A greener Gulf – Petroleum Economist

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A greener Gulf

Blessed with sunshine and wind as abundant as its oil and gas, the region is starting to plot a cleaner post-oil future

Energy leaders in the Middle East were listening when Shell warned in 1991 that climate change was happening faster than at any time since the end of the ice age. But the volume was not turned up high enough. A little over a decade later, rising oil prices and a booming industry meant that doors in the global corridors of power were largely closed to environmentalists’ warnings. The Gulf’s carbon footprint, exacerbated by generous fuel and energy subsidies, soared.

Things are changing—right at the heart of the oil world. Saudi Arabia and the UAE, both core Opec members, have earmarked $50bn and $163bn for spending on greener energy by 2023 and 2050, respectively. The eco-friendly tone of Gulf governments’ new national visions means state-owned entities—Saudi Aramco, Abu Dhabi National Oil Company (Adnoc), Emirates National Oil Company (Enoc), Qatar Petroleum and Kuwait Petroleum Corporation (KPC), to name some—must do as their masters wish. A greening of the Gulf is underway.

What prompted the shift? For one thing, the fragmented politics and unattractive costs that used to snuff out oil companies’ appetites for renewables have eased. Globally, years of momentum are now built into efforts to fight against climate change—Gulf countries may have joined the movement late, but joined they have. For another, it saves money. The greening goes hand in hand with reducing subsidies too, another feature of the region’s changing energy economics—and no less part of the effort to free up energy wasted at home so it can be sold more lucratively abroad.

Middle East oil producers—especially state-owned entities with socio-economic checklists to meet—have shown unprecedented support for the Paris Agreement since its inception in December 2015. And there is no sign their position will alter much, despite worries that the US may now falter on its commitment to the historic climate deal, which aims to keep global temperature rises this century well below 2 degrees Celsius. The world’s most powerful politician might not be convinced by climate science but big oil companies are. Middle East energy leaders have an opportunity to build a bigger presence—with a bigger voice—in the emerging green economy.

$50bn – Amount Saudi Arabia plans to spend on renewables by 2023

Meeting local needs is also paramount. And the need is great. The Middle East Solar Industry Association expects the region’s total electricity demand to exceed 1,000 terawatt-hours this year alone. Gulf power capacity must rise about 8%, or 69 gigawatts, as soon as 2020, involving $85bn of investment, according to Apicorp, a bank. Longer term, population and economic growth will demand even more electricity. Cairo, for example, will add 0.5m people to its population by end-2017, Qatar’s 2.5m population is expected to rise eight-fold by 2050; and Dubai’s to double to 5m by 2030.

Luckily for the Gulf, the cost of installing and using renewable technologies in the Middle East has plummeted, as it has elsewhere. Commercially available solar-panel efficiency worldwide jumped from 15% to 22% in the past five years, after two decades of near stagnation, according to the World Economic Forum (WEF), while capacity factors for wind turbines nearly doubled to 50% in the past decade. The UAE has spearheaded affordable solar: in September, Abu Dhabi set a world-record low price for large-scale solar power-¢2.42 per kWh.

The opportunities in renewables contrast with a growing sense of gloom about hydrocarbons in the Gulf. Oil prices remain low and global supplies are ample. Talk of “peak demand”—accurate or not—is troubling executives across the region. Notions of an era after oil infused the Saudi Vision 2030 and crown prince Mohammed bin Salman’s desire to break the kingdom’s “addiction to oil”.

In that context, renewables could act as a life raft for the Middle East—the Gulf especially—yielding opportunities in a fast-growing segment of the energy economy and, if it helps meets local needs, free more crude oil for export. Mohammed bin Zayed, Abu Dhabi’s crown prince, asked in 2015 if his country would be sad when it exported “the last barrel of oil”. He answered his own question: “If we are investing in the right sectors”—he was referring to renewable energy—”I can tell you we will celebrate at that moment.”

Rethinking extremes

For green investors, the Middle East’s extreme climate offers largely untapped riches: 300 days of sunshine and desert winds are the ideal playground for new and cost-efficient solar technologies. It also offers a constant reminder of the climate-change threat. The temperature of 54°C recorded in Kuwait last year marked the highest level ever recorded in the eastern hemisphere and, considering questionable data gathering methods in the early 1900s, possibly the highest ever recorded on earth. Little surprise then that the Mena Climate Action Plan will nearly double the portion of the World Bank’s financing dedicated to climate action up to 2020, to around $1.5bn per year.

With an economic tailwind behind them, renewables can take advantage of this political will. Cost is key—and even cheap coal is being overtaken. The average global levelised cost of electricity (LCOE) for coal has hovered around $100 per megawatt-hour for over a decade, but the cost of utility-scale solar photovoltaic in Mena—$600/MWh a decade ago—is now just as cheap. The LCOE for wind is even lower, at just $50/MWh, though PV might soon catch up there too: the International Renewable Energy Agency (Irena) expects solar’s LCOE to fall by 59% over the next decade.

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Oil-fired generation, often the mainstay for baseload power in the Gulf, is no solution, despite the fall in price. Increasingly strict environmental policy and competition in the export market mean burning crude oil or fuel oil domestically is a costly waste. Saudi Arabia, for example, burns up to 1m b/d of Aramco’s oil output to generate electricity for its 30m residents, at a cost of around $16bn a year based on recent prices.

Renewable oil recovery

In fact, renewables and oil enjoy an increasingly symbiotic relationship. For one thing, petrodollars are funding the investment in green energy. For another, renewables are also increasingly used to benefit oil in another way, through enhanced oil recovery (EOR).

Oman’s Miraah solar-thermal plant is the best example. Using 36 glasshouses, it will generate 6,000 tonnes of steam per day to support state-owned and Shell-led Petroleum Development Oman’s existing thermal EOR technology at the Amal field. The $0.6bn contract to create Miraah results in an 80% saving of natural gas at the field and should come online this year. To the west, al-Reyadah, a joint venture between Adnoc and Masdar, officially inaugurated the Mussafah facility last November. The first commercial-scale carbon capture, utilisation and storage facility in the Middle East, al-Reyadah will capture up to 0.8m tonnes a year of carbon emitted from Emirates Steel and pipe it to Abu Dhabi Company for Onshore Petroleum Operations for use in EOR at its Bab and Rumaitha fields.

But such projects—and the existing green energy plants that are already on line—pale in significance against the broader goals of the region’s governments. The UAE launched its Energy Plan 2050 in January, with the aim of increasing clean-energy use by 50% and improving energy efficiency by 40%. According to the plan, by 2050, the UAE’s energy mix will comprise 44% from renewable energy, 38% from gas, 12% from so-called “clean fossil” fuels (such as carbon capture and storage and new generation coal-fired power plants) and 6% from nuclear energy. More than 90% of the country’s energy needs are now met by natural gas—a rising import bill that Abu Dhabi and Dubai are keen to minimise. Better cost management is paying off: Dubai-based Enoc has saved $7m since the launch of the Group’s Energy and Resource Management programme in 2012.

The UAE’s financial success in solar power is defying older notions that PV is a money sink. The Mohammed bin Rashid al-Maktoum Solar Park, under construction, will be the world’s largest such site. Capacity for the $13.6bn project will reach 1GW by 2020 and 5GW by 2030—enough, say developers, to power 0.8m homes. On a smaller scale, the installation of rooftop solar in the UAE could reach 70MW this year alone—tenfold growth in just one year.

Not to be outdone, Saudi Arabia is seeking bidders for the first stage of its $50bn renewables plan to develop almost 10GW of renewable energy by 2023, with the first tender for 400MW of wind capacity and 300MW of solar. Qualified bidders were scheduled to present their offers for the projects from 17 April—the first major step towards the kingdom’s goal for renewables to supply 30% of its power by 2030. Saudi Aramco and US firm GE delivered the first wind turbine to the kingdom last December. In keeping with Saudi’s ambitious style, the energy ministry also aims to make its Renewable Energy Project Development Office the world’s most competitive government-run programme.

$163bn – Amount the UAE plans to spend on renewables by 2030

On the other side of the Gulf, Iran has big plans too, calling for the addition of 5GW of renewable energy in the next five years and another 2.5GW by 2030. It is an ambitious strategy considering Tehran needs foreign investment—and even basic financing is tricky while some sanctions remain in place. Yet Tehran’s appetite for change makes the unlikely possible. German company Athos Solar became the first investor to install and launch two high-performance greenfield solar-PV plants in Iran in early February. Athos provided 100% equity for the $21m project in the province of Hamadan near Tehran, with a combined peak output of 14MW. The speed with which the project was executed will be envied in established markets: Athos completed both greenfield plants just nine months after first contact with the Iranian developer. Iran’s restricted financing options will narrow the field of potential investors, but companies with deep enough pockets will be welcomed.

Operations at Kuwait’s first-ever solar power plant began last October at the Umm Gudair oilfield, where the $99m project will generate 10MW by an unspecified completion date. Half the power has been earmarked for the public electricity network as a step towards generating 15% of the country’s energy needs via renewable sources by 2030. The other half has been allocated to supply state-owned Kuwait Oil Company’s oilfield. Meanwhile, Morocco is aiming to have 600MW in operation by 2019, Jordan has 540MW of solar-PV projects under construction and Egypt plans to have 2.7GW of solar-PV capacity by 2020. Appetite for nuclear energy is also slowly emerging in the Middle East. As with solar, the UAE is leading the charge. Construction of the $24.4bn Barakah 1 plant is scheduled for completion in 2020, when it should meet up to 25% of the country’s electricity demand and save up to 12m tonnes in emissions per year. But Saudi Arabia is being the most ambitious. The Kingdom plans to construct 16 nuclear power reactors over the next 25 years at a cost of more than $80bn and projects 17 GW of nuclear capacity by 2040. Egypt expects to finalise a contract to build a nuclear power plant with Russia’s Rosatom by the end of this year, while the company’s feasibility study for a $10bn contract for two 1000 MWe VVER units at Az-Zarqa in central Jordan is due by July, with the country’s first nuclear power plant potentially operational by 2025.

The Middle East’s enthusiasm for green energy is laudable, but it is a little late compared to global efforts. The European Union’s Emissions Trading Scheme (ETS) began in 2005, albeit initially on a frail note, while China and the US, especially California, have been slowly upgrading their green education for over a decade. The GCC states are holding their own in the Middle East as progressive thinkers, which is largely thanks to their pots of petrodollars from years of triple-digit oil prices pre-2014 now being invested in green research and development.

Although worldwide spending on clean energy last year fell, from $348.5bn in 2015 to $287.5bn, the drop was largely a reflection of investors getting more value for their buck. Technological advancements and efficiency led to a 19% increase in the amount of wind and solar energy connected to power grids around the world last year. Hold the applause, though. Irena estimated in 2015 that global annual investments in renewable energy would need to reach over $0.5 trillion in the period up to 2020, and then scale up to an annual average of $0.900 trillion between 2021 and 2030 to achieve green targets.

Saudi Aramco was the only Middle Eastern oil major who in late 2016 joined nine of the world’s other biggest oil companies to invest $1bn per year to bolster energy efficiency, in addition to individual clean-energy projects. Given Aramco’s supremacy in oil, sceptics said it was not more than a token gesture. Still, $1bn is some token.

Green investments require a new—and generous—way of thinking. The concepts and lingo borne in Europe are increasingly peppering business conversations in the Middle East, but it has been a relatively slow journey. In 2007, the European Investment Bank (EIB) issued the world’s first green bond, labelled a Climate Awareness Bond (CAB), which was followed by the World Bank’s first green bond in 2008. Green bonds, where the proceeds are applied to finance or re-finance new or existing green projects, evolved from being the remit of multilateral development banks to be an accessible mechanism for the public and private sector.

The global rate of green-bond issuances reached $60bn in the first nine months of 2016-150% of the total issuances in 2015, says the World Bank. While such bonds still account for just a slice of the $100 trillion global bond market, the increasingly savvy state-owned Middle Eastern oil companies are keen. Such methods of raising money enhance companies’ reputations as sustainable and environmentally friendly brands-big ticks for Gulf countries’ low carbon National Visions.

Not all green financial mechanisms are welcome. Singapore’s launch of a carbon tax for refineries, power stations and other big emitters from 2019 has raised eyebrows in the Middle East. The tax could increase refiners’ costs by up to $7 a barrel. This comes around the same time as refineries are trying to navigate the implications of the International Maritime Organization (IMO)’s decision to clean up shipping more quickly than previously planned. The IMO’s sulphur cap on marine fuels used by ships must now drop from 3.5% to 0.5% by January 2020, instead of 2025.

But Singapore’s move raises two crucial points for the Middle East and its booming refining sector. First, it highlights the value of funnelling cash into renewable-energy projects to avoid the inevitable budget-crunching impact of environmental policies. Second, it puts pressure on Middle Eastern oil and industry leaders to adapt before change is forced upon them—by more aggressive climate fighters in key markets like Asia. They must quickly identify solutions, for the options currently on the table hold little appeal; ETS, voluntary off-setting systems and carbon taxes, for example. Every year that governments and oil companies dither is another year that other countries and regions make headway on emerging and established ETS or targeted carbon. The clock is ticking-loudly.

Subsidies—going, going, gone?

Middle Eastern governments’ initial attempts at creating price stability during the colonial era and after independence quickly evolved into gross overconsumption. MENA is home to 5.5% of the world’s population and 3.3% of its GDP, yet it accounted for a staggering 48% of its energy subsidies, according to a World Bank report. Adversity has helped focus minds. Iran’s financial woes spurred by Western-imposed sanctions prompted Tehran to introduce the Targeted Subsidy Reform Act in 2010, which provided a rough roadmap for subsidy cuts to spread across the region. Falling oil prices from mid-2014 helped the oil-rich Gulf as it started to change tack from January 2015. The reforms could not have come soon enough. For example, the cost of the UAE’s petroleum subsidies totalled $7bn a year and were only part of wider energy subsidies that totalled $29bn a year—6.6% of GDP—before the country stopped fuel subsidies on 1 August 2015. Governments and state-owned oil companies’ bid to cushion the thinning wad of petrodollars means ongoing subsidy cuts will be followed by a sales tax in several Gulf states from 2018, with talk of income tax for foreign residents.

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