How can a quintessential threat to one of the region’s main resources become the epicentre of its economic transformation and sustainability plans? What is the pragmatic approach to a transformative shift in energy and economic systems in the UAE?
As COP28 draws nearer, hear from the most credible thought leaders for an honest and in-depth analysis into the energy trilemma challenge.
- Robin Mills, CEO, Qamar Energy. Founder and Director, Cognisium, UAE
- Vandana Hari, Founder & CEO, Vanda Insights; Columnist, Nikkei Asia; Energy Markets Expert, Singapore
- Bill Spindle, Climate and Energy Journalist, Cipher News, UAE
- Moderator: Frank Kane, Communication Consultant, Ministry of Energy, KSA; Editor at Large, Arabian Gulf Business Insight Insights (AGBI)
Frank Kane: The UAE is currently expressing its commitment to decarbonization and renewable energy, while also aiming to increase its oil capacity. This poses a seeming conflict, as oil remains the primary driver of the country’s economy. The question is whether the UAE can find a way to balance these two aims. Can the country continue to reduce its oil dependency while simultaneously increasing capacity and decarbonizing its economy?
Vandana Hari: Being pragmatic is the way forward for Asia and its consumption of oil and gas. Asia is currently the largest and fastest-growing consuming region for these resources and is expected to maintain this position. Based in Singapore, I closely monitor the sentiment in Asia, particularly since the energy crisis that started in late 2020 and continued into 2021.
Before the Ukraine war, there was a Europe gas and power crisis which affected gas, power, and coal markets in Asia too. This led to a growing awareness in Asian countries, including China, India, and Southeast Asian nations, about the need to transition to cleaner energy sources. While their targets for achieving net zero may not be as ambitious as Europe and the US, these countries have still pledged to work towards net zero emissions.
While some countries may set targets for renewable energy by 2060 or 2070, India is showing pragmatism by aiming for realistic targets. However, there is concern in Asia about the decline in investments in oil and gas. Previously, gas was considered the natural transition/bridging fuel, but there has been a significant drop in these investments.
Consumers in Asia are realizing that gas is also considered harmful alongside oil, leading them to abstain from investing in both. This poses a problem for Asian countries, including major economies like China and India, as well as traditional gas exporters. These countries had planned their energy strategies for the next couple of decades around transitioning from coal to gas. However, with the negative perception of gas, they find themselves in a difficult predicament. As a result, they have started building LNG import terminals to meet their energy needs.
The past one and a half years have shown that Asia has increased its reliance on coal because it feels it has no other choice. Asian countries are increasingly vocal about their need for oil and gas, calling for investment, supply stability, and affordable and accessible energy. Without these, they fear a setback in their transition efforts. Countries like India and China are closely watching the UAE, which stands out for its commitment to increasing crude production and having a plan in place.
The next step for the UAE is to consider how to increase their crude production in a low carbon manner. It is important for them to reassure countries in Asia and meet their energy demand while reducing their carbon footprint. The UAE has full support from the largest energy demand growth region in the world and should invest and increase production. However, they need to figure out how to achieve this while also reducing their carbon emissions.
Frank Kane: The UAE finds itself in a dilemma that is reflective of a global predicament. While there is a widespread agreement on the need to decarbonize, there is also a desire for economic growth, which has traditionally been tied to hydrocarbons. This puts the UAE in a difficult position.
Robin Mills: The UAE is making significant progress in domestic decarbonization and has credible and achievable plans in place. It is likely that the UAE can achieve net-zero emissions faster and more easily than many other countries. However, they also have a significant oil production side to their economy which caters to the demands of the outside world for oil.
The Paris Agreement operates based on each country determining their own contributions to reducing emissions, rather than placing responsibility on others. The UAE, as an oil-producing nation, exports oil and it is the responsibility of other countries to decide whether to use it or find alternative sources. President Biden and others would not be happy if the UAE decided to reduce or eliminate its oil production.
Only a few countries, with the UAE being the largest, have credible plans to significantly increase oil production. On a global scale, decline rates in production are around 8% without reinvestment in fields, but drop to about 4% with reinvestment. Despite the potential decline in overall oil demand, there is still a need for new investment and production to meet the existing consumption gap.
Frank Kane: The UAE’s stance on the matter is highlighted, with the planned increase in capacity, from three to five million barrels, though not with the intended to boost production. Rather, it is seen as a necessary precaution in case any challenges arise during the energy transition.
Bill Spindle: The UAE is taking a proactive and aggressive approach towards decarbonization. They are focusing on reducing domestic emissions and their control over Scope 1 and 2 emissions within the country. Despite pragmatism suggesting a moderate approach, the UAE is moving at a fast pace in decarbonizing not only the country but also the oil and gas sector.
When it comes to investing in oil production abroad, there is a pragmatic approach being taken. Though there is potential for growth in production globally, there seems to be a division of labor between international oil companies such as ExxonMobil and Chevron, as they are reluctant to invest in big, long-term projects.
Exxon is currently prioritizing returning money to shareholders through dividends and buybacks due to dissatisfaction with their recent performance. They might also focus on short-term initiatives. As evidence, Exxon has shown interest in acquiring Pioneer Natural Resources in recent days.
The burden of the energy transition will most likely fall on national oil companies, which makes sense as they can produce the cleanest, greenest, and cheapest oil and gas. However, all players in the industry will need to adjust to the pace of the transition, and there will be various paths for different entities to follow. Overall, pragmatism will play a crucial role in navigating this shift.
The demand for goods and services is thriving in Asia and remaining relatively stable in other regions. However, it is unclear if this trend will continue. In terms of capacity, focusing on meeting demand may be a practical move. Nonetheless, there is a sense that the market will face downward pressure in the long run, which poses risks. Gulf producers could potentially address this by ensuring they have the capability to supply the existing demand, even if the market declines.
China is increasing its renewable energy sources primarily for energy security reasons, while the US, EU, and IRA are driven by anxiety about the impact of climate change. There is potential for policy changes which may affect energy demand. Overall, these factors are influencing the shift towards renewable energy and the global response to climate change.
Frank Kane: What are your views on the outcome of COP28?
Robin Mills: The challenge of coordinating the positions of over 160 countries in a global event like climate negotiations is difficult. There are major countries with differing opinions that cannot be forced to comply. The success of such events is largely dependent on diplomacy, but a significant portion, around 90-95%, is beyond the control of organizers. The Copenhagen climate conference, for instance, was considered a failure despite Denmark’s reputation as green due to its inability to achieve desired outcomes and ensuing blame game.
The disagreement between China and the US resulted in failures and differences in government approaches, which ultimately led to a fiasco. It wasn’t the fault of the Danes, but unfortunately, they were burdened with the consequences.
There are contradictions between perception and reality regarding countries hosting climate conferences (COPs) and their fossil fuel production. Germany, often seen as a green leader, has hosted multiple COPs (Conference of the Parties) while being a major coal producer with plans to continue coal mining until the 2030s. This raises questions about the true commitment to sustainability among COP hosts.
Bill Spindle: The COP process, which is primarily driven by climate activists, was initially seen to accelerate the shift towards renewable energy. However, these activists found it to be an ineffective and frustrating tool for achieving their goal.
The oil and gas industry has recognized the increasing momentum of the energy transition and has felt the need to get involved in the process. They are not necessarily opposed to the transition but instead are trying to slow it down or manipulate it to their advantage.
The success or failure of COPs is just one aspect when considering the energy transition and is not the most crucial factor. While important, the energy transition is progressing on its own with dynamics that are not significantly influenced by climate diplomacy.
Robin Mills: When setting ambitious targets at conferences like COP28, it is not effective to simply set even tougher targets if they are not met. Instead, it is better to examine why the original target was not achieved and identify the obstacles, whether they are policy, economic, or other barriers. This practical approach focuses on finding solutions to overcome these barriers rather than just increasing the target.
Frank Kane: What is possible?
Robin Mills: The oil industry should have acted on methane emissions years ago, as it is one of the easiest climate issues to tackle. A global agreement on methane and tougher measures is important but is a low standard to meet. The UAE could respond to criticism of being an oil-producing country by taking meaningful action on climate finance. They also call on developed countries to fulfill their promises of providing climate and development funds for lower-income countries, emphasizing the need for a proper agreement on climate finance that can truly bring about transformation.
The UAE and the Middle East give a strong signal for carbon capture and storage, which is crucial for addressing carbon emissions. It is suggested that if carbon capture and storage can be included in the carbon trading provisions, like renewables, it would allow for the trading of reductions and the flow of finance into this technology of carbon capture. The UAE and other major oil producers see the transition towards clean energy as incredibly important and helpful. Tripling renewables is a key goal, and one that everyone supports.
Frank Kane: The debate between ‘phasing down’ and ‘phasing out’ is likely to be the focus in Western media. What is the view from Asia?
Vandana Hari: The Asian countries are looking to move away from coal, but they prioritize having a secure, stable, and affordable energy supply to support economic growth. However, last year, many of these countries had to turn to coal again because Europe was consuming all the LNG and paying high prices for it. This region is increasingly dependent on LNG imports.
Many countries in Asia have not secured their baseload energy through term contracts, resulting in a heavy reliance on the spot market, up to 30% in some cases. For example, Pakistan was unable to purchase a single spot LNG cargo, leading to power outages, industries shutting down, and overall consequences for the region. These countries suffered greatly from the energy crisis, despite increasing their coal usage. Unfortunately, this crisis has gone largely unnoticed in Western and international media, which predominantly focuses on the energy situation in Europe.
The message from Asia is that although political leaders claim they want to phase out coal, the reality is that they will continue to use it to prevent their populations from becoming more energy poor and to avoid economic suffering. This is a message that needs to be heard worldwide as Asia is not willing to shut down their industries.
China has significantly increased its coal production and is using more of it, including the dirtiest coal available. In 2021, the government removed the limits it had set on coal mining quotas, allowing producers to extract as much coal as possible. This move indicates that the government is turning a blind eye or potentially encouraging the excessive mining of coal.
The price paid by Asia for carbon abatement in coal power generation is high, as the technology for carbon capture is expensive and not widely available. However, China is taking steps to address this by retiring old coal-fired power plants and constructing new ones with carbon capture capabilities.
Although media attention often focuses on China’s plans for new coal-fired plants, they miss the fact that many old plants are being phased out for retrofitting purposes. It is more cost-effective and efficient to implement carbon capture technology in new, larger power plants rather than retrofitting older ones.
China is making affordable natural gas accessible, but this is not the case for most of Asia. Consequently, Asia requires a stable and affordable natural gas supply as it is an imperative transition fuel. Many Asian countries were gas producers and exporters, but their gas reservoirs are depleting, and they are struggling due to the exit of oil majors. As a result, the burden has now fallen on national oil companies, which are not fully prepared to handle this situation financially or technologically. This is the current reality in Asia.
Frank Kane: The American situation regarding energy is intriguing. On one hand, there has been significant investment in renewables, particularly in relation to the IRA. This has had a profound impact. On the other hand, American shale production continues to rise, making the country the leading producer worldwide. This paradoxical situation raises questions about what Americans really want from their energy sources. It is unclear what would satisfy the American population in terms of their energy needs.
Bill Spindle: The United States is a significant global producer of fossil fuels. Currently, the Democrats, led by President Biden, prefer maintaining fossil fuel production while also promoting an energy transition through incentives rather than penalties. Their strategy involves offering incentives to push forward clean energy initiatives, with minimal punitive measures in place.
The US will likely support a phase down of fossil fuels to achieve an energy transition. If there is a strong agreement on reducing methane emissions at the COP, it would be positive. Additionally, it is important to get a commitment to triple renewable energy sources with clear targets and a substantial financing package. The current US$100 billion financing effort has been inadequate and insufficient for the developed world’s responsibilities.
The UAE has the potential to create a global financing plan supported not only by its own promises but also by the robust financial and political alliances it has established with countries globally. There is a possibility of a significant increase in renewable energy, along with a potential agreement on methane emissions. However, no agreement seems likely regarding fossil fuels. The perspective on the energy transition has shifted, as there was previously a belief that the new energy system needed to be fully built before making the switch. However, this mindset is changing, with an understanding that the transition will not be a simple switch but rather a gradual process.
The language surrounding the decline of fossil fuels has become more prevalent and understood by individuals. There is a belief that by tripling on renewables, the decline of fossil fuels will become inevitable. Recently, quotes from the leadership team have indicated that not only is this decline desirable, but also something they want to actively see happen.
The UAE might face criticism for not agreeing on a fossil fuel phase out or phase down, but it is understandable that some people will be unhappy. Despite this, if the UAE manages to achieve other significant goals, it would still be commendable.
Audience 1: It would be interesting to see how the regulations in the region catch up and when banks have a stronger mandate to finance large numbers. Currently, there is a lack of framework, making it difficult to navigate and invest. While there are ESG frameworks to label transactions as green, there is a need for a transition framework that can be applied across the industry. With proper regulation and a transition framework, the numbers in sustainable finance can increase, but we still have a long way to go.
Robin Mills: The lack of renewable finance in Africa, despite the immense potential and need for energy and economic development, raises questions about why companies, banks, and others are not supporting such projects. This goes beyond the issue of a set amount of funds available, as there are significant structural barriers at play. Understanding and addressing these barriers is crucial for effectively financing renewable projects in Africa.
It is important to focus on positive investments rather than solely divesting from environmentally harmful industries. The environmental movement’s approach of urging people not to invest in coal and gas without offering alternative options is disastrous. Instead, major banks should invest in climate-friendly technologies and responsibly consider investing in coal and gas alongside these alternatives, thereby making it less problematic overall.
Frank Kane: What are the reliable renewables?
Bill Spindle: Solar energy is currently experiencing rapid growth due to its strong economic potential. However, there are some trade conflicts surrounding it that need to be resolved. Despite this, solar power is expected to expand significantly in the coming years. Wind energy should not be overlooked either, although it is facing challenges in a high interest rate environment. The main challenge of the energy transition is the upfront cost and supply chain issues. The essence of this transition is that all the money needs to be invested upfront, even though technologies like wind may prove to be cheaper over time. However, raising the necessary funds can be difficult, especially if interest rates are high.
Frank Kane: What do we think of hydrogen?
Robin Mills: The high cost of hydrogen is a temporary issue that will eventually decrease. However, the bigger challenge lies in transporting hydrogen. Instead of shipping hydrogen around the world, it will serve as a base for other commodities like ammonia and green steel. By producing these commodities in one location and then transporting them, it will be much more efficient than trying to create them in different parts of the world. This approach will make it easier to move steel from one country to another rather than attempting to transport hydrogen and produce steel separately.
The use of hydrogen as an energy source is seen as beneficial for certain sectors that are difficult to decarbonize. In countries like Japan, hydrogen is considered a solution for many problems. Governments worldwide have been providing substantial subsidies for hydrogen, leading to a variety of options to choose from. However, it will take time to determine the most financially viable approach, considering the range of possibilities and the significant impact it can have on certain regions.
While using liquid hydrogen as a shipping fuel is questionable in the long run, hydrogen will be valuable and experience significant growth. However, the details of how and when hydrogen will become widespread and its implications for decarbonization need to be carefully considered. Many countries are providing subsidies to build a hydrogen industry, but the focus should be on reducing emissions rather than solely promoting the industry. This tension will take a considerable amount of time to resolve.
Frank Kane: What is the Asian view on nuclear power?
Vandana Hari: Nuclear power should be considered as a serious option. In Japan, after the Fukushima earthquake, it initially shut down its nuclear power plants due to public resistance. However, they have gradually been bringing back their nuclear capacity. Other Asian countries are also considering nuclear power, but it is politically sensitive in some places. The main challenge with nuclear power currently is the long lead time for construction and the significant investment required. Amid frequent energy crises, it can be difficult to prioritize such long-term projects. The progress of modular nuclear technology is interesting and countries in Asia without nuclear power are also paying close attention. The US is leading the development of modular nuclear reactors.
Frank Kane: The UAE has replaced 20-25% of its domestic mix with nuclear, which is a fair size chunk. Is nuclear considered green?
Robin Mills: Nuclear energy has the lowest life cycle carbon emissions compared to solar or wind power, and if done correctly, nuclear energy is safe. There is a long lead time in building nuclear power plants, but we do need to think long term.
The UAE’s nuclear program has been deemed a success, largely due to its adherence to both its timeline and budget. The nuclear sector has played a crucial role in the UAE, surpassing the impact of solar energy in reducing emissions. It is expected that nuclear energy will continue to contribute significantly to emissions reduction in the future, possibly reaching comparable levels as solar energy by 2050. Nuclear power is also critical for the decarbonization of the oil and gas industry, as they cannot meet their emission reduction targets without it. Additionally, various industries such as the aluminium and steel plants are purchasing low-carbon electricity, further highlighting the importance of nuclear energy.
China has also shown prowess in efficiently and cost-effectively constructing nuclear infrastructure. Other countries, however, have struggled with similar projects, which may be attributed to issues with project management and organization rather than the nuclear technology itself.
Frank Kane: What are your views on climate technology, carbon capture, utilisation and storage, direct air capture?
Robin Mills: I would count myself as an environmentalist, but the mainstream environmental movement is just infuriating when it comes to nuclear, carbon capture and storage. The IPCC says carbon capture and storage is incredibly important, it works and is safe.
Vandana Hari: A company in the US is exploring the idea of capturing carbon from the air by using a mineral called olivine. Olivine is abundant in the hills of a region in the UAE. The company plans to mine and scatter olivine on the surface of the sea and sand. They have already conducted a pilot project in the US to test this concept. It does not have a negative impact on the water or sand ecosystem but enhances their ability to absorb carbon from the air.
Robin Mills: The US IRA has had a significant impact by providing generous tax credits for carbon capture, resulting in a boost for the industry. Many individuals previously involved in oil and gas have transitioned to carbon capture startups and successfully raised hundreds of millions of dollars. This demonstrates the effectiveness of economic incentives in driving the adoption of carbon capture technology. While some argue that it is expensive, it is important to consider the cost in comparison to the consequences of not addressing carbon emissions.
With the introduction of higher carbon prices, such as US$90 per tonne in Europe and US$85 per tonne in the US, there is now an increase in carbon capture projects. Currently, there are 40 million tonnes of carbon capture operating globally, with plans for 240 million tonnes by 2030. The UAE aims for 1.2 billion tonnes by 2030 to achieve net zero, showing that while progress has been made, there is still a long way to go.
Bill Spindle: The carbon tax and the carbon border adjustment mechanism (CBAM) are causing waves in China and India. These countries have the option to either pay the Europeans a tax in the form of a tariff or implement their own tax system. As a result, carbon markets are expanding in China and India, with other countries like Indonesia and Japan considering similar measures. The cost of carbon will have a price placed on it globally, not just in Europe, which will eventually make carbon capture more affordable.
Audience 2: There are various concerns regarding the transition from fossil fuels to renewable energy sources. Has the IEA’s (International Energy Agency) move to disinvest from oil and gas, contributing to the problem rather than the solution? Is the world now too dependent on OPEC for oil production and in China for most solar panels and wind turbines? What about the potential shortage of minerals, particularly copper, needed for the energy transition? Is energy transition without sufficient minerals availability feasible? Overall, do you not have serious doubts about the practicality and challenges associated with achieving a complete shift to renewable energy?
Robin Mills: There are contrasting viewpoints in the IEA’s (International Energy Agency) energy system and climate policy. One team is focused on predicting the future of the oil market for the next year, while the other team is discussing the requirements to reach net zero emissions. The IEA’s message regarding no investment in new oil and gas fields was nuanced and caveated, but the media failed to convey these details. Environmentalists seized on the message to argue against any new investment in oil and gas fields, regardless of demand.