The United Arab Emirates, Saudi Arabia, and Oman are making impressive strides in developing their renewable and clean energy potential, but they will need to decarbonize their oil and gas operations faster to adapt to the energy transition. This was one of the takeaways at AGSIW’s Petro Diplomacy 2024 conference from a conversation with Roger Diwan, vice president of research and analysis, upstream, at S&P Global Commodity Insights.

This year’s event, “The Countdown to Net Zero,” addressed the opportunities as well as challenges faced by the Arab petrostates in managing the energy transition in line with resolutions adopted at the United Nations Climate Change Conference, COP28, in Dubai in 2023. The climate summit ended with a pledge by nearly 200 parties, including all six Gulf Cooperation Council states, to transition away from fossil fuels and triple renewable energy capacity by 2030 to keep global warming from exceeding 1.5 degrees Celsius.

Decarbonization Is Key

According to Diwan, COP28 reset the discussion around the transition, “and we now understand that this transition is going to move in different directions at very different speeds. Some countries are going to be able to accelerate it. Some are behind.” He added: “Financing will be available in some places and not others. It’s multidimensional, and it means that to grasp it in one nice, tight bundle is very difficult.”

Of the three fossil fuels, coal will have to be phased out, but oil and gas are needed to ensure energy security through the transition, he argued. But the industry needs to invest more in decarbonization. “They need to decarbonize fast to continue to have a license to operate into the transition,” Diwan explained.

On day one of the two-week Dubai climate summit, major oil and gas companies signed the Global Methane Pledge and agreed to move rapidly to eliminate emissions of methane, a powerful greenhouse gas associated with the fossil fuel industry.

“Basically, the large oil and gas companies, national and international oil companies, have pledged to remove methane at a very fast speed, before the end of the decade, to get most of the methane they emit out of the system. It’s a big deal. It’s a gas that is really damaging, and we have the technology and the ability to do it,” Diwan said. “In a way, COP28 was a success there, and that’s one element that the industry is trying to move on very fast. It’s key for oil, but it’s also key for liquefied natural gas.”

He explained that with new regulations being introduced on the carbon content of exports, methane and carbon emissions will have to be controlled if the United States and Gulf Arab countries want to continue to export LNG to Europe.

“All the Gulf countries are looking at really reducing the methane and carbon content of their LNG to continue to have that license to export,” he continued. So, oil and gas will continue to have a place in the transition, but the industry needs to do its part. However, the difficulty is the carbon capture side, as the technology has yet to be developed at scale and remains costly. “The technology is not proven completely, so that’s a problem for the industry. The decarbonization is slow, so the decarbonizing molecule is moving at a slow pace, and that’s a problem. So, the methane side is what can go faster, but it’s not going to be enough,” Diwan argued.

Another decarbonization technology is direct air capture, but it is in the early days of development and would take more than a decade to mature. “Direct air capture is really at the beginning, and that’s going to require at least 10-15 more years to get to a cost that is palatable,” he added.

The Question of Future Oil Demand

The key challenge for oil producing countries is the widening gap in demand forecasts as the transition moves forward, particularly for transportation fuels. The International Energy Agency projects that demand for all fossil fuels will reach a peak before the end of the decade and then decline. However, OPEC expects continued strong demand for oil beyond 2045. The gap between the medium-term forecasts of the two organizations has widened to 8 million barrels per day, a number Diwan says is unprecedented.

“There is a healthy debate about where demand is moving. Just to give you the three positions, OPEC believes, basically, that oil demand will continue to grow, that it doesn’t have a peak and will continue to grow slowly but surely even in the 2040s,” Diwan said.

The world is consuming 104 mb/d of oil, but the IEA projects demand to remain flat or slightly below that level by the end of the decade. On the other hand, OPEC estimates demand will rise to 112 mb/d by 2030. Two years ago, the two forecasts were similar, Diwan noted.

S&P Global expects demand to rise to 108 mb/d by 2030. “We believe that demand will continue to grow this decade for liquids, will peak around 2031, plateau for some time, and then start to decline,” he explained. The reason is that demand for the main products, such as gasoline, diesel, and jet fuel, is “slowing down structurally” because of the emergence of biofuels and e-fuels for use in transportation as well as growth in electric vehicles, especially in China.

The role of natural gas in the transition is more secure because it will be needed as backup to intermittent renewable energy, such as wind and solar power. “You need it for two very important reasons. You need it to balance the power systems. When you have a lot of intermittent power that you’re adding to the grid, and we’re adding it at an incredibly fast pace, you’re going to need something to help you firm the grid, and gas will play that role. So, we might have more capacity but maybe less demand,” Diwan said. S&P Global does not forecast gas peaking until the mid-2030s, followed by a “long, long plateau.”

The other need for gas is to replace coal in Asia, home to the two largest coal consumers – China and India. “If you want to decarbonize Asia and remove coal, gas is your only option really at the scale that is needed. So, the notion that you would be able to bypass gas in Asia and get to something else is just not realistic.” Diwan said some 4 billion to 5 billion more people are going to need energy, and it will take time to switch to nonhydrocarbon sources.

COP28 called for an accelerated effort to phase down “unabated coal power,” referencing coal-fired electricity generation without carbon capture and storage, and a phase out of “inefficient fossil fuel subsidies” along with adoption of measures to drive the transition away from fossil fuels in the energy system.

The Energy Institute’s 2024 “Statistical Review of World Energy,” released June 20, showed that oil consumption rebounded strongly in 2023, largely on the back of a recovery in Chinese demand, while coal demand rose to a new record. “Whilst China is by far the largest consumer of coal (it beat its own record set in 2022 and now accounts for 56% of the world’s total consumption), in 2023 India exceeded the combined consumption of Europe and North America for the first time ever,” according to the review. This rise in fossil fuel consumption led to a 7% increase in carbon dioxide emissions from flaring, and emissions from methane and industrial processes rose by over 5%.

Demand for natural gas was flat, while crude oil demand exceeded 100 mb/d for the first time. In all, fossil fuel consumption as a percentage of primary energy demand held at 81.5%, a 0.4% decline over 2022. At the same time, consumption of renewable energy and electricity demand grew at a much faster rate with record generation from renewables, driven by increasingly competitive wind and solar energy, the data showed.

The conclusion from these data points and indicators was that the “progression of the transition is slow, but the big picture masks diverse energy stories playing out across different geographies.”

Gulf States Push Ahead on Renewables

Although oil and gas dominate in the Middle East, the share of renewables is growing rapidly. The Energy Institute’s data shows that in 2023, renewable energy, excluding hydropower, grew by 43%.

Much of that increase has been driven by solar projects in the UAE, Saudi Arabia, and Oman, which are also investing heavily in green hydrogen. “In the Gulf, you have countries with very different endowments, both in terms of resources and capital and capabilities,” Diwan said. At the same time, they are decarbonizing their oil and gas “slowly but surely” while regional renewable energy developers, such as the UAE’s Masdar and Saudi Arabia’s ACWA Power, are going global.

Diwan listed Saudi Arabia’s Neom as one of the most exciting projects in the region. The futuristic city is designed to run exclusively on renewable energy and is the site of the world’s largest green hydrogen project under development. The Neom Green Hydrogen Company, a joint venture among ACWA Power, Air Products, and Neom, estimates it will generate up to 4 gigawatts of solar and wind energy to produce up to 600 million tons per day of carbon-free hydrogen once completed by the end of 2026.

Diwan says the project is the only one on that scale, but as many as 20 such plants will be needed to bring down costs and create a market for green hydrogen. “Saudi Arabia is doing its part on the hydrogen side in a way to prove that technology. It’s a complicated technology, and it’s probably longer term, but we can’t accuse them of not being at the forefront of it. They’re also moving fast on decarbonizing their electricity grid, moving from oil to gas and adding quite a lot of renewables, and within 10 years, I would say maybe half of their grid could be renewable,” he said.

Saudi Arabia and the UAE are leading the expansion of solar capacity in the region. The UAE leads with around 5.4 GW of installed solar capacity in Dubai and Abu Dhabi and an additional 8 GW of renewable energy planned by 2027.

Saudi Arabia’s plans are more ambitious. The kingdom currently has 2.8 GW of renewable energy and is set to add 1.1 GW in 2024 to reach 3.9 GW. Riyadh recently increased its 2030 target for renewables capacity from 59 GW to 130 GW. It plans to start awarding 20 GW of projects annually beginning in 2024. It is also investing heavily in stepping up its natural gas production and expanding its natural gas grid to displace liquid fuels in power generation and free up more oil for exportation. It has dropped plans to expand oil production capacity by 1 mb/d and is aiming for a 50-50 split between gas and renewables in electricity generation by 2030.

“In Saudi Arabia, they have sun and land, which are about the two things you need, and there are plenty of solar panels. And they’re going about it. They’re doing the same with wind. Oman is more about gas and hydrogen,” Diwan said. But oil is still the main resource for the Gulf producers. “The reality is these countries have the lowest cost, the least carbon-intense oil. They will be the last producers. If the market is 100 million or 80 million or 70 million, I think Saudi Arabia could be producing exactly the same level because they have the cheapest cost and the least polluting barrel. So, they are where they need to be,” he said.

The question is one of price and revenue generation for the Gulf states, whose oil and gas accounts for 84% of their energy mix and revenue. “I don’t see the oil market collapsing in the next 10 years. So, Saudi Arabia will produce 10 mb/d. The question is at what price. Is it at $80 or $60 or $40? That’s the question, and that’s what they need to manage. Rather than the end of oil, they will be the last producer.”