Few would today doubt the irreversibility of the global energy transition even as the Russia-Ukraine conflict has distracted attention from it. In reality, this process has been underway for decades thanks to increased energy efficiency without which, global oil consumption today would be twice its actual level, according to International Monetary Fund estimates. The political will behind efforts to counter climate change has strengthened to a point where such endeavors are now part of the mainstream political discourse.
This transition presents an obvious dilemma for firms that have traditionally generated their income from extracting and refining oil. While responses have been far from uniform, a growing number of companies have taken the proverbial bull the horns and reinvented themselves as generic energy companies. An early start by BP in 2001 to rebrand itself as “Beyond Petroleum” proved premature but more recently, the company set itself a net-zero target by 2050 and committed itself to proactive energy diversification.
Others have come to similar conclusions. Shell has labeled itself as an energy transition company, while Total, Equinor, ENI, and Repsol have repositioned themselves as energy businesses, signaling low carbon investment of close to $200bn by 2030. While the US majors have been more cautious, even they are prioritizing efficiency and technologies such as carbon capture.
The behavior of oil majors raises interesting questions for the so-called petrol states, countries whose primary natural resource is hydrocarbons. The Gulf countries all fall into this category: oil looms large as a source of gross domestic product, government income, and export revenues alike. For decades, these countries have sought to counter the dominance of oil through economic diversification, which has meant stimulating the non-oil economy.
But what about diversification within the energy cluster rather than beyond it? Progress in this regard was limited for decades by the limited range of other known natural resourcesin the Gulf, which arguably mattered less in a global economy where hydrocarbons ruled the roost. And while for instance, solar energy has attracted interest for a long time, practical progress was held back by technology costs as well as the fact the infrastructure for exporting that energy did not exist. At home, subsidized hydrocarbons for a long time decisively outshone its rivals.
All these erstwhile obstacles have crumbled. Renewable costs have declined by some 80 percent over the past decade whereas more challenging geographies and unconventional reserves have pushed up the cost of oil extraction. The once so generous subsidies are much less so today, partly to create appropriate incentives for efficiency and appropriate resource management. And while the Gulf countries are still not in a position to easily export renewable energy, even this is beginning to change. There is a renewed interest in broader Middle Eastern collaboration.
The rise of Saudi Arabian megacity NEOM will create an important cluster next door tothe Egyptian and Levantine markets. And growing interest in green hydrogen and green ammonia presents an attractive opportunity for the Gulf countries to harness their competitiveness in solar energy for the production of exportable products that are in growing demand internationally.
Today,the Gulf countries are credibly eyeing a position of global leadership in energy diversification. While the Gulf Cooperation Council will play an important role in global oil markets for decades, it now has the toolkit to establish itself as a diverse energy hub of global significance. All of this will allow the Gulf countries to reap the benefits of increased resilience and reduced volatility that a more diversified portfolio is likely to bring.
While energy diversification remains an evolving story, important new planks of it are apparent today. Firstly, the repricing of gas and increased sensitivity to environmental considerations have created renewed incentives for gas exploration at a time when gas is widely regarded as an appealing transition fuel — a compelling alternative to more polluting hydrocarbons. Saudi Arabia has recently announced substantial new gas finds and further progress looks likely across the region.
The Gulf region is dramatically ramping up its renewables capacity and the UAE recently gained acclaim for the largest increase in renewables capacity worldwide over the past decade: from 13 megawatts in 2011 to 2,540 megawatts in 2020. This is diversifying the regional energy mix and creating new opportunities for industrial development. For instance, Acwa Power and Masdar have established themselves as globally important energy companies in the region with a growing international portfolio of renewable investments. Some of the largest green hydrogen investments globally are now happening in the Gulf.
Where does all of this leave oil? The old ambition of global leadership thanks to low costs and easy access stands firm but is now coupled with technological innovation, notably in areas such as carbon capture and storage. This allows the region to focus on a reduced environmental impact and explore novel ways of extracting value out of oil through downstream and manufacturing activity.
Energy diversification is a reality in the Gulf today, something that arguably materialized much faster than other types of economic diversification. For decades the region seemed to be wedded to oil as its main natural resource. But the Gulf has emerged as an innovative leader in global energy transition with remarkable speed, a role it is well-positioned to consolidate in the years ahead.
Extracted in full from: The Gulf’s move from petrol states to energy states | Arab News