Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

Envisioning a New Economic Middle East: Reshaping the Gulf with Israel

| Jan. 31, 2019

We can envision the advent of a new economic revolution forming in the Shia crescent as a new, cohesive political force in the Middle East between Sunni Gulf Arabs and Israel by deepening rapprochement to counter Iran’s expansion. Alongside years of discreet contact and informal diplomatic backchannels between Gulf Countries and Israel, the future portends closer economic links between these power blocs. With the combination of Israeli technology and Gulf capital, there is no shortage of synergies eager to be developed, as Gulf States explore new visionary economic reforms looking beyond a dependence on oil revenues.

Exploring Gas Synergies

The first of these likely to unfold is in the realm of natural gas, which Gulf capitals have increasingly turned to both as a tool for economic diversification and a cleaner energy source to meet rising electricity demand. In the UAE today, natural gas consumption outpaces production, with much of the country’s needs met through the Dolphin Gas Pipeline to Qatar, while Saudi consumption is set to outpace production, as demand surges. In addition to electricity, natural gas demand in the Gulf is also being driven by moves to develop downstream refining and chemical markets by national oil companies. These initiatives include Aramco’s behemoth $150B investment plan, with the goal of boosting production from 14 to 23 bcf/day, and partnership between ADNOC and Mubadala to explore investments in downstream projects. In all the Gulf States, Qatar has the largest gas reserves, and its recently symbolic OPEC withdrawal portends greater focus on inking gas deals both in the region and on a global level. 

 At the same time, the Eastern Mediterranean has experienced large gas discoveries, affecting Israel, Egypt, Lebanon, Cyprus, and Turkey, with the potential to rewrite the regional geopolitical landscape. Among these findings are Israel’s mammoth Tamar and Leviathan gas fields, as well as Egypt’s Zohar gas field, both of which carry the potential for Jerusalem and Cairo to establish themselves as regional energy hubs. Israel has already begun exploring the EastMed Gas Pipeline, which would transport gas through Cyprus into the European gas market, which has been eager for new, diverse suppliers.

However, due to the infrastructure costs, diplomatic standoffs, presence of alternatives, and the sheer scale of the project from an engineering standpoint, Israel could increasingly look south as a way to move its gas exports abroad. Already, Israel’s DelekGroup, which developed the Tamar and Leviathan fields alongside Houston-based Noble Energy, has inked a $15B gas deal with Egypt’s Dolphinus Holdings. With the advent of production from the Zohar gas field, Egypt is increasingly positioning itself as a future LNG export hub, with existing gas infrastructure making it an attractive export hub for regional producers and consumers alike. Both Abu Dhabi and Riyadh have enjoyed warm relations with the Sisi regime, playing a key role in stabilizing the country’s economy by providing more than $20 billion of economic assistance between 2013 and 2015. With austerity tightening the belts of Arab monarchies, future partnerships between Egypt and the Gulf are likely to be greased by commercial interest, spearheaded by sovereign wealth fund behemoths, including the Abu Dhabi Investment Authority, Mubadala, and Saudi Arabia’s Public Investment Fund.                       

 The Public Investment Fund in particular has already displayed an interest in foreign gas deals, most notably in Russia, where it has partnered with Novatek on the firm’s Arctic-2 LNG project. It is possible in the next few years that the Gulf States will be able to informally explore synergies with Israeli gas producers by investing in Egyptian infrastructure, thereby building a more interconnected Middle Eastern energy market and transitioning regional geopolitics away from oil and into the natural gas market. With the unresolved GCC dispute in mind and unlikely changing anytime in the foreseeable future with talks at a stalemate, Abu Dhabi and Riyadh will not be eager about importing greater amounts of gas from Qatar. This climate will make these investments even more likely as both countries seek to form regional gas alliances, with Egypt as an already stalwart ally of both capitals. 

 Doha also occupies a significant role in the future gas dynamics of the Middle East. With its existing expertise in the natural gas industry and LNG exports, as well as its behemoth Qatari Investment Authority (QIA), Doha has the potential to play a powerful role in the region. In contrast to Saudi Arabia and the UAE, Qatar has had much more substantive relations with the Israel, even if behind closed doors. In 1996, Israel inaugurated its trade mission within Qatar, and with Gulf markets closing to Qatari investments, there is likely much growth to be realized between the two nations in the field of natural gas. Given its history as a major player in Palestinian politics, Qatar could be uniquely positioned both as an investor in the Eastern Mediterranean and as a neutral party to settle disputes between Israel and Lebanon over new auctions, as well as those between Turkey and Cyprus. 


More significantly though, the Middle East and the Gulf in particular will be heavily affected by the spectre of climate change during this century. As temperatures rise, electricity demand growth from industrial development will be transformed by demand from air conditioning and desalination. Absent a more mature and resilient electricity grid, this trend could be catastrophic for the Gulf States. Luckily, the region is well-positioned to take advantage of renewables, especially in solar. As Saudi Aramco invests in LNG production capacity, both the Saudi government and private sector have been expanding into the renewables space. In January 2019, Saudi Arabia announced its first wind tender had gone to a consortium of Masdar and EDF, though much of the country’s focus has been on solar energy, which is dominated by Acwa Power. As of July 2018, Acwa’s portfolio included 8 projects in advanced development stages, with total power capacity of 29 gigawatts and desalination capacity of 2.3 million cubic meters/day. In the neighboring UAE, Masdar, a portfolio company of Mubadala, has led the push into renewables, operating Shams-1, the largest solar field in the Middle East with power capacity of 100 megawatts. Both countries have strong renewable energy targets, with the UAE aiming for 7% of electricity generation to come from renewable sources and Saudi Arabia targeting 9.5 GW or 10% of capacity by 2023.

Israel’s photovoltaic (PV) market is too small to attract international attention yet, but it has established a name for itself as a leader in other areas, including desalination. Earlier this year, the country announced the tender for a public private partnership in desalination known as Sorek 2. With a targeted completion date in 2023, Sorek 2 is expected to produce 200 million cubic meters of drinking water every year, which will boost national production to around 735 million cubic meters, or 85% of Israel’s household and municipal water needs. At the same time, an ongoing five-year drought has boosted additional investments throughout the country, with plans to build two more desalination plants to add to the existing five. At the end of 2017, Saudi desalination capacity stood at 5 million cubic meters/day, with the Saudi Saline Water Conversion Corporation investing $80 billion by 2025 to boost production to 8.5 million cubic meters/day. As the climate warms and water resources become more strained, cross-border partnerships will be essential not only for capturing economic value, but preserving political stability. With both Saudi Arabia, the United Arab Emirates, and Israel slated to be affected and, in some ways, are already affected by climate change, this is a clear area for economic cooperation and co-investments in the long-run.

 Economic Diversification           

With greater stress on the need to diversify from oil, Gulf sovereign wealth funds have become prolific dealmakers in global markets, especially in the venture capital space. From Silicon Valley to Shenzhen, sovereign wealth funds have had a prominent seat at the table, especially through initiatives like Softbank’s Vision Fund, funded heavily by the Saudi PIF and Emirates-based Mubadala. Through the Vision Fund already, Gulf money has in part been flowing into Israeli ventures, with Cybereason Inc. receiving $100M in financing from the fund.

 On top of their innovative technologies and attractive valuations, a number of Israeli startups offer services that complement many of the PIF and Mubadala’s investments. In the case of the former, the PIF has sought a broad exposure to the Electric Vehicle (EV) market, as a hedge against declining oil demand. As the PIF makes these investments, both in the hopes of generating future growth and in building up a Saudi EV Market, it will become increasingly imperative that Riyadh mitigate the challenges associated with these ambitions, most notably in charging. Already, Israeli startup StoreDot has a product that can charge EV batteries in as little as 5 minutes, with a production agreement already signed with EVE Energy Co, the largest designer and provider of lithium batteries in China.

 Additionally, Gulf universities have also been raising their profiles internationally, as each country seeks to reform its education system and boost the skills of its labor force. Early on, these universities, most notably the King Abdullah University of Science and Technology (KAUST) are likely to capitalize on existing comparative advantages in the Saudi economy. This is evidenced by Dow’s May 2018 opening of an R&D center on the campus of KAUST, thereby leveraging the strong Saudi background in chemicals and energy. KAUST will likely continue to raise its prominence as a center for not only Saudi but Middle Eastern tech education, raising the possibility of student exchanges, innovation partnerships, and potentially even research centers with Israeli and global peers. Education and technological development will be central to diversifying the economy away from oil. In order for the Gulf States to become attractive business and technology hubs, they will need to ensure that students are graduating with the skills demanded by these jobs.

 Future Landscape 

Outside of the threat of Iran, greater economic cooperation will enable the Gulf States and Israel to tackle regional challenges, including the politics of natural gas, climate change, and diversification. At the same time, greater cooperation could result in greater Iranian destabilizing activity and active measures within the Gulf, as well as a decline in the Gulf’s soft power in the rest of the Middle East. As Riyadh tries to court influence in Beirut and Baghdad to deter Iranian expansion, such costs could be tremendously harmful and, in fact, benefit Iran. Even at home, Iran could ramp up its cooperation with the Saudi Shi’a population in the Eastern Province, home to large oil reserves and occasional bouts of civil unrest. In doing so, popular unrest within the Kingdom and malicious Iranian cyber activity outside of it could both target joint Israeli-Gulf investment projects, raising the costs of doing business for investors and deterring future projects.

 Yet cyber offers a great example of how an Iranian backlash could trigger more, not less integration between these two economic regions. Israel’s cyber advantage is well known globally, and the country’s Defense Export Control Agency (DECA) quietly approved the sale of surveillance technology from an Israeli firm, NSO, to the Saudis last year. Potential vectors for Iranian cyber activity could be targeting large-scale infrastructure, especially those belonging to Aramco, which previously was the victim of a large cyberattack in 2012 that saw 35,000 computers partially or completely wiped. Such a cyberattack could be devastating if timed close to the firm’s IPO, slated to be completed by 2021. It should be noted that the Vision Fund’s first Israeli investment, Cybereason, was founded by alumni from the IDF’s elite Unit 8200 unit, and Israel itself is home to a thriving cyber startup scene, featuring many firms and dedicated cyber VC funds that could be attractive partners for both Saudi authorities and sovereign wealth managers. In this regard, the cyber relationship mirrors the dynamic of defense-driven economic integration of the two regions. Though this relationship is likely to be rocky and turbulent, the underlying interest to cooperate remains stronger than ever and is set to get even stronger in the future.

 The hope is that the greater economic cooperation incubating between the Gulf States and Israel will create a culture of entrepreneurship within Gulf economies. In that way, the Gulf States will begin to each adopt a “startup nation” mentality that has been championed in Israel over the past successful several decades.

Michael B. Greenwald is a fellow at Harvard Kennedy School's Belfer Center for Science and International Affairs. He is deputy executive director of the Trilateral Commission, senior adviser to Atlantic Council President and CEO Frederick Kempe, and adjunct professor at Boston University. From 2015-2017, Greenwald served as the US Treasury attaché to Qatar and Kuwait. He previously held counterterrorism and intelligence roles in the US government.


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For Academic Citation: Greenwald, Michael.“Envisioning a New Economic Middle East: Reshaping the Gulf with Israel.” Belfer Center for Science and International Affairs, Harvard Kennedy School, January 31, 2019.

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