How artificial intelligence can revolutionize the Middle East energy sector

Global electric demand is expected to double by 2050, which experts like Dr Scott Nowson, AI lead at PwC Middle East, believe will require AI to help expand energy supply challenges. (Shutterstock)
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Updated 24 February 2020

How artificial intelligence can revolutionize the Middle East energy sector

  • Artificial intelligence will play a key role in the utilization of energy resources, says a new report
  • AI could potentially create value of up to $5.8 trillion annually in 19 different energy industries

ABU DHABI: Artificial intelligence (AI) will play a key role in the near future in the utilization of energy resources — including renewables such as solar and wind power — according to a report that draws on research conducted by the American management consulting firm McKinsey & Company.

The report, entitled “Artificial Intelligence: Transforming the Future of Energy and Sustainability,” highlights the potential for AI applications in the Middle East energy sector amid a flurry of investments in renewables such as solar and wind.

The study cites McKinsey’s estimates that AI technologies have the potential to create value ranging from $3.5 trillion to $5.8 trillion annually across 19 different energy industries. 

“We see AI and the full power of digital analytics coming up in all parts of the energy system, whether in oil or gas,” said Rachid Majiti, a senior partner at McKinsey & Company.

“It has been a tech-heavy industry. It is now, more than ever, cheaper to capture, process and store data, which means you can use much more complex and advanced algorithms to optimize your oil and gas operations, translating into more production output and lower costs.”

Majiti foresees AI and digital-analytics applications across the spectrum of energy sources, specifically renewables, given the intermittency of wind and solar-power generation and the consequent need for continuous grid stabilization on the basis of production output.

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$5.8 trillion

Value creation potential of AI across energy industries

He said there are significant opportunities for AI in the management of renewable energy generation as users will need to understand, monitor and adjust output patterns.

“If you cannot deal with the intermittency, you cannot count on it, which defies its purpose,” Majiti said.

“As consumers start playing a role as producers of electricity at home in the future, AI can help in managing demand and supply between the network and the source.”

Globally, electricity demand is forecast to double by 2050. The hope is that renewable energy will account for more than 50 percent of the power supply in the post-2035 period.

In the Middle East, energy demand is expected to grow by 10 to 15 percent by 2035 — and by 20 percent by 2050.

The energy scenarios are partly grounded on the alternative energy ambitions of Abu Dhabi and Saudi Arabia.

“The region has great potential,” Majiti told Arab News. “It has one of the best solar irradiance globally, and this high solar intensity allows to produce solar power at very competitive costs.

“Given the ambitious plans and competitiveness of its renewable energy, the region has an opportunity to continue maintaining its global energy leadership by combining its oil and gas leadership with its (expanding) renewables (portfolio).”

This will also allow regional governments to maintain the cost of energy low for consumers — both residential and industry — thus supporting an energy-intensive industry in the future.

Incidentally, several countries in the Arab region are introducing smart meters, which are designed to help utilities monitor power demand more closely — and both utilities and consumers to better understand consumption patterns.

This is an area in which Saudi Arabia is a pace setter: It recently awarded a $30 million contract for supplying and installing 120,000 smart meters in the Northern and West Northern regions of the Kingdom.

Once implemented, the scheme will effectively reduce operational costs and water waste and boost the accuracy of water use data, establishing in the process the infrastructure for further AI-based innovations.

Looking ahead, “Transforming the Future of Energy and Sustainability” underscores Saudi Arabia’s efforts to meet its goal of becoming the largest smart-grid developer in the Middle East and North Africa region.

The Kingdom has launched the process of establishing an advanced billing infrastructure comprised of 8.3 million smart meters, expected to be installed over the next seven years.

“The overall Saudi smart grid market is predicted to reach a value of $3.6 billion before 2030,” the study said.

Referring to the $500 billion Neom project, the new report says Saudi Arabia’s objective is to power the mega-city entirely through AI-based solutions using 100 percent renewable energy.

Such a plan will enhance AI’s influence on how the Arab region finds solutions to its urban energy challenges.

Dr. Scott Nowson, AI lead at PwC Middle East, describes AI’s potential for disrupting the Middle East’s renewable energy sector as enormous.

Take demand prediction, which is a significant consideration in any energy market. “With a dependency on ever-changing environmental factors — like weather — being able to accurately model supply from renewable sources is very important,” Nowson said.

“Another application of AI would be machine learning to determine the best locations for new solar-panel placements.”

Nowson says the transition to a sustainable energy model is particularly important for the Gulf Cooperation Council as the region represents some of the largest producers of oil per capita in the world.

“It’s in the global interest that we explore alternatives,” he told Arab News. “But our latest CEO survey tells us we still have some way to go when it comes to renewables.”

The 2020 Global PwC CEO survey, launched in Davos, found that while recognition of opportunities from climate change initiatives has more than doubled in the last decade, the region is still playing catch up when compared to global peers.

“But no place in the world is going through the change and initiatives we are witnessing here in the region,” Nowson said.

“Neom is a case in point. That is why I strongly believe in the potential of AI to support and help accelerate both production and consumption of renewable energy and enable the region to become a world leader on that front.”

In the near future, Nowson anticipates increasing investments in AI application in renewable energy, not just for deployment but also in research and development.

“This could be through material science for more efficient solar cells, exploration of biofuels, or using complex simulations to understand how to run our cities in the most environmentally efficient manner,” he said.

A second report by McKinsey, “Global Annual Energy Perspective,” which offers a detailed outlook across 146 countries, provides more proof that energy systems around the world are going through rapid transitions.

The study anticipates a significant rise in energy demand in the Middle East due to population increase, economic expansion and industrial development.

“The region also has one of the highest energy intensities, both on a per capita basis as well as a per unit of GDP basis,” Majiti said.

“This results in a higher potential for savings from energy efficiency from households in the Middle East.”

To meet the projected higher energy demand, significant capital investments have been made by Middle East governments and the private sector.

More attention is now being given to energy efficiency as governments take action through efficiency programs, prompting consumers to use different appliances.

“Consumers are becoming more aware of energy efficiency to help reduce their bills,” Majiti said. “The good news is that energy demand will still grow, and energy is a key ingredient of economic growth.”

Nevertheless, “Global Annual Energy Perspective” estimates lower future growth rates for energy in the Middle East, compared with historical data. This suggests that conservation efforts are leading to changes in energy-use behavior that are resulting in a positive impact on energy demand.

“On the supply side, the biggest evolution we are seeing is the increasing role of renewables in the energy mix in the Middle East,” Majiti said.

“Globally, renewables have already started to accelerate, contributing to a significant share of the energy mix.”


INTERVIEW: ‘Now is the wrong time to be selling,’ says JP Morgan Middle East MD Steven Rees

Updated 29 March 2020

INTERVIEW: ‘Now is the wrong time to be selling,’ says JP Morgan Middle East MD Steven Rees

  • Rees: Right now, the economy is in an unprecedented state. In a literal sense, economic time has stopped.

Global financial markets have gyrated widely over the past two weeks, with the most savage drops in stock market history turning into one of the best rallies ever recorded.

In these mercurial circumstances, Steven Rees has some simple advice to investors: “Now is the wrong time to be selling,” he told Arab News.

Rees speaks with some authority. He spent many years as head of global equity strategy for JP Morgan, the most profitable bank in the US.

His view is also especially relevant for Saudi Arabia and the Middle East. Rees runs JP Morgan’s Middle East team from bases in London and Geneva, and the bank has a long relationship with the Kingdom, going back to the 1930s when it helped fund the embryonic oil industry. 

“Now more than ever we’re committed to working with the country and with businesses there,” Rees said.

But Saudi Arabia, and the rest of the world, is living through extraordinary times. The global economy has been thrown into reverse as the spread of the coronavirus disease (COVID-19) effectively closes off huge chunks of economic activity, and governments around the world have had to step in with unprecedented aid packages to mitigate the effects of what is now an inescapable recession.

Rees paints a stark picture of the economic state of the world. “Right now, the economy is in an unprecedented state. In a literal sense, economic time has stopped — due to government-imposed social distancing — but in a capitalist economy, financial time never stops — bills still need to be paid and markets to keep trading,” he said.

“Consumption is just grinding to a halt. We’ve never seen anything like this. The impact on the second quarter of the year is going to be far greater than anything we’ve ever seen,” Rees added.

In JP Morgan’s American homeland, which is adding virus cases at an alarming rate, the economic effect will be devastating. The bank is forecasting a 14 percent contraction in GDP in the second quarter. In Europe — where some experts say virus cases are approaching a peak — the hit will be a 22 percent fall in the economy.

The bank does not quantify the effect on Middle East economies, but Rees said the region had “done a relatively good job” in reacting to the crisis by shutting down big parts of their economies and getting citizens and expatriate workers to adjust to the “new normality.”

He warned, however: “No country will be spared by the downturn.”

Against this depressing backdrop, he sees some hope from the ability of governments to use radical intervention to mitigate the economic effects and prevent recession turning into a prolonged depression. One aim of policymakers is to help get people over the extreme standstill that will take place in the second quarter.

“The swift monetary and fiscal policy response should help bridge this gap, facilitate smooth transacting in the financial markets, and ensure that corporate and household costs are still covered while economic time is frozen,” he said.

The US Congress last week approved a $2 trillion economic aid package, on top of hundreds of billions of dollars of monetary stimulus injected into the financial system by the Federal Reserve. “The Fed has been acting decisively for the last several weeks. Now, Congress has done its part,” Rees said.

While American workers are to get a sizable lump sum to help them through, as well as extended and enhanced unemployment insurance, small businesses — “the epicenter of the crisis” in America, Rees said — will get some $350 billion in loans to help meet essential overheads. 

“Overall, the firepower from the Fed to help stabilize financial markets and preserve liquidity, combined with the fiscal ‘bazooka’ in the $2 trillion legislation are powerful forces that will help the economy avoid the worst-case scenarios some have feared. Moreover, these measures should help the economy to be in a position to recover when things begin to normalize,” he added.

The reaction of financial markets in the weeks ahead will be crucial. “For investors, the $2 trillion stimulus package should be supportive for US equities and other risk assets, as it helps fill the negative income gap created by social distancing. In other words, the bill reduces the risks of a ‘worst-case scenario’ for markets.”

He added: “While the markets will want to see confirmation that containment measures are causing infection rates to crest before waving the ‘all clear’ flag, reduced tail risk is clearly helping markets see light at the end of the tunnel.”

There might even be buying opportunities in the current situation, but he warned investors to be cautious and selective in their choices. “There are some high quality assets that are undervalued. Some businesses will not only survive the downturn, but will come out of it stronger. Everything we liked before this happened, we still like, and investors have a chance to buy things at a discount,” Rees said.

He singled out technology, health care and high dividend payers like utilities as offering appreciable investment upside. Transport, aviation, retail, energy and some industrials, on the other hand, probably do not have long-term value.

“Stay calm and have a shopping list. This is not a market where you want to take on extreme risk. There is a lot of talk about market capitulation and some panic out there. But our recommendation is not to wait until everything is perfect and we have complete clarity,” he said.

With a wave of oil about to hit global markets in the next few weeks as the restraints of the production pact between Saudi Arabia and Russia fall away, the energy outlook is depressing, he said. “The timing of the production surge has been made much worse by what’s happened with the global economy. It’s a worse case scenario for the price of oil, and it is tough to see how it will pan out.

“There are countries with low cost structures or who can cut costs the fastest, but the ultimate winner will be the consumer. If energy prices are low it can boost the economic recovery we see in the second half of the year,” Rees said.

He expects a “broad-based support package” for US energy once policymakers stabilize the economic situation, and some American “interaction” with global energy markets.

JP Morgan has been involved at the heart of the Vision 2030 strategy in Saudi Arabia, intended to diversify the Kingdom’s economy away from oil dependency and boost the private sector, still heavily reliant on oil-driven government revenues for growth. Rees said the current global economic and financial crisis might have some effect on the implementation of some aspects of that strategy.

“Vision 2030 is still the right plan, but this temporary downturn will probably delay some aspects of it. The Kingdom will probably have to reduce some expenditure. They (Saudi policymakers) will have to juggle, investing for the long-term transformation but also trying to stabilize the economy and protect their citizens.

“The big mega-projects are still on track but the transformation may be delayed somewhat in terms of the diversification of the economy. But we see this as a temporary slowdown, rather than a long-term disruption of the potential of Saudi Arabia and the rest of the world,” Rees said.

The next few months will be critical, he believes. “This is a largely consumer-driven shutdown, so the question is when people can travel again, when can they leave their home and start spending again. The question is whether that happens in May, June, or later in the year.”

Whatever happens, the relationship between the Kingdom and JP Morgan will continue. “We have an 85-year relationship with Saudi Arabia and nothing has changed in our view of the long-term ‘invesaibility’ of the Kingdom. You have to take a longer term view than you took three months ago, but we’re still convinced of the long-term attractions of Saudi Arabia. 

“Our view of the opportunities there has not changed. In times of stress, Saudi Arabia can continue to look to the strengths of JP Morgan. We’ve been through a lot together,” Rees said.