Middle East producers to defend oil, gas, while grappling with own climate pressures
Hydrocarbons-rich Middle East countries attending the UN Climate Change Conference in Egypt want to steer the narrative on energy security and transition at a time when they are boosting their oil and gas output in a race to avoid having stranded assets as the globe eyes net-zero emissions.
Gulf countries have made it clear that oil and gas will be needed for decades to come, and that the region has the least carbon-intensive barrels to fuel a global economy seeking to lower its emissions.
This tone is likely to be reflected at COP27, which begins Nov. 7, where the West’s narrative of halting hydrocarbon investments to meet net-zero goals is being overshadowed by an energy crisis not seen since the 1970s.
“Now is not the time to point out that the long-term underinvestment in oil and gas has made a difficult situation even worse,” Sultan al-Jaber, CEO of the UAE’s Abu Dhabi National Oil Co. told ADIPEC conference Oct. 31.
“If we zero out hydrocarbon investment, due to natural decline we would lose 5 million b/d of oil each year from the current supplies. This would make the shocks the world experienced this year feel like a minor tremor.”
For the UAE, OPEC’s third-biggest producer that will be hosting COP28 in 2023, the path is clear. ADNOC is planning to boost its oil production capacity from over 4 million b/d to 5 million b/d by 2030 or even before.
OPEC kingpin Saudi Arabia is also on track to ramp up its production, with state-run oil giant Aramco raising its maximum sustainable capacity to 13 million b/d by 2027 from 12 million b/d now.
“Saudi Arabia and the other OPEC+ states argue that Western policymakers have overestimated the pace of the energy transition,” said Ben Cahill, a senior fellow for the Center for Strategic and International Studies. “They see themselves as voices of realism. Of course, these views align with their long-term interests and role as energy providers.”
Qatar, meanwhile, is rapidly expanding its LNG capacity, touting gas as a cleaner burning alternative to coal.
Gulf countries are pushing forward their oil and gas agenda while at the same time pledging to lower their emissions.
The UAE was the first Gulf country to commit to net-zero emissions by 2050, and was followed by Saudi Arabia and Bahrain, which pledged to reach that target by 2060, and Oman by 2050.
The UAE is garnering international support for its clean energy agenda, and signed a pact with the US to mobilize $100 billion to finance 100 GW of clean energy projects globally by 2035.
Simon Penney, the UK’s trade minister for the Middle East and Pakistan, said the energy transition was an area ripe for investment, citing BP’s partnership with ADNOC on green hydrogen, as he is in the midst of negotiating a free-trade agreement between the UK and the Gulf Cooperation Council. At the same time, the UK has been among major oil and gas consumers pressing Gulf countries to increase flows to the market to help offset Russian sanctions, with Saudi Arabia and other OPEC nations lobbied for more crude and Qatar approached for any spare LNG cargoes.
“Gulf countries are historically hydrocarbon energy producing countries, and they are committed to a transition towards net-zero, and we work with them on that transition, in the same way we’re transitioning in the UK,” Penney told S&P Global Commodity Insights Nov. 2 on the sidelines of the Arab British Economic Summit in London.
“We see energy as a very long-term play, as opposed to the very specific short-term need” for oil and gas supplies.
Middle East risks
However, countries in the Middle East, particularly in the Gulf, will have to juggle their hydrocarbon agenda and net-zero targets with higher domestic energy demand to fuel an ever-hotter desert climate that needs more power generation, especially in energy-intensive industries such as water desalination.
“The Gulf states will be sites of increasing climate stress,” said Karen Young, a senior scholar at Columbia University’s Center on Global Energy Policy. “Oil and gas production will continue, however, and this will become a cleaner industry in terms of its own carbon emissions in production, but it will be exported to places where its use will not be.”
Although Gulf countries are boosting renewable power, they will still rely on oil and gas for power generation, a situation that robs them of barrels needed for export to fuel their petrodollar economies. These countries are seeing higher energy demand amid a ballooning population, fast-growing economies and lingering energy subsidies, exacerbating the climate change stress.
In 2016, desalination in the Middle East accounted for 5% of the region’s total energy consumption and desalinated water production is forecast to increase 14-fold by 2040, according to the International Energy Agency.
“We definitely see higher risks in the future in the region due to climate change,” said Jinsun Lim, an energy and environment policy analyst at the IEA. “Water scarcity, increasing aridity in major areas, including droughts, higher temperatures and heat waves in the region could add a stress test to the energy systems by raising electricity demand for the water supply and also for the cooling.”
However, adapting to climate change requires significant investments, with such costs likely to amount to 3.3% of GDP per year for individual Middle East and Central Asia countries over the next 10 years, the International Monetary Fund said in a report in March.
“They might seem fiscally constrained to be able to make some of these investments at the moment, but when you realize the cost of inaction is, not only on CO2, but also on their own budgets, then it would push them to making the attractive atmosphere for these kinds of investments to come in,” said Ali al-Saffar, the IEA’s Middle East and North Africa program manager.