The MENA energy corridor: where institutional flows are actually moving

The narrative around the Middle East and North African energy transition has moved faster than the underlying flows of capital it claims to describe. Read the headline coverage and one would conclude that the region is in the midst of an organised pivot toward renewables, that hydrocarbons are being managed down on a defined timetable, and that the institutional flows from the major sovereign wealth pools are being redirected at scale into the new infrastructure. The reality, from inside the deal pipeline, is more textured and considerably more interesting.

Two parallel tracks

The flows that I see crossing my desk fall into two reasonably distinct categories. The first is the conventional hydrocarbon trade — crude, refined products, gas — which continues at scale and which has, if anything, been reinforced by the energy-security concerns that have driven policy across Europe and parts of Asia over the last several years. The volumes are substantial, the documentation infrastructure is mature, and the deal cycle is broadly familiar to anyone who has worked in this market over a career. The narrative that this trade is being wound down has not yet caught up with the volumes that are physically moving.

The second is the renewables and transition infrastructure flow, which is genuinely growing but which is not, in my observation, displacing the conventional flow at anything like the rate the public coverage implies. The two are running in parallel, with limited operational overlap, and they are being financed by different parts of the same institutions. A sovereign-wealth office that is committing serious capital to grid-scale solar in the Gulf is, often, simultaneously committing serious capital to upstream hydrocarbon development, and the two decisions are made by people who do not necessarily talk to each other in the way the institutional org chart suggests they should.

The implication for an originator is that the two pipelines have to be tracked separately. The conventional pipeline runs on its established rhythms, with the documentation patterns and counterparty relationships that have built up over decades. The transition pipeline runs on rhythms that are still being established, with documentation patterns that are still being settled and counterparty relationships that are, in many cases, no more than a few years old. Combining them in a single framework is a category error.

Where the conventional flows are moving

The conventional flows have shifted in their geography over the last several years in ways that are well-documented but worth restating. Volumes that previously moved in defined directions have rerouted, sometimes through new intermediation structures, and the resulting trade flows have produced new counterparty patterns that are still settling.

For an originator, this has produced both opportunity and complication. The opportunity is that the established trade-finance institutions have not yet fully rebuilt the relationships that the rerouting has disrupted, and the work of bridging the new trade flows with the documentation and credit support they require has been in part the work of independent originators. The complication is that some of the new structures are being assembled by parties whose track records are thinner than the conventional trade-finance institutions would have demanded a decade ago, and the diligence work has had to expand correspondingly.

I have made it a discipline, in this environment, to do considerably more of the diligence on the counterparty in advance of taking a mandate than I would have considered necessary in earlier years. The cost of finding out, three months into an engagement, that the principal counterparty does not have the operational capacity they represented is substantial in time and in reputation. The cost of an extra two weeks of diligence at the front is small in comparison.

Where the transition flows are moving

The transition flows are, in my observation, moving at scale into a smaller number of identified projects than the public coverage suggests. The major grid-scale solar and onshore wind projects in the Gulf, the announced green-hydrogen consortia, and the various transition-related real-asset acquisitions account for the great majority of the visible commitment. The longer tail of smaller projects has attracted less capital than the announcements would imply, partly because the diligence requirements for institutional capital are difficult to meet at smaller project scales, and partly because the development pipeline has not produced the volume of investable opportunities the policy framing suggested it would.

The pricing of these flows is also worth noting. The headline projects have attracted capital on terms that, in some cases, look optimistic relative to the underlying project economics, particularly when the policy support that has been factored into the projections is examined carefully. Whether this will produce a rebalancing in the next several years is one of the open questions in the regional capital flow picture, and the answer will depend on whether the policy support that is currently underwriting the transition projects is sustained at the levels currently committed.

What the diligence looks like

The diligence work I do on a transition-related project differs from the diligence I do on a conventional hydrocarbon project in several respects. The first is that the track record of the principal sponsors is necessarily shorter, and the available comparators are correspondingly fewer. The second is that the regulatory framework supporting the project economics is in many cases newer than the framework supporting comparable conventional projects, and the durability of that framework over the project lifetime is harder to assess. The third is that the offtake structures are often more complex, with multiple counterparties and contingent pricing mechanisms that require more careful documentation than the simpler offtakes typical of conventional trade.

None of this makes the work undoable. It does mean that the time per deal is longer, the risk-pricing is necessarily more conservative, and the kinds of capital that can practically be brought to the work are more limited than the headlines suggest. The originators who are working successfully in this space have, in my observation, accepted these constraints and built their pipelines around them rather than against them.

The institutional flows over the next two to three years

Looking at the deal pipeline ahead, the picture I would offer is as follows.

The conventional flows will continue at scale. The geopolitical environment has reinforced the security premium on conventional production from the region, and the buyers who would have, in another environment, accelerated their disengagement have in many cases extended their engagement instead. The volumes will remain substantial, the documentation work will remain familiar, and the originator's role will remain essentially what it has been for a long time.

The transition flows will continue to grow, but at a rate that is slower than the policy ambition suggests and faster than the most sceptical commentary would predict. The next two to three years will see the maturation of several of the large announced projects from financial close into operational delivery, and the operational performance of those projects will set the pricing expectations for the next wave. Several of the announced projects will not close on the timelines currently committed, and the capital allocated to them will be redirected to the projects that do.

The institutional capital flowing into the region will continue to be more patient, more strategically directed, and less yield-sensitive than the comparable capital flowing into more developed-economy infrastructure. The sovereign-wealth and national development institutions of the region have a longer time horizon than most private capital, and the projects that fit that horizon will continue to attract the most serious commitment. The originators whose pipelines are aligned with that horizon will continue to produce results; the originators whose pipelines are aligned with shorter-cycle private capital will find the work more difficult than they expected.

The role of the independent originator

The institutional landscape of the region has, in some respects, become more crowded over the last decade. The major investment banks have built out their regional presences, the development institutions have professionalised their deal teams, and the family-office advisory networks have grown considerably. A new entrant looking at the regional picture might reasonably wonder whether there is still meaningful room for the independent originator working on the model that has served originators of my generation for decades.

My answer, after watching the field for some time, is that the room remains and in some respects has expanded. The institutional bodies have become better at the work that suits institutions — the well-defined transactions with established counterparties, the engagements that fit cleanly into the published mandates of the institutional teams, the deals that can be processed through the standard documentation flows. The work that does not fit cleanly into these categories — the engagements that require flexibility on documentation, the transactions that cross the boundary between the conventional and transition tracks, the introductions that depend on long relationships rather than on institutional credentials — has, if anything, become harder for institutions to handle as their internal compliance frameworks have hardened.

The independent originator who has the relationships, the discipline on documentation, and the patience to work on the timelines the region actually runs on continues to find substantive work. The model is not for everyone, and it is not for the cycle of rapid deal-cycle-and-fee accumulation that characterises some parts of the institutional advisory market. It is, however, durable, and the people working on it are producing engagements that close on terms that hold.

A closing observation

The MENA energy corridor is, taken as a whole, more interesting than the headlines suggest precisely because the parallel tracks within it are running on different rhythms and producing different kinds of opportunity. The originator who insists on treating it as a single market gets the rhythm wrong on at least one of the tracks. The originator who treats it as two markets running in parallel can position usefully on each. After three decades of working in and around the region, that is the framing I find most reliably produces work I am willing to take to my counterparties.