Is energy transition in the GCC threat or collateral?
In the run-up to the Symposium on Energy Outlooks jointly held by the International Energy Agency, the International Energy Forum and the Organization of the Petroleum Exporting Countries on Feb. 15 in Riyadh, there is caution in the winds.
A few whispering questions spread the vast horizon: What does energy transition mean to the affluent Gulf states? Is it necessary in the first place? The answer to this question can be laborious and extensive, but I intend to provide a conceptual response through an economic lens.
The Gulf states have long relied on petrodollars to fuel their regional economic and social developments. The growth has, nevertheless and for the most part, been procyclical where, for instance, the average net incomes in the Middle East from oil and gas fell by 40 percent in 2015–2018 compared to their highs in 2010–2014, according to IEA.
The imperatives to reform and diversify the economic structures have accordingly waxed and waned. Still, the combination of factors is putting pressure on these governments, such as climate agenda and the social forces, potential loss of competitive capital access and industrial competitiveness due to the emerging global standards and border tax adjustments for commodities that do not adhere to certain environmental standards.
There is also long-term uncertainty over the demand for oil and gas, and let us not forget here that supply usually follows demand and not vice versa.
The Gulf states must also realize that the development of new energies could "pull the mat" beneath toward new global players. For example, some relatively small oil and gas producers today, such as Chile and Denmark, are implementing ambitious plans to produce green and low-emission fuels. This trend will ultimately redefine the global energy economy we know today. The threats are, therefore, on the horizon and, if anything, is increasing.
On the flip side, things could be much more promising. The Gulf states are well positioned to capitalize on their inherent capabilities and energy market positioning to reap greater benefits from the energy transition. In addition to reducing demand locally through energy efficiency practices and behavioral changes, the Gulf states can strengthen their global market positioning as developers and exporters of conventional and new energy-based products through the deployment of emission capture and utilization, thereby developing a circular economy and maximizing the trade of fossil-based products and commodities.
The region can also tap into the potential of renewables for power, thereby electrifying the energy systems and optimizing operational excellence.
The states can also develop green hydrogen and hydrogen-based derivatives and products, establishing a new business arm for energy.
These three vectors — electrification, emissions capture and utilization and new energies such as hydrogen — will also help producer economies establish low-emission industrial clusters or transform the existing ones.
But is this possible? The answer technically is yes, as these Gulf states have all that it takes to reap the benefits from high solar irradiation and, at some places, wind potentials, established networks of gas pipelines and processing facilities, efficient overhead lines, established industrial ports and global investment partnerships.
The mass transition i.e., if several Gulf states move in this direction collectively or separately, would also create a sizeable and attractive demand in the region for technology providers, project developers, investors and financiers. In addition, the states can use the opportunity to develop local supply chains and high-profile services sectors.
The energy transition is collateral to the established energy portfolio and offers great growth potential to these economies, provided the political will is there to drive such an agenda forward timely and seriously.