The glittering city skylines of the Middle East have been built on energy wealth. But oil and gas are fast falling out of fashion, and if the region is to retain its power, sustainable trade and finance must be embraced, writes Maddy White.
The fossil fuel industry has played a vital role in the fast growth of the Middle East since the 1970s. Given its history and the fact that the region is home to more than half of the world’s crude oil and over a third of natural gas reserves, the notion of a “green Mena” risks sounding incongruous.
Some Middle Eastern powers still collect the vast majority of their money from oil and gas. In Saudi Arabia, the sector accounts for about half of GDP and 70% of export earnings, according to the Organization of the Petroleum Exporting Countries. Meanwhile in Kuwait, oil and gas comprises an eye-watering 92% of export revenues.
Others have managed to diversify their economies: in the UAE, oil exports account for about 30% of GDP. However, the dependence on oil varies across the seven emirates, most notably its two most successful. Dubai has focused on becoming a hub for tourism, trade and finance and as such oil now accounts for less than 1% of GDP – whereas at one time it was more than 50%. Meanwhile Abu Dhabi, the richest emirate, still depends on oil for much of its wealth.
Sustainability initiatives by governments – particularly in Saudi Arabia and the UAE – are being carved out to take advantage of the sizeable transition opportunity. A key part of Saudi Arabia’s Vision 2030 is to use the country’s investment power to create a more sustainable economy, while the UAE’s Vision 2021 has strived to implement green growth plans. But the regional reliance on finite resources means that translating these schemes into real-world business will take great effort.
Ali Tariq Khan, head of sustainable trade for the Middle East, North Africa and Turkey and head of global trade and receivable finance for Bahrain at HSBC, tells GTR: “The economies in this region are still reliant on hydrocarbons, and that is not going to change soon.
“It will take time. But at the same time, we also need to accept that hydrocarbons cannot be switched off immediately. There is a transition; there is a journey that needs to happen.”
Despite ongoing efforts to advance this transition, projects are being pursued that go against regional goals and the Paris Agreement, which has been ratified by all countries in the region except for Iran, Iraq, Libya and Yemen.
For example, construction is currently underway on a power plant in Dubai which will produce around 7% of its output from coal. The US$3.4bn project would seem to contradict the emirate’s plan to be the lowest carbon footprint city by 2050 – one of the targets of the Dubai Clean Energy Strategy – though the companies involved say it will use only “clean coal”.
The plant is a joint venture under Hassyan Energy Company between Dubai Electricity and Water Authority, the state-run utility, Saudi Arabia’s ACWA Power and China’s Harbin Electric and Silk Road Fund. Hassyan Energy completed a US$2.47bn financing package to build the plant in 2016 and it is expected to be fully operational by 2023.
The plant uses ultra supercritical (USC) technology to reduce its emissions. General Electric, one of two contractors for the project, says on its website that the most efficient USC technology can help coal plants deliver up to 47.5% net efficiency rates – above the global average of 34%. The project will use imported coal.
Nevertheless, while questions remain about how the region will transition away from oil and gas, a flurry of sustainable trade and export finance deals have been signed recently. In January, to much fanfare, HSBC announced it had successfully completed the first green trade finance facility in the region.
The bank arranged the deal worth US$48mn for Lamprell, an engineering services provider, to support the UAE-based company’s fabrication work on an offshore wind farm in the North Sea.
According to Khan, the bank has made some headway since then, completing “several transactions” in the region. “We executed a receivable finance transaction for a company to discount their project payment certificates related to the construction of an energy efficient water desalination plant. We held a second party opinion on the sustainability credentials of that plant aligning to the Green Loan Principles.”
Another regional example relates to an import loan facility for a cardboard manufacturer. The company sources 100% of its materials from wastepaper, which the bank confirmed using external party certifications.
“It is very clear that our clients are thinking about sustainability. They do want to go on this journey, and we need to be having that conversation with them. Following that, we should be able to give them ESG solutions as they require,” he says.
Similarly, Fiji Varghese, regional head of trade finance for the Middle East at Crédit Agricole, tells GTR that companies across the board are looking to take action. “More corporates are coming to us and are keen to engage, even with some of the oil and gas transactions, asking how they can look at ESG.”
In one example, he speaks of an aluminium smelter client in the region that is producing batches of aluminium using only solar power. “The company has separated that aluminium, and we are in discussions with it on financing that from sourcing to sale,” he says, adding that a “major automotive buyer has taken the full contract for the solar-powered aluminium.”
Harnessing solar power is a priority for the Middle East.
Abu Dhabi, already home to the Noor Abu Dhabi plant which began operations in April 2019, plans to build the world’s largest solar plant. Al Dhafra is expected to be operational by 2022, with a total cost of US$1bn, according to BNP Paribas, which led financing for the project.
In terms of export credit agency (ECA)-backed sustainable projects, Simon Lee, head of international trade and transaction banking for Mena at Crédit Agricole, tells GTR that the Middle East may be catching up to its global counterparts. He points to a transaction for Saudi Arabia’s finance ministry last year as “globally only the second ever ECA-backed green loan to be put in place”, adding that it would have been the first globally had there not been a small, last-minute delay to the execution of the transaction.
The US$258mn loan with Crédit Agricole and HSBC was backed by Euler Hermes for the purchase of 842 German-made buses destined for Riyadh’s public transport system.
GTR was told by HSBC at the time that the facility was green because of the use of the proceeds – to alleviate traffic congestion and promote public transport – and because its reporting features make it compliant with the Green Loan Principles, as outlined by the Loan Market Association in 2018.
A similar deal was signed for a rail venture in Cairo last year. The project involves two monorails which will be operational by 2023; a 54km line will connect East Cairo to the New Administrative Capital and a 42km line will link the 6th October City to Giza.
JP Morgan arranged the UK Export Finance-guaranteed loan, launching the syndication of the facility in April last year. Banks involved in the deal include CaixaBank, Crédit Agricole, Credit Suisse, KfW Ipex-Bank, NatWest, Société Générale and UBS.
The Cairo deal is comparable with the Saudi Arabian transaction in its objective, yet it was not labelled “green” in public statements as was the case with the bus deal. This leads to confusion over how transactions are graded as green – especially given the lack of universal framework for sustainable trade and export finance deals that financiers must follow.
“If I issue a guarantee for a wind farm, I don’t know whether that is green financing or not. It can be, depending on the environmental audit, because the underlying is a guarantee – nothing else has changed,” says Varghese.
With no set rules around what constitutes a sustainable deal in trade, greenwashing becomes a risk.
Khan says: “Greenwashing can be a problem because sustainable financing is an evolving space, and targets are moving constantly. I cannot stress enough the importance of transparency and reporting, but we cannot do it by ourselves as banks – there has to be an ecosystem.”
As firms generally have access to financing at present, they do not necessarily need that financing to be green, and for now it remains more of a nice-to-have, he says. Therefore, greenwashing will become a bigger risk when financing becomes harder to obtain without sustainability targets, or similar, in place.
Companies are also under pressure from investors, which are demanding more green deals and better practices. Shareholders at ExxonMobil and Chevron have been putting the oil majors under pressure to boost their low-carbon businesses this year, for example.
“ESG is becoming increasingly pushed from the top-down, investor and corporate treasurer, perspective,” says Varghese.
Regulators in the Middle East are also urging the private sector to be more sustainable.
For example, the UAE’s Securities and Commodities Authority now requires public joint stock companies listed on exchanges, including the Abu Dhabi Stock Exchange and Dubai Financial Market, to follow ESG disclosure requirements. Meanwhile, Bahrain Bourse last year launched voluntary ESG guidelines.
But it appears that such pressure, as well as governments’ various initiatives and visions, may not be sufficiently engaging the private sector to take action on ESG.
In PwC’s 24th CEO report for the Middle East published earlier this year, less than half (46%) of the executives surveyed said they would increase spending on ESG over the next three years as part of their post-pandemic planning. In comparison, 83% said they would increase investment in digital solutions. Just 17% of respondents plan to include climate change and environmental damage in their risk management planning.
With the private sector not fully aligned on the path forward, it is clear that the region still has some way to go in moving away from its oil riches and making sustainability a true priority.