system components that
will be explained in the further thesis.
Cf. Gabler (2017).
Cf. Gabler (2017).
Cf. Gabler (2017).
Cf. Konstantin, P. (2009), p. 1 ff.

A secondary energy carrier is one that has been converted from a primary energy carrier
to a more convenient form. These more final forms are heating oil, fuels, electricity, coke,
district heating and hydrogen. Whereas electricity is the most crucial one for modern use.
After the extraction of primary energy carriers. These primary carriers can partly be used
by consumers directly or they are transformed into secondary energy carriers first. After
transport and processes the energy is used directly or in form of useful energy that creates
heat, mechanical work, chemical energy, light or information energy. However, every
step in this process can create emission to a certain degree (e.g. it is comparably high for
the transformation process and relatively low for the process of transportation).
2.1.2 Relevance
As previously mentioned energy is one of the most crucial factors for modern society
since it is involved in nearly all fundamental processes of economic and daily life. This
includes high-temperature heat for the melting of metal ores, low-temperature heat for
heating and water heating, transport of goods and persons, electrochemical reactions such
as electrolysis, lighting and telecommunications as well as stationary motors. In terms of
resource economics, energy is one Indispensable resource: virtually no production pro-
cess would exist without energy.
Companies in the energy sector are therefore some of the largest companies by revenues
and profits. The following table 1 shows the top 10 private energy companies in 2013 by
market value and profits, whereas they are ranked by profit. The data are from a survey
of the top 250 energy companies in the world by Platts.
Table 1: Worldwide top 10 Companies in the energy sector by profits, cf. Platts (2013).
Rank Name
Country Revenue
(Mil. USD)
Profits (Mil.
1 ExxonMobil USA
428,376 44,880
2 Gazprom
145,084 36,775
Royal Dutch Shell
4 Chevron
222,580 26,179
5 PetroChina China
358,065 18,810
Cf. Carstan, V. (2010), p. 47.
Cf. Carstan, V. (2010), p. 47.
Cf. Gabler (2017).

6 Total
238,502 13,991
7 Statoil
121,388 11,852
8 BP
375,580 11,580
9 Lukoil
139,171 11,004
Rosneft Russia
92,294 10,604
These companies are primary active in the area of extracting primary energy carriers and
partly in the transformation to secondary energy carriers. However, they are also distrib-
uting secondary energy through different channels.
Companies that are just focusing on the generation of electricity and services are often
more regional and for that reason smaller compared to the big global players that play a
crucial role in extraction of the primary energy carriers. For example the two biggest
players in Germany in 2013 were E.ON SE with 2,852 Mil. USD in profit (rank 33) and
RWE AG with 1,709 Mil. USD in profit (rank 60).
The reason why there is no company from the Middle East ranked in this list, even when
they have a lot of natural resources which could be extracted is, that the biggest energy
companies in this area are state owned. For example, the Saudi Arabian company Saudi
Aramco is the world`s largest oil company by production of barrels per day (in 2014 in
average 9.5 Mil. Barrels of oil per day) and would be ranked high in the top 10 list if state
owned companies would have been included. Also, the National Iranian Oil Company
which is responsible for all upstream operations in the oil and natural gas sectors and all
downstream activities in the oil sector in Iran would probably be among the top 10 (pro-
duction of oil in 2014 was on average 3,4 Mil. barrels per day). It should be mentioned
that even when Rosneft is counted in the list as private company, Russia controls about
70% of the stocks by 2015.
To conclude, the energy sector (and its infrastructure) plays a vital life in every aspect of
daily life and is the backbone of the economy of a country. Furthermore, energy compa-
nies are some of the most powerful and influential companies with high revenues and
Cf. Platts (2013).
Cf. Investopedia (2015).

Since energy is that important, it plays also a huge role in global geopolitics ­ especially
when it comes to natural reserves of oil or gas for example. Areas of great reserves usually
have a high geopolitical tension.
On the other side, prices for primary energy carriers
are very sensitive to geopolitical crisis in the main producing countries.
However, there are also other downsides associated with energy use and extraction. The
extraction of primary energy carriers can harm the environment and the use of energy and
the generation of secondary energy carriers can produce emissions. These emissions (par-
ticularly CO2-emissions) are strongly influencing the worldwide climate through a
changing effect regarding the temperature. Besides this other gas emissions or nuclear
waste and specific disasters can be dangerous for health in general and can be potentially
hazardous for some regions, the atmosphere and the seas.
An obvious result of these
emissions are huge smog problems of some larger cities. Especially these problems lead
to a rethinking and remodeling of the energy sector. Now energy efficiency and the use
of renewable energy with less or no emissions receiving more attention.
A higher energy efficiency means less emission and less loss of energy while it is gener-
ated or transformed. For example, in the 70s and 80s power plants in Germany based on
fossil fuels had an efficiency of 35 to 38%. However, modern power plants reach an effi-
ciency of around 45%.
This means that relatively lesser primary energy carriers are
needed and that emissions are reduced. Besides technological innovations like the im-
provement of powerplants, there are other ways to increase the energy efficiency and
decrease the amount of global emissions. A very significant one is the trade of emission
certificates. However, these are hard to coordinate on a global level while they can work
on a more regional scale like the European Union.
Since energy supply should cover all populated areas, the need for a good and efficient
infrastructure is very high. This includes for example gas stations and powerlines as well
as generators. To ensure this supply, high infrastructure cost occur ­ but this is also a
chance for energy companies for investments.
In general, it is important to ensure the energy security. This means the minimizing of
risks of disruption to the energy supplies. These disruptions can be caused whether by
accidents, disasters, political interventions, terrorism or industrial disputes. It therefore is
Cf. World Energy Council (2013).
Cf. Konstantin, P. (2009), p. 11.
Cf. Carstan, V (2010), p. 60ff.
Cf. Konstantin, P. (2009), p. 132.
Cf. Carstan, V (2010), p. 62.

important to use an energy mix to not be too dependent on a few sources of energy ­ e.g.
Besides a broad mix of energy sources to ensure the energy security, especially
renewable energy carriers are highly advantageous, since wind or solar as energy carrier
for example don't need an extraction of natural resources and no trade and transportation
of resources with and through other countries. However, also renewable based energy is
partly imported or exported depending on beneficial regional circumstances.
As one can see, energy is a key factor in every aspect of life with a lot of. It furthermore
offers countless opportunities for investments. However, there are strong global players,
especially dealing with the extraction, whereas some companies seem to have kind of a
regional monopoly status as were seen on the examples of Saudi Arabia and Iran. Never-
theless, the possibilities for profitable investments are huge, since the energy sector co-
vers many fields besides the extraction of natural resources. In the following part of this
thesis, the diverse sources of energy will be analyzed. This analysis will help to under-
stand the beneficially of some investments over others regarding given circumstances.
2.1.3 Source of Energy Coal
Coal is one of the fossil fuels and was the primary energy source of the 19. hundred in-
dustrial revolution, which is still widely used. For the first time in the current century the
global coal consumption was reduced in 2015 ­ mainly caused by China´s transformation
to a less energy intensive society.
There are different types of coal, whereas the energy density is measured by ton of coal
equivalent (tce). One tce equals 7,000 kcal per kg or 7Gcal/t (one kcal equals 4.187 kJ).
The most important ones as source of energy are hard coal and lignite as well as coking
coal for producing steel. One ton of high quality hard coal equals 1 tce. Compared to oil,
tce has about 70% of the energy density of a ton of crude oil. The efficiency of producing
electricity from coal is about 40%.
Coal as an energy carrier provides around 40% of today world`s electricity. Whereas Asia
is currently the biggest market for coal and accounts for 66% of the global coal consump-
tion. However, its use will probably decline in the future since the climate change encour-
ages states to change their energy mix in favour of cleaner energy forms ­ like renewable
Cf. World Energy Council (2016), p. 16.
Cf. World Energy Council (2016), foreword.
Cf. Konstantin, P. (2009), p. 3ff.

As of 2014 coal-fired power generation is accountable for 4,090 terawatt hours
(TWh) in China, 1,711 TWh in the USA, 868 TWh in India and 299 TWh in Japan. There
is no country originated in the Middle East among the top 16 countries regarding coal-
fired power generation.
The following table 2 shows the main coal producing countries and regions in 2014 and
Table 2: Coal Production in 2014 and 2015 by country and region, cf. World Energy Council (2016), p. 12.
Million Tons
Country 2014
China 4,000 3,747
USA 906.9 813
India 659.6 677
Australia 503.3
Indonesia 470.8
Region 2014
Total Africa
Total Asia Pacific
Total CIS
Total EU
Total Middle East
Total North America
Total S. & Cent. America
World 8,176,4 7861
There are two aspects that are meaningfully interesting in this table. On one hand, the
worldwide production of coal declined significantly between 2014 and 2015. On the other
hand, the region of Middle East is by far the region with the lowest production of coal. In
Cf. World Energy Council (2016), p. 6.

2015, they only produced one million tons of coal which is about 0,001% of the world-
wide production. That means that the natural reserves are probably very low or the ex-
traction costs are too high to use them.
Since the transportation of coal is comparatively high and the Middle east has large nat-
ural reserves on other fossil fuels, coal seems to be not a promising energy carrier on
which one could base an investment in the energy sector.
For these reasons, coal will
be generally excluded for a further consideration.
To conclude, coal played a crucial role as an energy carrier since the industrial revolution.
But there can be seen a trend that leads to a declined use of coal, which will probably go
on till other sources of energy take over its place as the worlds primary electricity pro-
duction resource. Crude Oil
As already stated crude oil has a higher energy density than coal and is generally
measured in barrel, whereas one barrel equals 137 kg. Since there are different quality
levels, its energy is equally to coal measured in ton of oil equivalent (toe), whereas 1 toe
equals 10 Gcal (41,868 GJ or about 10.000 kcal).
Crude oil is the primary fossil energy carrier accounting for 32.9% of global energy
consumption. Especially the transport sector has a huge demand for oil and is responsible
for 63% of the oil consumption. Even though substitutions for oil exist, they are not yet
imminent and it is not expected that they reach more then 5% of the demand for the next
five years.
Besides the use of crude oil for the transport sector in form of gasoline (used to fuel cars),
diesel fuel (used for cars or boats) or jet fuel it can also be used for other products or as
heating oil to heat buildings. Furthermore, it can be used to generate power what is for
example done by Saudi Arabia extensively during the summer months (month with higher
power demand). However, usually the use of natural gas and coal is more likely to meet
the higher summer electricity demands by other countries.
The region of Middle East is naturally rich on conventional natural crude oil reserves,
which are projected as a whole at around 1.2 trillion barrels. However, the amount of
Cf. Konstantin, P. (2009), p. 17.
Cf. Konstantin, P. (2009), p. 3.
Cf. WEC (2016), p. 5.
Cf. Energy Information Administration (2014).
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Investment Potentials in the Energy Sector of the Middle East
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Asgar Abdullazade (Author), 2016, Investment Potentials in the Energy Sector of the Middle East, Munich, GRIN Verlag,


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