Executive Summary
Investments in renewable energy rose faster than investment in fossil fuels in 2022 for the first time ever, the International Energy Agency stated in a recent report. Much of the momentum for this shift was driven by the volatility in the oil and gas markets following Russia’s invasion of Ukraine in February amid fears of an energy shock. So where do the Gulf Arab oil and gas exporters stand in this new energy paradigm, and how are they managing their own energy transition? As the United Arab Emirates prepares to host the United Nations Conference of the Parties climate summit, COP28, in November, the role of hydrocarbons in the future energy mix is likely to be one of the more contentious issues – one that will determine the success or failure of the summit.
COP28 will provide an opportunity for the Gulf Cooperation Council states that have set net-zero emission targets to demonstrate that they are taking seriously the threat of climate change and implementing measures to decarbonize and make a meaningful contribution to the global net-zero effort. A number of mega solar and wind projects are in the implementation stages across the GCC at the same time as a budding green hydrogen industry is taking hold, but the process of producing green hydrogen will require a massive scale-up of renewables capacity. Energy efficiency measures need to be implemented more stringently to reduce the region’s high per capita consumption of fossil fuels and diversify energy sources for power generation to curb greenhouse gas emissions.
Although fossil fuels make up around 80% of the global energy mix, the rapid scale-up of investment in renewables and electrification might advance the peak oil demand timeline. The IEA now expects demand for fossil fuels to peak by the end of the 2020s, or earlier, while demand for gasoline will reach a plateau even sooner as sales of electric vehicles multiply. Natural gas has a longer shelf life in the decarbonization scenario, but methane emissions need to be tackled if the cleaner of the fossil fuel family is to serve as a transition fuel.
If the Arab oil and gas producers are to survive in a carbon-constrained energy world, they will have to decarbonize their energy and industrial operations by trapping the carbon dioxide emitted across the value chain as they expand their production capacity to meet future demand and counter natural declines from existing reservoirs. Setting a price on carbon would allow for carbon capture, utilization, and storage to be deployed more aggressively across the Gulf states, which is not currently the case. Oil and gas will continue to have a space in a much smaller market leading up to 2050, assuming the carbon content can be managed. The Gulf Arab producers are well placed to deliver low cost, low carbon intensive oil as higher cost production and carbon intensive oil is left in the ground.
Dependence on oil and gas exports renders the economies of the Gulf Arab states vulnerable to price shocks, which hit hard during the 2020 coronavirus pandemic when demand and prices crashed. This reality underscores the urgent need for the Gulf states to diversify their economies at a much faster pace away from heavy reliance on hydrocarbons. A new economic template is needed to ensure societal well-being and to preserve the environment for future generations in a region that is highly exposed to climate change. The loss of a significant revenue stream for the oil exporting countries carries socioeconomic ramifications and needs careful management.
As one of the world’s biggest oil producers and a leader in renewable energy technologies, the UAE will need to prove that it can provide a neutral space for constructive talks to push the climate agenda toward a conclusion that is acceptable to all parties. It will not be an easy task, but it is one that can no longer be relegated to future summits. As host of what may prove to be a make-or-break summit for climate action, the UAE will need to find common ground to make COP28 a success because time and the Middle East’s remaining carbon budget are running out.
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About Petro Diplomacy
This paper is the scene setter for the 2023 Petro Diplomacy conference. Now in its ninth year, AGSIW’s Petro Diplomacy conference is a signature annual event that brings together stakeholders in the energy sector of the Gulf Arab states, global supply competitors in North America, analysts, and policymakers to discuss how changes in technology, fiscal priorities, and opportunities for growth continue to alter the relationship between politics and energy for both the region and the world.
