The geopolitical challenges of the energy market in the Red Sea

Historically, the Red Sea has been a strategic hub for the economic transactions between East and West; this is also true regarding the energy market. On the one hand, greater political instability together with ongoing transformation in the region have highlighted new challenges in the energy sector and a shift of investments in the crucial area of the Eastern Mediterranean. On the other hand, Saudi Arabia, a central actor in the Red Sea and key member of OPEC (Organization of the Petroleum Exporting Countries), is increasingly looking East to Russia to help the stabilize oil prices worldwide. However, it still considers the Red Sea one of its privileged zones of influence, especially to counter Iran’s ambitions in the region.

One recent example of a shift of investments from the Red Sea to the Eastern Mediterranean comes from the London-based British Petroleum (BP). In this area, many European countries are keen to exploit or invest in the promising offshore oil and gas fields under the zone of influence of countries like Egypt, Israel and Cyprus. BP recently announced a significant divestment from its Gulf of Suez oil concessions in the Red Sea, including its interests in the Gulf of Suez Petroleum Company (GUPCO), to concentrate investments and operations in the vast Egyptian off-shore gas reserves. BP investments will be concentrated in the Giza/Fayoum gas field in the West Nile Delta, which is expected to produce the equivalent of 60,000 barrels of oil per day.

As disclosed by Reuters in June 2019, the deal involves the Dubai-based Dragon Oil which should buy BP’s interests in GUPCO. The value of the sales, which is subject to the approval of the Egyptian Ministry of Petroleum and Mineral Resources, has not been disclosed. Reuters, however, citing industry and banking resources, estimates an approximate value of more than $600 million. The deal should be completed by the end of 2019.

British Petroleum investments in Egypt have grown with a steady pace over the past four years, more than anywhere else in its portfolio, according to a statement by CEO Bob Dudley. He also said that BP has invested $12 billion in Egypt to date and plans to invest $3 billion more over the forthcoming two years. With this sale, BP seems to favor the Eastern Mediterranean over the Red Sea.

But when looking at the energy policy of the main actors of the Red Sea, Saudi Arabia must be center stage.In the heart of the Red Sea, Saudi Arabia is strengthening its connection to Russia. Moscow has been focused in talks with OPEC over the past two months with growing interest from the media. The results of these talks should determine oil prices for the second half of 2019 if an agreement can be reached on oil production policies from all the key players.

Following the 2015-2016 oil crisis, the cooperation between OPEC and Russia has been beneficial to the stabilisation of oil prices, resulting in the highly publicized “OPEC+” deal (in which Russia together with OPEC countries agreed to cut their oil production). This is the mantra repeated by a key figure in Saudi Arabia, Khalid A. Al-Falih, Minister of Energy, Industry and Mineral Resources and Chairman of Saudi company Aramco. Al-Falih entertained bilateral talks with Putin and his counterpart Alexander Novac, the Russian Minister of Energy. Russia is also seen as a strategic partner for the interests of Saudi Arabia in Europe. Should the Kingdom decide to invest in refineries in Europe, Russian crude oil would be extremely beneficial to it.

However, on the opposite shore of the Red Sea, Sudan also plays a significant role for the interests of Saudi Arabia and its allies in the region like the United Arab Emirates. Both countries, following the turmoil caused by the overthrowing of former President Omar El Bashir, have injected a conspicuous amount of money into the Sudan Central Bank, which has been suffering from a scarcity of dollars. In May 2019, Saudi Arabia announced a deposit of 250 million dollars in the Sudan Central Bank – only a month after the UAE had announced the deposit of the same amount of money. The support package is meant to sustain Sudan, which is a close ally against Iranian influence in the region, and also provides military forces in the Saudi-led coalition in the war in Yemen.

Even though the Red Sea seems quite distant from a European perspective, it is worth remembering that it still plays a significant role in the geopolitical ambitions of many Gulf States.

It is also worth noting the cooperation between Saudi Arabia and Russia: they are united on the energy front, like on the stabilization of oil prices through large agreements on yearly output, yet they remain on opposite sides on the Iranian dossier, which poses one of the greatest challenges to the stability of the whole region and has vast ramifications worldwide.